The information in this preliminary prospectus supplement is not complete and may be changed. This preliminary prospectus supplement is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

File Pursuant to Rule 424(b)(3)

Registration No. 333-106386

Subject to completion, dated December 5, 2003.

Prospectus supplement

To prospectus dated November 19, 2003

Hanover Compressor Company

$100,000,000

    % Convertible Senior Notes due 2014

The notes will mature on January 15, 2014. Interest on the notes will be payable on January 15 and July 15 of each year, beginning on July 15, 2004.

The notes are convertible by holders into shares of our common stock at an initial conversion rate of              shares of our common stock per $1,000 principal amount of notes (subject to adjustment in certain events), which is equal to an initial conversion price of $             per share, at any time prior to their stated maturity or redemption or repurchase by us.

At any time on or after January 15, 2011 but prior to January 15, 2013, we may redeem some or all of the notes at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, if the price of our common stock exceeds 135% of the conversion price of the notes then in effect for 20 trading days out of a period of 30 consecutive trading days, as specified in this prospectus supplement. At any time on or after January 15, 2013, we may redeem some or all of the notes at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any.

Holders will have the right to require us to repurchase the notes upon a change in control, as described in this prospectus supplement, at a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any.

The notes are our general unsecured obligations and will rank equally in right of payment with all of our other senior debt, including our existing 4.75% Convertible Senior Notes due 2008. The notes will be effectively subordinated to all existing and future liabilities of our subsidiaries.

We have granted the underwriters an option to purchase up to an additional $15,000,000 aggregate principal amount of notes to cover over-allotments.

Our common stock is listed on the New York Stock Exchange under the symbol “HC.” The last reported sales price of our common stock on the New York Stock Exchange on December 4, 2003 was $10.13 per share.

See “ Risk factors” beginning on page S-14 of this prospectus supplement for a discussion of certain risks that you should consider in connection with an investment in the notes.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompany prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Public offering price		Underwriting discount		Proceeds, before expenses, to Hanover
Per note		%		%		%
Total	$		$		$

The notes will not be listed on any securities exchange. Currently, there is no public market for the notes.

We expect that the delivery of the notes will be made to investors in book-entry form through The Depository Trust Company on or about     , 2003.

Joint book-running managers

JPMorgan Credit Suisse First Boston

Banc One Capital Markets, Inc.

Citigroup

Scotia Capital

Wachovia Securities

Simmons & Company International

                         , 2003

You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell the notes in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of the respective dates on the front of those documents or earlier dates specified therein. Our business, financial condition, results of operations and prospects may have changed since those dates.

Table of Contents

Prospectus Supplement

	Page
Special note regarding forward-looking statements	i
Summary	S-1
The offering	S-8
Summary consolidated financial and operating data	S-11
Risk factors	S-14
Where you can find more information	S-29
Use of proceeds	S-30
Price range of common stock	S-31
Dividend policy	S-31
Capitalization	S-32
Selected historical consolidated financial data	S-35
Management’s discussion and analysis of financial condition and results of operations	S-39
Business	S-79
Management	S-101
Description of certain other financial obligations	S-102
Description of notes	S-109
Important U.S. federal income tax considerations	S-124
Underwriting	S-131
Legal matters	S-133
Experts	S-133

Prospectus

	Page
About This Prospectus	1
Where You Can Find More Information	1
Forward-Looking Statements	2
About Our Company	4
Use of Proceeds	4
Ratios of Earnings to Fixed Charges and Earnings to Fixed Charges and Preferred Stock Dividends	5
Description of Debt Securities	6
Description of Common Stock and Preferred Stock	17
Description of Depositary Shares	20
Description of Securities Warrants	22
Description of Stock Purchase Contracts and Stock Purchase Units	24
Plan of Distribution	25
Legal Matters	26
Experts	26
Index to Financial Statements	F-1

Special note regarding

forward-looking statements

Certain matters discussed in this prospectus supplement and the accompanying prospectus and the documents we incorporate by reference herein and therein may include “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate,” or words of similar import. Similarly, statements that describe our future plans, objectives or goals or future revenues or other financial metrics are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated as of the date of this prospectus supplement, the accompanying prospectus or the documents we incorporate by reference herein and therein, as applicable. These risks and uncertainties include:

•  our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment;

•  a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas production equipment;

•  reduced profit margins resulting from increased pricing pressure in our business;

•  the loss of market share through competition;

•  the introduction of competing technologies by other companies;

•  changes in economic or political conditions in the countries in which we do business;

•  currency fluctuations;

•  losses due to the inherent risks associated with our operations, including equipment defects, malfunctions and failures and natural disasters;

•  governmental safety, health, environmental and other regulations, which could require us to make significant expenditures;

•  legislative changes in the countries in which we do business;

•  our inability to successfully integrate acquired businesses;

•  our inability to properly implement new enterprise resource planning systems used for integration of our accounting, operations and information systems;

•  our inability to retain key personnel;

•  war, social unrest, terrorist attacks and/or the responses thereto;

•  our inability to generate sufficient cash, access capital markets, refinance existing debt or incur indebtedness to fund our business;

•  our inability to comply with covenants in our debt agreements and the agreements related to our compression equipment lease obligations;

•  the decreased financial flexibility associated with our significant cash requirements and substantial debt, including our compression equipment lease obligations;

i

•  our inability to reduce our debt relative to our total capitalization;

•  our inability to execute our exit and sale strategy with respect to assets classified on our balance sheet as discontinued operations and held for sale;

•  our inability to conclude the agreed-upon settlement of the securities-related litigation and adverse results in other litigation brought by plaintiffs that are not party to the settlement;

•  fluctuations in our net income attributable to changes in the fair value of our common stock that will be used to fund the settlement of the securities-related litigation; and

•  adverse results in the pending investigation by the Securities and Exchange Commission (“SEC”).

In addition, the risks described in the “Risk factors” section of this prospectus supplement could cause our actual results to differ from those described in, or otherwise implied by, the forward-looking statements. Other factors besides those described in this prospectus supplement, the accompanying prospectus or the documents we incorporate by reference herein and therein could also affect our actual results.

You should not unduly rely on these forward-looking statements, which speak only as of the date such statements are made. Except as otherwise required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date such statements are made or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

ii

Summary

This summary highlights information contained elsewhere in this prospectus supplement or the accompanying prospectus. You should read carefully the entire prospectus supplement, the accompanying prospectus, the documents incorporated by reference and the other documents to which we refer for a more complete understanding of this offering. You should read “Risk factors” beginning on page S-14 of this prospectus supplement for more information about important risks that you should consider before buying the notes in this offering. Unless the context requires otherwise or as otherwise indicated, “Hanover,” “we,” “us,” “our” or similar terms in this prospectus supplement refer to Hanover Compressor Company and its subsidiaries on a consolidated basis.

Hanover Compressor Company

We are a global market leader in the full service natural gas compression business and are also a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Founded in 1990, and a public company since 1997, our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. In addition, through our ownership of Belleli Energy S.r.I. (“Belleli”), we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalination plants, primarily for use in Europe and the Middle East.

We believe that we are currently the largest natural gas compression company in the United States on the basis of aggregate rental horsepower, with approximately 6,064 rental units in the United States having an aggregate capacity of approximately 2,583,000 horsepower at September 30, 2003. In addition, we estimate that we are one of the largest providers of compression services in the rapidly growing Latin American and Canadian markets, operating approximately 832 units internationally with approximately 925,000 horsepower at September 30, 2003. As of September 30, 2003, approximately 74% of our natural gas compression horsepower was located in the United States and approximately 26% was located elsewhere, primarily in Latin America and Canada.

Our products and services are essential to the production, processing, transportation and storage of natural gas and are provided primarily to energy producers and distributors of oil and natural gas. Our decentralized operating structure, technically experienced personnel and high-quality compressor fleet have allowed us to successfully provide reliable and timely customer service.

Industry trends

We compete primarily in the market for transportable natural gas compression units of up to 4,500 horsepower. The market for rental compression has experienced significant growth over

S-1

the past decade. Although recently we have not experienced any significant growth in rentals or purchases of equipment and services by our customers, which we believe is a result of the lack of a significant increase in U.S. natural gas production levels, we believe that the U.S. gas compression market will continue to grow due to the increased demand for natural gas, the continued aging of the natural gas reserve base and the attendant decline of wellhead pressures, the discovery of new reserves and the continuing interest in outsourcing compression by independent producers. However, because the majority of oil and gas reserves are located outside of the United States, we believe that international markets will be a primary source of our growth opportunities in the gas compression market in the years to come.

As of June 2003, the rental portion of the domestic gas compression market was estimated by industry sources to be approximately 5.0 million horsepower, which we estimate accounts for approximately 30% of aggregate U.S. horsepower, having doubled since 1996. Growth of the rental compression capacity in the U.S. market has been primarily driven by the trend toward outsourcing by energy producers and processors. We believe that outsourcing provides the customer greater financial and operating flexibility by minimizing the customer’s investment in equipment and enabling the customer to more efficiently resize their compression capabilities to meet changing reservoir conditions. In addition, we believe that outsourcing typically provides the customer with more timely and technically proficient service and maintenance, which often reduces operating costs. We believe growth opportunities for compressor rental and sales exist due to (1) increased worldwide energy consumption, (2) implementation of international environmental and conservation laws prohibiting the flaring of natural gas, which increases the need for gathering systems, (3) increased outsourcing by energy producers and processors, (4) the environmental soundness, economy and availability of natural gas as an alternative energy source and (5) continued aging of the worldwide natural gas reserve base and the attendant decline of wellhead pressures. The rental compression business is capital intensive, and our ability to take advantage of these growth opportunities may be limited by our ability to raise capital to fund our expansion. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” in this prospectus supplement.

Competitive strengths

We believe we have the following key competitive strengths:

•  Broad-based solutions offering: We believe that we are the only company in our industry that offers both outsourced rental of, as well as the sale of, compression and oil and gas production and processing equipment and related services. Our services include complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment as well as engineering and product design, fabrication, installation, customer service and after-market support. Our global customer base consists of U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, independent producers and natural gas processors, gatherers and pipelines. By offering a broad range of services that complement our historic strengths, we believe that we can provide comprehensive integrated global solutions to meet our customers’ oil and gas production and processing equipment and compression needs. We believe the breadth and quality of our services and rental fleet, the depth of our customer relationships and our presence in major gas-producing regions

S-2

of the United States, Latin America and Canada place us in a position to capture additional outsourced business on a global basis.

•  Leading position in high horsepower compression: High horsepower compression, composed of units with greater than 500 horsepower, is the fastest growing portion of our rental compression business. We believe we are a leading provider of these units, which are typically installed on larger wells, gathering systems and processing and treating facilities. The scale and more attractive unit economics of these facilities largely insulate them from declining commodity prices. As a result, compressors in this segment tend to realize higher utilization rates. We believe that the greater technical requirements of these larger systems enable us to differentiate our compression products and to leverage sales of related products and services. As of September 30, 2003, approximately 79% of our aggregate horsepower consisted of high horsepower compression units.

•  Provider of superior customer service: To facilitate our broad-based approach, we have adopted a geographical business unit concept and utilize a decentralized management and operating structure to provide superior customer service in a relationship-driven, service-intensive industry. We believe that our regionally-based network, local presence, experience and in-depth knowledge of customers’ operating needs and growth plans enable us to effectively meet their evolving needs. Our team of over 130 sales representatives aggressively pursues the rental and sales market for our products and services in their respective territories. Our efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

•  International experience: We believe we are a leading supplier of natural gas compression services in Latin America and Canada, with an expanding presence in Eastern Europe, Africa and Asia. As of September 30, 2003, of the approximately 925,000 horsepower of compression we had deployed internationally, approximately 84% was located in Latin America (primarily in Venezuela, Argentina and Mexico) and approximately 11% was located in Canada. We believe our experience in managing our international rental fleet and our efforts to develop and expand our international sales force have created a global platform from which we can continue to grow in international markets. Through our experiences in these international markets, we have demonstrated our ability to operate in remote and sometimes challenging environments. We believe international markets represent one of the greatest growth opportunities for our business, with rapidly expanding opportunities in regions such as Russia, the Middle East, West Africa and the Far East.

Business strategy

We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies:

•  Focus on core business: We have built our leading market position through our strengths in compression rentals, compressor fabrication, production and processing equipment rental and fabrication and parts and service. We are focusing our efforts on these businesses and on streamlining operations in our core markets. In connection with

S-3

these efforts, we have decided to exit and sell certain non-core business lines. In December 2002, our board of directors approved management’s recommendation to exit and sell our non-oilfield power generation assets and certain used equipment business lines. We have since sold our interests in two non-oilfield power generation facilities.

•  Focus on return on capital: We are seeking to deploy our capital more effectively in order to improve the total return from our investments. To achieve this objective, we intend to work to improve our operating performance and profitability by focusing on the following initiatives:

•  improving our domestic fleet utilization by retiring less profitable units, limiting the addition of new units and, where applicable and permissible under our bank credit facility and the agreements related to our compression equipment lease obligations, moving idle domestic units into service in international markets;

•  increasing prices selectively for our domestic rental business;

•  increasing activity in our fabrication sales and parts and service operations to take advantage of our available fabrication capacity and field technician manpower; and

•  improving operating efficiencies by consolidating certain of our operations.

•  Exploit international opportunities: International markets continue to represent one of the greatest growth opportunities for our business. Although our international horsepower has grown significantly over the last six years, we continue to believe that the market is underserved. Of total proven worldwide oil and natural gas reserves, the vast majority are located outside the United States. We believe that the continuing worldwide development and implementation of oil and gas environmental and conservation laws prohibiting the flaring of natural gas and encouraging the use of gas-fired power generation, coupled with increased worldwide energy consumption, will continue to drive use of compression by international energy companies. In addition, we typically see higher pricing in international markets relative to the domestic market. We intend to allocate additional resources toward international markets, to open offices abroad, where appropriate, and to move idle domestic units into service in international markets, where applicable. However, our ability to invest capital resources and allocate assets into international markets is restricted by our bank credit facility and the agreements related to our compression equipment lease obligations.

•  Improve our capital discipline: We plan to improve our capital discipline by lowering the working capital we have employed and reducing debt with both excess cash flow and proceeds from asset sales. We are also focused on improving the management of our working capital by lowering the number of days outstanding for our accounts receivable and reducing inventory levels. To reduce debt, we are committed to under-spending cash flow and we are currently planning to allocate approximately $180 million of our operating cash flow generated from 2004 through 2006 to debt reduction.

2002 restatements, SEC investigation and securities litigation

We experienced rapid growth from 1998 through 2001 primarily as a result of acquisitions, particularly during 2000 and 2001, during which period our total assets increased from approximately $753 million as of December 31, 1999 to approximately $2.3 billion as of

S-4

December 31, 2001. Our growth exceeded our infrastructure capabilities and strained our internal control environment. During 2002, we announced a series of restatements of certain transactions that occurred in 1999, 2000 and 2001. These restatements of our financial statements ultimately reduced our initially reported pre-tax income by $3.1 million, or 4.9%, for the year ended December 31, 1999, by $14.5 million, or 15.5%, for the year ended December 31, 2000, and by $0.4 million, or 0.3%, for the year ended December 31, 2001, although certain restatements resulted in a larger percentage adjustment on a quarterly basis. See “Management’s discussion and analysis of financial condition and results of operations—Previous restatements” in this prospectus supplement.

During 2002, a number of company executives involved directly and indirectly with the transactions underlying the restatements resigned, including our former Chief Executive Officer, Chief Financial Officer and Vice Chairman of our board of directors, Chief Operating Officer and the head of our international operations. During and after 2002, we hired and appointed a new Chief Executive Officer and Chief Financial Officer, hired and appointed our first General Counsel, and hired a new Controller and managers of Human Resources and Policy Administration. In addition, during 2002, we also added three independent directors to our board of directors and elected an independent Chairman of the Board from among the three new directors.

On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the transactions underlying and other matters relating to the restatements of our financial statements announced in 2002. We have cooperated with the Fort Worth District Office Staff of the SEC in its investigation. Based upon our discussions to date with the Fort Worth District Office Staff of the SEC, we currently believe that a settlement of the investigation will be reached on terms that we do not believe will have a material adverse impact on our business, consolidated financial position, results of operations or cash flows. However, we can give no assurances in this regard, and we expect any settlement with the SEC to include findings of violations of the securities laws by us with respect to certain of the restated transactions. We understand that any resolution of the investigation reached by us with the Fort Worth District Office Staff of the SEC will have no legal effect until it is reviewed and, if appropriate, approved by the SEC in Washington, D.C., and we cannot predict what action might ultimately be taken against us by the SEC. As such, we do not anticipate announcing any resolution of the investigation unless and until such resolution is approved by the SEC in Washington, D.C.

Hanover and certain of its past and present officers and directors are named as defendants in a consolidated action pending in federal court that includes a putative securities class action, a putative class action arising under the Employee Retirement Income Security Act (“ERISA”) and shareholder derivative actions. The litigation relates principally to the matters involved in the transactions underlying the restatements of our financial statements. The plaintiffs allege, among other things, that we and the other defendants acted unlawfully and fraudulently in connection with those transactions and our original disclosures related to those transactions and thereby violated the antifraud provisions of the federal securities laws and the other defendants’ fiduciary duties to Hanover. On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions brought against us. See “Business—Legal proceedings” in this prospectus supplement.

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The terms of the proposed settlement provide for us to (1) make a cash payment of approximately $30 million (of which approximately $27 million was funded by payments from our directors’ and officers’ insurance carriers), (2) issue 2.5 million shares of our common stock and (3) issue a contingent note with a principal amount of $6.7 million. The note will be payable, together with accrued interest, on March 31, 2007 but can be extinguished (with no money owing under it) if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. In addition, upon the occurrence of a change of control of us, if the change of control, or shareholder approval of the change of control, occurs within 12 months after final court approval of the settlement, we will be obligated to contribute an additional $3 million to the settlement fund. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our board of directors and enhancements to our code of conduct. The settlement remains subject to, among other things, court approval and could be the subject of an objection by potentially affected persons. We have the right to terminate the settlement under certain circumstances, including if more than a certain number of the plaintiffs elect to opt out of the settlement. There can be no assurances that the settlement will be approved or finalized, or that it will be finally approved or finalized on the terms agreed upon in the Stipulation of Settlement. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the putative consolidated securities class action.

Change in accounting principle

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued Interpretation Number 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). FIN 46 applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some, but not all, of the variable interest entities they own.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089.0 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale leaseback of the equipment), $1,105.0 million in debt and

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$34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us, but are now included in property, plant and equipment in our consolidated financial statements, had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

We have a consolidated subsidiary trust that has Mandatorily Redeemable Preferred Securities outstanding which have a liquidation value of $86.3 million. These securities are reported on our consolidated balance sheet as Mandatorily Redeemable Convertible Preferred Securities. The trust may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes, if any, in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed above.

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The offering

The following summary contains basic information about the notes and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the notes, please refer to the section of this prospectus supplement entitled “Description of notes.” For purposes of the description of the notes included in this prospectus supplement, references to “Hanover,” “us,” “we” and “our” refer only to Hanover Compressor Company and do not include our subsidiaries.

Issuer Hanover Compressor Company.

Securities $100,000,000 aggregate principal amount of         % Convertible Senior Notes due 2014. We have also granted the underwriters an option to purchase up to an additional $15,000,000 aggregate principal amount of notes to cover over-allotments.

Interest payment

    dates January 15 and July 15 of each year, commencing July 15, 2004.

Maturity date January 15, 2014.

Conversion rights Holders may convert their notes into shares of our common stock at any time prior to their stated maturity or redemption or repurchase by us.

For each $1,000 principal amount of notes surrendered for conversion, you will receive          shares of our common stock, subject to adjustment. This represents an initial conversion price of $         per share of common stock. As described in this prospectus supplement, the conversion rate may be adjusted for certain reasons, but it will not be adjusted for accrued and unpaid interest. Except as otherwise described in this prospectus supplement, you will not receive any payment representing accrued and unpaid interest upon conversion of a note. Notes called for redemption may be surrendered for conversion prior to the close of business on the second business day immediately preceding the redemption date.

Optional redemption We may not redeem the notes prior to January 15, 2011. At any time on or after January 15, 2011 but prior to January 15, 2013, we may redeem the notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, if the closing price of our common stock has exceeded 135% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date on which we mail the redemption notice, which date will be at least 20 days but no more than 60 days prior to the redemption date. At any time on or after January 15, 2013, we may redeem the notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

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Repurchase upon a     change in control If we experience a specified change in control, a holder of notes will have the right, subject to certain conditions and restrictions, to require us to repurchase some or all of its notes at a repurchase price equal to 100% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

Ranking The notes are our general unsecured obligations and will rank equally in right of payment with all of our other senior debt, including our existing 4.75% Senior Convertible Notes due 2008, and senior in right of payment to all of our subordinated debt, including our Zero Coupon Subordinated Notes due March 31, 2007. The notes will be junior in right of payment to our secured debt to the extent of the assets securing the debt. The notes will be effectively subordinated to all existing and future liabilities of our subsidiaries, including their obligations with respect to our compression equipment lease notes, our current bank credit facility, our proposed new $345 million bank credit facility (the “Proposed Bank Credit Facility”) and the guarantee of our concurrent offering of senior notes as described below. As of September 30, 2003, after giving effect to this offering and our concurrent offering of $200 million of senior notes and the application of the net proceeds, and the closing of our Proposed Bank Credit Facility, our subsidiaries would have had approximately $1,088.4 million of debt outstanding (excluding intercompany indebtedness and guarantees of debt of Hanover).

Taxation Prospective investors should carefully review the information relevant to an investment in the notes under “Important U.S. federal income tax considerations” and are also urged to consult their own tax advisors prior to investing in the notes.

Use of proceeds We intend to use the net proceeds we receive from this offering to repay a portion of the outstanding indebtedness under our bank credit facility.

Book-entry form The notes will be issued in book-entry form and will be represented by a permanent global certificate deposited with, or on behalf of, The Depository Trust Company (“DTC”) and registered in the name of a nominee of DTC. Beneficial interests in any of the notes will be shown on, and transfers will be effected only through, records maintained by DTC or its nominee and any such interest may not be exchanged for certificated securities, except in limited circumstances.

Trustee, paying agent     and conversion     agent Wachovia Bank, National Association

Governing law The indenture governing the notes and the notes will be governed by, and construed in accordance with, the laws of the State of New York.

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Listing of the notes The notes will not be listed on any securities exchange or included in any automated quotation system. Although the underwriters have advised us that they presently intend to make a market in the notes, they are not obligated to do so, and any market making may be discontinued at any time. Therefore, an active market for the notes may not develop.

Common stock The common stock of Hanover Compressor Company is listed on The New York Stock Exchange under the symbol “HC.”

Risk factors

You should read the “Risk factors” section, beginning on page S-14, as well as the other cautionary statements described in this prospectus supplement so that you understand the risks associated with an investment in the notes and the common stock issuable upon their conversion.

Refinancing

We intend to issue $200 million in aggregate principal amount of senior notes that are guaranteed on a senior subordinated basis by Hanover Compression Limited Partnership, our wholly-owned principal domestic operating subsidiary (“HCLP”), concurrently with the offering of the notes. If we close both the concurrent offering of our senior notes and the offering of the notes offered hereby, we will satisfy the condition that we effect at least $275 million of new financings on required terms to close our Proposed Bank Credit Facility, as more fully described in “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources.” The sale of the notes offered hereby and the sale of the senior notes are not contingent upon each other. The sale of the notes offered hereby, the sale of the senior notes and the closing of our Proposed Bank Credit Facility are each components of our current refinancing initiatives intended to improve our liquidity and financial position.

We expect the offering of the senior notes and the offering of the notes offered hereby to close concurrently with our Proposed Bank Credit Facility. However, there can be no assurances that we will be able to complete the sale of the senior notes or to close our Proposed Bank Credit Facility.

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Summary consolidated financial and operating data

In the table below, we have provided you with our summary historical consolidated financial and operating data. The historical consolidated financial data as of and for each of the fiscal years in the three-year period ended December 31, 2002 were derived from our audited consolidated financial statements. The historical consolidated financial data as of and for the nine months ended September 30, 2003 and 2002 were derived from our unaudited condensed consolidated financial statements. In the opinion of management, such unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations of such interim periods.

The information in this section should be read along with our consolidated financial statements, the accompanying notes and other financial information that is either included or incorporated by reference in this prospectus supplement. See “Where you can find more information” on page S-29.

	Year Ended December 31,
	2002			2001(1)			2000(1)
(In thousands, except per share and operating data)				(Restated)			(Restated)
Income Statement Data:
Total revenues and other income(2)	$	1,028,810		$	1,040,960		$	546,824
Expenses:
Operating		585,051			629,645			307,388
Selling, general and administrative		153,676			92,172			51,768
Foreign currency translation		16,753			6,658			—
Other		27,607			9,727			—
Depreciation and amortization(3)		151,181			88,823			52,188
Goodwill impairment(3)		52,103			—			—
Leasing expense(4)		91,506			78,031			45,484
Interest expense(5)		43,352			23,904			15,048
Total expenses		1,121,229			928,960			471,876
Income (loss) from continuing operations before income taxes		(92,419	)		112,000			74,948
Provision for (benefit from) income taxes		(17,576	)		42,388			27,818
Income (loss) from continuing operations		(74,843	)		69,612			47,130
Income (loss) from discontinued operations, net of tax(2)		(41,225	)		2,965			2,509
Cumulative effect of accounting change for derivative instruments, net of tax		—			(164	)		—
Net income (loss)	$	(116,068	)	$	72,413		$	49,639
Net income (loss) per common share
Basic	$	(1.46	)	$	1.00		$	0.80
Diluted	$	(1.46	)	$	0.94		$	0.75
Weighted average common and equivalent shares outstanding
Basic		79,500			72,355			61,831
Diluted		79,500			81,175			66,366
Cash flows provided by (used in):
Operating activities	$	195,717		$	152,774		$	29,746
Investing activities		(193,703	)		(482,277	)		(67,481	)
Financing activities		(4,232	)		307,259			77,589
Balance Sheet Data (end of period):
Working capital	$	212,085		$	275,074		$	282,730
Property, plant and equipment, net(6)		1,167,675			1,151,513			574,703
Total assets(6)		2,154,029			2,265,776			1,246,172
Total debt(6)		554,944			509,813			113,358
Mandatorily redeemable convertible preferred securities		86,250			86,250			86,250
Total common stockholders’ equity		927,626			1,039,468			628,947
Operating data (end of period):
Horsepower:
Domestic		2,654,000			2,696,000			1,741,000
International		860,000			781,000			410,000
Units:
Domestic		6,201			6,332			4,411
International		787			734			433
Average horsepower/unit		503			492			444
Utilization		78	%		84	%		86	%

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	Nine Months Ended September 30,
	2003			2002
(In thousands, except per share and operating data)	(Unaudited)
Income Statement Data:
Total revenues and other income(2)	$	825,248		$	767,113
Expenses:
Operating		490,258			431,330
Selling, general and administrative		119,658			107,644
Foreign currency translation		1,336			13,339
Provision for estimated cost of litigation settlement(7)		40,253			—
Other		2,951			14,837
Depreciation and amortization(6)		126,886			82,367
Goodwill impairment(3)		—			47,500
Leasing expense(4)(6)		43,139			68,206
Interest expense(4)(5)(6)		57,283			31,137
Total expenses		881,764			796,360
Loss from continuing operations before income taxes		(56,516	)		(29,247	)
Provision for (benefit from) income taxes		(18,463	)		7,412
Loss from continuing operations		(38,053	)		(36,659	)
Loss from discontinued operations, including write-downs, net of tax(2)		(11,382	)		(4,489	)
Cumulative effect of accounting change, net of tax(6)		(86,910	)		—
Net loss	$	(136,345	)	$	(41,148	)
Net income (loss) per common share
Basic	$	(1.69	)	$	(0.52	)
Diluted	$	(1.69	)	$	(0.52	)
Weighted average common and equivalent shares outstanding
Basic		80,907			79,338
Diluted		80,907			79,338
Cash flows provided by (used in):
Operating activities	$	85,264		$	121,477
Investing activities		(75,971	)		(153,452	)
Financing activities		4,712			32,839
Balance sheet data (end of period):
Working capital(8)	$	55,716		$	246,393
Property, plant and equipment, net(6)		2,046,687			1,231,689
Total assets(6)		3,042,407			2,208,618
Total debt(6)		1,754,903			577,780
Mandatorily redeemable convertible preferred securities		86,250			86,250
Total common stockholders’ equity		816,506			990,876
Operating data (end of period):
Horsepower:
Domestic		2,583,000			2,782,000
International		925,000			839,000
Units:
Domestic		6,064			6,390
International		832			785
Average horsepower/unit		509			505
Utilization		80	%		80	%

(1) During 2002, we announced a series of restatements that ultimately reduced our initially reported pre-tax income by $3.1 million, or 4.9%, for the year ended December 31, 1999, by $14.5 million, or 15.5%, for the year ended December 31, 2000, and by $0.4 million, or 0.3%, for the year ended December 31, 2001, although certain restatements resulted in a larger percentage adjustment on a quarterly basis. For a description of these restatements, see Notes 22 and 23 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

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(2) For a description of significant business acquisitions, see Note 2 to the consolidated financial statements for the year ended December 31, 2002 and Note 2 to the condensed consolidated financial statements for the three and nine months ended September 30, 2003 included in this prospectus supplement. In the fourth quarter of 2002, we decided to discontinue certain businesses. For a description of the discontinued operations, see Note 3 to the consolidated financial statements for the year ended December 31, 2002 and Note 13 to the condensed consolidated financial statements for the three and nine months ended September 30, 2003 included in this prospectus supplement.

(3) In June 2001, the FASB issued Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, amortization of goodwill to earnings is discontinued. Instead, goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred. SFAS 142 was effective for us on January 1, 2002. For financial data relating to our goodwill and other intangible assets, see “Management’s discussion and analysis of financial condition and results of operations” and Note 9 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement for a discussion of SFAS 142 and the goodwill impairments we recorded during 2002.

(4) Prior to 2001, we entered into two interest rate swaps with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the swap counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $3.2 million and an unrealized loss of approximately $7.6 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the years ended December 31, 2002 and 2001, respectively. In addition, we recognized unrealized gains of approximately $4.1 million and $1.5 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002, respectively, and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts were reported as “Change in Fair Value of Derivative Financial Instruments” in our consolidated statement of operations. We have reclassified these amounts as interest and lease expense to conform to the 2003 financial statement classification.

(5) We have reclassified the distributions on our Mandatorily Redeemable Convertible Securities as interest expense, and prior periods have been reclassified to conform to the 2003 financial statement classification.

(6) In accordance with FIN 46, for periods ending after June 30, 2003, we have included in our consolidated financial statements the special purpose entities that lease compression equipment to us. As a result, we have added approximately $897 million of compression equipment assets, net of accumulated depreciation, and $1,139.6 million of our compression equipment lease obligations (including $1,105.0 million in debt) to our balance sheet as of September 30, 2003. As allowed by FIN 46, we have not restated our financial statements for periods prior to July 1, 2003 to include the compression equipment assets and compression equipment lease obligations. See “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Sale leaseback transactions.”

(7) On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions discussed in “Business—Legal proceedings.” See “Management’s discussion and analysis of financial condition and results of operations—Nine months ended September 30, 2003 compared to nine months ended September 30, 2002—Provision for estimated cost of litigation settlement.”

(8) Working capital decreased to $55.7 million at September 30, 2003 from $212.1 million at December 31, 2002. The decrease in working capital was primarily due to the reclassification of our $194 million 1999A equipment lease note, which matures in June 2004, to current debt. This obligation was recorded on our balance sheet in July 2003 upon consolidation of the entities which lease equipment to us when we adopted FIN 46 for our sale leaseback transactions.

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Risk factors

An investment in the notes involves risks. You should carefully consider and evaluate all of the information in this prospectus supplement and the accompanying prospectus, including the following risk factors, before investing.

Risks related to the notes

We have a substantial amount of debt, including our compression equipment lease obligations, that could limit our ability to fund future growth and operations and increase our exposure during adverse economic conditions.

As of September 30, 2003, we had approximately $1,754.9 million of debt, as well as approximately $86.3 million of Mandatorily Redeemable Convertible Preferred Securities issued through our subsidiary, Hanover Compressor Capital Trust.

As of July 1, 2003, we adopted the provisions of FIN 46 with respect to the special purpose entities that lease compression equipment to us which required us to include in our consolidated financial statements the special purpose entities that lease compression equipment to us. As a result, we added approximately $1,139.6 million of compression equipment lease obligations outstanding (including $1,105.0 million in debt) to our balance sheet.

Our substantial debt, including our compression equipment lease obligations, could have important consequences to you. For example, these commitments could:

•  make it more difficult for us to satisfy our obligations, including under the notes;

•  increase our vulnerability to general adverse economic and industry conditions;

•  limit our ability to fund future working capital, capital expenditures, acquisitions or other general corporate requirements or to repurchase the notes from you upon a change in control;

•  increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are at, and a portion of our compression equipment leasing expense is based upon, variable rates;

•  limit our flexibility in planning for, or reacting to, changes in our business and our industry;

•  place us at a disadvantage compared to our competitors that have less debt or fewer operating lease commitments; and

•  limit our ability to borrow additional funds.

We will need to generate a significant amount of cash to service our debt, including the notes and our compression equipment lease obligations, to fund working capital and to pay our debts that come due.

Our ability to make scheduled payments under the notes and our compression equipment lease obligations and our other debt, or to refinance our debt and other obligations, will depend on our ability to generate cash in the future. Our ability to generate cash in the future is subject to our operational performance, as well as general economic, financial, competitive, legislative and regulatory conditions, among other factors.

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For the nine months ended September 30, 2003, we incurred interest and leasing expense of $100.4 million related to our debt, including our compression equipment lease obligations.

As of September 30, 2003, we had outstanding borrowings of approximately $172 million (3.4% rate as of September 30, 2003) and outstanding letters of credit of approximately $71.7 million under our bank credit facility (our “bank credit facility”) and approximately $25 million of credit capacity remaining (after giving effect to the covenant limitations in our bank credit facility).

Approximately $604 million of our debt, including approximately $388 million of our compression equipment lease obligations, will mature within two years from September 30, 2003. Our ability to refinance this debt and other financial obligations will be affected by the factors discussed above and those discussed below and by the general market at the time we refinance. The factors discussed herein could adversely affect our ability to refinance this debt and other financial obligations at a reasonable cost.

Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our bank credit facility, or any new bank credit facility, in an amount sufficient to enable us to pay our debt, compression equipment lease obligations, operating lease commitments and other financial obligations, or to fund our other liquidity needs. We cannot be sure that we will be able to refinance any of our debt or our other financial obligations on commercially reasonable terms or at all. Our inability to refinance our debt or our other financial obligations on commercially reasonable terms could materially adversely affect our business.

The documents governing our outstanding debt, including our compression equipment lease obligations, contain financial and other restrictive covenants. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. If we are not able to effect at least $275 million of new financings and close our Proposed Bank Credit Facility, we may not be in compliance with the financial covenants under our existing bank credit facility in the near future.

Our bank credit facility and other debt obligations, including the notes and the agreements related to our compression equipment lease obligations, contain, among other things, covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities. These covenants include provisions that restrict our ability to:

•  incur additional debt or issue guarantees;

•  create liens on our assets;

•  engage in mergers, consolidations and dispositions of assets;

•  enter into additional operating leases;

•  pay dividends on or redeem capital stock;

•  enter into derivative transactions;

•  make certain investments or restricted payments;

•  make capital expenditures above certain limits;

•  make investments, loans or advancements to certain of our subsidiaries;

•  prepay or modify our debt facilities;

S-15

•  enter into transactions with affiliates; or

•  enter into sale leaseback transactions.

In addition, under the bank credit facility and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000, we have granted the lenders a security interest in our inventory, equipment and certain of our other property and the property of our domestic subsidiaries and pledged 66% of the equity interest in certain of our foreign subsidiaries.

Our bank credit facility and other financial obligations and the agreements related to our compression equipment lease obligations require us to maintain financial ratios and tests, which may require that we take action to reduce our debt or act in a manner contrary to our business objectives. Adverse conditions in the oil and gas business or in the United States or global economy or other events related to our business may affect our ability to meet those financial ratios and tests. A breach of any of these covenants or failure to maintain such financial ratios would result in an event of default under our bank credit facility, the agreements related to our compression equipment lease obligations and the agreements relating to our other financial obligations. If such an event of default occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable.

In February 2003, we executed an amendment to our bank credit facility and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility.

As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment lease obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

With respect to the more restrictive financial covenants that will be in effect for the quarter ending March 31, 2004 if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at March 31, 2004. However, we currently have bank commitments totaling $345 million for the Proposed Bank Credit Facility with different and/or less restrictive covenants which would apply to us upon closing of the Proposed Bank Credit Facility. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at December 31, 2003 and March 31, 2004.

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The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financings to refinance a portion of our existing indebtedness and satisfaction of other customary conditions. If we close both the concurrent offering of our senior notes and the offering of the notes offered hereby, we will satisfy the condition that we effect at least $275 million of new financings. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions under the agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

As a holding company, Hanover’s only source of cash is distributions from its subsidiaries.

Hanover Compressor Company is a holding company with no material assets other than the equity interests of its subsidiaries and interests in its unconsolidated affiliates. Hanover’s subsidiaries and its unconsolidated affiliates conduct substantially all of Hanover’s operations and directly own substantially all of its assets. Therefore, its operating cash flow and ability to meet its debt obligations, including the notes, will depend on the cash flow provided by its subsidiaries and its unconsolidated affiliates in the form of loans, dividends or other payments to Hanover as a shareholder, equity holder, service provider or lender. The ability of Hanover’s subsidiaries and its unconsolidated affiliates to make such payments to Hanover will depend on their earnings, tax considerations, legal restrictions and restrictions under their indebtedness. In addition, the Proposed Bank Credit Facility will restrict the ability of our subsidiaries to pay dividends to Hanover to an amount intended solely to cover required cash interest payments on Hanover’s indebtedness plus certain expenses incurred by Hanover. Hanover’s subsidiaries are not obligated to make funds available for payment of the notes.

The notes will be junior to the indebtedness of our operating subsidiaries.

The notes will be issued by Hanover and will be structurally subordinated to the existing and future claims of our operating subsidiaries’ creditors. Holders of the notes will not be creditors of our operating subsidiaries. The claims to the assets of our operating subsidiaries derive from our own equity interests in those operating subsidiaries. Claims of our operating subsidiaries’ creditors will generally have priority as to the assets of our operating subsidiaries over our own equity interest claims and will therefore have priority over the holders of our non-guaranteed debt, including the notes. Our operating subsidiaries’ creditors may include:

• general creditors;

• trade creditors;

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• secured creditors;

• taxing authorities; and

• creditors holding guarantees, including HCLP’s guarantee of the notes offered in the proposed offering of our senior notes.

As of September 30, 2003, after giving effect to this offering and our concurrent offering of $200 million of senior notes and the application of the net proceeds, and the closing of our Proposed Bank Credit Facility, our subsidiaries would have had approximately $1,088.4 million of debt outstanding (excluding intercompany indebtedness and guarantees of debt of Hanover).

In addition, the notes will be effectively junior to any secured debt of Hanover to the extent of the collateral securing such debt.

You cannot be sure that an active trading market will develop for the notes.

There is no established trading market for the notes. We have no plans to list the notes on a securities exchange. Although the underwriters have advised us that they currently intend to make a market in the notes after the completion of the offering, the underwriters are not obligated to do so, and such market making activities may be discontinued at any time without notice. We cannot assure you that any market for the notes will develop, or that such a market will provide liquidity for holders of the notes. The liquidity of any market for the notes will depend upon the number of holders of the notes, our results of operations and financial condition, the market for similar securities, the interest of securities dealers in making a market in the notes and other factors. An active or liquid trading market may not develop for the notes.

It may not be possible for us to purchase the notes on the occurrence of a change in control.

Upon the occurrence of specific change of control events, we will be required to offer to repurchase all of the notes at 100% of the principal amount of the notes plus accrued and unpaid interest to the date of purchase. We cannot assure you that there will be sufficient funds available for us to make any required repurchase of the notes upon a change of control. In addition, restrictions under our bank credit facility, our Proposed Bank Credit Facility and the agreements governing our compression equipment lease obligations may not allow us to repurchase the notes. Our failure to purchase tendered notes would constitute a default under the indenture governing the notes, which, in turn, would constitute a default under our bank credit facility and other debt instruments. See “Description of notes.”

The possible volatility of our common stock price could adversely affect your ability to resell the notes or common stock issuable upon conversion of the notes.

The trading prices of the notes in the secondary market will be directly affected by the trading prices of our common stock and the general level of interest rates. It is impossible to predict whether the price of our common stock or interest rates will rise or fall. Trading prices of our common stock will be influenced by our operating results and prospects and by economic, financial and other factors. In addition, securities markets worldwide have in the recent past experienced significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our

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common stock could decrease significantly. Investors may be unable to resell their shares of our common stock received upon conversion of the notes at or above the conversion price.

In addition, future sales of our common stock by our significant stockholders may adversely affect the market price of our common stock. GKH Partners, L.P. and GKH Investments, L.P., which are partnerships affiliated with Melvyn N. Klein, one of our directors, collectively own approximately 8.3 million shares of our common stock. The terms of the proposed settlement of our putative class action lawsuits provide for such partnerships to pay 2.5 million shares of our common stock from their holdings or from other sources. GKH Partners has advised us that it is in the process of dissolving and “winding up” its affairs. GKH Partners has also informed us that GKH Partners has advised its limited partners that it has extended the wind-up process of the partnership for an additional twelve months from January 25, 2003 until January 25, 2004. As previously reported in our most recent annual proxy statement, as part of the wind-up process, GKH Partners and GKH Investments have advised us that they may liquidate or distribute substantially all of their respective assets, including the remaining shares of our common stock held by them.

Conversion of the notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their notes.

The conversion of some or all of the notes will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.

We have significant leverage relative to our total capitalization, which could result in a further downgrade in our credit rating or other adverse consequences if we do not reduce our leverage.

In February 2003, Moody’s Investors Service, Inc. (“Moody’s”) announced that it had downgraded by one notch our senior implied credit rating, our 4.75% Convertible Senior Notes rating and our 7.25% Mandatorily Redeemable Convertible Preferred Securities rating to Ba3, B2 and B3, respectively, and Standard & Poor’s Ratings Services (“Standard & Poor’s”) announced that it had lowered our corporate credit rating to BB-. In addition, both rating agencies placed us on negative watch. In June 2003, Standard & Poor’s assigned a B- rating to our Zero Coupon Subordinated Notes due March 31, 2007. On November 19, 2003, Standard & Poor’s affirmed our corporate credit rating and the rating of our Zero Coupon Subordinated Notes. Standard & Poor’s outlook remains negative. In July 2003, Moody’s confirmed the credit ratings set forth above and assigned a B3 rating to our Zero Coupon Subordinated Notes. On November 21, 2003, Moody’s announced that it had further downgraded our senior implied credit rating, our 4.75% Convertible Senior Notes rating and our 7.25% Mandatorily Redeemable Convertible Preferred Securities rating to B1, B3 and Caa1, respectively, that it had rated our Zero Coupon Subordinated Notes as Caa1 and that it had changed our outlook to stable. Recently, Moody’s and Standard & Poor’s have rated the notes offered hereby                  and                 , respectively.

We do not have any credit rating downgrade provisions in our debt agreements or the agreements related to our compression equipment lease obligations that would accelerate their maturity dates. However, a further downgrade in our credit rating could materially and adversely affect the market price of the notes and our ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. Should this occur, we

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might seek alternative sources of funding. In addition, our significant leverage puts us at greater risk of default under one or more of our existing debt agreements if we experience an adverse change to our financial condition or results of operations. Our ability to reduce our leverage depends upon market and economic conditions, as well as our ability to execute liquidity enhancing transactions such as sales of non-core assets or our equity securities.

Risks related to our business

We are currently the subject of an SEC investigation.

On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the transactions underlying and other matters relating to the restatements of our financial statements announced in 2002. We have cooperated with the Fort Worth District Office Staff of the SEC in its investigation. Based upon our discussions to date with the Fort Worth District Office Staff of the SEC, we currently believe that a settlement of the investigation will be reached on terms that we do not believe will have a material adverse impact on our business, consolidated financial position, results of operations or cash flows. However, we can give no assurances in this regard, and we expect any settlement with the SEC to include findings of violations of the securities laws by us with respect to certain of the restated transactions. We understand that any resolution of the investigation reached by us with the Fort Worth District Office Staff of the SEC will have no legal effect until it is reviewed and, if appropriate, approved by the SEC in Washington, D.C., and we cannot predict what action might ultimately be taken against us by the SEC. As such, we do not anticipate announcing any resolution of the investigation unless and until such resolution is approved by the SEC in Washington, D.C.

We and certain of our officers and directors are named as defendants in putative class action lawsuits and in various derivative lawsuits.

Hanover and certain of its past and present officers and directors are named as defendants in a consolidated action pending in federal court that includes a putative securities class action, a putative class action arising under ERISA and shareholder derivative actions. The litigation relates principally to the matters involved in the transactions underlying the restatement of our financial statements. For a discussion of these restatements, see Notes 22 and 23 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement. See also “Management’s discussion and analysis of financial condition and results of operations—Previous restatements.” On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions brought against us. See “Business—Legal proceedings.” The terms of the proposed settlement provide for us to (1) make a cash payment of approximately $30 million (of which approximately $27 million was funded by payments from our directors’ and officers’ insurance carriers), (2) issue 2.5 million shares of our common stock and (3) issue a contingent note with a principal amount of $6.7 million. The note will be payable, together with accrued interest, on March 31, 2007 but can be extinguished (with no money owing under it) if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. In addition, upon the occurrence of a change of control of us, if the change of control, or shareholder approval of the change of control, occurs within 12 months after final court approval of the settlement, we will be obligated to contribute an additional $3 million to the settlement fund. As part of the settlement, we have also agreed to implement corporate governance enhancements, including

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allowing large shareholders to participate in the process to appoint two independent directors to our board of directors. The settlement remains subject to, among other things, court approval, could be the subject of an objection by potentially affected persons, and, under certain circumstances, including if the number of opt-outs from the settlement exceeds a certain number, can be terminated by us. There can be no assurances that the settlement will be approved or finalized, or that it will be finally approved or finalized on the terms agreed upon in the Stipulation of Settlement. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the putative consolidated securities class action.

As of September 30, 2003, we had incurred approximately $14.0 million in legal-related expenses in connection with the internal investigations, the putative class action securities and ERISA lawsuits, the derivative lawsuits and the SEC investigation. Of this amount, we advanced approximately $2.2 million on behalf of certain current and former officers and directors in connection with the above-described proceedings. We intend to advance the litigation costs of our current and former officers and directors, subject to the limitations imposed by Delaware and other applicable law and our certificate of incorporation and bylaws. We expect to incur approximately $4.4 million in additional legal fees and administrative expenses in connection with the settlement of the litigation, the SEC investigation and advances on behalf of current and former officers and directors for legal fees. If the settlement is not approved by the court or is otherwise not finalized, we will be forced to further litigate these claims. This further litigation will distract management’s attention from current operations, will result in our incurring additional costs, will cause uncertainty regarding our future prospects and could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

We are still in the process of improving our infrastructure capabilities, including our internal controls and procedures, which were strained by our rapid growth, to reduce the risk of future accounting and financial reporting problems.

We experienced rapid growth from 1998 through 2001 primarily as a result of acquisitions, particularly during 2000 and 2001, during which period our total assets increased from approximately $753 million as of December 31, 1999 to approximately $2.3 billion as of December 31, 2001. Our growth exceeded our infrastructure capabilities and strained our internal control environment. During 2002, we announced a series of restatements of transactions that occurred in 1999, 2000 and 2001. These restatements of our financial statements ultimately reduced our initially reported pre-tax income by $3.1 million, or 4.9%, for the year ended December 31, 1999, by $14.5 million, or 15.5%, for the year ended December 31, 2000, and by $0.4 million, or 0.3%, for the year ended December 31, 2001, although certain restatements resulted in a larger percentage adjustment on a quarterly basis.

During 2002, a number of company executives involved directly and indirectly with the transactions underlying the restatements resigned, including our former Chief Executive Officer, Chief Financial Officer and Vice Chairman of our board of directors, Chief Operating Officer and the head of our international operations. During and after 2002, we hired and appointed a new Chief Executive Officer and Chief Financial Officer, hired and appointed our first General Counsel, and hired a new Controller and managers of Human Resources and Policy Administration. In addition, during 2002, we added three independent directors to our board of directors and elected an independent Chairman of the Board from among the three new directors.

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Under the direction of our board of directors and new management, we have been reviewing and continue to review our internal controls and procedures for financial reporting and substantially enhanced certain of our controls and procedures. We have begun to implement a new enterprise resource planning system to better integrate our accounting functions, particularly to better integrate acquired companies. We have made personnel changes and hired additional qualified staff in the legal, accounting, finance and human resource areas and are utilizing third parties to assist with certain aspects of our integration. We have hired a third party to perform internal audit functions for us and anticipate hiring internal personnel to perform this function. Our new management has also adopted policies and procedures, including disseminating a new code of conduct applicable to all employees, to better assure compliance with applicable laws, regulations and ethical standards.

Although we are in the process of implementing improved internal controls and procedures, full implementation will be accomplished over a period of time and, unless and until these efforts are successfully completed, we could experience future accounting and financial reporting problems.

Unforeseen difficulties with the implementation of our enterprise resource planning system could adversely affect our internal controls and our business.

We have contracted with Oracle Corporation to assist us with the design and implementation of a new enterprise resource planning system which will support our human resources, accounting, estimating, financial, fleet and job management and customer systems. We are currently implementing this system. The efficient execution of our business is dependent upon the proper functioning of our internal systems. Any significant failure or malfunction of our enterprise resource planning system may result in disruptions of our operations. Our results of operations could be adversely effected if we encounter unforeseen problems with respect to the implementation or operation of this system.

We require a substantial amount of capital to expand our compressor rental fleet and our complementary businesses.

During 2003, we plan to spend approximately $150 to $175 million on capital expenditures, including (1) rental equipment fleet additions, (2) approximately $60 million on equipment overhauls and other maintenance capital and (3) our additional $15 million investment in Belleli. The amount of these expenditures may vary depending on conditions in the natural gas industry. In addition, our bank credit facility restricts the amount we can spend on capital expenditures in 2003 to no more than $200 million. During the nine months ended September 30, 2003, we spent approximately $105.2 million in continued expansion and maintenance of our rental fleet and other businesses.

Historically, we have funded our capital expenditures through internally generated funds, sale leaseback transactions and debt and equity financing. While we believe that cash flow from our operations and borrowings under our existing bank credit facility will provide us with sufficient cash to fund our planned 2003 capital expenditures, we cannot be sure that these sources will be sufficient. As of September 30, 2003, we had approximately $25.0 million of credit capacity remaining (after giving effect to the covenant limitations in the agreement) under our bank credit facility, and our available cash balance was $33.5 million. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

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Our ability to substitute compression equipment under our compression equipment lease obligations is limited and there are risks associated with reaching that limit prior to the expiration of the lease term.

We are the lessee in five transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment we own that we are substituting is equal to or greater than the value of the equipment owned by special purpose entities that is being substituted. We generally substitute equipment when a lease customer of ours exercises a contractual right or otherwise desires to buy the leased equipment or when fleet equipment owned by the special purpose entities becomes obsolete or is selected by us for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to, among other restrictions, a percentage of the termination value under each lease. The termination value is equal to (1) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (2) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity or to the holders of the notes issued by the special purpose entity or their agents. In the following table, termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by our compression equipment operating leases. The aggregate amount of replacement equipment substituted to date (in dollars and percentage of termination value), the termination value and the substitution percentage limitation relating to each of our compression equipment operating leases to date as of September 30, 2003 are as follows:

Lease	Value of Substituted Equipment		Percentage of Termination Value(1)		Termination Value(1)		Substitution Limitation as Percentage of Termination Value		Lease Termination Date
	(In millions)				(In millions)
June 1999(2)	$	32.0	16.0	%	$	200.0	25	%	June 2004
March and August 2000		25.6	12.8	%		200.0	25	%	March 2005
October 2000		20.0	11.6	%		172.6	25	%	October 2005
August 2001		24.7	8.0	%		309.3	25	%	September 2008
August 2001		19.4	7.5	%		257.7	25	%	September 2011
Total	$	121.7			$	1,139.6

(1) Termination value assumes all accrued rents paid before termination.

(2) We intend to use the net proceeds from the proposed offering of our senior notes together with available cash to repay the outstanding indebtedness under our June 1999 equipment lease notes.

In the event we reach the substitution limitation prior to a lease termination date, we will not be able to effect any additional substitutions with respect to such lease. This inability to substitute could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

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A prolonged, substantial reduction in oil or gas prices, or prolonged instability in domestic or global energy markets, could adversely affect our business.

Our operations depend upon the levels of activity in natural gas development, production, processing and transportation. In recent years, oil and gas prices and the level of drilling and exploration activity have been extremely volatile. For example, oil and gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil and gas prices or significant instability in energy markets. As a result, the demand for our gas compression and oil and gas production equipment would be adversely affected. Any future significant, prolonged decline in oil and gas prices could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Erosion of the financial condition of our customers can also adversely affect our business. During times when the oil or natural gas market weakens, the likelihood of the erosion of the financial condition of these customers increases. If and to the extent the financial condition of our customers declines, our customers could seek to preserve capital by canceling or delaying scheduled maintenance of their existing gas compression and oil and gas production equipment and determining not to purchase new gas compression and oil and gas production equipment. In addition, upon the financial failure of a customer, we could experience a loss associated with the unsecured portion of any of our outstanding accounts receivable.

Recently, due in part to a deterioration in market conditions, we have experienced a decline in revenues and profits. Our business recorded a $116.1 million net loss for the year ended December 31, 2002 and a $136.3 million net loss for the nine months ended September 30, 2003. Our results for the year ended December 31, 2002 and the nine months ended September 30, 2003 have been affected by an increase in selling, general and administrative expenses, depreciation expense, foreign currency translation expense, interest expense, goodwill impairments, asset impairments, write-downs of discontinued operations and the cumulative effect of an accounting change. If market conditions continue to deteriorate, there could be a material decline in our business, consolidated financial condition, results of operations and cash flows.

There are many risks associated with conducting operations in international markets.

We operate in many different geographic markets, some of which are outside the United States. Changes in local economic or political conditions, particularly in Latin America or Canada, could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Additional risks inherent in our international business activities include the following:

•  difficulties in managing international operations;

•  unexpected changes in regulatory requirements;

•  tariffs and other trade barriers which may restrict our ability to enter into new markets;

•  potentially adverse tax consequences;

•  expropriation of property or restrictions on repatriation of earnings;

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•  difficulties in establishing new international offices and risks inherent in establishing new relationships in foreign countries;

•  the burden of complying with foreign laws; and

•  fluctuations in currency exchange rates and the value of the U.S. dollar, particularly with respect to our operations in Argentina and Venezuela.

In addition, our future plans involve expanding our business in international markets where we currently do not conduct business. Our decentralized management structure and the risks inherent in establishing new business ventures, especially in international markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Some of the international markets in which we operate or plan to operate in the future are politically unstable and are subject to occasional civil unrest, such as Western Africa. Riots, strikes, the outbreak of war or terrorist attacks in foreign locations could also adversely affect our business. We have not obtained insurance against terrorist attacks and, due to its limited availability and high cost, do not expect to obtain such insurance in the future.

Political conditions and fluctuations in currency exchange rates in Argentina and Venezuela could materially and adversely affect our business.

We have substantial operations in Argentina and Venezuela. As a result, adverse political conditions and fluctuations in currency exchange rates in Argentina and Venezuela could materially and adversely affect our business.

In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on fund transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts could either be made at an exchange rate negotiated by the parties or, if no such agreement were reached, a preliminary payment could be made based on a one dollar to one peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 business days of the devaluation. We have renegotiated all of our agreements in Argentina. As a result of these negotiations, we received approximately $11.2 million in reimbursements in 2002 and $0.7 million in the first nine months of 2003. During the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million for assets exposed to currency translation in Argentina. For the nine months ended September 30, 2003, our Argentine operations represented approximately 5% of our revenue and 9% of our gross margin. During the year ended December 31, 2002, we recorded an exchange loss of approximately $9.9 million for assets exposed to currency translation in Argentina. For the year ended December 31, 2002, our Argentine operations represented approximately 5% of our revenue and 7% of our gross margin. The economic situation in Argentina is subject to change. To the extent that the situation in Argentina deteriorates, exchange controls continue in place and the value of the peso against the dollar is reduced further, our results of operations in Argentina could be materially and adversely affected which could result in reductions in our net income.

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In addition, during the nine months ended September 30, 2002, we recorded an exchange loss of approximately $1.9 million for assets exposed to currency translation in Venezuela and recorded a translation gain of approximately $0.5 million for all other countries. For the nine months ended September 30, 2003, our Venezuelan operations represented approximately 11% of our revenue and 18% of our gross margin. During the year ended December 31, 2002, we recorded an exchange loss of approximately $5.8 million for assets exposed to currency translation in Venezuela. For the year ended December 31, 2002, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross margin. At September 30, 2003, we had approximately $25.0 million in accounts receivable related to our Venezuelan operations.

In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production has dropped substantially. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, talks of a settlement break down, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption in our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the nine months ended September 30, 2003, we recognized approximately $2.7 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues.

Many of our compressor leases with customers have short initial terms and we cannot be sure that the leases for these rental compressors will be renewed after the end of the initial lease term.

The length of our compressor leases with customers varies based on operating conditions and customer needs. In most cases, under currently prevailing lease rates, the initial lease terms are not long enough to enable us to fully recoup the average cost of acquiring or fabricating the equipment. We cannot be sure that a substantial number of our lessees will continue to renew their leases or that we will be able to re-lease the equipment to new customers or that any renewals or re-leases will be at comparable lease rates. The inability to renew or re-lease a substantial portion of our compressor rental fleet would have a material adverse effect upon our business, consolidated financial condition, results of operations and cash flows.

We operate in a highly competitive industry.

We experience competition from companies that may be able to more quickly adapt to technological and other changes within our industry and throughout the economy as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies. We also may not be able to take advantage of certain opportunities or make certain investments because of our significant leverage and the restrictive covenants in our bank credit facility, the agreements related to our compression equipment lease obligations and our

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other obligations. In times of weak market conditions, we may experience reduced profit margins from increased pricing pressure. We may not be able to continue to compete successfully in this market or against such competition. If we cannot compete successfully, we may lose market share and our business, consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Natural gas operations entail inherent risks that may result in substantial liability to us.

Natural gas operations entail inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could result in uncontrollable flows of gas or well fluids, fires and explosions. These risks may expose us, as an equipment operator or fabricator, to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. We have obtained insurance against liability for personal injury, wrongful death and property damage, but we cannot be sure that the insurance will be adequate to cover the liability we may  incur. Insurance premium pricing is highly volatile and we cannot be sure that we will be able to obtain insurance in the future at a reasonable cost or at all. Our business, consolidated financial condition, results of operations and cash flows could be materially adversely affected if we incur substantial liability and the damages are not covered by insurance or are in excess of policy limits.

Our ability to manage our business effectively will be weakened if we lose key personnel.

We depend on the continuing efforts of our executive officers and senior management. The departure of any of our key personnel could have a material adverse effect on our business, operating results and financial condition. We do not maintain key man life insurance coverage with respect to our executive officers or key management personnel. In addition, we believe that our success depends on our ability to attract and retain additional qualified employees. There is significant demand in our industry for qualified engineers and mechanics to manufacture and repair natural gas compression equipment. If we fail to retain our skilled personnel and to recruit other skilled personnel, we could be unable to compete effectively.

There is a risk that the Internal Revenue Service or another taxing authority would not agree with our treatment of sale leaseback transactions which could increase our taxes.

We treat our sale leaseback transactions as financing arrangements for income tax and certain other tax purposes. A tax treatment inconsistent with our position could have a material adverse effect on our financial condition, results of operations and liquidity. We intend to continue to treat the leases as a secured financing arrangement for income and certain other tax purposes, which is consistent with how the leases are intended to be treated for bankruptcy law and state law purposes. If the Internal Revenue Service or another taxing authority were to successfully contend that the leases or any of our other operating leases should be treated as a sale leaseback of equipment rather than a secured financing arrangement, we may owe significant additional taxes. This result may affect our ability to make payments on our debt or our compression equipment lease obligations.

Our business is subject to a variety of governmental regulations relating to the environment, health and safety.

Our business is subject to a variety of federal, state, local and foreign laws and regulations relating to the environment, health and safety. These laws and regulations are complex, change frequently and have tended to become more stringent over time. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and

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issuance of injunctions as to future compliance. From time to time as part of the regular overall evaluation of our operations, including newly acquired operations, we apply for or amend facility permits with respect to stormwater or wastewater discharges, waste handling, or air emissions relating to painting and blasting, which subjects us to new or revised permitting conditions that may be onerous or costly to comply with. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks or pipelines and other regulated units, all of which may impose additional compliance and permitting obligations.

We are evaluating the impact on our operations of recently promulgated air emission regulations under the Clean Air Act relating to non-road engines. We intend to implement any equipment upgrades or permit modifications required by these air emission regulations according to the required schedule of compliance. We do not anticipate, however, that any changes or updates in response to such regulations, or any other anticipated permit modifications (for stormwater, other air emission sources or otherwise) or anticipated ongoing regulatory compliance obligations will have a material adverse effect on our operations either as a result of any enforcement measures or through increased capital costs. Based on our experience to date, we believe that the future cost of compliance with existing laws and regulations will not have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. However, future events, such as compliance with more stringent laws, regulations or permit conditions, a major expansion of our operations into more heavily regulated activities, more vigorous enforcement policies by regulatory agencies, or stricter or different interpretations of existing laws and regulations could require us to make material expenditures.

We have conducted preliminary environmental site assessments with respect to some, but not all, properties currently owned or leased by us, usually in a pre-acquisition context. Some of these assessments have revealed that soils and/or groundwater at some of our facilities are contaminated with hydrocarbons, heavy metals and various other regulated substances. With respect to newly acquired properties, we do not believe that our operations caused or contributed to any such contamination in any material respect and we are not currently under any governmental orders or directives requiring us to undertake any remedial activity at such properties. We typically will develop a baseline of site conditions so we can establish conditions at the outset of our operations on such property. However, the handling of petroleum products and other regulated substances is a normal part of our operations and we have experienced occasional minor spills or incidental leakage in connection with our operations. Certain properties previously owned or leased by us were determined to be affected by soil contamination. Where such contamination was identified and determined by us to be our responsibility, we conducted remedial activities at these previously-held properties to the extent we believed necessary to meet regulatory standards and either sold the owned properties to third parties or returned the leased properties to the lessors. Based on our experience to date and the relatively minor nature of the types of contamination we have identified to date, we believe that the future cost of necessary investigation or remediation on our current properties will not have a material adverse effect on our business, consolidated financial condition, results of operations, and cash flows. We cannot be certain, however, that clean-up standards will not become more stringent, or that we will not be required to undertake any remedial activities involving any material costs on any of these current or previously held properties in the future or that the discovery of unknown contamination or third-party claims made with respect to current or previously owned or leased properties may not result in material costs.

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Where you can find more information

This prospectus supplement and the accompanying prospectus do not contain all of the information included in the registration statement and all of the exhibits and schedules thereto. For further information about Hanover, you should refer to the registration statement of which the accompanying prospectus is a part. Summaries of agreements or other documents in this prospectus supplement and the accompanying prospectus are not necessarily complete. Please refer to the exhibits to the registration statement for complete copies of such documents.

We file annual, quarterly and current reports, proxy statements and other information with the SEC (File No. 1-13071). Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330.

We maintain a website which can be found at http://www.hanover-co.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and the amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available on our website. Unless specifically incorporated by reference in this prospectus supplement or the accompanying prospectus, information that you may find on our website is not part of this prospectus supplement.

Our common stock is listed on the New York Stock Exchange under the symbol “HC.” Our reports, proxy statements and other information may be read and copied at the New York Stock Exchange at 30 Broad Street, New York, New York 10005.

The SEC allows us to “incorporate by reference” the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus supplement and the accompanying prospectus and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and all documents we subsequently file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until all of the securities described in this prospectus supplement and the accompanying prospectus are sold:

•  our Annual Report on Form 10-K for the year ended December 31, 2002;

•  our Quarterly Reports on Form 10-Q/A for the three months ended March 31, 2003, on Form 10-Q for the three months ended June 30, 2003 and on Form 10-Q/A for the three months ended September 30, 2003;

•  our Current Reports on Form 8-K, filed with the SEC on February 3, 2003, February 6, 2003, February 7, 2003, February 12, 2003, March 5, 2003 (excluding the information furnished in Item 9 thereof, which is not deemed filed and which is not incorporated by reference herein), March 17, 2003, May 14, 2003, July 28, 2003 and November 18, 2003; and

•  all filings we make pursuant to the Securities Exchange Act of 1934 after the date of this prospectus supplement and prior to consummation of this offering.

We will provide copies of these filings and any exhibit specifically incorporated by reference into these filings at no cost by request directed to us at the following address or telephone number:

Hanover Compressor Company

Attention: Corporate Secretary

12001 N. Houston Rosslyn

Houston, Texas 77086

(281) 447-5175

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Use of proceeds

We estimate that the net proceeds from this offering (after deducting discounts to the underwriters and estimated expenses of the offering) will be approximately $96 million (or approximately $110 million if the underwriters exercise their over-allotment option in full). We intend to use the net proceeds from this offering to repay a portion of the outstanding indebtedness under our bank credit facility.

At September 30, 2003, we had outstanding borrowings of approximately $172 million (3.4% interest rate per annum as of September 30, 2003) and outstanding letters of credit of approximately $71.7 million under our bank credit facility, which matures on November 30, 2004.

We intend to issue, concurrently with this offering of the notes, $200 million in aggregate principal amount of senior notes that are guaranteed on a senior subordinated basis by HCLP. We intend to use the net proceeds from our senior notes offering of approximately $193 million to repay a portion of the outstanding indebtedness under our 1999A equipment lease notes due June 2004. If we close both the concurrent offering of our senior notes and the offering of the notes offered hereby, we will satisfy the condition that we effect at least $275 million of new financings on required terms to close our Proposed Bank Credit Facility, as more fully described in “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources.” The sale of the notes offered hereby and the sale of the senior notes are not contingent upon each other.

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Price range of common stock

Our common stock is listed on the New York Stock Exchange under the symbol “HC.” As of November 7, 2003, 82,297,300 shares of our common stock were issued and held of record by approximately 707 holders. On December 4, 2003, the last reported sales price of our common stock on the New York Stock Exchange was $10.13. The following table presents, for the periods indicated, the range of high and low quarterly closing sales prices of our common stock, as reported on the New York Stock Exchange.

	Price
	High		Low
Year ended December 31, 2001
First Quarter	$	44.38	$	29.25
Second Quarter	$	40.45	$	29.00
Third Quarter	$	34.00	$	19.00
Fourth Quarter	$	30.40	$	19.90
Year ended December 31, 2002
First Quarter	$	25.52	$	10.50
Second Quarter	$	20.33	$	11.56
Third Quarter	$	13.50	$	6.80
Fourth Quarter	$	11.98	$	6.20
Year ended December 31, 2003
First Quarter	$	10.10	$	6.00
Second Quarter	$	11.70	$	6.85
Third Quarter	$	12.19	$	9.00
Fourth Quarter (through December 4, 2003)	$	10.81	$	9.21

Dividend policy

We have not paid any cash dividends on our common stock since our formation and do not anticipate paying such dividends in the foreseeable future. Our board of directors anticipates that all cash flow generated from operations in the foreseeable future will be retained and used to pay down debt, and to develop and expand our business. Our bank credit facility limits the payment of cash dividends on our common stock to 25% of our net income for the period from December 3, 2001 through November 30, 2004. Our Proposed Bank Credit Facility will prohibit our payment of cash dividends on our common stock. Any future determinations to pay cash dividends on the common stock will be at the discretion of the our board of directors and will be dependent upon our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by our board of directors.

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Capitalization

The following table shows:

•  our actual capitalization as of September 30, 2003; and

•  our capitalization as of September 30, 2003, as adjusted to give effect to the offering of $100 million aggregate principal amount of the notes at par and the application of the estimated net proceeds of $96 million and our concurrent offering of $200 million aggregate principal amount of our senior notes at par and the application of the estimated net proceeds of $193 million, and the closing of our Proposed Bank Credit Facility. See “The offering—Refinancing.”

You should read this table in conjunction with the information set forth under “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements, the accompanying notes and other financial information included or incorporated by reference in this prospectus supplement. This table does not reflect the possible exercise of the underwriters’ option to purchase up to an additional $15 million aggregate principal amount of notes to cover over-allotments.

In January 2003, the FASB issued FIN 46, an interpretation of ARB 51. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $897 million in compression equipment assets, net of accumulated depreciation, and approximately $1,139.6 million in compression equipment lease obligations (including $1,105.0 million in debt and $34.6 million in minority interest obligations) to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense.

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	As of September 30, 2003
	Actual			As adjusted(1)
(In thousands, except par value and share amounts)				(Unaudited)
Cash and cash equivalents(2)	$	33,455		$	15,344
Short-term debt
Belleli—factored receivables	$	22,815		$	22,815
Belleli—revolving credit facility		12,441			12,441
Other, interest at 5.0%, due 2004		5,295			5,295
Total short-term debt	$	40,551		$	40,551
Long-term debt, including current maturities
Bank credit facility(3)	$	172,000		$	—
Proposed Bank Credit Facility(4)		—			72,000
4.75% convertible senior notes due 2008		192,000			192,000
Notes offered hereby		—			100,000
1999A equipment lease notes, interest at 3.4%, due June 2004(5)		194,000			—
2000A equipment lease notes, interest at 3.4%, due March 2005(5)		193,600			193,600
2000B equipment lease notes, interest at 3.4%, due October 2005(5)		167,411			167,411
2001A equipment lease notes, interest at 8.5%, due September 2008(5)		300,000			300,000
2001B equipment lease notes, interest at 8.8%, due September 2011(5)		250,000			250,000
% senior notes due 2010		—			200,000
Zero coupon subordinated notes due March 31, 2007		180,536			180,536
PIGAP note, interest at 6.0%, due 2053(6)		59,756			59,756
Real estate mortgage, interest at 3.2%, collateralized by certain land and buildings, payable through September 2004		3,000			3,000
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		2,049			2,049
Total long-term debt, including current maturities	$	1,714,352		$	1,720,352
Mandatorily Redeemable Convertible Preferred Securities(7)	$	86,250		$	86,250
Minority interest (obligations under compression equipment leases)(5)	$	34,628		$	28,628
Common stockholders’ equity
Common stock, $.001 par value, 200,000,000 shares authorized; 82,422,276 shares issued(8)	$	82		$	82
Additional paid-in capital		854,316			854,316
Deferred employee compensation – restricted stock grants		(6,101	)		(6,101	)
Accumulated other comprehensive loss		2,685			2,685
Retained earnings (deficit)(9)		(32,151	)		(34,063	)
Treasury stock—253,115 common shares, at cost		(2,325	)		(2,325	)
Total common stockholders’ equity	$	816,506		$	814,594
Total capitalization	$	2,692,287		$	2,690,375

(1) Reflects (a) the issuance at par of $100 million aggregate principal amount of the notes offered hereby and the use of the net proceeds therefrom, (b) the issuance at par of $200 million aggregate principal amount of our senior notes and the use of the net proceeds therefrom, and (c) the closing of the Proposed Bank Credit Facility.

(2) As of September 30, 2003, on an as adjusted basis after giving effect to the sale of the notes and the proposed concurrent offering of our senior notes and the application of the net proceeds, and the closing of the Proposed Bank Credit Facility, our cash and cash equivalents would have been reduced to reflect the approximately $18.1 million in costs associated with these proposed transactions, including underwriting discounts, bank fees and other expenses.

(3) As of September 30, 2003, we had outstanding borrowings of approximately $172 million under our bank credit facility (3.4% rate at September 30, 2003) and approximately $25 million of credit capacity remaining (after giving effect to the covenant limitations in the bank credit facility), and our available cash balance was $33.5 million.

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(4) As of September 30, 2003, on an as adjusted basis after giving effect to the sale of the notes and the proposed concurrent offering of our senior notes and the application of the net proceeds, and the closing of the Proposed Bank Credit Facility, we would have had outstanding borrowings of approximately $72 million under our Proposed Bank Credit Facility, and approximately $124 million of credit capacity remaining (after giving effect to the covenant limitations in the Proposed Bank Credit Facility) and our available cash balance would have been approximately $15.3 million.

(5) As of September 30, 2003, (a) the minority interest pursuant to the 1999A equipment lease notes was $6.0 million, resulting in a termination value for the 1999A equipment lease notes of $200.0 million, (b) the minority interest pursuant to the 2000A equipment lease notes was $6.4 million, resulting in a termination value for the 2000A equipment lease notes of $200.0 million, (c) the minority interest pursuant to the 2000B equipment lease notes was $5.2 million, resulting in a termination value for the 2000B equipment lease notes of $172.6 million, (d) the minority interest pursuant to the 2001A equipment lease notes was $9.3 million, resulting in a termination value for the 2001A equipment lease notes of $309.3 million, and (e) the minority interest pursuant to the 2001B equipment lease notes was $7.8 million, resulting in a termination value for the 2001B equipment lease notes of $257.8 million.

(6) In October 2003, our PIGAP II joint venture, which repressurizes oil fields in eastern Venezuela for Petroleos de Venezuela, S.A., closed a $230 million project financing that is non-recourse to us other than with respect to our investment in the project. Proceeds from the loan were used to repay The Williams Companies, Inc. and us, based on our respective ownership percentages, for the initial funding of construction-related costs. We own 30% of the project and received approximately $78.5 million from the financing and a distribution of earnings from the project of which approximately $59.9 million was used to pay off the PIGAP note payable to Schlumberger related to the project.

(7) The Mandatorily Redeemable Preferred Securities were issued by a consolidated subsidiary trust that may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes, if any, in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 with respect to the consolidated subsidiary trust that has issued the Mandatorily Redeemable Preferred Securities.

(8) Does not include shares of Hanover common stock issuable upon exercise of employee stock options or exercise of warrants to purchase common stock or issuable upon exercise of our Mandatorily Redeemable Convertible Preferred Securities, our outstanding convertible notes or the notes offered hereby. See “Description of certain other financial obligations.” Also does not include the 2.5 million shares of Hanover common stock to be issued in connection with our agreement to settle the putative securities class action, the putative ERISA class action and the shareholder derivative actions filed against us, which agreement is subject to, among other things, court approval.

(9) As adjusted, retained deficit reflects $1.9 million (net of tax) of estimated charges associated with the impact of expensing the deferred financing fees on the debt repaid.

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Selected historical

consolidated financial data

In the table below, we have provided you with our selected historical consolidated financial data. The historical consolidated financial data as of and for each of the fiscal years in the five-year period ended December 31, 2002 were derived from our audited consolidated financial statements. The historical consolidated financial data as of and for the nine months ended September 30, 2003 and 2002 were derived from our unaudited condensed consolidated financial statements. See “Management’s discussion and analysis of financial condition and results of operations—Nine months ended September 30, 2003 compared to nine months ended September 30, 2002—Form 10-Q/A.” In the opinion of management, such unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations of such interim periods.

The information in this section should be read along with our consolidated financial statements, the accompanying notes and other financial information included or incorporated by reference in this prospectus supplement.

	Years Ended December 31,
	2002			2001(1)			2000(1)		1999(1)		1998
				(Restated)			(Restated)		(Restated)
(In thousands, except per share data)
Income Statement Data:
Revenues:
Domestic rentals	$	328,600		$	269,679		$	172,517	$	136,430	$	107,420
International rentals		189,700			131,097			81,320		56,225		40,189
Parts, service and used equipment		223,845			214,872			113,526		39,130		29,538
Compressor and accessory fabrication		114,009			223,519			90,270		52,531		67,453
Production and processing equipment fabrication		149,656			184,040			79,121		27,255		37,466
Equity in income of non-consolidated affiliates		18,811			9,350			3,518		1,188		1,369
Gain on change in interest in non-consolidated affiliate		—			—			864		—		—
Other		4,189			8,403			5,688		5,371		2,916
Total revenues(2)		1,028,810			1,040,960			546,824		318,130		286,351
Expenses:
Domestic rentals		120,740			95,203			60,336		46,184		36,570
International rentals		57,579			45,795			27,656		18,765		12,816
Parts, service and used equipment		179,844			152,701			79,958		26,504		21,735
Compressor and accessory fabrication		99,446			188,122			76,754		43,663		58,144
Production and processing equipment fabrication		127,442			147,824			62,684		20,278		25,781
Selling, general and administrative		153,676			92,172			51,768		33,782		26,626
Foreign currency translation		16,753			6,658			—		—		—
Other		27,607			9,727			—		—		—
Depreciation and amortization(3)		151,181			88,823			52,188		37,337		37,154
Goodwill impairment(3)		52,103			—			—		—		—
Leasing expense(4)		91,506			78,031			45,484		22,090		6,173
Interest expense(5)		43,352			23,904			15,048		9,064		11,716
Total expenses		1,121,229			928,960			471,876		257,667		236,715
Income (loss) from continuing operations before income taxes		(92,419	)		112,000			74,948		60,463		49,636
Provision for (benefit from) income taxes		(17,576	)		42,388			27,818		22,008		19,259
Income (loss) from continuing operations		(74,843	)		69,612			47,130		38,455		30,377
Income (loss) from discontinued operations, net of tax(2)		(41,225	)		2,965			2,509		—		—
Cumulative effect of accounting change for derivative instruments, net of tax		—			(164	)		—		—		—
Net income (loss)	$	(116,068	)	$	72,413		$	49,639	$	38,455	$	30,377
Net income (loss) per common share
Basic	$	(1.46	)	$	1.00		$	0.80	$	0.67	$	0.53
Diluted	$	(1.46	)	$	0.94		$	0.75	$	0.63	$	0.50
Weighted average common and equivalent shares outstanding
Basic		79,500			72,355			61,831		57,048		56,936
Diluted		79,500			81,175			66,366		61,054		60,182

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	Years Ended December 31,
	2002			2001(1)			2000(1)			1999(1)			1998
				(Restated)			(Restated)			(Restated)
(In thousands, except per share data)
Cash flows provided by (used in):
Operating activities	$	195,717		$	152,774		$	29,746		$	71,610		$	31,147
Investing activities		(193,703	)		(482,277	)		(67,481	)		(95,502	)		(14,699	)
Financing activities		(4,232	)		307,259			77,589			18,218			(9,328	)
Balance Sheet Data (end of period):
Working capital	$	212,085		$	275,074		$	282,730		$	103,431		$	113,264
Property, plant and equipment, net(6)		1,167,675			1,151,513			574,703			498,877			392,498
Total assets(6)		2,154,029			2,265,776			1,246,172			753,387			614,590
Total debt(6)		554,944			509,813			113,358			85,648			157,387
Mandatorily redeemable convertible preferred securities		86,250			86,250			86,250			86,250			—
Total common stockholders’ equity		927,626			1,039,468			628,947			365,928			315,470

	Nine Months Ended September 30,
	2003			2002
	(Unaudited)
(In thousands, except per share data)
Income Statement Data:
Revenues:
Domestic rentals	$	241,728		$	249,276
International rentals		151,973			143,612
Parts, service and used equipment		118,327			172,826
Compressor and accessory fabrication		81,839			85,284
Production and processing equipment fabrication		211,152			99,771
Equity in income of non-consolidated affiliates		16,873			13,928
Other		3,356			2,416
Total revenues(2)		825,248			767,113
Expenses:
Domestic rentals		94,043			89,358
International rentals		47,682			39,855
Parts, service and used equipment		85,781			143,904
Compressor and accessory fabrication		73,950			73,884
Production and processing equipment fabrication		188,802			84,329
Selling, general and administrative		119,658			107,644
Foreign currency translation		1,336			13,339
Provision for estimated cost of litigation settlement(7)		40,253			—
Other		2,951			14,837
Depreciation and amortization(6)		126,886			82,367
Goodwill impairment(3)		—			47,500
Leasing expense(4)(6)		43,139			68,206
Interest expense(4)(5)(6)		57,283			31,137
Total expenses		881,764			796,360
Loss from continuing operations before income taxes		(56,516	)		(29,247	)
Provision for (benefit from) income taxes		(18,463	)		7,412
Loss from continuing operations		(38,053	)		(36,659	)
Loss from discontinued operations, including write downs, net of tax(2)		(11,382	)		(4,489	)
Cumulative effect of accounting change, net of tax(6)		(86,910	)		—
Net loss	$	(136,345	)	$	(41,148	)
Net income (loss) per common share
Basic	$	(1.69	)	$	(0.52	)
Diluted	$	(1.69	)	$	(0.52	)
Weighted average common and equivalent shares outstanding
Basic		80,907			79,338
Diluted		80,907			79,338

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	Nine Months Ended September 30,
	2003			2002
	(Unaudited)
(In thousands, except per share data)
Cash flows provided by (used in):
Operating activities	$	85,264		$	121,477
Investing activities		(75,971	)		(153,452	)
Financing activities		4,712			32,839
Balance sheet data (end of period):
Working capital(8)	$	55,716		$	246,393
Property, plant and equipment, net(6)		2,046,687			1,231,689
Total assets(6)		3,042,407			2,208,618
Total debt(6)		1,754,903			577,780
Mandatorily redeemable convertible preferred securities		86,250			86,250
Total common stockholders’ equity		816,506			990,876

(1) During 2002, we announced a series of restatements that ultimately reduced our initially reported pre-tax income by $3.1 million, or 4.9%, for the year ended December 31, 1999, by $14.5 million, or 15.5%, for the year ended December 31, 2000, and by $0.4 million, or 0.3%, for the year ended December 31, 2001, although certain restatements resulted in a larger percentage adjustment on a quarterly basis. For a description of these restatements, see Notes 22 and 23 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

(2) For a description of significant business acquisitions, see Note 2 to the consolidated financial statements for the year ended December 31, 2002 and Note 2 to the condensed consolidated financial statements for the three and nine months ended September 30, 2003 included in this prospectus supplement. In the fourth quarter of 2002, we decided to discontinue certain businesses. For a description of the discontinued operations, see Note 3 to the consolidated financial statements for the year ended December 31, 2002 and Note 13 to the condensed consolidated financial statements for the three and nine months ended September 30, 2003 included in this prospectus supplement.

(3) In June 2001, the FASB issued SFAS 142. Under SFAS 142, amortization of goodwill to earnings is discontinued. Instead, goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred. SFAS 142 was effective for us on January 1, 2002. For financial data relating to our goodwill and other intangible assets, see “Management’s discussion and analysis of financial condition and results of operations” and Note 9 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement for a discussion of SFAS 142 and the goodwill impairments we recorded during 2002.

(4) Prior to 2001, we entered into two interest rate swaps with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the swap counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $3.2 million and an unrealized loss of approximately $7.6 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the years ended December 31, 2002 and 2001, respectively. In addition, we recognized unrealized gains of approximately $4.1 million and $1.5 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002, respectively, and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts were reported as “Change in fair value of derivative financial instruments” in our consolidated statement of operations. We have reclassified these amounts as interest and lease expense to conform to the 2003 financial statement classification.

(5) We have reclassified the distributions on our Mandatorily Redeemable Convertible Securities as interest expense, and prior periods have been reclassified to conform to the 2003 financial statement classification.

(6) In accordance with FIN 46, for periods ending after June 30, 2003, we have included in our consolidated financial statements the special purpose entities that lease compression equipment to us. As a result, we

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have added approximately $897 million of compression equipment assets, net of accumulated depreciation, and approximately $1,139.6 million of our compression equipment lease obligations (including $1,105.0 million in debt) to our balance sheet as of September 30, 2003. As allowed by FIN 46, we have not restated our financial statements for periods prior to July 1, 2003 to include the compression equipment assets and compression equipment lease obligations. See “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates—Sale leaseback transactions.”

(7) On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions discussed in “Business—Legal proceedings.” See “Management’s discussion and analysis of financial condition and results of operations—Nine months ended September 30, 2003 compared to nine months ended September 30, 2002—Provision for estimated cost of litigation settlement.”

(8) Working capital decreased to $55.7 million at September 30, 2003 from $212.1 million at December 31, 2002. The decrease in working capital was primarily due to the reclassification of our $194 million 1999A equipment lease note, which matures in June 2004, to current debt. This obligation was recorded on our balance sheet in July 2003 upon consolidation of the entities which lease equipment to us when we adopted FIN 46 for our sale leaseback transactions.

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Management’s discussion and analysis of

financial condition and results of operations

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included in this prospectus supplement.

General

We are a global market leader in the full service natural gas compression business and are also a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Founded in 1990, and a public company since 1997, our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. In addition, through our ownership of Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalination plants, primarily for use in Europe and the Middle East.

We have grown through both internal growth and acquisitions. During 2003, we have been reducing our capital spending and are focusing on completing the integration of recent acquisitions. In addition, we have previously announced our plan to reduce our headcount by approximately 500 employees worldwide and to consolidate our fabrication operations into nine fabrication centers down from the 13 fabrication centers we had as of December 31, 2002. The estimated annualized savings from these actions are expected to be approximately $18 million. Some of these cost reductions were needed to align our costs with current sales levels. During the three months ended December 31, 2002, we accrued approximately $2.8 million in employee separation costs related to the reduction in workforce. During the nine months ended September 30, 2003, we paid approximately $1.3 million in separation benefits. Since December 31, 2002, our workforce has decreased by approximately 500 employees. However, some of this workforce reduction was outside of our original headcount reduction plan and we are continuing to focus on the further consolidation of our fabrication operations.

During the fourth quarter of 2002, we reviewed our business lines and our board of directors approved management’s recommendation to exit and sell our non-oilfield power generation facilities and certain used equipment business lines. The results from these businesses are reflected as discontinued operations in our consolidated financial statements and prior periods have been adjusted to reflect this presentation. Additionally, in the second and fourth quarters of 2002, we recorded certain write-downs, asset impairments and restructuring costs. A summary of these changes and the related impact on our financial results is discussed below.

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Recent events

Amendment to bank credit facility. In February 2003, we executed an amendment to our bank credit facility and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000. The amendment, effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment increased the commitment fee under the bank credit facility by 0.125% and increased the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest costs as a result of the amendment as compared to the bank credit facility prior to the amendment depends on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of our foreign subsidiaries. This amendment also restricts our capital spending to $200 million in 2003. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements. Pursuant to the amendment, our financial covenants become more restrictive on and after March 31, 2004. See “—Liquidity and capital resources.”

Exchange offer. In connection with the sale leaseback transactions entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes that are registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed by the deadline required by the agreement and we were required to pay additional lease expense in an amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased our lease expense by approximately $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

Panoche/Gates dispositions. In May 2003, we announced that we had agreed to sell our 49% membership interest in Wellhead Power Panoche, LLC (“Panoche”) and our 92.5% membership interest in Wellhead Power Gates, LLC (“Gates”) to Hal Dittmer and Fresno Power Investors Limited Partnership, who currently own the remaining interests in Panoche and Gates. Panoche and Gates own gas-fired peaking power plants of 49 megawatts and 46 megawatts, respectively. The Panoche transaction closed in June 2003 and the Gates transaction closed in September 2003. Total consideration for the transactions was approximately $27.2 million consisting of approximately $6.4 million in cash, $2.8 million in notes that mature in May 2004, a $0.5 million note that matures in September 2005 and the release of our obligations under a capital lease from GE Capital to Gates that had an outstanding balance of approximately $17.5 million at the time of the Gates closing. In addition, we were released from a $12 million letter of credit from us to GE Capital that was provided as additional credit support for the Gates capital lease.

Securities class actions. On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative

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actions discussed in “Business—Legal proceedings.” See “—Nine months ended September 30, 2003 compared to nine months ended September 30, 2002—Provision for estimated cost of litigation settlement.”

PIGAP II restructuring and our Zero Coupon Subordinated Notes due March 31, 2007. On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We had previously given notice of our intent to exercise the PIGAP put in January 2003. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from Hanover in August 2001 as part of the purchase price for the acquisition of Production Operators Corporation’s (“POC”) natural gas compression business, ownership interest in certain joint venture projects in South America, and related assets. As a result, we retained our interest in PIGAP. As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. We restructured the $150 million subordinated note as our Zero Coupon Subordinated Notes due March 31, 2007, which notes were issued to Schlumberger in such transaction and are being sold by Schlumberger in a registered public offering scheduled to close on December 8, 2003. Original issue discount accretes under the zero coupon notes at a rate of 11.0% per annum for their remaining life, up to a total principal amount of $262.6 million payable at maturity. The notes will accrue additional interest at a rate of 2.0% per annum upon the occurrence and during the continuance of an event of default under the notes. The notes will also accrue additional interest at a rate of 3.0% per annum if our consolidated leverage ratio, as defined in the indenture governing the notes, exceeds 5.18 to 1.0 as of the end of any two consecutive fiscal quarters. Notwithstanding the preceding, in no event will the total additional interest accruing on the notes exceed 3.0% per annum if both of the previously mentioned circumstances occur. The notes also contain a covenant that limits our ability to incur additional indebtedness if our consolidated leverage ratio exceeds 5.6 to 1.0, subject to certain exceptions.

Also on May 14, 2003, we agreed with Schlumberger Surenco, an affiliate of Schlumberger, to the modification of the repayment terms of a $58.0 million obligation that was accrued as a contingent liability on our balance sheet since the acquisition of POC and was associated with the PIGAP II joint venture. The obligation was converted into a non-recourse promissory note (the “PIGAP Note”) payable by Hanover Cayman Limited, our indirect wholly-owned consolidated subsidiary, with a 6% interest rate compounding semi-annually until maturity in December 2053. In October 2003, the PIGAP II joint venture closed on the project’s financing and distributed approximately $78.5 million to Hanover, of which approximately $59.9 million was used to pay off the PIGAP Note.

Recent significant acquisitions

In July 2002, we increased our ownership of Belleli, an Italian-based engineering, procurement and construction company that engineers and manufactures desalination plants and heavy wall reactors for refineries and processing plants for use primarily in Europe and the Middle East, to 40.3% from 20.3% by converting a $4.0 million loan, together with the accrued interest thereon, to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9.4 million loan, together with the accrued interest thereon, to the other principal owner of Belleli for additional equity ownership and began consolidating the results of Belleli’s operations. Belleli has three manufacturing facilities, one in Mantova, Italy and two in the United Arab Emirates (Jebel Ali and Hamriyah).

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In connection with our increase in ownership in November 2002, we had certain rights to purchase the remaining interest in Belleli and the right to market the entire company to a third party. During 2002, we also purchased certain operating assets of Belleli for approximately $22.4 million from a bankruptcy estate and leased these assets to Belleli for approximately $1.2 million per year, for seven years, for use in its operations. In August 2003, we exercised our option to acquire the remaining 49% interest in Belleli for approximately $15.0 million. We are in the process of completing our valuation of Belleli’s intangible assets, which we expect will be completed in the fourth quarter of 2003. We are also currently in the process of reviewing our strategy with respect to our investment in Belleli.

In August 2001, we acquired 100% of the issued and outstanding shares of POC from Schlumberger for $761 million in cash, our common stock and debt, subject to certain post-closing adjustments pursuant to the purchase agreement that to date have resulted in an increase in the purchase price to approximately $778 million due to an increase in net assets acquired. Under the terms of the purchase agreement, Schlumberger received approximately $270 million in cash (excluding the amounts paid for the increase in net assets), $150 million in a long-term subordinated note, which was subsequently restructured as our Zero Coupon Subordinated Notes due March 31, 2007 as discussed above and 8,707,693 shares of our common stock, or approximately 11% of our outstanding shares, which are required to be held by Schlumberger for at least three years following the closing date. The ultimate number of shares issued under the purchase agreement was determined based on the nominal value of $283 million divided by $32.50 per share, the 30-day average closing price of Hanover common stock as defined under the acquisition agreement and subject to a collar of $41.50 and $32.50. The estimated fair value of the stock issued was $212.5 million, based on the market value of the shares at the time the number of shares issued was determined, reduced by an estimated 20% discount due to the restrictions on the stock’s marketability. The POC acquisition was accounted for as a purchase and was included in our financial statements commencing on September 1, 2001.

We recorded approximately $71.4 million in goodwill related to the acquisition of POC. In addition, we recorded $9.8 million in estimated value of identifiable intangible assets. The purchase price was subject to certain post-closing adjustments, a contingent payment of up to $58 million by us to Schlumberger and additional contingent payments by us based on the realization of certain tax benefits by us over the next 15 years. As discussed above under  “—Recent events—PIGAP II restructuring and our Zero Coupon Subordinated Notes due March 31, 2007,” the contingent payment of up to $58 million was restructured on May 14, 2003 as a non-recourse promissory note payable by Hanover Cayman Limited.

In March 2001, we purchased OEC Compression Corporation in an all-stock transaction for approximately $101.8 million, including the assumption and payment of approximately $64.6 million of OEC debt. We paid an aggregate of approximately 1,146,000 shares of our common stock to stockholders of OEC. The acquisition was accounted for under the purchase method of accounting and is included in our financial statements commencing in April 2001.

In September 2000, we acquired the compression services division of Dresser-Rand Company for $177 million in cash and common stock, subject to certain post-closing adjustments pursuant to the acquisition agreement that to date have resulted in an increase in the purchase price to approximately $199 million due to increases in net assets acquired. In July 2000, we acquired PAMCO Services International for approximately $58 million in cash and notes. In June 2000, we acquired Applied Process Solutions, Inc. for approximately 2,303,000 shares of our common stock. These acquisitions were included in the results of operations from their respective acquisition dates.

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Results by segment

The following table summarizes our revenues, expenses and gross profit percentages for each of our business segments:

	Nine Months Ended September 30,						Years Ended December 31,
	2003			2002			2002			2001(1)			2000(1)
										(Restated)			(Restated)
(In thousands except for percentages)
Revenues:
Domestic rentals	$	241,728		$	249,276		$	328,600		$	269,679		$	172,517
International rentals		151,973			143,612			189,700			131,097			81,320
Parts, service and used equipment		118,327			172,826			223,845			214,872			113,526
Compressor and accessory fabrication		81,839			85,284			114,009			223,519			90,270
Production and processing equipment fabrication		211,152			99,771			149,656			184,040			79,121
Equity in income of non-consolidated affiliate		16,873			13,928			18,811			9,350			3,518
Other		3,356			2,416			4,189			8,403			6,552
	$	825,248		$	767,113		$	1,028,810		$	1,040,960		$	546,824
Expenses:
Domestic rentals	$	94,043		$	89,358		$	120,740		$	95,203		$	60,336
International rentals		47,682			39,855			57,579			45,795			27,656
Parts, service and used equipment		85,781			143,904			179,844			152,701			79,958
Compressor and accessory fabrication		73,950			73,884			99,446			188,122			76,754
Production and processing equipment fabrication.		188,802			84,329			127,442			147,824			62,684
	$	490,258		$	431,330		$	585,051		$	629,645		$	307,388
Gross profit percentage:
Domestic rentals		61	%		64	%		63	%		65	%		65	%
International rentals.		69	%		72	%		70	%		65	%		66	%
Parts, service and used equipment		28	%		17	%		20	%		29	%		30	%
Compressor and accessory fabrication.		10	%		13	%		13	%		16	%		15	%
Production and processing equipment fabrication		11	%		15	%		15	%		20	%		21	%

(1) In 2002, we determined to restate our financials for the years ended December 31, 2001, 2000 and 1999. Accordingly, revenues, expenses, income before taxes, net income and earnings per share have been restated for the years ended December 31, 2001, 2000 and 1999. See Notes 22 and 23 to our consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

Critical accounting policies and estimates

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and accounting policies, including those related to bad debts, inventories, fixed assets, investments, intangible assets, income taxes, warranty obligations, sale leaseback transactions, revenue recognition and contingencies and litigation.

We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. The results of this process form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and liquidity.

Allowances and reserves

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be

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required. During 2002, 2001 and 2000, we recorded approximately $7.1 million, $4.9 million and $3.2 million, respectively, in additional allowances for doubtful accounts. During the nine months ended September 30, 2003 and 2002, we recorded approximately $3.0 million and $2.8 million, respectively, in additional allowance for doubtful accounts.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those expected by management, additional inventory write-downs may be required.

Long-lived assets and investments

We review for the impairment of long-lived assets, including property, plant and equipment, goodwill, intangibles and investments in non-consolidated affiliates whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair market value and is charged to the period in which the impairment occurred. In addition, goodwill is evaluated at least annually pursuant to the requirements of SFAS 142 to determine if the estimated fair value of the reporting unit exceeds the net carrying value of the reporting unit, including the applicable goodwill. The estimates of fair market value are based upon management’s estimates of the present value of future cash flows. Management makes assumptions regarding the estimated cash flows and if these estimates or their related assumptions change, an impairment charge may be incurred.

We capitalize major improvements that we believe extend the useful life of an asset. Repairs and maintenance are expensed as incurred. Interest is capitalized during the fabrication period of compression equipment and facilities that are fabricated for use in our rental operations. The capitalized interest is recorded as part of the basis of the asset to which it relates and is amortized over the asset’s estimated useful life.

We hold minority interests in companies having operations or technology in areas that relate to our business, one of which is publicly traded and may experience volatile share prices. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Tax assets

We must estimate our expected future taxable income in order to assess the realizability of our deferred income tax assets. As of September 30, 2003, we reported a net deferred tax liability of $33.8 million, which included gross deferred tax assets of $272.8 million, net of a valuation allowance of $25.8 million. Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions and future financial conditions.

Additionally, we must consider any prudent and feasible tax planning strategies that might minimize the amount of deferred tax liabilities recognized or the amount of any valuation

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allowance recognized against deferred tax assets, if management has the ability to implement these strategies and the expectation of implementing these strategies if the forecasted conditions actually occur. The principal tax planning strategy available to us relates to the permanent reinvestment of the earnings of foreign subsidiaries. Assumptions related to the permanent reinvestment of the earnings of foreign subsidiaries are reconsidered annually to give effect to changes in our businesses and in our tax profile.

Sale leaseback transactions

Since 1999, we have entered into five sale leaseback transactions of compression equipment with special purpose entities. These sale leaseback transactions were previously evaluated for lease classification in accordance with SFAS 13, “Accounting for Leases.” In accordance with generally accepted accounting principles, the special purpose entities were not included in our consolidated financial statements for the periods ending prior to June 30, 2003 when the owners of the special purpose entities made a substantial residual equity investment of at least 3% of the total capital of the entity that is at risk during the entire term of the lease. In connection therewith, generally accepted accounting principles required us to:

•  estimate the remaining life of the asset at lease inception;

•  estimate the fair market value of the asset at lease inception;

•  estimate the leased equipment’s residual value at the end of the lease;

•  estimate certain costs to be incurred by us in connection with the lease;

•  estimate the present value of the lease payments under the lease; and

•  confirm that the substantial residual equity investment of at least 3% of the total capital of the entity continues to be at risk during the entire term of the lease.

We treat the leases as financing arrangements for federal income tax and certain other tax purposes.

In addition, because we sold the compressors to the special purpose entities, our depreciation expense was reduced by approximately $36 million, $43 million and $31 million for the years ended December 31, 2002, 2001 and 2000, respectively, and by approximately $16.6 million and $27.4 million for the nine months ended September 30, 2003 and 2002, respectively. We also believe that these transactions had the effect of decreasing interest expense. However, we believe the decreased interest expense and the increased leasing expense are not directly comparable because the duration of our compression equipment operating leases is longer than the maturity of our bank credit facility.

On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment

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assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

See “—New accounting pronouncements” and “—Leasing transactions and accounting change for FIN 46” for more information on these sale leaseback transactions.

Revenue recognition—Percentage of completion accounting

We recognize revenue and profit for our fabrication operations as work progresses on long-term, fixed-price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We follow this method because reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made and because the fabrication projects usually last several months. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Examples of factors that would give rise to revisions include variances in the actual or revisions to the estimated costs of components, labor or other fabrication costs. The average duration of these projects is four to six months. As of September 30, 2003, we had approximately $38.6 million in costs and estimated earnings on uncompleted contracts in excess of billings to our customers.

We estimate percentage of completion for compressor and processing equipment fabrication on a direct labor hour to total labor hour basis. This calculation requires management to estimate the number of total labor hours required for each project and to estimate the profit expected on the project. Production and processing equipment fabrication percentage of completion is estimated using the direct labor hour and cost to total cost basis. The cost to total cost basis requires us to estimate the amount of total costs (labor and materials) required to complete each project. Since we have many fabrication projects in process at any given time, we do not believe that materially different results would be achieved if different estimates, assumptions, or conditions were used for each project.

Contingencies and litigation

Due to the restatement of our financial statements and in the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, we are required to record (and have recorded) a loss during any period in which we, based on our experience, believe a contingency is likely to result in a financial loss to us. See “Business—Legal proceedings.”

Nine months ended September 30, 2003 compared to nine months ended September 30, 2002

Form 10-Q/A

The discussion below, the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2003, and other information included in this

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prospectus supplement reflect the correction of certain inadvertent classification errors contained in our presentation of revenues and expenses related to compressor and accessory fabrication and production and processing equipment fabrication for the three and nine months ended September 30, 2003, as well as our backlog related to compressor and accessory fabrication and production and processing equipment fabrication as of September 30, 2003. The classification errors involve approximately $3.3 million of revenues and approximately $2.6 million of expenses that were previously classified as “Compressor and accessory fabrication” that have been reclassified as “Production and processing equipment fabrication.” In addition, the classification errors involve approximately $4.4 million that was previously classified in our compression equipment backlog that has been reclassified in our production and processing equipment backlog as of September 30, 2003. These classification errors were identified and corrected in our Quarterly Report on Form 10-Q/A with respect to the quarterly period ended September 30, 2003, which was filed with the SEC on December 2, 2003.

In connection with the filing of our Quarterly Report on Form 10-Q/A, we also corrected certain typographical errors contained in our Quarterly Report on Form 10-Q with respect to the quarterly period ended September 30, 2003 as described in the Explanatory Note to the Quarterly Report on Form 10-Q/A with respect to the quarterly period ended September 30, 2003, and we conformed certain portions of our description of legal proceedings to the description included in this prospectus supplement.

This amendment on Form 10-Q/A had no effect on our total revenues, total expenses, net income, total assets, total liabilities or total equity as previously reported in our Quarterly Report on Form 10-Q with respect to the quarterly period ended September 30, 2003.

Revenues

Our total revenues increased by $58.1 million, or 8%, to $825.2 million during the nine months ended September 30, 2003 from $767.1 million during the nine months ended September 30, 2002. The increase resulted primarily from the inclusion of $95.0 million in revenues from Belleli which, beginning in November 2002, are included as part of our production and processing equipment business. The increase in revenues related to the inclusion of Belleli was partially offset by a decrease in revenues from our domestic rental and parts, service and used equipment businesses.

The North American rig count increased by 30% to 1,441 at September 30, 2003 from 1,110 at September 30, 2002, and the twelve-month rolling average North American rig count increased by 15% as of September 30, 2003 to 1,307 from 1,135 at September 30, 2002. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $5.24 per Mcf at September 30, 2003 from $2.10 per Mcf at September 30, 2002. Despite the increase in natural gas prices and the recent increase in rig count, U.S. natural gas production levels have not significantly changed. Recently, we have not experienced any significant growth in rentals or purchases of equipment and services by our customers, which we believe is a result of the lack of a significant increase in U.S. natural gas production levels.

Domestic rentals revenues decreased by $7.6 million, or 3%, to $241.7 million during the nine months ended September 30, 2003 from $249.3 million during the nine months ended September 30, 2002. The decrease in domestic revenues was primarily attributable to weaker demand and stronger competition for domestic compression which resulted in a lower utilization of our rental fleet during the nine months ended September 30, 2003. Our average domestic

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utilization for the nine months ended September 30, 2003 was approximately 4% lower than our average utilization for the nine months ended September 30, 2002. At both September 30, 2003 and 2002, our domestic compression horsepower utilization rate was approximately 75%.

International rental revenues increased by $8.4 million, or 6%, to $152.0 million during the nine months ended September 30, 2003 from $143.6 million during the nine months ended September 30, 2002. International rental revenues increased primarily from: (1) the expansion of our business operations, (2) the recognition of approximately $2.7 million in billings to Venezuelan customers in the first nine months of 2003 which were not recognized in 2002 due to concerns about the ultimate receipt of these revenues as a result of the strike by workers of the national oil company in Venezuela and (3) a $1.9 million fee received for the modification of a contract in Venezuela. At both September 30, 2003 and 2002, our international compression horsepower utilization rate was approximately 94%.

At September 30, 2003, our compressor rental fleet consisted of approximately 3,508,000 horsepower, a 3% decrease from the approximately 3,621,000 horsepower in the rental fleet at September 30, 2002. Domestic horsepower in our rental fleet decreased by 7% to approximately 2,583,000 horsepower at September 30, 2003 from approximately 2,782,000 horsepower at September 30, 2002. In addition, international horsepower increased by 10% to approximately 925,000 horsepower at September 30, 2003 from approximately 839,000 horsepower at September 30, 2002. Our overall compression horsepower utilization rate was approximately 80% at both September 30, 2003 and 2002. We continue to move idle domestic compression in our rental fleet into service in our international rental operations. In addition, during the third quarter of 2003 we retired idle units representing approximately 41,000 horsepower from our domestic rental fleets that are to be sold or scrapped.

Revenue from parts, service and used equipment decreased by $54.5 million, or 32%, to $118.3 million during the nine months ended September 30, 2003 from $172.8 million during the nine months ended September 30, 2002. The decrease in parts and service revenue was primarily due to lower used rental equipment sales and installation revenues, the loss of some customer alliance contracts to competitors and lower spending levels than what we anticipated from our customers. Included in parts, service and used equipment revenue for the nine months ended September 30, 2003 was $27.7 million in used rental equipment and installation sales compared to $64.9 million for the nine months ended September 30, 2002.

Revenues from compressor and accessory fabrication decreased by $3.5 million, or 4%, to $81.8 million during the nine months ended September 30, 2003 from $85.3 million during the nine months ended September 30, 2002.

Revenues from production and processing equipment fabrication increased by $111.4 million, or 112%, to $211.2 million during the nine months ended September 30, 2003 from $99.8 million during the nine months ended September 30, 2002. The increase in production and processing equipment revenues is primarily due to the inclusion of $94.1 million in revenues from the results of Belleli.

Equity in income of non-consolidated affiliates increased by $3.0 million, or 21%, to $16.9 million during the nine months ended September 30, 2003, from $13.9 million during the nine months ended September 30, 2002. This increase is primarily due to an improvement in results from our equity interest in Hanover Measurement and PIGAP II joint ventures.

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Expenses

Operating expenses for domestic rentals increased by $4.6 million, or 5%, to $94.0 million during the nine months ended September 30, 2003 from $89.4 million during the nine months ended September 30, 2002. The gross margin from domestic rentals was 61% during the nine months ended September 30, 2003 and 64% during the nine months ended September 30, 2002. The decrease in gross margin was due to a lower overall utilization of our domestic rental fleet without a corresponding decrease in overhead and expenses and $0.9 million expensed in the second quarter for startup and commissioning costs associated with a gas plant facility that began operations in the third quarter of 2003.

Operating expenses for international rentals increased by $7.8 million, or 20%, to $47.7 million during the nine months ended September 30, 2003 from $39.9 million during the nine months ended September 30, 2002. The increase was primarily attributable to the corresponding increase in international rental revenues. The gross margin from international rentals was 69% during the nine months ended September 30, 2003 and 72% during the nine months ended September 30, 2002.

Operating expenses for our parts, service and used equipment business decreased by $58.1 million, or 40%, to $85.8 million during the nine months ended September 30, 2003 from $143.9 million during the nine months ended September 30, 2002. The decrease was primarily related to the corresponding 32% decrease in parts, service and used equipment revenue and an increase in gross margin. The gross margin from parts, service and used equipment was 28% during the nine months ended September 30, 2003 and 17% during the nine months ended September 30, 2002. During the nine months ended September 30, 2002, we recorded approximately $6.1 million in inventory write-downs and reserves for parts inventory that was either obsolete, excess or carried at a price above market value. Also, included in parts, service and used equipment revenue for the nine months ended September 30, 2003 was $27.7 million in used rental equipment and installation sales, with a 16% gross margin compared to $64.9 million in sales with an 11% gross margin for the nine months ended September 30, 2002. Our used rental equipment and installation sales (which usually have a lower margin than our parts and service sales) decreased our parts, service and used equipment gross margin by approximately 4% in the nine months ended September 30, 2003. The inventory write-down and used rental equipment and installation sales reduced our total parts, service and used equipment gross margin by approximately 9% in the nine months ended September 30, 2002.

Operating expenses for our compressor and accessory fabrication business increased by $0.1 million to $74.0 million during the nine months ended September 30, 2003 from $73.9 million during the nine months ended September 30, 2002. The gross margin on compressor and accessory fabrication was 10% during the nine months ended September 30, 2003 and 13% during the nine months ended September 30, 2002. We continue to face strong competition for new compression fabrication business, which negatively affected the selling price of our compression equipment and the related gross margins during 2003.

The operating expenses attributable to production and processing equipment fabrication business increased by $104.5 million, or 124%, to $188.8 million during the nine months ended September 30, 2003 from $84.3 million during the nine months ended September 30, 2002. The increase in production and processing equipment fabrication expenses was primarily due to the consolidation of the results of Belleli in the nine months ended September 30, 2003. The gross margin attributable to production and processing equipment fabrication was 11% during the nine months ended September 30, 2003 and 15% during the nine months ended September 30, 2002. Of the decrease in

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gross margin for production and processing equipment fabrication, 2% was attributable to the inclusion of Belleli. The remaining decrease in gross margin was primarily attributable to increased competition and operational disruptions related to our consolidation efforts.

Selling, general and administrative expenses increased $12.0 million, or 11%, to $119.7 million during the nine months ended September 30, 2003 from $107.7 million during the nine months ended September 30, 2002. The increase is primarily due to the inclusion of Belleli’s selling, general and administrative costs of approximately $7.6 million and an increase in payroll and consulting costs related to our focus on improving our organizational structure to facilitate the consolidation of our operations.

Foreign currency translation for the nine months ended September 30, 2003 resulted in a loss of $1.3 million, compared to a loss of $13.3 million for the nine months ended September 30, 2002. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on fund transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts could either be made at an exchange rate negotiated by the parties or, if no such agreement were reached, a preliminary payment could be made based on a one dollar to one peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 business days of the devaluation. During the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million and $1.9 million for assets exposed to currency translation in Argentina and Venezuela, respectively, and recorded a translation gain of approximately $0.5 million for all other countries. We have renegotiated all of our agreements in Argentina. As a result of these negotiations, we received approximately $11.2 million in reimbursements in 2002 and $0.7 million in the first nine months of 2003.

Other expenses decreased by $11.9 million, or 80%, to $2.9 million during the nine months ended September 30, 2003 from $14.8 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, other expenses included $2.9 million in charges primarily recorded to write off certain non-revenue producing assets and to record the estimated settlement of a contractual obligation. For the nine months ended September 30, 2002, other expenses included a $12.1 million write-down of investments in three non-consolidated affiliates that have experienced a decline in value that we believe to be other than temporary, a $0.5 million write-off of a purchase option for an acquisition that we have abandoned and a $2.0 million write-down of a note receivable from Aurion Technologies, Inc.

Depreciation and amortization increased by $44.5 million, or 54%, to $126.9 million during the nine months ended September 30, 2003 compared to $82.4 million during the nine months ended September 30, 2002. The increase in depreciation was primarily due to (1) $14.4 million of impairments recorded for rental fleet assets to be sold or scrapped, (2) additions to the rental fleet, including maintenance capital, which were placed in service in 2002 and the first nine months of 2003 that are included in our depreciable asset base, (3) $4.2 million in additional depreciation expense related to the adoption of FIN 46, and (4) $3.1 million in depreciation and amortization expense from the inclusion of Belleli.

Leasing expense decreased $25.1 million, or 37%, to $43.1 million during the nine months ended September 30, 2003 from $68.2 million for the nine months ended September 30, 2002. Beginning in July 2003, payments accrued under our sale leaseback transactions are included in

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interest expense as a result of consolidating the entities that lease compression equipment to us. See “—Cumulative effect of accounting change.”

Interest expense increased by $26.2 million, or 84%, to $57.3 million during the nine months ended September 30, 2003 from $31.1 million for the nine months ended September 30, 2002. Beginning in July 2003, our interest expense includes the payments accrued under our sale leaseback transactions of approximately $20.9 million. See “—Cumulative effect of accounting change.” In addition, our interest expense increased due to an increase in the outstanding balance of the debt payable to Schlumberger and the inclusion of Belleli’s interest expense of approximately $1.5 million. We have reclassified the distributions on our mandatorily redeemable convertible securities as interest expense; and prior periods’ financial statements have been reclassified to conform to the 2003 financial statement classification.

Due to a downturn in our business and changes in the business environment in which we operate, we completed a goodwill impairment analysis as of June 30, 2002. As a result of the analysis performed, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business unit during the nine months ended September 30, 2002.

Provision for estimated cost of litigation settlement

Hanover and certain of its past and present officers and directors are named as defendants in a consolidated action pending in federal court that includes a putative securities class action, a putative class action arising under ERISA and derivative actions. The litigation relates principally to the matters involved in the transactions underlying the restatement of our financial statements. On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions brought against us. See “Business—Legal proceedings.” The terms of the proposed settlement provide for us to: (1) make a cash payment of approximately $30 million (of which approximately $27 million was funded by payments from our directors and officers insurance carriers), (2) issue 2.5 million shares of our common stock, and (3) issue a contingent note with a principal amount of $6.7 million. The note will be payable, together with accrued interest, on March 31, 2007 but can be extinguished (with no money owing under it) if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. In addition, upon the occurrence of a change of control of us, if the change of control, or shareholder approval of the change of control, occurs within 12 months after final court approval of the settlement, we will be obligated to contribute an additional $3 million to the settlement fund. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our board of directors and enhancements to our code of conduct. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the putative consolidated securities class action.

GKH Investments, L.P. and GKH Private Limited (collectively “GKH”), which as of September 30, 2003 together own approximately 10% of our outstanding common stock and which sold shares in our March 2001 secondary offering of common stock, are parties to the proposed settlement and have agreed to settle claims against them that arise out of that offering as well as other potential securities, ERISA, and derivative claims. The terms of the proposed settlement provide for GKH to pay 2.5 million shares of our common stock from their holdings or from other sources.

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In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related-party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in our statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by us. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related-party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 6, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us in connection with the settlement. In the third quarter of 2003, we recorded a reduction in the charge of $3.5 million to adjust our estimate of the settlement due to the additional change in the value of such common stock during the three months ended September 30, 2003.

Based on the terms of the settlement agreement, we determined that a liability related to these lawsuits was probable and that the value was reasonably estimable. Accordingly, we evaluated the individual components of the settlement in consideration of existing market conditions and established an estimate for the cost of the litigation settlement. The details of this estimate are as follows (in thousands):

	Amended First Quarter Estimated Settlement			Second and Third Quarter Adjustment to Estimated Settlement			Total
Cash	$	30,050		$	—		$	30,050
Estimated fair value of note to be issued		5,194			—			5,194
Common stock to be issued by Hanover		26,600			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

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The $5.2 million estimated fair value of the note to be issued was based on the present value of the future cash flows discounted at borrowing rates currently available to us for debt with similar terms and maturities. Using a market-borrowing rate of 11%, the principal value and the stipulated interest rate required by the note of 5% per annum, an estimated discount of $1.5 million was computed on the note to be issued. Upon the issuance of the note, the discount will be amortized to interest expense over the term of the note. Because the note could be extinguished without a payment (if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007), we will be required to record an asset in future periods for the value of the embedded derivative, as required by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), when the note is issued. This asset will be marked to market in future periods with any increase or decrease included in our statement of operations.

As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts that are expected to be paid in the next 12 months. During the second quarter of 2003, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon the approval of the settlement by the court, we will record such amounts in liabilities and stockholders’ equity, respectively, and will include the shares in our outstanding shares used for earnings per share calculations.

The final value of the settlement may differ significantly from the estimates currently recorded, depending on the market value of our common stock when the settlement is approved by the court, potential changes in the market conditions affecting the valuation of the note to be issued and whether we are required to make the additional $3 million payment in the event of a change of control. Additionally, the settlement is contingent on court approval and certain other conditions. We have the right to terminate the settlement under certain circumstances, including if more than a certain number of the plaintiffs elect to opt out of the settlement. There can be no assurances that the settlement will be approved or finalized, or that it will be approved or finalized on the terms agreed upon in the Stipulation of Settlement. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

Income taxes

The provision for income taxes decreased $25.9 million, to a benefit of $18.5 million during the nine months ended September 30, 2003 from a provision of $7.4 million during the nine months ended September 30, 2002. The decrease resulted from the decrease in income before income taxes and a higher average effective tax rate on pre-tax income. The average effective income tax rates during the nine months ended September 30, 2003 and September 30, 2002 were 33% and 25%, respectively. The increase in rate was primarily due to the U.S. income tax impact of international operations, the relative weight of foreign income to U.S. income, and the non-deductible goodwill impairment charge recorded during the nine months ended September 30, 2002.

Discontinued operations

During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management’s recommendation to exit and sell our non-oilfield power generation and

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certain used equipment business lines. Income (loss) from discontinued operations increased $1.8 million, to net income of $1.2 million during the nine months ended September 30, 2003, from a loss of $0.6 million during the nine months ended September 30, 2002. Loss from the write-down of discontinued operations increased $8.7 million, to a loss of $12.6 million during the nine months ended September 30, 2003 from a loss of $3.9 million during the nine months ended September 30, 2002. The losses relate to write-downs of our discontinued operations to their estimated market value.

Cumulative effect of accounting change

We recorded a cumulative effect of accounting change of $86.9 million, net of tax, related to the partial adoption of FIN 46 on July 1, 2003.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights and the determination of when and which business enterprise should consolidate the VIE in its financial statements. FIN 46 applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some, but not all, of the variable interest entities they own. Because we are still evaluating whether we will be required to make any other potential changes in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed below.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

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Net loss

Our net loss increased by $95.2 million to a loss of $136.3 million during the nine months ended September 30, 2003 from a loss of $41.1 million during the nine months ended September 30, 2002. Net loss increased primarily due to the inclusion in the nine months ended September 30, 2003 of (1) a cumulative effect of accounting change of $133.7 million ($86.9 million net of tax), (2) the write-down of certain non-core assets as discounted operations of $16.3 million ($10.6 million after tax), (3) impairments recorded for rental fleet assets to be sold or scrapped of $14.4 million ($9.8 million after tax) and the $40.3 million ($26.2 million after tax) provision for the estimated settlement cost of the securities-related litigation. This increase was partially offset by the inclusion in the nine months ended September 30, 2002 of a $47.5 million goodwill impairment charge ($44.2 million after tax) and pre-tax charges of $26.2 million ($17.0 million after tax) to write down certain non-core assets and parts and power generation inventory.

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues

Our total revenues decreased by $12.2 million, or 1%, to $1,028.8 million during the year ended December 31, 2002 from $1,041.0 million during 2001, as declining revenues in our fabrication businesses more than offset increases in revenues from our domestic and international rental business.

Revenues from rentals increased by $117.5 million, or 29%, to $518.3 million during 2002 from $400.8 million during 2001. Domestic revenues from rentals increased by $58.9 million, or 22%, to $328.6 million during 2002 from $269.7 million during 2001. International rental revenues increased by $58.6 million, or 45%, to $189.7 million during 2002 from $131.1 million during 2001. The increase in both domestic and international rental revenues resulted from expansion of our rental fleet and business acquisitions completed in 2001. During 2001, we completed two significant acquisitions: (1) in March 2001, we acquired OEC Compression Corporation, which increased our rental fleet by approximately 175,000 horsepower and (2) in August 2001, we acquired Production Operators Corporation, which increased our rental fleet by approximately 860,000 horsepower.

The increase in international rental revenues was offset in part by decreased revenues from our Venezuelan operations. In December 2002, certain opponents of Venezuelan President Hugo Chavez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month long walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down its oil industry. As a result, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million as a result of the disruption in our operations in Venezuela. At December 31, 2002, we had approximately $21.5 million in outstanding receivables related to our Venezuelan operations.

At December 31, 2002, the compressor rental fleet consisted of approximately 3,514,000 horsepower, a 1% increase over the 3,477,000 horsepower in the rental fleet at December 31, 2001. Domestic horsepower in the rental fleet decreased by 1% to 2,654,000 horsepower at December 31, 2002 from approximately 2,696,000 horsepower at December 31, 2001 and international horsepower increased by 10% to 860,000 horsepower at December 31, 2002 from approximately 781,000 horsepower at December 31, 2001.

Revenues from parts, service and used equipment increased by $8.9 million, or 4%, to $223.8 million during 2002 from $214.9 million during 2001. This increase was due to a $26.5 million gas

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plant sale transaction and a $20.1 million compression equipment sale transaction offset by lower revenues as a result of weaker market conditions.

Revenues from compressor and accessory fabrication decreased by $109.5 million, or 49%, to $114.0 million during 2002 from $223.5 million during 2001. During 2002, an aggregate of approximately 150,900 horsepower of compression equipment was fabricated and sold compared to approximately 366,000 horsepower fabricated and sold during 2001.

Revenues from production and processing equipment fabrication decreased by $34.3 million, or 19%, to $149.7 million during 2002 from $184.0 million during 2001. In July 2002, we increased our ownership of Belleli to 40.3% from 20.3% by converting a $4.0 million loan to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9.4 million loan to the other principal owner of Belleli for additional equity ownership and began consolidating the results of Belleli’s operations. Production and processing equipment revenues included $15.4 million in revenues from the consolidation of Belleli since November 21, 2002. Excluding Belleli, revenues from our fabrication businesses declined by 27% due to decreased capital spending by our customers in 2002 caused by weak economic market conditions and political and economic events in South America that resulted in lower drilling and new well completion activity by oil and gas producers. The average North American rig count decreased by 27% in 2002 to 1,097 from 1,497 in 2001 and the twelve-month rolling average Henry Hub natural gas price decreased to $3.22 per Mcf in December 2002 from $4.26 per Mcf in December 2001.

Equity in earnings in subsidiaries increased $9.4 million, or 101%, to $18.8 million during 2002, from $9.4 million during 2001. This increase was primarily due to our acquisition of POC, which included interests in three joint venture projects in South America. These joint ventures contributed $21.2 million in equity earnings for 2002 compared to $8.1 million in equity earnings in 2001 that were partially offset by a decrease in equity earnings from Hanover Measurement Services Company LP, which decreased to a loss of $2.2 million in 2002 from $0.8 million in income in 2001.

Expenses

Operating expenses from domestic rentals increased by $25.6 million, or 27%, to $120.8 million during 2002 from $95.2 million during 2001. Operating expenses from international rentals increased by $11.8 million, or 26%, to $57.6 million during 2002 from $45.8 million during 2001. The increase in rental expenses resulted primarily from the increased rental business and the corresponding 22% and 45% increase in domestic and international rental revenues, respectively, over revenues for the corresponding period in 2001. The gross profit percentage from domestic and international rentals was approximately 63% and 70%, respectively, during 2002 and 65% and 65%, respectively, in 2001. The decrease in domestic rentals gross profit percentage was primarily due to weaker domestic market conditions. The increase in international rentals gross profit percentage was due to the increase in revenues in 2002 without a corresponding increase in expenses.

Operating expenses of our parts, service and used equipment segment increased by $27.1 million, or 18%, to $179.8 million, during 2002, compared to $152.7 million in 2001, which partially relates to the increase in parts, service and used equipment activity which corresponds to the 4% increase in parts, service and used equipment revenue. The gross profit margin from parts, service and used equipment was 20% during 2002 down from 29% in 2001. In 2002, parts and service

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revenue included $62.4 million in used equipment sales at a 13% gross margin, compared to $28.0 million in 2001, with a 31% gross margin. Approximately four percentage points of the decrease in gross profit margin for parts, service and used equipment was due to a low margin gas plant sale transaction and a low margin compressor sale transaction. In addition, approximately three percentage points of the decrease in gross margin was due to $6.8 million in inventory write-downs and reserves for parts that were either obsolete, excess or carried at a price above market value. The remainder of the decrease was primarily due to the impact of weaker market conditions on sales volume and margins.

Operating expenses of compressor fabrication decreased by $88.7 million, or 47%, to $99.4 million during 2002 from $188.1 million during 2001, commensurate with the decrease in compressor fabrication business and revenue. The gross profit margin on compression fabrication was 13% during 2002 down from 16% in 2001. The operating expenses attributable to production equipment fabrication decreased by $20.4 million, or 14%, to $127.4 million during 2002 from $147.8 million during 2001. The gross profit margin attributable to production and processing equipment fabrication was 15% during 2002, down from 20% in 2001. The decrease in gross profit margin for compression and accessory fabrication and production and processing equipment fabrication was attributable to lower sales levels without a corresponding decrease in overhead and the impact of weaker market conditions on sales margins.

Selling, general and administrative expenses increased $61.5 million, or 67%, to $153.7 million in 2002 from $92.2 million in 2001. The increase was attributable to increased personnel and other selling and administrative activity in our business segments resulting from the acquisitions completed during 2001. We also recorded $3.8 million in employee separation costs relating to our announced reduction in our work force and management changes and approximately $11.6 million in additional legal and accounting costs, a significant portion of which was associated with our board of directors and Special Litigation Committee review of certain transactions, the restatement of our financial results and the SEC investigation.

Depreciation and amortization increased by $62.4 million, or 70%, to $151.2 million during 2002 compared to $88.8 million during 2001. During 2002 we recorded a $34.5 million charge included in depreciation and amortization expense for reductions in the carrying value of certain idle compression equipment that is being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned. The remaining increase in depreciation was due to the additions to the rental fleet, partially offset by the change in estimated lives of certain compressors. After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimate of the useful life of certain compression equipment to range from 15 to 30 years instead of a uniform 15-year depreciable life. Our new estimated lives are based upon our experience, maintenance program and the different types of compressors presently in our rental fleet. We believe our new estimate reflects the economic useful lives of the compressors more accurately than a uniform useful life applied to all compressors regardless of their age or performance characteristics. The effect of this change in estimate on 2002 was a decrease in depreciation expense of approximately $14.4 million and an increase in net income of approximately $8.6 million ($0.11 per share).

In addition, because we sold compressors in sale leaseback transactions in August 2001, depreciation expense was reduced by approximately $36 million in 2002 compared to approximately $43 million in 2001. The decrease in depreciation in 2002 from 2001 was due to our change in estimate of useful lives of our compressors on July 1, 2001 as discussed above.

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The increase in depreciation was also offset by the decrease in goodwill amortization due to our adoption of SFAS 142. Under SFAS 142, amortization of goodwill over an estimated useful life was discontinued. Instead, goodwill amounts became subject to a fair value-based annual impairment assessment. During 2001, approximately $11.6 million in goodwill amortization was recorded.

We incurred leasing expense of $91.5 million during 2002 compared to $78.0 million during 2001. The increase of $13.5 million was attributable to the sale leaseback transactions we entered into in August 2001 and was partially offset by the unrealized gains and losses recorded related to two of our interest rate swaps. In connection with these leases, we were obligated to prepare registration statements and complete an exchange offer to enable the holders of the notes issued by the lessors to exchange their notes for notes that were registered under the Securities Act of 1933. Because the exchange offer was not completed until March 13, 2003, we were required to pay additional leasing expense in the amount of approximately $105,600 per week until March 13, 2003. The additional leasing expense began accruing on January 28, 2002. In 2002, we recorded additional leasing expense of approximately $5.1 million related to the registration and exchange offering obligations.

The fair value of our derivative instruments (interest rate swaps) increased by $3.2 million during 2002 while the fair value decreased by $7.6 million in 2001. These changes in fair value were due to the recognition of an unrealized change in the fair value of our interest rate swaps that we had not designated as cash flow hedges under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” The unrealized gains and losses are reflected in our leasing expense.

Interest expense increased by $19.5 million to $43.4 million during 2002 from $23.9 million during 2001. The increase in interest expense was due to higher levels of outstanding debt partially offset by lower effective interest rates.

Foreign currency translation expense increased by $10.1 million, or 152%, to $16.8 million during 2002 compared to $6.7 million during 2001. The increase was primarily due to our operations in Argentina and Venezuela. In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on funds transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts could either be made at an exchange rate negotiated by the parties or, if no such agreement was reached, a preliminary payment could be made based on a one dollar to one peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 days of the devaluation. We have renegotiated all of our agreements in Argentina. As a result of these negotiations, we received approximately $11.2 million in partial reimbursements in 2002. We recorded $1.5 million of these partial reimbursements in translation expense and $9.7 million in revenues from international rentals. During 2002, we recorded an exchange loss of approximately $9.9 million and $5.8 million for assets exposed to currency translation in Argentina and Venezuela, respectively and recorded a translation loss of approximately $1.1 million for all other countries.

Due to a downturn in our business and changes in the business environment in which we operate, we completed a goodwill impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business in the second quarter of 2002. The second step of the impairment test required us to allocate the fair value of

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the production and processing equipment business to its assets. We performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. We estimated the fair value of our reporting units using a combination of the expected present value of future cash flows and the market approach, which uses actual market sales. In the fourth quarter of 2002, we also recorded a $4.6 million goodwill impairment related to our pump division, which is expected to be sold during the next 12 months.

Other expenses increased $17.9 million, or 184%, to $27.6 million during 2002 compared to $9.7 million during 2001. Other expenses in 2002 included $15.9 million of write-downs and charges related to investments in four non-consolidated affiliates that had experienced a decline in value that we believed to be other than temporary, a $0.5 million write-off of a purchase option for an acquisition that we had abandoned, $2.7 million in other non-operating costs and a $8.5 million write-down of notes receivable including a $6.0 million reserve established for loans to employees who were not executive officers. Other expenses in 2001 included a $2.7 million bridge loan commitment fee associated with our acquisition of POC, a $5.0 million write-down of an investment in Aurion Technologies, Inc., a $1.0 million litigation settlement and $1.0 million in other non-operating expenses.

Income taxes

The provision for income taxes decreased by $60.0 million, or 141%, to a tax benefit of $17.6 million during 2002 from $42.4 million of tax expense during 2001. The decrease resulted primarily from the corresponding decrease in income before income taxes. The average effective income tax rates during 2002 and 2001 were 19.0% and 37.8%, respectively. The decrease in the effective tax rate was due primarily to a nondeductible goodwill impairment charge, United States income tax impact of international operations and valuation allowances against certain net operating losses. The effective tax rate benefited from non-United States foreign exchange losses deductible for tax in excess of book losses.

Discontinued operations

During the fourth quarter of 2002, we reviewed our business lines and our board of directors approved management’s recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. In the fourth quarter of 2002, we recorded a pre-tax charge of $52.3 million ($36.4 million, net of tax) to write down our investment in discontinued operations to current estimated fair market values. In addition, these operations recorded approximately $6.0 million ($3.9 million, net of tax) in write-downs that were recorded in the second quarter of 2002. Discontinued operations included three non-oilfield power generation projects in California and related inventory and certain of our used equipment divisions.

Income (loss) from discontinued operations decreased $3.9 million, or 130%, to a net loss of $0.9 million during 2002 from net income of $3.0 million during 2001. The decrease in net income was primarily attributable to weaker market conditions which affected sales volume and gross margins.

Net income

Net income decreased $188.5 million, or 260%, to a net loss of $116.1 million during 2002 from net income of $72.4 million during 2001 primarily due to (1) the decline in market conditions which affected our compressor and accessory fabrication and production and processing equipment sales and gross profits, (2) a $6.7 million pre-tax inventory write-down, (3) a $34.5

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million charge included in depreciation and amortization expense for reductions in the carrying value of certain idle units of our compression fleet that are being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned, (4) an increase in selling, general and administrative expenses, depreciation expense, leasing expense, foreign currency translation expense and interest expense, (5) a $52.1 million goodwill impairment and (6) a $40.3 million charge to write down investments in discontinued operations to their estimated fair market values.

Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues

Our total revenues increased by $494.2 million, or 90%, to $1,041.0 million during the year ended December 31, 2001 from $546.8 million during 2000. The increase in revenues resulted from growth in horsepower of our natural gas compressor rental fleet, internal growth in our fabrication business and outsourcing businesses, which include compression, gas treating, process measurement and oilfield power generation, as well as growth due to business acquisitions completed in 2001 and 2000.

Revenues from rentals increased by $147.0 million, or 58%, to $400.8 million during 2001 from $253.8 million during 2000. Domestic revenues from rentals increased by $97.2 million, or 56%, to $269.7 million during 2001 from $172.5 million during 2000. International rental revenues increased by $49.8 million, or 61%, to $131.1 million during 2001 from $81.3 million during 2000. The increase in both domestic and international rental revenue resulted from expansion of our rental fleet and business acquisitions completed in 2001 and 2000. At December 31, 2001, our compressor rental fleet consisted of approximately 3,477,000 horsepower, a 62% increase over the 2,151,000 horsepower in the rental fleet at December 31, 2000. Domestically, our rental fleet increased by 955,000 horsepower, or 55%, during 2001 and internationally by 371,000 horsepower, or 90%.

Revenue from parts, service and used equipment increased by $101.4 million, or 89%, to $214.9 million during 2001 from $113.5 million during 2000. This increase was due in part to an increase in our marketing focus for this business segment, as well as expansion of business activities through acquisitions. Approximately 40% of the increase in parts, service and used equipment revenues resulted from business acquisitions. Revenues from compressor fabrication increased by $133.2 million, or 148%, to $223.5 million during 2001 from $90.3 million during 2000. Approximately 47% of this increase was due to the acquisition of Dresser-Rand Company’s compression service division in September 2000 and the POC acquisition in August 2001. During 2001, an aggregate of approximately 366,000 horsepower of compression equipment was fabricated and sold compared to approximately 166,000 horsepower fabricated and sold during 2000.

Revenues from production and processing equipment fabrication increased by $104.9 million, or 133%, to $184.0 million during 2001 from $79.1 million during 2000. Of this increase, 48% was due to the acquisition of APSI during June 2000 and the remainder of the increase was due to an improvement in market conditions in the process equipment business compared to conditions that existed in 2000.

Equity in earnings in subsidiaries increased by $5.8 million, or 166%, to $9.3 million during 2001 from $3.5 million during 2000. This increase was primarily due to our acquisition of POC, which included interests in three joint venture projects in South America. These joint ventures

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contributed $8.1 million in equity earnings for 2001 that were partially offset by a decrease in equity earnings from Collicutt Hanover Mechanical Services, which decreased to a loss of $257,000 in 2001 from $786,000 in income in 2000.

Expenses

Operating expenses of the rental segments increased by $53.0 million, or 60%, to $141.0 million during 2001 from $88.0 million during 2000. The increase resulted primarily from an increase in business activity which corresponds with the 58% increase in revenues from rentals in 2001. The gross profit percentage from rentals was approximately 65% during 2001 and 2000.

Operating expenses of our parts, service and used equipment segment increased by $72.7 million, or 91%, to $152.7 million during 2001 compared to $80.0 million in 2000, which relates to an increase in business activity which corresponds to the 89% increase in parts, service and used equipment revenue. The gross profit margin from parts, service and used equipment was 29% during 2001 and 30% during 2000. Operating expenses of compressor fabrication increased by $111.3 million, or 145%, to $188.1 million during 2001 from $76.8 million during 2000, commensurate with the increase in compressor fabrication business and revenue. The gross profit margin on compression fabrication was 16% during 2001 and 15% during 2000. The operating expenses attributable to production equipment fabrication increased by $85.1 million, or 136%, to $147.8 million during 2001 from $62.7 million during 2000. The gross profit margin attributable to production and processing equipment fabrication was 20% during 2001 and 21% during 2000.

Selling, general and administrative expenses increased $40.4 million, or 78%, to $92.2 million during 2001 from $51.8 million during 2000. The increase was attributable to increased personnel and other administrative and selling expenses associated with business acquisitions completed during 2001 and 2000 as well as increased activity in our business segments.

Depreciation and amortization increased by $36.6 million, or 70%, to $88.8 million during 2001 compared to $52.2 million during 2000. The increase in depreciation was due to the additions to the rental fleet that were partially offset by an approximately $12 million decrease in depreciation as a result of the sale of compression equipment into the equipment leases in March, August and October 2000 and in August 2001. The increase in amortization of approximately $6.5 million was due to additional goodwill recorded from business acquisitions completed during 2001 and 2000.

After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimates of the useful life of certain compression equipment to range from 15 to 30 years instead of a 15-year depreciable life. The new estimated lives were based upon the different types of compressors in our rental fleet rather than a blanket life applied to all compressors and more accurately reflected the economic lives of the compressors. The effect of this change in estimates on the year ended December 31, 2001 was a decrease in depreciation expense of approximately $5 million and an increase in net income of approximately $3.1 million ($0.04 per share).

We incurred leasing expenses of $78.0 million during 2001 compared to $45.5 million during 2000. The increase of $32.5 million resulted from the additional equipment leases entered into in 2001 and 2000 and the unrealized loss of $7.6 million recorded related to the change in fair value of two of our interest rate swaps.

Interest expense increased by $8.9 million to $23.9 million during 2001 from $15.0 million for 2000. The increase in interest expense is due to higher levels of outstanding debt partially offset by lower effective interest rates.

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Foreign currency translation expense for the year ended December 31, 2001 was $6.7 million, primarily due to our operations in Argentina and Venezuela. Due to the currency exposure in Argentina and Venezuela, we recorded an exchange loss during 2001 of approximately $5.2 million and $1.2 million, respectively, for assets exposed to currency translation risk in these countries.

Other expenses during 2001 were $9.7 million, which included a $2.7 million bridge loan commitment fee associated with our acquisition of POC, a $5.0 million write-down of an investment in Aurion Technologies, Inc., a $1.0 million litigation settlement and $1.0 million in other non-operating expenses.

Income taxes

The provision for income taxes increased by $14.6 million, or 53%, to $42.4 million during 2001 from $27.8 million during 2000. The increase resulted primarily from the corresponding increase in income before income taxes. The average effective income tax rates during 2001 and 2000 were 37.8% and 37.1%, respectively.

Net income

Net income increased $22.8 million, or 46%, to $72.4 million during 2001 from $49.6 million during 2000 due to the increase in revenues and gross profits discussed above.

Leasing transactions and accounting change for FIN 46

We are the lessee in five transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (1) enabled us to affordably extend the duration of our financing arrangements and (2) reduced our cost of capital.

Prior to our first sale leaseback transaction in 1998, we financed our growth in compression assets by drawing down on our bank credit facility with a commercial bank. While highly flexible and well priced, the bank credit facility represented a short-term funding strategy to finance long-term assets. Sale leaseback transactions can reduce refinancing risk by extending the duration of our capital commitments.

Sale leaseback transactions also provided capital to us at a lower cost compared to other sources then available to us. Lenders to the special purpose entities did not require as high a rate of interest because their capital risk was mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. The reduced capital risk associated with our sale leaseback transactions had the effect of reducing our leasing expense as compared to an unsecured borrowing. We will continue to evaluate sale leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise.

We also believe that the sale leaseback transactions represent a source of capital in addition to the commercial bank financing that we traditionally use. This diversification of our capital sources has broadened our access to capital and allowed us to expand our operations.

In August 2001 and in connection with the acquisition of POC, we completed two sale leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease for $200 million. Under one sale

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leaseback transaction, we received $309.3 million in proceeds from the sale of certain compression equipment. Under the second sale leaseback transaction, we received $257.8 million in proceeds from the sale of additional compression equipment. Under the first transaction, the equipment was sold and leased back by us for a seven-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $0.2 million. Under the second transaction, the equipment was sold and leased back by us for a ten-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $0.2 million. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through September 30, 2003, we incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

In October 2000, we completed a $172.6 million sale leaseback transaction of compression equipment. In March 2000, we entered into a separate $200 million sale leaseback transaction involving certain compression equipment. Under the March transaction, we received proceeds of $100 million from the sale of compression equipment at the first closing in March 2000, and in August 2000, we completed the second half of the equipment lease and received an additional $100 million for the sale of additional compression equipment. In June 1999, we completed a $200 million sale leaseback transaction involving certain compression equipment. Under our 1999 and 2000 lease agreements, the equipment was sold and leased back by us for a five-year term and will be used by us in our business. We have options to repurchase the equipment under the 2000 and 1999 leases, subject to certain conditions set forth in these lease agreements. We intend to exercise our option to repurchase the equipment under the 1999 lease agreement in connection with our repayment of the outstanding indebtedness under our 1999A equipment lease notes with the net proceeds from the proposed offering of our senior notes together with available cash. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.5 million in transaction costs for the leases entered into in 2000 and 1999, which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions.

The following table summarizes as of September 30, 2003 the proceeds, residual guarantee (maximum exposure to loss) and lease termination date for equipment leases:

Lease	Sale Proceeds		Residual Value Guarantee		Lease Termination Date
(In thousands)
June 1999(1)	$	200,000	$	166,000	June 2004
March and August 2000		200,000		166,000	March 2005
October 2000		172,589		142,299	October 2005
August 2001		309,300		232,000	September 2008
August 2001		257,750		175,000	September 2011

(1) We intend to use the net proceeds from the proposed offering of our senior notes together with available cash to repay the outstanding indebtedness under our June 1999 equipment lease notes.

We made residual value guarantees under the lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment

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purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms, which are based on negotiation between us and third-party lessors, were supported by equipment appraisals and analysis.

In connection with the compression equipment leases entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offer to enable the holders of the notes issued by the lessors to exchange their notes with notes registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offer was not completed pursuant to the time line required by the agreements related to the compression equipment lease obligations and we were required to pay additional lease expense in an amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased our lease expense by $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

In February 2003, we executed an amendment to our bank credit facility and the compression equipment leases entered into in 1999 and 2000. See “—Liquidity and capital resources.”

Prior to July 1, 2003, these five lease transactions were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

Liquidity and capital resources

Our cash balance amounted to $33.5 million at September 30, 2003 compared to $19.0 million at December 31, 2002. Our principal source of cash during the nine months ended September 30, 2003 was approximately $85.3 million in cash flow from operations. Principal uses of cash during the nine months ended September 30, 2003 were capital expenditures of $105.2 million.

Working capital decreased to $55.7 million at September 30, 2003 from $212.1 million at December 31, 2002. The decrease in working capital was primarily due to the reclassification of our $194 million 1999A equipment lease note, which matures in June 2004, to current debt. This obligation was recorded on our balance sheet in July 2003 upon consolidation of the entities which lease equipment to us when we adopted FIN 46 for our sale leaseback transactions.

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We invested $105.2 million in property, plant and equipment during the nine months ended September 30, 2003, primarily for international rental projects and maintenance capital. As of September 30, 2003, we had approximately 3,508,000 horsepower in the rental fleet with approximately 2,583,000 horsepower domestically and approximately 925,000 horsepower in the international rental fleet.

Working capital decreased to $212.1 million at December 31, 2002 from $275.1 million at December 31, 2001, primarily as a result of a reduction in accounts receivable related to lower operating levels in the fourth quarter of 2002 compared to the fourth quarter of 2001. We invested $250.2 million in property, plant and equipment in 2002 and added approximately 37,000 net horsepower to our rental fleet.

In February 2003, we executed an amendment to our bank credit facility and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment increased the commitment fee under the bank credit facility by 0.125% and increased the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest costs as a result of the amendment as compared to the bank credit facility prior to the amendment depends on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of our foreign subsidiaries. This amendment also restricts our capital spending to $200 million in 2003. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements.

Our bank credit facility as so amended provides for a $350 million revolving credit facility that matures on November 30, 2004. Advances bear interest at (a) the greater of the administrative agent’s prime rate, the federal funds effective rate, or the base CD rate, or (b) a eurodollar rate, plus, in each case, a specified margin (3.4% and 3.2% weighted average interest rate at September 30, 2003 and December 31, 2002, respectively). A commitment fee based upon a percentage of the average available commitment is payable quarterly to the lenders participating in the bank credit facility. This fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on our bank credit facility, as of September 30, 2003, we had $71.7 million in letters of credit outstanding under the bank credit facility. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Our bank credit facility also limits the payment of cash dividends on our common stock to 25% of our net income for the period from December 1, 2001 through November 30, 2004.

As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. Giving effect to the covenant limitations in our bank credit facility, the liquidity available under that facility as of September 30, 2003 was approximately $25 million. Our cash balance amounted to $33.5 million at September 30, 2003.

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Because our bank credit facility will mature in November 2004, it will be reported as a current liability on our balance sheet for the year ended December 31, 2003, if not amended or replaced prior to such date.

While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment lease obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility. With respect to the more restrictive financial covenants that will be in effect for the quarter ending March 31, 2004, if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at such date. However, we currently have bank commitments totaling $345 million for the Proposed Bank Credit Facility with different and/or less restrictive covenants which would apply to us upon closing of the Proposed Bank Credit Facility. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at December 31, 2003 and March 31, 2004.

The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financings to refinance a portion of our existing indebtedness and satisfaction of other customary conditions. If we close both the concurrent offering of our senior notes and the offering of the notes offered hereby, we will satisfy the condition that we effect at least $275 million of new financings. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions under the agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

We may carry out new customer projects through rental fleet additions and other related capital expenditures. We generally invest funds necessary to make these rental fleet additions when our idle equipment cannot economically fulfill a project’s requirements and the new equipment

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expenditure is matched with long-term contracts whose expected economic terms exceed our return on capital targets. During 2003, we plan to spend approximately $150 to $175 million on capital expenditures including (1) rental equipment fleet additions, (2) approximately $60 million on equipment overhauls and other maintenance capital and (3) our additional $15 million investment in Belleli. The February 2003 amendment to our bank credit facility restricts our capital spending to $200 million in 2003. We expect that our 2003 capital spending, net of proceeds from equipment sales and excluding our additional $15 million investment in Belleli, will be within operating cash flows, excluding working capital needs. As a result of our agreement to settle the securities-related litigation, we will be required to pay approximately $5.0 million in estimated expenses over the next 12 months in addition to the amount held in escrow and reported as restricted cash on our condensed consolidated balance sheet. Historically, we have funded our capital requirements with a combination of internally generated cash flow, borrowing under a bank credit facility, sale leaseback transactions, raising additional equity and issuing long-term debt.

We believe that cash flow from operations and borrowing under our bank credit facility will provide us with adequate capital resources to fund our estimated level of capital expenditures through December 31, 2003, and, if closed, the Proposed Bank Credit Facility, together with the financings contemplated by that facility and cash flow from operations will provide us adequate capital resources to fund our estimated level of capital expenditures for the near term. Since capital expenditures are largely discretionary, we believe we would be able to significantly reduce them, in a reasonably short time frame, if expected cash flows from operations were not realized. As of September 30, 2003, we had approximately $172.0 million in borrowings and approximately $71.7 million in letters of credit outstanding on bank credit facility (3.4% weighted average effective rate at September 30, 2003). The letters of credit expire between 2003 and 2007. Our bank credit facility permits us to incur indebtedness, subject to covenant limitations described above, up to a $350 million credit limit, plus, in addition to certain other indebtedness, an additional $300 million in subordinated unsecured indebtedness and $125 million of other unsecured indebtedness. In addition, our bank credit facility permits us to enter into future sale leaseback transactions with respect to equipment having a value not in excess of $300 million.

In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements), or our “coverage ratio,” is greater than 2.25 to 1.0 and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereon. The indentures and agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of September 30, 2003, Hanover’s coverage ratio was less than 2.25 to 1.0 and therefore as of such date we could not incur indebtedness other than under our bank credit facility and up to an additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing indebtedness. We believe the Proposed Bank Credit Facility is within the types of refinancing indebtedness allowed under these agreements.

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In February 2003, Moody’s announced that it had downgraded by one notch our senior implied credit rating, our 4.75% Convertible Senior Notes rating and our 7.25% Mandatorily Redeemable Convertible Preferred Securities rating to Ba3, B2 and B3, respectively, and Standard & Poor’s announced that it had lowered our corporate credit rating to BB-. In addition, both rating agencies placed us on negative watch. In June 2003, Standard & Poor’s assigned a B- rating to our Zero Coupon Subordinated Notes due March 31, 2007. On November 19, 2003, Standard & Poor’s affirmed our corporate credit rating and the rating of our Zero Coupon Subordinated Notes. Standard & Poor’s outlook remains negative. In July 2003, Moody’s confirmed the credit ratings set forth above and assigned a B3 rating to our Zero Coupon Subordinated Notes. On November 21, 2003, Moody’s announced that it had further downgraded our senior implied credit rating, our 4.75% Convertible Senior Notes rating and our 7.25% Mandatorily Redeemable Convertible Preferred Securities rating to B1, B3 and Caa1, respectively, that it had rated our Zero Coupon Subordinated Notes as Caa1 and that it had changed our outlook to stable. Recently, Moody’s and Standard & Poor’s have rated the notes offered hereby          and         , respectively. We do not have any credit rating downgrade provisions in our debt agreements or the agreements related to our compression equipment lease obligations that would accelerate their maturity dates. However, a further downgrade in our credit rating could materially and adversely affect the market price of the notes and our ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. Should this occur, we might seek alternative sources of funding.

In May 2003, we entered into an agreement with Schlumberger to modify the $150 million subordinated note and payment terms of a $58 million contingent liability. See “—Recent events—PIGAP II restructuring and our Zero Coupon Subordinated Notes due March 31, 2007.”

In June 2003, we filed a shelf registration statement with the SEC pursuant to which we may from time to time publicly offer equity, debt or other securities in an aggregate amount not to exceed $700 million, including the notes offered hereby and the proposed offering of our senior notes. The shelf registration statement was subsequently declared effective by the SEC on November 19, 2003. Subject to market conditions, the shelf registration statement will be available to offer one or more series of additional debt or other securities. We cannot be sure that we will be able to complete such offerings of debt or other securities.

As part of our business, we are a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on our consolidated balance sheet. The possibility of our having to honor our contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events. We would record a reserve for these guarantees if events occurred that required that one be established. For a description of certain guarantees that are not reflected on our consolidated balance sheet, see Note 19 to the consolidated financial statements for the year ended December 31, 2002 and Note 9 to the consolidated financial statements for the nine months ended September 30, 2003 included in this prospectus supplement.

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The following summarizes our contractual obligations at December 31, 2002 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

	Total		2003		2004-2005		2006-2007		Thereafter
(In thousands)
Contractual Obligations:
4.75% convertible senior notes due 2008	$	192,000	$	—	$	—	$	—	$	192,000
Bank credit facility		156,500		—		156,500		—		—
Other debt(1)		206,444		33,741		171,428		735		540
Other contractual obligations(2)		60,740		60,740		—		—		—
Mandatorily redeemable convertible preferred securities		86,250		—		—		—		86,250
Compression equipment operating leases		420,964		83,703		138,750		97,975		100,536
Residual guarantees under compression equipment operating leases(3)		881,299		—		474,299		—		407,000
Facilities and other equipment operating leases		12,379		4,947		6,616		683		133
Total contractual cash obligations	$	2,016,576	$	183,131	$	947,593	$	99,393	$	786,459

(1) In connection with the POC acquisition on August 31, 2001, we issued a $150 million subordinated acquisition note to Schlumberger, which would have matured December 15, 2005. Interest on the note accrued and was payable-in-kind at the rate of 8.5% annually for the first six months after issuance and would have periodically increased in increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under note, interest would have accrued at a rate of 2% above the then applicable rate. The note was subordinated to all of our debt other than debt to fund future acquisitions. In May 2003, we agreed with Schlumberger to restructure the note as the Zero Coupon Subordinated Notes due March 31, 2007.

(2) As of December 31, 2002, we were required to pay $58.0 million plus accrued interest to Schlumberger upon obtaining financing of a South American joint venture, a minority interest of which was acquired by us in the acquisition of POC. Prior to the modification in May 2003, the $58.0 million obligation was previously accounted for as a contingent liability in our balance sheet. Because the joint venture failed to obtain the financing on or before December 31, 2002, we had the right to put our interest in the joint venture back to Schlumberger Surenco in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by us to the joint venture. In May 2003, we agreed with Schlumberger Surenco to modify the repayment terms of the $58.0 million obligation in the form of a non-recourse note payable by Hanover Cayman Limited, our indirect wholly owned consolidated subsidiary, with a 6% interest rate compounding semi-annually. In October 2003, the PIGAP II joint venture closed on the project’s financing and distributed approximately $78.5 million to Hanover, of which approximately $59.9 million was used to pay off the non-recourse note.

(3) We are a guarantor of approximately $881 million of debt associated with the special purpose entities with which we entered into sale leaseback transactions. The amount of these guarantees is equal to the amount of the residual value guarantees under the compression equipment lease agreements. The table below summarizes the compression equipment lease obligations that we recorded on our Consolidated Balance Sheet on July 1, 2003. See “—Leasing transactions and accounting change for FIN 46.”

	Total		2003		2004-2005		2006-2007		Thereafter
(In thousands)
Compression Equipment Obligations:
1999A equipment lease notes	$	194,000	$	—	$	194,000	$	—	$	—
2000A equipment lease notes		193,600		—		193,600		—		—
2000B equipment lease notes		167,411		—		167,411		—		—
2001A equipment lease notes		300,000		—		—		—		300,000
2001B equipment lease notes		250,000		—		—		—		250,000
Minority interest		34,628		—		17,578		—		17,050
Total compression equipment lease obligations	$	1,139,639	$	—	$	572,589	$	—	$	567,050

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We use derivative financial instruments to minimize the risks and/or costs associated with financial and global operating activities by managing our exposure to interest rate fluctuation on a portion of our variable rate debt and leasing obligations. We do not use derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

We adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133 requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. Prior to 2001, we entered into two interest rate swaps with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the swap counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $3.2 million and an unrealized loss of approximately $7.6 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the years ended December 31, 2002 and 2001, respectively. In addition, we recognized unrealized gains of approximately $4.1 million and $1.5 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002, respectively, and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts were reported as “Change in fair value of derivative financial instruments” in our consolidated statement of operations. We have reclassified these amounts as interest and lease expense to conform to the 2003 financial statement classification. The fair value of these interest rate swaps fluctuated with changes in interest rates over their terms and the fluctuations were recorded in our statement of operations.

During the second quarter of 2001, we entered into three additional interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:

Lease	Maturity Date	Strike Rate	Notional Amount
March 2000	March 11, 2005	5.2550%	$100,000,000
August 2000	March 11, 2005	5.2725%	$100,000,000
October 2000	October 26, 2005	5.3975%	$100,000,000

These three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the nine months ended September 30, 2003 and 2002, we recorded income of approximately $4.3 million and a loss of $13.6 million, respectively, related to these three swaps ($2.8 million and $8.8 million, net of tax) in other comprehensive income. During the years ended December 31, 2002 and 2001, we recorded a loss of approximately $13.6 million and $9.3 million, respectively, related to these three swaps ($8.9 million and $6.1 million,

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net of tax) in other comprehensive income. As of September 30, 2003, a total of approximately $12.2 million was recorded in current liabilities and approximately $6.5 million in long-term liabilities with respect to the fair value adjustment related to these three swaps.

The counterparties to the interest rate swap agreements are major international financial institutions. We continually monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us.

In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on fund transfers internally and outside the country. In addition, the Argentine government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts could either be made at an exchange rate negotiated by the parties or, if no such agreement were reached, a preliminary payment could be made based on a one dollar to one peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 business days of the devaluation. We have renegotiated all of our agreements in Argentina. As a result of these negotiations, we received approximately $11.2 million in reimbursements in 2002 and $0.7 million in the first nine months of 2003. During the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million for assets exposed to currency translation in Argentina. For the nine months ended September 30, 2003, our Argentine operations represented approximately 5% of our revenue and 9% of our gross margin. During the year ended December 31, 2002, we recorded an exchange loss of approximately $9.9 million for assets exposed to currency translation in Argentina. For the year ended December 31, 2002, our Argentine operations represented approximately 5% of our revenue and 7% of our gross margin. The economic situation in Argentina is subject to change. To the extent that the situation in Argentina deteriorates, exchange controls continue in place and the value of the peso against the dollar is reduced further, our results of operations in Argentina could be materially and adversely affected which could result in reductions in our net income.

In addition, during the nine months ended September 30, 2002, we recorded an exchange loss of approximately $1.9 million for assets exposed to currency translation in Venezuela and recorded a translation gain of approximately $0.5 million for all other countries. For the nine months ended September 30, 2003, our Venezuelan operations represented approximately 11% of our revenue and 18% of our gross margin. During the year ended December 31, 2002, we recorded an exchange loss of approximately $5.8 million for assets exposed to currency translation in Venezuela. For the year ended December 31, 2002, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross margin. At September 30, 2003, we had approximately $25.0 million in accounts receivable related to our Venezuelan operations.

In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production has dropped substantially. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan

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government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, talks of a settlement break down, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption in our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the nine months ended September 30, 2003, we recognized approximately $2.7 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues.

We are involved in a project to build and operate barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway as part of the performance of a contract between Global Energy and Refining Ltd. (“Global”), a Nigerian company, and an affiliate of The Royal/Dutch Shell Group (“Shell”). We have completed the building of the required barge-mounted facilities. We understand that Global must complete a significant financing for part of the project in the near term or Shell would be able to terminate its contract with Global. In light of the political environment in Nigeria and other factors, there is no assurance that Global will be able to effect the required financing. If Shell were to terminate the contract for any reason or we were to terminate our involvement in the project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment. We currently have an investment of approximately $31 million associated with the barge facility and approximately $4 million associated with advances to and our investment in Global.

New accounting pronouncements

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, amortization of goodwill over an estimated useful life was discontinued. Instead, goodwill is now reviewed for impairment annually or whenever events indicate impairment may have occurred. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. SFAS 142 was effective for us on January 1, 2002. The adoption of SFAS 142 affects financial statements for periods commencing on or after January 1, 2002, due to the discontinuation of goodwill amortization expense. For the year ended December 31, 2001, goodwill amortization expense was approximately $11.6 million.

The transition provisions of SFAS 142 required us to identify our reporting units and perform an initial impairment assessment of the goodwill attributable to each reporting unit as of January 1, 2002. We performed our initial impairment assessment and determined that our reporting units are the same as our business segments and that no impairment existed as of January 1, 2002. However, due to a downturn in our business and changes in the business environment in which we operate, we completed an additional impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business unit. The second step of the goodwill impairment test required us to allocate the fair value of the reporting unit to the production and processing equipment businesses’ assets. We performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. The fair value of reporting units was estimated using a combination of the expected present value of future cash flows and the market approach, which uses actual market sales. In the fourth quarter of 2002, we

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recorded a $4.6 million goodwill impairment related to our pump division, which we expect to sell in 2003 or early 2004. The table below presents the carrying amount of goodwill (in thousands):

	At September 30, 2003		At December 31, 2002
Domestic rentals	$	97,265	$	94,655
International rentals		34,786		34,659
Parts, service and used equipment		32,691		32,691
Compressor and accessory fabrication		14,573		14,573
Production and processing equipment fabrication		26,032		3,941
Total	$	205,347	$	180,519

Our net income and earnings per share, adjusted to exclude goodwill amortization expense, for the 12 months ended December 31, 2001 and 2000 are as follows:

	2001		2000
	(Restated)		(Restated)
(In thousands, except per share data)
Net income	$	72,413	$	49,639
Goodwill amortization, net of tax		8,846		4,280
Adjusted net income	$	81,259	$	53,919
Basic earnings per share, as reported	$	1.00	$	0.80
Goodwill amortization, net of tax		0.12		0.07
Adjusted basic earnings per share	$	1.12	$	0.87
Diluted earnings per share, as reported	$	0.94	$	0.75
Goodwill amortization, net of tax		0.11		0.06
Adjusted diluted earnings per share	$	1.05	$	0.81

In June 2001, the FASB issued SFAS 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets” (“SFAS 143”). SFAS 143 establishes the accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 became effective for Hanover on January 1, 2003. The adoption of this new standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 became effective for us on January 1, 2003. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. We have adopted the provisions of the new standard, which had no material effect on our consolidated results of operations, cash flows or financial position.

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3. We adopted the provision of SFAS 146 for restructuring activities initiated after December 31, 2002, which had no material effect on our financial statements. SFAS 146 requires

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that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 became effective for interim periods beginning after June 15, 2003. We have adopted the provisions of EITF 00-21, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on our consolidated results of operations, cash flow or financial position.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 were effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We have adopted the disclosure provisions that are included within the consolidated financial statements included in this prospectus supplement.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights and the determination of when and which business enterprise should consolidate the VIE in its financial statements. FIN 46 applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some, but not all, of the variable interest entities they own.

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Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

We have a consolidated subsidiary trust that has Mandatorily Redeemable Preferred Securities outstanding which have a liquidation value of $86.3 million. These securities are reported on our balance sheet as Mandatorily Redeemable Convertible Preferred Securities. The trust may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes, if any, in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed above.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of SFAS 149 will be applied prospectively. We have adopted the provisions SFAS 149, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31,

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2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, the FASB issued Staff Position 150-4 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $34.6 million in sale leaseback obligations that are currently reported as “Minority interest” on our condensed consolidated balance sheet pursuant to FIN 46. See “—Leasing transactions and accounting change for FIN 46.”

These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of September 30, 2003, the yield rates on the outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At September 30, 2003, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

Previous restatements

April 2002 restatement

In conjunction with a review of our joint ventures and other transactions conducted by counsel under the direction of the Audit Committee of our board of directors, we restated our financial statements for the year ended December 31, 2000. The net effect of the restatement made in April 2002 for the year ended December 31, 2000 was as follows: (1) a decrease in revenues of $37.7 million, from $603.8 million to $566.1 million; (2) a decrease in income before income taxes of $12.0 million, from $93.5 million to $81.5 million; (3) a decrease in net income of $7.5 million, from $58.7 million to $51.2 million; and (4) a decrease in earnings per common share of $0.12 basic and $0.11 diluted. See Note 22 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

The transactions involved in the April 2002 restatement are: (1) the Cawthorne Channel project in Nigeria initially conducted through the Hampton Roads Shipping Investors II, L.L.C. joint venture; (2) the acquisition of two compressors in a non-monetary exchange transaction; (3) a compressor sale transaction; and (4) the sale of three turbine engines.

In connection with the restatement made in April 2002 for the year ended December 31, 2000, we also restated certain 2001 quarterly financial information previously reported. Our 2001 annual financial statements reflected the correction of entries that had been made in our previously issued quarterly financial statements for the first, second and third quarters of 2001. We had previously entered into the non-oil field power generation market, and we had agreed to sell certain turbines on extended credit and recognized revenues and the related profits at the time of the transactions. We had recorded $1.8 million of pre-tax income on a $16.1 million turbine sale in the second quarter of 2001 and had recorded $3.1 million of pre-tax income on a $16.9 million turbine sale in the third quarter of 2001. Upon further evaluation of the transactions in connection with the April 2002 restatement, we determined that each of these turbine sales failed to meet the criteria for recognition of revenue and determined that as a result such revenue should not have been recognized in 2001. We also determined that selling,

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general and administrative expenses had been understated by $0.5 million and $2.0 million for the three months and nine months ended September 30, 2001, respectively, and depreciation and amortization expenses had been understated by $0.5 million and $1.6 million for the three months and nine months ended September 30, 2001, respectively.

November 2002 restatement

Subsequent to the April 2002 restatement, a special committee of the board of directors together with the Audit Committee and company management, aided by outside legal counsel, completed an extensive investigation of certain transactions recorded during 2001, 2000 and 1999, including those transactions restated by us in April 2002. As a result of this investigation, we determined, with the concurrence of our independent accountants, to restate our financial statements for several transactions, including one that was the subject of the April 2002 restatement. The net effect of this restatement for the year ended December 31, 2001 was as follows: (1) a decrease in revenues of $7.5 million, from $1,078.2 million to $1,070.7 million; (2) a decrease in income before income taxes of $0.4 million, from $117.4 million to $117.0 million; (3) a decrease in net income of $0.2 million, from $72.6 million to $72.4 million; and (4) a decrease in diluted earnings per common share of $0.01. The net effect of this restatement for the year ended December 31, 2000 was as follows: (1) a decrease in revenues of $3.3 million, from $566.1 million to $562.8 million; (2) a decrease in income before taxes of $2.5 million, from $81.5 million to $79.0 million; (3) a decrease in net income of $1.6 million, from $51.2 million to $49.6 million; and (4) a decrease in earnings per common share of $0.03 basic and $0.02 diluted. The net effect of this restatement for the year ended December 31, 1999 was as follows: (1) a decrease in revenues of $5.1 million, from $323.2 million to $318.1 million; (2) a decrease in income before income taxes of $3.1 million, from $63.6 million to $60.5 million; (3) a decrease in net income of $1.9 million, from $40.4 million to $38.5 million; and (4) a decrease in earnings per common share of $0.04 basic and $0.03 diluted. See Note 23 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

The transactions involved in the November 2002 restatement are: (1) sale of compression and production equipment; (2) a delay penalty; (3) a turbine sale and purchase; (4) an agreement to provide technical assistance to an Indonesian company; (5) a scrap sale transaction; (6) the sale of certain used compression equipment; and (7) the recording of pre-acquisition revenues associated with a business acquired by us. In addition, we restated the following transactions by reversing their impact from the quarter originally recorded in 2000 and recording them in a subsequent quarter of 2000: (1) the sale of an interest in a power plant in Venezuela; (2) an agreement to provide services to a company ultimately acquired by Hanover; and (3) the sale of four used compressors. See Note 23 to the consolidated financial statements for the year ended December 31, 2002 included in this prospectus supplement.

Certain of these restatement adjustments are attributable to our businesses which are now classified as discontinued operations in the consolidated financial statements included in this prospectus supplement.

SEC investigation and securities class actions

Hanover and certain of its past and present officers and directors are named as defendants in a consolidated action pending in federal court that includes a putative securities class action, a putative class action arising under ERISA and derivative actions. In November 2002, the SEC issued a Formal Order of Private Investigation relating to us. The litigation and the SEC investigation

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relate principally to the matters involved in the transactions underlying the restatement of our financial statements. The plaintiffs in the private lawsuits allege, among other things, that we and the other defendants acted unlawfully and fraudulently in connection with those transactions and our original disclosures related to those transactions and thereby violated the antifraud provisions of the federal securities laws and the other defendants’ fiduciary duties to Hanover. Although the defendants have denied these allegations, there can be no assurance, if the litigation is not settled, that we would be successful in defending these claims. See “Business—Legal proceedings.” Certain officers and directors involved directly and indirectly with the transactions underlying the restatements resigned, and we have made significant changes to our internal controls. See “Risk factors—Risks related to our business—We are still in the process of improving our infrastructure capabilities, including our internal controls and procedures, which were strained by our rapid growth, to reduce the risk of future accounting and financial reporting problems.”

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Business

General

We are a global market leader in the full service natural gas compression business and are also a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Founded in 1990, and a public company since 1997, our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. In addition, through our ownership of Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalination plants, primarily for use in Europe and the Middle East.

We believe that we are currently the largest natural gas compression company in the United States on the basis of aggregate rental horsepower, with approximately 6,064 rental units in the United States having an aggregate capacity of approximately 2,583,000 horsepower at September 30, 2003. In addition, we estimate that we are one of the largest providers of compression services in the rapidly growing Latin American and Canadian markets, operating approximately 832 units internationally with approximately 925,000 horsepower at September 30, 2003. As of September 30, 2003, approximately 74% of our natural gas compression horsepower was located in the United States and approximately 26% was located elsewhere, primarily in Latin America and Canada.

Our products and services are essential to the production, processing, transportation and storage of natural gas and are provided primarily to energy producers and distributors of oil and natural gas. Our decentralized operating structure, technically experienced personnel and high-quality compressor fleet have allowed us to successfully provide reliable and timely customer service.

Industry trends

We compete primarily in the market for transportable natural gas compression units of up to 4,500 horsepower. The market for rental compression has experienced significant growth over the past decade. Although recently we have not experienced any significant growth in rentals or purchases of equipment and services by our customers, which we believe is a result of the lack of a significant increase in U.S. natural gas production levels, we believe that the U.S. gas compression market will continue to grow due to the increased demand for natural gas, the continued aging of the natural gas reserve base and the attendant decline of wellhead pressures, the discovery of new reserves and the continuing interest in outsourcing compression by independent producers. However, because the majority of oil and gas reserves are located outside of the United States, we believe that international markets will be a primary source of our growth opportunities in the gas compression market in the years to come.

As of June 2003, the rental portion of the domestic gas compression market was estimated by industry sources to be approximately 5.0 million horsepower, which we estimate accounts for

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approximately 30% of aggregate U.S. horsepower, having doubled since 1996. Growth of the rental compression capacity in the U.S. market has been primarily driven by the trend toward outsourcing by energy producers and processors. We believe that outsourcing provides the customer greater financial and operating flexibility by minimizing the customer’s investment in equipment and enabling the customer to more efficiently resize their compression capabilities to meet changing reservoir conditions. In addition, we believe that outsourcing typically provides the customer with more timely and technically proficient service and maintenance, which often reduces operating costs. We believe growth opportunities for compressor rental and sales exist due to (1) increased worldwide energy consumption, (2) implementation of international environmental and conservation laws prohibiting the flaring of natural gas, which increases the need for gathering systems, (3) increased outsourcing by energy producers and processors, (4) the environmental soundness, economy and availability of natural gas as an alternative energy source and (5) continued aging of the worldwide natural gas reserve base and the attendant decline of wellhead pressures. The rental compression business is capital intensive, and our ability to take advantage of these growth opportunities may be limited by our ability to raise capital to fund our expansion. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” in this prospectus supplement.

Competitive strengths

We believe we have the following key competitive strengths:

•  Broad-based solutions offering: We believe that we are the only company in our industry that offers both outsourced rental, as well as the sale of, compression and oil and gas production and processing equipment and related services. Our services include complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment as well as engineering and product design, fabrication, installation, customer service and after-market support. Our global customer base consists of U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, independent producers and natural gas processors, gatherers and pipelines. By offering a broad range of services that complement our historic strengths, we believe that we can provide comprehensive integrated global solutions to meet our customers’ oil and gas production and processing equipment and compression needs. We believe the breadth and quality of our services and rental fleet, the depth of our customer relationships and our presence in major gas-producing regions of the United States, Latin America and Canada place us in a position to capture additional outsourced business on a global basis.

•  Leading position in high horsepower compression: High horsepower compression, composed of units with greater than 500 horsepower, is the fastest growing portion of our rental compression business. We believe we are a leading provider of these units, which are typically installed on larger wells, gathering systems and processing and treating facilities. The scale and more attractive unit economics of these facilities largely insulate them from declining commodity prices. As a result, compressors in this segment tend to realize higher utilization rates. We believe that the greater technical requirements of these larger systems enable us to differentiate our compression products and to leverage sales of related products and services. As of September 30, 2003, approximately 79% of our aggregate horsepower consisted of high horsepower compression units.

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•  Provider of superior customer service: To facilitate our broad-based approach, we have adopted a geographical business unit concept and utilize a decentralized management and operating structure to provide superior customer service in a relationship-driven, service-intensive industry. We believe that our regionally-based network, local presence, experience and in-depth knowledge of customers’ operating needs and growth plans enable us to effectively meet their evolving needs. Our team of over 130 sales representatives aggressively pursues the rental and sales market for our products and services in their respective territories. Our efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

•  International experience: We believe we are a leading supplier of natural gas compression services in Latin America and Canada, with an expanding presence in Eastern Europe, Africa and Asia. As of September 30, 2003, of the approximately 925,000 horsepower of compression we had deployed internationally, approximately 84% was located in Latin America (primarily in Venezuela, Argentina and Mexico) and approximately 11% was located in Canada. We believe our experience in managing our international rental fleet and our efforts to develop and expand our international sales force have created a global platform from which we can continue to grow in international markets. Through our experiences in these international markets, we have demonstrated our ability to operate in remote and sometimes challenging environments. We believe international markets represent one of the greatest growth opportunities for our business, with rapidly expanding opportunities in regions such as Russia, the Middle East, West Africa and the Far East.

Business strategy

We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies:

•  Focus on core business: We have built our leading market position through our strengths in compression rentals, compressor fabrication, production and processing equipment rental and fabrication and parts and service. We are focusing our efforts on these businesses and on streamlining operations in our core markets. In connection with these efforts, we have decided to exit and sell certain non-core business lines. In December 2002, our board of directors approved management’s recommendation to exit and sell our non-oilfield power generation assets and certain used equipment business lines. We have since sold our interests in two non-oilfield power generation facilities.

•  Focus on return on capital: We are seeking to deploy our capital more effectively in order to improve the total return from our investments. To achieve this objective, we intend to work to improve our operating performance and profitability by focusing on the following initiatives:

•  improving our domestic fleet utilization by retiring less profitable units, limiting the addition of new units and, where applicable and permissible under our bank credit facility and the agreements related to our compression equipment lease obligations, moving idle domestic units into service in international markets;

•  increasing prices selectively for our domestic rental business;

•  increasing activity in our fabrication sales and parts and service operations to take advantage of our available fabrication capacity and field technician manpower; and

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•  improving operating efficiencies by consolidating certain of our operations.

•  Exploit international opportunities: International markets continue to represent one of the greatest growth opportunities for our business. Although our international horsepower has grown significantly over the last six years, we continue to believe that the market is underserved. Of total proven worldwide oil and natural gas reserves, the vast majority are located outside the United States. We believe that the continuing worldwide development and implementation of oil and gas environmental and conservation laws prohibiting the flaring of natural gas and encouraging the use of gas-fired power generation, coupled with increased worldwide energy consumption, will continue to drive use of compression by international energy companies. In addition, we typically see higher pricing in international markets relative to the domestic market. We intend to allocate additional resources toward international markets, to open offices abroad, where appropriate, and to move idle domestic units into service in international markets, where applicable. However, our ability to invest capital resources and allocate assets into international markets is restricted by our bank credit facility and the agreements related to our compression equipment lease obligations.

•  Improve our capital discipline: We plan to improve our capital discipline by lowering the working capital we have employed and reducing debt with both excess cash flow and proceeds from asset sales. We are also focused on improving the management of our working capital by lowering the number of days outstanding for our accounts receivable and reducing inventory levels. To reduce debt, we are committed to under-spending cash flow and we are currently planning to allocate approximately $180 million of our operating cash flow generated from 2004 through 2006 to debt reduction.

Industry overview

Gas compression

Typically, compression is required at several intervals of the natural gas production cycle: at the wellhead, at the gathering lines, into and out of gas processing facilities, into and out of storage and throughout the transportation systems.

Over the life of an oil or gas well, natural reservoir pressure and deliverability typically decline as reserves are produced. As the natural reservoir pressure of the well declines below the line pressure of the gas gathering or pipeline system used to transport the gas to market, gas no longer flows naturally into the pipeline. It is at this time that compression equipment is applied to economically boost the well’s production levels and allow gas to be brought to market.

In addition to such wellhead and gas field gathering activities, natural gas compressors are used in a number of other applications, most of which are intended to enhance the productivity of oil and gas wells, gas transportation lines and processing plants. Compressors are used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be removed and injected into a pipeline for transmission to facilities for further processing. As gas is transported through a pipeline, compression equipment is applied to allow the gas to continue to flow in the pipeline to its destination. Additionally, compressors are used to re-inject associated gas to lift liquid hydrocarbons and thereby increase the rate of crude oil production from oil and gas wells. Furthermore, compression enables gas to be stored in underground storage reservoirs for subsequent extraction during periods of peak demand. Finally, compressors are often used in combination with oil and gas production equipment to

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process and refine oil and gas into higher value added and more marketable energy sources, as well as used in connection with compressed natural gas vehicle fueling facilities providing an alternative to gasoline.

Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or change their compressor units to optimize the well production or pipeline efficiency. Due to the technical nature of the equipment, a dedicated local parts inventory, a diversified fleet of natural gas compressors and a highly trained staff of field service personnel are necessary to perform such functions in the most economic manner. These requirements, however, have typically proven to be an extremely inefficient use of capital and manpower for independent natural gas producers and have caused such firms, as well as natural gas processors and transporters, to increasingly outsource their non-core compression activities to specialists such as us.

The advent of rental and contract compression roughly 40 years ago made it possible for natural gas producers, transporters and processors to improve the efficiency and financial performance of their operations. We believe compressors leased from specialists generally have a higher rate of mechanical reliability and typically generate greater productivity than those owned by oil and gas operators. Furthermore, because compression needs of a well change over time, outsourcing of compression equipment enables an oil and gas producer to better match variable compression requirements to the production needs throughout the life of the well. Also, certain major domestic oil companies are seeking to streamline their operations and reduce their capital expenditures and other costs. To this end, they have sold certain domestic energy reserves to independent energy producers and are outsourcing facets of their operations. We believe that such initiatives are likely to contribute to increased rentals of compression equipment.

Natural gas compressor fabrication involves the design, fabrication and sale of compressors to meet the unique specifications dictated by the well pressure, production characteristics and the particular applications for which compression is sought. Compressor fabrication is essentially an assembly operation in which an engine, compressor, control panel, cooler and necessary piping are attached to a frame called a “skid.” A fabricator typically purchases the various compressor components from third-party manufacturers, but employs its own engineers and design and labor force.

In order to meet customers’ needs, gas compressor fabricators typically offer a variety of services to their customers, including:

•  engineering, fabrication and assembly of the compressor unit;

•  installation and testing of the unit;

•  ongoing performance review to assess the need for a change in compression; and

•  periodic maintenance and replacement parts supply.

Production and processing equipment

Crude oil and natural gas are generally not marketable as produced at the wellhead and must be processed before they can be transported to market. Production and processing equipment is used to separate and treat oil and gas immediately as it is produced to achieve a marketable quality of product. Production processing typically involves the separation of oil and gas and the removal of contaminants. The end result is “pipeline,” or “sales” quality oil and gas. Further

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processing or refining is almost always required before oil or gas is suitable for use as fuel or feedstock for petrochemical production. Production processing normally takes place in the “upstream” market, while refining and petrochemical production is referred to as the “downstream” market.

Wellhead or upstream production and processing equipment includes a wide and diverse range of products. We sell “standard” production equipment primarily into domestic U.S. markets, which is used for processing wellhead production from onshore or shallow-water offshore platform production. In addition, we sell custom-engineered, built-to-specification production and processing equipment, which typically consists of much larger equipment packages than standard equipment, and is generally used in much larger scale production operations. These large projects tend to be in remote areas, such as deepwater offshore sites, and in developing countries with limited oil and gas industry infrastructure. Technology, engineering capabilities, project management and quality control standards are the key drivers in this market.

The standard production equipment market tends to be somewhat commoditized, with sales following general industry trends. Equipment can be built for inventory based on historical product mix and predicted industry activity. The custom equipment market is driven by global economic and political trends, and the type of equipment that is being purchased can vary significantly.

Market conditions

We believe that the most fundamental force driving the demand for gas compression and production equipment is the growing global consumption of natural gas. As more gas is consumed, the demand for compression and production equipment increases. In addition, we expect the demand for liquefied natural gas, compressed natural gas and liquefied petroleum gas to continue to increase and result in additional demand for our compression and production equipment and related services.

Although natural gas has historically been a more significant source of energy in the United States than in the rest of the world, we believe that aggregate foreign natural gas consumption has recently grown. Despite this growth in energy demand, most non-U.S. energy markets have historically lacked the infrastructure necessary to transport natural gas to local markets and natural gas historically has been flared at the wellhead. Given recent environmental legislation and the construction of numerous natural gas-fueled power plants built to meet international energy demand, we believe that international compression markets are experiencing growth.

We believe that natural gas is considered to be the “fuel of the future” because it provides the best mix of environmental soundness, economy and availability of any energy source. Rising worldwide energy demand, environmental considerations, the further development of the natural gas pipeline infrastructure and the increasing use of natural gas as a fuel source in oilfield power generation are the principal reasons for this growth.

While gas compression and production and processing equipment typically must be engineered to high specifications to meet demanding and unique customer specifications, the fundamental technology of such equipment has been stable and has not been subject to significant technological change.

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Business segments

Our revenues and income are derived from five business segments:

•  Domestic rentals. Our domestic rentals segment primarily provides natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets located within the United States.

•  International rentals. Our international rentals segment provides substantially the same services as our domestic rentals segment except it services locations outside the United States.

•  Compressor and accessory fabrication. Our compressor and accessory fabrication segment involves the design, fabrication and sale of natural gas compression units and accessories to meet unique customer specifications.

•  Production and processing equipment fabrication. Our production and processing equipment fabrication segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas and engineering, procurement and manufacturing of heavy wall reactors for refineries and construction of desalination plants.

•  Parts, service and used equipment. Our parts, service and used equipment segment provides a full range of services to support the surface production needs of customers, from installation and normal maintenance and services to full operation of a customer’s owned assets and surface equipment as well as sales of used equipment.

The domestic and international compression rentals segments have operations primarily in the United States, Canada and South America. For financial data relating to our business segments and financial data relating to the amount or percentage of revenue contributed by any class of similar products or services which accounted for 10% or more of consolidated revenue in any of the last three fiscal years, see “Management’s discussion and analysis of financial condition and results of operations—Results by segment” and the Notes to our consolidated financial statements included in this prospectus supplement.

Compression rentals, maintenance services and compressor and accessory fabrication

We provide our customers with a full range of compressor and associated equipment sales, rental, maintenance and contract compression services. As of September 30, 2003, our compressor fleet consisted of approximately 6,900 units, ranging from 8 to 4,500 horsepower per unit. The size, type and geographic diversity of this rental fleet enable us to provide our customers with a range of compression units that can serve a wide variety of applications and to select the correct equipment for the job, rather than trying to “fit” the job to our fleet of equipment.

We base our gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the length of the contract and the inclusion of any other desired services, such as installation, transportation and the degree of daily operation. In early 2003, we began to selectively introduce price increases for our domestic compression rental business and we anticipate being able to achieve an average 1-2% increase in prices. Such price increases, along with a slight improvement in market

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conditions, resulted in a 2% increase in revenue from our domestic rentals business in the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. Substantially all of our units are operated pursuant to “contract compression” or “rental with full maintenance” agreements under which we perform all maintenance and repairs on such units while under contract. In the U.S. onshore market, compression rental fleet units are generally leased under contract with minimum terms of six months to two years, which convert to month-to-month at the end of the stipulated minimum period. Historically, the majority of our customers have extended the length of their contracts, on a month-to-month basis, well beyond the initial term. Typically, our compression rental units used in offshore and international applications carry substantially longer lease terms than those for onshore domestic applications.

An essential element of our success is our ability to provide compression services to customers with contractually committed compressor run-times of between 95% and 98%. Historically, our incidence of failing to meet run-time commitments (the penalty for which is paid in credits to the customer’s account) has been insignificant, due largely to our rigorous preventive maintenance program and extensive field service network that permits us to promptly address maintenance requirements. Our team of experienced maintenance personnel performs our rental compression maintenance services both at our facilities and in the field. Such maintenance facilities are situated in close proximity to actual rental fleet deployment to permit superior service response times.

All rental fleet units are serviced at manufacturers’ recommended maintenance intervals, modified as required by the peculiar characteristics of each job and the actual operating experience of each compressor unit. Prior to the conclusion of any rental job, our field management evaluates the condition of the equipment and, where practical, corrects any problems before the equipment is shipped out from the job site. Although natural gas compressors generally do not suffer significant technological obsolescence, they do require routine maintenance and periodic refurbishing to prolong their useful life. Routine maintenance includes alignment, compression checks and other parametric checks that indicate a change in the condition of the equipment. In addition, oil and wear-particle analysis is performed on all units on an ongoing scheduled basis and prior to their redeployment at specific compression rental jobs. Overhauls are done on a condition-based interval instead of a time-based schedule. In our experience, these rigorous procedures maximize component life and unit availability and minimize avoidable downtime. Typically, we overhaul each rental compressor unit for general refurbishment every 36 to 48 months and anticipate performing a comprehensive overhaul of each rental compressor unit every 60 to 72 months. This maintenance program has provided us with a highly reliable fleet of compressors in excellent condition.

Our field service mechanics provide all operating and maintenance services for our compression units leased on a contract compression or full maintenance basis and are on-call 24 hours a day. Those field personnel receive regular mechanical and safety training both from our staff and our vendors. Each of our field mechanics is responsible for specific compressor unit installations and has at his or her disposal a dedicated local parts inventory. Additionally, each field mechanic operates from a fully equipped service vehicle. Each mechanic’s field service vehicle is equipped with a radio or cellular telephone, which allows that individual to be our primary contact with the customer’s field operations staff and to be contacted at either his or her residence or mobile phone 24 hours a day. Accordingly, our field service mechanics are given the responsibility to promptly respond to customer service needs as they arise based on the mechanic’s trained judgment and field expertise.

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We believe our competitive position has benefited from the managerial parity that our sales and field service organizations enjoy within the company, enabling these two vital organizations to work together in a highly coordinated fashion in order to deliver maximum customer service, responsiveness and reliability. The foundation for our successful field operations effort is the experience and responsiveness of our compressor rental field service and shop staff of compressor mechanics. Our field service mechanics are coordinated and supported by regional operations managers who have supervisory responsibility for specific geographic areas.

Our compressor and accessory fabrication operations design, engineer and assemble compression units and accessories for sale to third parties as well as for placement in our compressor rental fleet. As of September 30, 2003, we had a compressor unit fabrication backlog for sale to third parties of $29.3 million compared to $20.4 million at September 30, 2002. Substantially all backlog is expected to be produced within a 90 to 180 day period. In general, units to be sold to third parties are assembled according to each customer’s specifications and sold on a turnkey basis. We acquire major components for these compressor units from third-party suppliers.

Compressor rental fleet

The size and horsepower of our compressor rental fleet owned or operated under lease on September 30, 2003 are summarized in the following table:

Range of Horsepower per Unit	Number of Units	Aggregate Horsepower	% of Horsepower
0-100	2,005	120,000	3.4%
101-200	1,382	220,000	6.3%
201-500	1,200	408,000	11.6%
501-800	764	503,000	14.3%
801-1,100	372	373,000	10.7%
1,101-1,500	900	1,268,000	36.2%
1,501-2,500	197	363,000	10.3%
2,501-4,500	76	253,000	7.2%
Total	6,896	3,508,000	100.0%

Oil and gas production and processing equipment fabrication

Through our production and processing equipment fabrication division, we design, engineer, fabricate, sell and rent a broad range of oil and gas production equipment designed to heat, separate, dehydrate and measure crude oil and natural gas. Our product line includes line heaters, oil and gas separators, glycol dehydration units and skid-mounted production packages designed for both onshore and offshore production facilities. We generally maintain standard product inventories to meet most customers’ rapid response requirements and minimize customer downtime. As of September 30, 2003, we had a production and processing equipment fabrication backlog of $32.2 million (excluding Belleli’s backlog of $65.6 million at September 30, 2003) compared to $47.3 million at September 30, 2002. Substantially all of our backlog is expected to be produced within a three to eighteen month period. We also purchase and recondition used production and processing equipment which is then sold or rented.

Parts, service and used equipment

We purchase and recondition used gas compression units, oilfield power generation and treating facilities and production equipment that is then sold or rented to customers. In addition, we

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often provide contract operations and related services for customers that prefer to own their production, gas treating and oilfield power generation or compression equipment. We believe that we are particularly well qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression rental, production processing equipment and oilfield power generation equipment and facilities. As customers look to us to provide an ever-widening array of outsourced services, we will continue to build our core business with emerging business opportunities, such as turnkey gas treatment, gas measurement and oilfield-related power generation sales and services. We maintain parts inventories for our own use and to meet our customers’ needs. As of September 30, 2003, we had approximately $110.0 million in parts and supplies inventories.

Sources and availability of raw materials

Our fabrication operations consist of fabricating compressor and production and processing equipment from components and subassemblies, most of which we acquire from a wide range of vendors. These components represent a significant portion of the cost of our compressor and production and processing equipment products. Although our products are generally shipped within 180 days following their order date, increases in raw material costs cannot always be offset by increases in our products’ sales prices. We believe that all materials and components are readily available from multiple suppliers at competitive prices.

Market and customers

Our global customer base consists of U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines. Additionally, we have negotiated strategic alliances or preferred vendor relationships with key customers pursuant to which we receive preferential consideration in customer compressor and oil and gas production equipment procurement decisions in exchange for providing enhanced product availability, product support, automated procurement practices and limited pricing concessions. No individual customer accounted for more than 10% of our consolidated revenues during 2002, 2001 or 2000.

Our compressor leasing activities are located throughout the continental United States, internationally and in offshore operations. International locations include Argentina, Barbados, Egypt, United Arab Emirates, Equatorial Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Mexico, Peru, Pakistan, Indonesia, Nigeria, United Kingdom, Russia and Canada. In addition, we have representative offices in the Netherlands and the Cayman Islands. As of September 30, 2003, equipment representing approximately 26% of our compressor horsepower was being used in international applications.

Sales and marketing

Our more than 130 salespeople aggressively pursue the rental and sales market for compressors and production equipment and other products in their respective territories. Each salesperson is assigned a customer list on the basis of the experience and personal relationships of the salesperson and the individual service requirements of the customer. This customer and relationship-focused strategy is communicated through frequent direct contact, technical presentations, print literature, print advertising and direct mail. Our advertising and promotion strategy is a concentrated approach, tailoring specific messages into a very focused presentation methodology.

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Additionally, our salespeople coordinate with each other to effectively pursue customers who operate in multiple regions. The salespeople maintain intensive contact with our operations personnel in order to promptly respond to and satisfy customer needs. Our sales efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

Upon receipt of a request for proposal or bid by a customer, we assign a team of sales, operations and engineering personnel to analyze the application and prepare a quotation, including selection of the equipment, pricing and delivery date. The quotation is then delivered to the customer and, if we are selected as the vendor, final terms are agreed upon and a contract or purchase order is executed. Our engineering and operations personnel also often provide assistance on complex compressor applications, field operations issues or equipment modifications.

Competition

We believe that we are currently the largest natural gas compression company in the United States on the basis of aggregate rental horsepower. However, the natural gas compression services and fabrication business is highly competitive. Overall, we experience considerable competition from companies who may be able to more quickly adapt to changes within our industry and changes in economic conditions as a whole, more readily take advantage of available opportunities and adopt more aggressive pricing policies.

Because the business is capital intensive, our ability to take advantage of growth opportunities may be limited by our ability to raise capital. As part of the most recent amendment to our bank credit facility, we agreed to limit our capital expenditures for 2003 to no more than $200 million. To the extent that any of our competitors have a lower cost of capital or have greater access to capital than we do, they may be able to compete more effectively, which may allow them to more readily take advantage of available opportunities.

Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rental units increases in a rental fleet, the number of sales, engineering, administrative and maintenance personnel required does not increase proportionately.

One of the significant cost items in the compressor rental business is the amount of inventory required to service rental units. Each rental company must maintain a minimum amount of inventory to stay competitive. As the size of the rental fleet increases, the required amount of inventory does not increase in the same proportion. The larger rental fleet companies can generate cost savings through improved purchasing power and vendor support.

We believe that we compete effectively on the basis of price, customer service, including the availability of personnel in remote locations, flexibility in meeting customer needs and quality and reliability of our compressors and related services. A few major fabricators, some of whom also compete with us in the compressor rental business, dominate the compressor fabrication business. We believe that we are one of the largest compressor fabrication companies in the United States.

In our production and processing equipment business we have different competitors in the standard and customer engineered equipment markets. Competitors in the standard equipment market include several large companies and a large number of small, regional fabricators. Competition in the standard equipment market is generally based upon price, availability, the

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ability to provide integrated projects and level of product support after the sale. Our competition in the custom engineered market usually consists of larger companies. Increasingly, the ability to fabricate these large systems near to the point of end-use is a major competitive issue.

Government regulation

We are subject to various federal, state, local and foreign laws and regulations relating to the environment, health and safety, including regulations and permitting for air emissions, wastewater and storm water discharges and waste handling and disposal activities. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks, or pipelines and other regulated units, all of which may impose additional regulatory compliance and permitting obligations. Failure to comply with these environmental laws and regulations or associated permits may result in the assessment of administrative, civil, and criminal penalties, the imposition of investigatory and remedial obligations, and the issuance of injunctions as to future compliance. Moreover, as with any owner or operator of real property, we are subject to clean-up costs and liability for regulated substances or any other toxic or hazardous wastes that may exist on or have been released under any of our properties.

In connection with our due diligence investigation of potential new properties for acquisition, we typically perform an evaluation to identify potentially significant environmental issues and take measures to have such issues addressed by the seller or ourselves, as appropriate under the circumstances. We cannot be certain, however, that all such possible environmental issues will be identified and fully addressed prior to our acquisition of new properties. Moreover, the handling of petroleum products and other regulated substances is a normal part of our operations and we have experienced occasional minor spills or incidental leakages in connection with our operations. As part of the regular overall evaluation of our operations, including newly acquired facilities, we assess the compliance and permitting status of these operations and facilities with applicable environmental laws and regulations and seek to address identified issues in accordance with applicable law.

The Comprehensive Environmental Response, Compensation and Liability Act, also known as “CERCLA” or the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the facility or disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA and similar state laws, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment.

The Resource Conservation and Recovery Act (“RCRA”) and regulations promulgated thereunder govern the generation, storage, transfer and disposal of hazardous wastes. We must comply with RCRA regulations for any of our operations that involve the generation, management or disposal of hazardous wastes (such as painting activities or the use of solvents). In addition, to the extent we operate underground tanks on behalf of specific customers, such operations may be regulated under RCRA. We believe we are in substantial compliance with RCRA and are not

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aware of any current claims against us alleging RCRA violations. We cannot provide any assurance, however, that we will not receive such notices of potential liability in the future.

We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our operations for a number of years. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, regulated substances, or other wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under our control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, we could be required to remove or remediate previously disposed wastes or property contamination, or to perform remedial plugging or pit closure operations to prevent future contamination. We are not currently under any order requiring that we undertake or pay for any clean-up activities, nor are we aware of any current environmental claims by the government or private parties against us demanding remedial costs or alleging that we are liable for such costs. However, we cannot provide any assurance that we will not receive any such claims in the future.

The Federal Water Pollution Control Act of 1972, also known as the “Clean Water Act,” and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. The EPA also has adopted regulations requiring covered industrial operators to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. We believe that we are in substantial compliance with requirements under the Clean Water Act.

The Clean Air Act restricts the emission of air pollutants from many sources, including compressors and operational support facilities. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance. In addition, certain states have or are considering and the federal government has recently passed more stringent air emission controls on off-road engines. These laws and regulations may affect the costs of our operations.

On June 25, 1999, we notified the Air Quality Bureau of the Environmental Protection Division, New Mexico Environment Department of potential violations of regulatory and permitting requirements. The violations included failure to conduct required performance tests, failure to file required notices and failure to pay fees for compressor units located on sites for more than one year. We promptly paid the required fees and corrected the violations. On June 12, 2001, after the violations had been corrected, the Director of the Division issued a compliance order to us in connection with the alleged violations. The compliance order assessed a civil penalty of $15,000 per day per regulatory violation and permit; no total penalty amount was proposed in the compliance order. On October 3, 2003, the Division notified us that the total proposed penalty would be $759,072. However, since the alleged violations had been self-disclosed, that amount was reduced to $189,768. We expect to respond to the penalty assessment, challenging some of the calculations, and will propose an alternative settlement amount, which we expect to be less than $100,000.

We believe that we are currently in substantial compliance with environmental laws and regulations and that the phasing-in of recent more stringent air emission controls on off-road

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engines and other known regulatory requirements at the rate currently contemplated by such laws and regulations will not have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Stricter standards in environmental legislation that may affect us may be imposed in the future, such as more stringent air emission requirements or proposals to make currently non-hazardous wastes subject to more stringent and costly handling, disposal and clean-up requirements. While we may be able to pass on the additional costs of complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. Accordingly, new laws or regulations or amendments to existing laws or regulations might require us to undertake significant capital expenditures and otherwise have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Our operations outside the United States are potentially subject to similar foreign governmental controls and restrictions pertaining to the environment. We believe our operations are in substantial compliance with existing foreign governmental controls and restrictions and that compliance with these foreign controls and restrictions has not had a material adverse effect on our operations. We cannot provide any assurance, however, that we will not incur significant costs to comply with these foreign controls and restrictions in the future.

International operations

We operate in many different geographic markets, some of which are outside the United States. Changes in local economic or political conditions, particularly in Venezuela, Argentina, other parts of Latin America or Canada, could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Additional risks inherent in our international business activities include the following:

•  difficulties in managing international operations;

•  unexpected changes in regulatory requirements;

•  tariffs and other trade barriers which may restrict our ability to enter into new markets;

•  changes in political conditions;

•  potentially adverse tax consequences;

•  restrictions on repatriation of earnings or expropriation of property;

•  the burden of complying with foreign laws; and

•  fluctuations in currency exchange rates and the value of the U.S. dollar.

See the discussion of our Argentine and Venezuelan operations included in “Management’s discussion and analysis of financial condition and results of operations” in this prospectus supplement. Our future plans involve expanding our business in international markets where we currently do not conduct business. Our decentralized management structure and the risks inherent in new business ventures, especially in international markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In January 2002, Argentina devalued its peso against the U.S. dollar and imposed significant restrictions on fund transfers internally and outside the country. In addition, the Argentine

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government enacted regulations to temporarily prohibit enforcement of contracts with exchange rate-based purchase price adjustments. Instead, payment under such contracts could either be made at an exchange rate negotiated by the parties or, if no such agreement were reached, a preliminary payment could be made based on a one dollar to one peso equivalent pending a final agreement. The Argentine government also required the parties to such contracts to renegotiate the price terms within 180 business days of the devaluation. We have renegotiated all of our agreements in Argentina. As a result of these negotiations, we received approximately $11.2 million in reimbursements in 2002 and $0.7 million in the first nine months of 2003. During the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million for assets exposed to currency translation in Argentina. For the nine months ended September 30, 2003, our Argentine operations represented approximately 5% of our revenue and 9% of our gross margin. During the year ended December 31, 2002, we recorded an exchange loss of approximately $9.9 million for assets exposed to currency translation in Argentina. For the year ended December 31, 2002, our Argentine operations represented approximately 5% of our revenue and 7% of our gross margin. The economic situation in Argentina is subject to change. To the extent that the situation in Argentina deteriorates, exchange controls continue in place and the value of the peso against the dollar is reduced further, our results of operations in Argentina could be materially and adversely affected which could result in reductions in our net income.

In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production has dropped substantially. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, talks of a settlement break down, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption in our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the nine months ended September 30, 2003, we recognized approximately $2.7 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues. During the year ended December 31, 2002, we recorded an exchange loss of approximately $5.8 million for assets exposed to currency translation in Venezuela. For the year ended December 31, 2002, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross margin. At September 30, 2003, we had approximately $25.0 million in accounts receivable related to our Venezuelan operations.

As part of our acquisition of the gas compression business of Schlumberger, we acquired minority interests in three joint ventures in Venezuela. As a minority investor in these joint ventures, we will not be able to control their operations and activities, including without limitation, whether and when they distribute cash or property to their holders. In January 2003, we gave notice of our intent to exercise our right to put our interest in one of these joint ventures, the PIGAP II

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joint venture, back to Schlumberger Surenco. If not exercised, the put right would have expired as of February 1, 2003. On May 14, 2003, we entered into an agreement with Schlumberger Surenco to terminate the PIGAP II put and thus have retained our ownership interest in PIGAP II.

We are involved in a project to build and operate barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway as part of the performance of a contract between Global, a Nigerian company, and an affiliate of Shell. We have completed the building of the required barge-mounted facilities. We understand that Global must complete a significant financing for part of the project in the near term or Shell would be able to terminate its contract with Global. In light of the political environment in Nigeria and other factors, there is no assurance that Global will be able to effect the required financing. If Shell were to terminate the contract for any reason or we were to terminate our involvement in the project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment. We currently have an investment of approximately $31 million associated with the barge facility and approximately $4 million associated with advances to and our investment in Global.

Employees

As of September 30, 2003 we had approximately 4,100 employees, approximately 105 of whom are represented by a labor union. Furthermore, we had approximately 486 contract personnel. In addition, as of September 30, 2003, Belleli Energy, our wholly owned subsidiary which we began consolidating in November 2002, had approximately 1,300 employees, approximately 400 of whom are represented by a labor union, and 198 contract personnel. We believe that our relations with our employees and contract personnel are satisfactory.

Properties

The following table describes the material facilities owned or leased by us as of September 30, 2003:

Location	Status	Approximate Square Footage	Uses
Broken Arrow, Oklahoma	Owned	127,505	Compressor and accessory fabrication
Davis, Oklahoma	Owned	393,870	Compressor and accessory fabrication
Houston, Texas	Owned	256,505	Compressor and accessory fabrication
Houston, Texas	Owned	148,925	Compressor and accessory fabrication
Houston, Texas	Leased	51,941	Office
Anaco, Venezuela	Leased	10,000	Compressor rental and service
Casper, Wyoming	Owned	28,390	Compressor rental and service
Comodoro Rivadavia, Argentina	Leased	21,000	Compressor rental and service
Comodoro Rivadavia, Argentina	Owned	26,000	Compressor rental and service
Farmington, New Mexico	Owned	20,361	Compressor rental and service
Gillette, Wyoming	Leased	10,200	Compressor rental and service
Houston, Texas	Leased	13,200	Compressor rental and service
Kilgore, Texas	Owned	33,039	Compressor rental and service
Maturin, Venezuela	Owned	20,000	Compressor rental and service

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Location	Status	Approximate Square Footage	Uses
Midland, Texas	Owned	53,300	Compressor rental and service
Neuquen, Argentina	Owned	30,000	Compressor rental and service
Pampa, Texas	Leased	24,000	Compressor rental and service
Pocola, Oklahoma	Owned	18,705	Compressor rental and service
Santa Cruz, Bolivia	Leased	32,200	Compressor rental and service
Tulsa, Oklahoma	Leased	16,456	Compressor rental and service
Tulsa, Oklahoma	Leased	13,100	Compressor rental and service
Tulsa, Oklahoma	Leased	19,200	Compressor rental and service
Victoria, Texas	Owned	21,840	Compressor rental and service
Victoria, Texas	Leased	18,083	Compressor rental and service
Walsall, UK–Redhouse	Owned	15,300	Compressor rental and service
Walsall, UK–Westgate	Owned	44,700	Compressor rental and service
West Monroe, Louisiana	Owned	26,100	Compressor rental and service
Yukon, Oklahoma	Owned	22,453	Compressor rental and service
Odessa, Texas	Owned	15,751	Parts, service and used equipment
Houston, Texas	Leased	28,750	Parts, service and used equipment
Houston, Texas	Leased	73,450	Parts, service and used equipment
Odessa, Texas	Owned	30,281	Parts, service and used equipment
Broussard, Louisiana	Owned	74,402	Production and processing equipment fabrication
Calgary, Alberta, Canada	Owned	95,000	Production and processing equipment fabrication
Columbus, Texas	Owned	219,552	Production and processing equipment fabrication
Corpus Christi, Texas	Owned	11,000	Production and processing equipment fabrication
Dubai, UAE	Owned	29,914	Production and processing equipment fabrication
Hamriyah Free Zone, UAE	Owned	20,664	Production and processing equipment fabrication
Houston, Texas	Leased	103,000	Production and processing equipment fabrication
Mantova, Italy	Owned	196,800	Production and processing equipment fabrication
Tulsa, Oklahoma	Owned	40,100	Production and processing equipment fabrication
Victoria, Texas	Owned	50,506	Production and processing equipment fabrication

Our corporate headquarters and compressor fabrication facility in Houston, Texas and our production equipment manufacturing facility in Columbus, Texas are mortgaged to secure the repayment of approximately $3.0 million (as of September 30, 2003) in debt to a commercial bank.

Legal proceedings

Commencing in February 2002, approximately 15 putative securities class action lawsuits were filed against us and certain of our current and former officers and directors in the United States

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District Court for the Southern District of Texas. These class actions (together with subsequently filed actions) were consolidated into one case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A. O’Connor. The complaints asserted various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and sought unspecified amounts of compensatory damages, interest and costs, including legal fees. The court entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel. On September 5, 2003, lead plaintiffs filed an amended complaint in which they continued to seek relief under Sections 10(b) and 20(a) of the Securities Exchange Act against Hanover, certain former officers and directors and our auditor, PricewaterhouseCoopers LLP, on behalf of themselves and the class of persons who purchased Hanover securities between May 4, 1999 and December 23, 2002.

In the securities action, the plaintiffs allege generally that the defendants violated the federal securities laws by making misstatements and omissions in our periodic filings with the SEC as well as in other public statements in connection with the transactions that were restated in 2002. A description of the transactions that were restated is set forth in “Management’s discussion and analysis of financial condition and results of operations—Previous restatements.”

Commencing in February 2002, four derivative lawsuits were filed in the United States District Court for the Southern District of Texas, two derivative lawsuits were filed in state district court for Harris County, Texas (one of which was nonsuited and the second of which was removed to Federal District Court for the Southern District of Texas) and one derivative lawsuit was filed in the Court of Chancery for the State of Delaware in and for New Castle County. These derivative lawsuits, which were filed by certain of our shareholders purportedly on behalf of Hanover, alleged, among other things, that our directors breached their fiduciary duties to shareholders in connection with certain of the transactions that were restated in 2002, and seek unspecified amounts of damages, interest and costs, including legal fees. The derivative lawsuits in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002 into the Harbor Finance Partners derivative lawsuit. With that consolidation, the pending derivative lawsuits were:

Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Harbor Finance Partners, derivatively on behalf of Hanover Compressor Company	Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant	H-02-0761	United States District Court for the Southern District of Texas	03/01/02

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Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Coffelt Family, LLC, derivatively on behalf of Hanover Compressor Company	Michael A. O’Connor, Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein, Alvin V. Shoemaker and Robert R. Furgason, Defendants and Hanover Compressor Company, Nominal Defendant	19410-NC	Court of Chancery for the State of Delaware State Court in New Castle County	02/15/02

On October 2, 2003, the Harbor Finance Partners derivative lawsuit was consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust securities class action.

On and after March 26, 2003, three plaintiffs filed separate putative class actions against Hanover, certain named individuals and other purportedly unknown defendants, in the United States District Court for the Southern District of Texas. The alleged class is composed of persons who participated in or were beneficiaries of The Hanover Companies Retirement and Savings Plan, which was established by Hanover pursuant to Section 401(k) of the United States Internal Revenue Code of 1986, as amended. The purported class action seeks relief under ERISA based upon Hanover’s and the individual defendants’ alleged mishandling of Hanover’s 401(k) Plan. The three ERISA putative class actions are entitled: Kirkley v. Hanover, Case No. H-03-1155; Angleopoulos v. Hanover, Case No. H-03-1064; and Freeman v. Hanover, Case No. H-03-1095. On August 1, 2003, the three ERISA class actions were consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust federal securities class action. On October 9, 2003, a consolidated amended complaint was filed by the plaintiffs in the ERISA class action against Hanover, Michael McGhan, Michael O’Connor and William Goldberg, which included the same allegations as indicated above, and was filed on behalf of themselves and a class of persons who purchased or held Hanover securities in their 401(k) Plan between May 4, 1999 and December 23, 2002.

These actions allege generally that, in connection with the transactions that were restated in 2002, we and certain individuals acting as fiduciaries of Hanover’s 401(k) Plan breached their fiduciary duties to the plan participants by offering Hanover common stock as an investment option, failing to provide material information to plan participants regarding the suitability of Hanover common stock as an investment alternative, failing to monitor the performance of plan fiduciaries, and failing to provide material information to other fiduciaries.

On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to, among other things, court approval, will settle all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions described above. The terms of the proposed settlement provide for us to: (1) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (2) issue 2.5 million shares of our common stock, and (3) issue a contingent note with a principal amount of $6.7 million. The note will be payable, together with accrued interest, on March 31, 2007 but can be extinguished (with no money owing under it) if our common stock trades at or above the average price of $12.25 per share for

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15 consecutive days at any time between March 31, 2004 and March 31, 2007. In addition, upon the occurrence of a change of control of us, if the change of control or shareholder approval of the change of control occurs within 12 months after final court approval of the settlement, we will be obligated to contribute an additional $3 million to the settlement fund. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our board of directors and certain enhancements to our code of conduct. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the putative consolidated securities class action.

GKH Investments, L.P. and GKH Private Limited (collectively “GKH”), which together own approximately 10% of Hanover’s outstanding common stock and which sold shares in our March 2001 secondary offering of common stock, are parties to the proposed settlement and have agreed to settle claims against them that arise out of that offering as well as other potential securities, ERISA, and derivative claims. The terms of the proposed settlement provide for GKH to transfer 2.5 million shares of Hanover common stock from their holdings or from other sources.

In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in Hanover’s statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by Hanover. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 5, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us in connection with the settlement. In the third quarter of 2003, we recorded a reduction in the charge of $3.5 million to adjust our estimate of the settlement due to additional change in the value of such common stock during the three months ended September 30, 2003.

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Based on the terms of the settlement agreement, we determined that a liability related to these lawsuits was probable and that the value was reasonably estimable. Accordingly, we evaluated the individual components of the settlement in consideration of existing market conditions and established an estimate for the cost of the litigation settlement. The details of this estimate are as follows (in thousands):

	Amended First Quarter Estimated Settlement			Second and Third Quarter Adjustment To Estimated Settlement			Total
Cash	$	30,050		$	—		$	30,050
Estimated fair value of note to be issued .		5,194			—			5,194
Common stock to be issued by Hanover		26,600			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

The $5.2 million estimated fair value of the note to be issued was based on the present value of the future cash flows discounted at borrowing rates currently available to us for debt with similar terms and maturities. Utilizing a market-borrowing rate of 11%, the principal value and stipulated interest rate required by the note of 5% per annum, an estimated discount of $1.5 million was computed on the note to be issued. Upon the issuance of the note, the discount will be amortized to interest expense over the term of the note. Because the note could be extinguished without a payment (if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007), we will be required to record an asset in future periods for the value of the embedded derivative, as required by SFAS 133, when the note is issued. This asset will be marked to market in future periods with any increase or decrease included in our statement of operations.

As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts which are expected to be paid in the next twelve months. During the second quarter, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon approval of the settlement by the court, we will record such amounts in liabilities and stockholders’ equity, respectively, and will include the shares in our outstanding shares used for earnings per share calculations.

The final value of the settlement may differ significantly from the estimates currently recorded, depending on the market value of our common stock when approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued and whether we are required to make the additional $3 million payment in the event of a change of control. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

On October 24, 2003, the parties moved the court for preliminary approval of the proposed settlement and sought permission to provide notice to the potentially affected persons and to set a date for a final hearing to approve the proposed settlement. The settlement, therefore,

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remains subject to, among other things, court approval and could be the subject of an objection by potentially affected persons. We also have the right to terminate the settlement under certain circumstances, including if more than a certain number of the plaintiffs elect to opt out of the settlement. There can be no assurances that the settlement will be approved or finalized, or that it will be finally approved or finalized on the terms agreed upon in the Stipulation of Settlement.

On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the transactions underlying and other matters relating to the restatements of our financial statements announced in 2002. We have cooperated with the Fort Worth District Office Staff of the SEC in its investigation. Based upon our discussions to date with the Fort Worth District Office Staff of the SEC, we currently believe that a settlement of the investigation will be reached on terms that we do not believe will have a material adverse impact on our business, consolidated financial position, results of operations or cash flows. However, we can give no assurances in this regard, and we expect any settlement with the SEC to include findings of violations of the securities laws by us with respect to certain of the restated transactions. We understand that any resolution of the investigation reached by us with the Fort Worth District Office Staff of the SEC will have no legal effect until it is reviewed and, if appropriate, approved by the SEC in Washington, D.C., and we cannot predict what action might ultimately be taken against us by the SEC. As such, we do not anticipate announcing any resolution of the investigation unless and until such resolution is approved by the SEC in Washington, D.C.

As of September 30, 2003, we had incurred approximately $14.0 million in legal related expenses in connection with the internal investigations, the putative class action securities and ERISA lawsuits, the derivative lawsuits and the SEC investigation. Of this amount, we advanced approximately $2.2 million on behalf of certain current and former officers and directors in connection with the above-named proceedings. We intend to advance the litigation costs of our current and former officers and directors, subject to the limitations imposed by Delaware and other applicable law and Hanover’s certificate of incorporation and bylaws. We expect to incur approximately $4.4 million in additional legal fees and administrative expenses in connection with the settlement of the litigation, the SEC investigation and advances on behalf of current and former officers and directors for legal fees.

On June 25, 1999, we notified the Air Quality Bureau of the Environmental Protection Division, New Mexico Environment Department of potential violations of regulatory and permitting requirements. The violations included failure to conduct required performance tests, failure to file required notices and failure to pay fees for compressor units located on sites for more than one year. We promptly paid the required fees and corrected the violations. On June 12, 2001, after the violations had been corrected, the Director of the Division issued a compliance order to us in connection with the alleged violations. The compliance order assessed a civil penalty of $15,000 per day per regulatory violation and permit; no total penalty amount was proposed in the compliance order. On October 3, 2003, the Division notified us that the total proposed penalty would be $759,072. However, since the alleged violations had been self-disclosed, that amount was reduced to $189,768. We expect to respond to the penalty assessment, challenging some of the calculations, and will propose an alternative settlement amount, which we expect to be less than $100,000.

In the ordinary course of business we are involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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Management

The following sets forth, as of September 30, 2003, the name, age and business experience for the last five years of each of our executive officers:

Name	Age	Position
Chad C. Deaton	50	President and Chief Executive Officer; Director
John E. Jackson	45	Senior Vice President and Chief Financial Officer
Mark S. Berg	45	Senior Vice President, General Counsel and Secretary
Peter G. Schreck	39	Vice President—Treasury and Planning
Stephen P. York	47	Vice President and Corporate Controller

Chad C. Deaton was elected President, Chief Executive Officer and director in August 2002. From 1976 through 1984, Mr. Deaton served in a variety of positions with the Dowell Division of Dow Chemical. Following Schlumberger’s acquisition of Dowell in 1984, Mr. Deaton served in management positions with Schlumberger in Europe, Russia and the United States. Mr. Deaton was Executive Vice President of Schlumberger Oilfield Services from 1998 to 1999. From September 1999 to September 2001, Mr. Deaton served as a Senior Advisor to Schlumberger Oilfield Services.

John E. Jackson has served as Senior Vice President and Chief Financial Officer since February 2002. Prior to joining Hanover, Mr. Jackson served as Vice President and Chief Financial Officer of Duke Energy Field Services, a joint venture of Duke Energy and Phillips Petroleum that is one of the nation’s largest producers and marketers of natural gas liquids. Mr. Jackson joined Duke Energy Field Services as Vice President and Controller in April 1999 and was named Chief Financial Officer in February 2001. Prior to joining Duke Energy Field Services, Mr. Jackson served in a variety of treasury, controller and accounting positions at Union Pacific Resources between June 1981 and April 1999.

Mark S. Berg has served as Senior Vice President, General Counsel and Secretary since May 2002. From 1997 through 2001, Mr. Berg was an executive officer of American General Corporation, a Fortune 500 diversified financial services company, most recently serving in the position of Executive Vice President, General Counsel and Secretary. Mr. Berg began his career in 1983 as an associate with the Houston-based law firm of Vinson & Elkins L.L.P. and served as a partner from 1990 through 1997.

Peter G. Schreck has served as Vice President—Treasury and Planning since September 2000. Mr. Schreck was previously employed in various financial positions by Union Pacific Corporation and its affiliated subsidiaries from 1988 through August 2000. Immediately prior to joining Hanover, Mr. Schreck held the position of Treasurer and Director of Financial Services for Union Pacific Resources Company.

Stephen P. York has served as Vice President and Corporate Controller since April 2002. Prior to joining Hanover, Mr. York served as Director, Payroll Production of Exult, Inc., a provider of web-enabled human resources management services in Charlotte, NC, since 2001. From 1981 to 2000, Mr. York held various management positions with Bank of America Corporation, including Senior Vice President—Personnel Operations, Senior Vice President—Controller/General Accounting, Senior Vice President—Corporate Accounts Payable/Fixed Assets and Vice President—Audit Director. Mr. York was an accountant with KPMG Peat Marwick from 1979 to 1981.

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Description of certain other financial obligations

Bank credit facility and the Proposed Bank Credit Facility

We have an amended and restated bank credit facility which provides for (1) a revolving credit facility in an aggregate principal amount of $350 million and (2) a commitment to issue letters of credit up to $75 million. At September 30, 2003, we had approximately $172 million of outstanding borrowings and $71.7 million of outstanding letters of credit under the bank credit facility. Amounts outstanding under our bank credit facility bear interest at (1) the greater of the administrative agent’s prime rate, the federal funds effective rate or the base CD rate, or (2) the Eurodollar rate plus, in each case, the spread. In addition, a commitment fee based upon a percentage of the average available commitment is payable quarterly to the lenders participating in the facility. The revolving loans may be borrowed, repaid and reborrowed from time to time.

Our bank credit facility also contains various financial covenants which require, among other things, that we meet our specified quarterly financial ratios, including cash flow and net worth measurements and restricts, among other things, our ability to incur additional indebtedness or sell assets.

In February 2003, we executed an amendment to our bank credit facility and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs.

As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility. With respect to the more restrictive financial covenants that will be in effect for the quarter ending March 31, 2004, if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at such date. However, we currently have bank commitments totaling $345 million for the Proposed Bank Credit Facility with different and/or less restrictive covenants which would apply to us upon closing of the Proposed Bank Credit Facility. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at December 31, 2003 and March 31, 2004.

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The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financings to refinance a portion of our existing indebtedness and satisfaction of other customary conditions. If we close both the concurrent offering of our senior notes and the offering of the notes offered hereby, we will satisfy the condition that we effect at least $275 million of new financings. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions under the agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

When fully drawn, the $350 million under our bank credit facility is senior secured debt, and our obligations under the facility rank equally in right of payment with all of our other senior obligations. The banks under our bank credit facility and certain of our compression equipment operating leases that we entered into in 1999 and 2000 have a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries and we pledged 66% of the equity in certain of our foreign subsidiaries.

If closed, amounts outstanding under our $345 million Proposed Bank Credit Facility will be senior secured debt, and our obligations under our Proposed Bank Credit Facility will rank equally in right of payment with all of our other senior obligations. The terms of our Proposed Bank Credit Facility are still being negotiated, and we cannot provide any assurances as to the terms and conditions that will finally be agreed to in our Proposed Bank Credit Facility. Nevertheless, we expect that our Proposed Bank Credit Facility may contain certain terms and provisions that are materially different from our bank credit facility. While we expect that our Proposed Bank Credit Facility will include certain financial covenants that are in our bank credit facility, we also expect that our Proposed Bank Credit Facility will not contain all of the financial covenants that are in our bank credit facility. Certain of these covenants may be more restrictive than the financial covenants

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in our bank credit facility. In addition, we expect that our Proposed Bank Credit Facility may contain a new requirement that HCLP maintain a certain minimum consolidated tangible net worth.

We expect that the negative covenants in our Proposed Bank Credit Facility will address certain matters that are addressed in the negative covenants in our bank credit facility. In certain cases, however, there may be material changes to the text of these negative covenants and the related exceptions, and some of these changes may result in negative covenants that are more restrictive than the negative covenants in our bank credit facility, while other changes may provide us with greater operating flexibility. Unlike our bank credit facility, our Proposed Bank Credit Facility may not contain a negative covenant restricting the capital expenditures of Hanover and its subsidiaries, but our Proposed Bank Credit Facility may contain new negative covenants restricting the ability of Hanover and its subsidiaries to enter into agreements with third parties that contain negative pledges and restrictions on subsidiary distributions.

As is the case with respect to our bank credit facility, we expect that our Proposed Bank Credit Facility may be secured by inventory, equipment and certain other property of Hanover and its domestic subsidiaries and 66% of the equity interests in certain of Hanover’s foreign subsidiaries. In addition, Hanover and certain of its domestic subsidiaries may grant liens on certain real property owned or leased by them in the United States.

We intend to file with the SEC the current draft of the Proposed Bank Credit Facility on a Current Report on Form 8-K.

Zero Coupon Subordinated Notes due March 31, 2007

On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We had previously given notice of our intent to exercise the PIGAP put in January 2003. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from Hanover in August 2001 as part of the purchase price for the acquisition of POC’s natural gas compression business, ownership interest in certain joint venture projects in South America, and related assets. As a result, we retained our interest in PIGAP. As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. We restructured the $150 million subordinated note as our Zero Coupon Subordinated Notes due March 31, 2007, which notes were issued to Schlumberger in such transaction and are being sold by Schlumberger in a registered public offering scheduled to close on December 8, 2003. Original issue discount accretes under the zero coupon notes at a rate of 11.0% per annum for their remaining life, up to a total principal amount of $262.6 million payable at maturity. The notes will accrue additional interest at a rate of 2.0% per annum upon the occurrence and during the continuance of an event of default under the notes. The notes will also accrue additional interest at a rate of 3.0% per annum if our consolidated leverage ratio, as defined in the indenture governing the notes, exceeds 5.18 to 1.0 as of the end of any two consecutive fiscal quarters. Notwithstanding

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the preceding, in no event will the total additional interest accruing on the notes exceed 3.0% per annum if both of the previously mentioned circumstances occur. The notes also contain a covenant that limits our ability to incur additional indebtedness if our consolidated leverage ratio exceeds 5.6 to 1.0, subject to certain exceptions.

The Zero Coupon Subordinated Notes are our general subordinated unsecured obligations and rank junior in right of payment to all of our senior debt and senior subordinated debt, including the notes offered hereby. The notes are not guaranteed by any of our subsidiaries and therefore are effectively subordinated to all obligations of our existing and future subsidiaries.

4.75% Convertible Senior Notes

In March 2001, we issued $192 million aggregate principal amount of 4.75% Convertible Senior Notes due March 15, 2008. The convertible senior notes are convertible at the option of the holder into shares of our common stock at a conversion rate of 22.7596 shares of common stock per $1,000 principal amount of convertible senior notes. The conversion rate is subject to anti-dilution adjustment in certain events.

On or after March 15, 2004, we have the right at any time to redeem some or all of the convertible senior notes. If we experience a specified change in control, a holder of the convertible senior notes may require us to repurchase, with cash or common stock, some or all of the convertible senior notes at a price equal to 100% of the principal amount plus accrued and unpaid interest to the repurchase date.

The convertible senior notes are our general unsecured obligations and rank equally in right of payment with all of our other senior debt, including the notes offered hereby. The convertible senior notes are effectively subordinated to all existing and future liabilities of our subsidiaries.

Mandatorily Redeemable Convertible Preferred Securities

In December 1999, we issued $86.3 million of unsecured 7¼% Mandatorily Redeemable Convertible Preferred Securities through our subsidiary, Hanover Compressor Capital Trust, a Delaware business trust (the “Trust”). Under a guarantee agreement, we guaranteed on a subordinated basis any payments required to be made by the Trust to the extent the Trust does not have funds available to make the payments.

The Mandatorily Redeemable Convertible Preferred Securities are convertible at the option of the holder into shares of our common stock, have a liquidation amount of $50 per security and mature in 30 years, but we may redeem them, in whole or in part, at any time. We are required to pay annual cash distributions at the rate of 7¼%, payable quarterly in arrears. However, such payments may be deferred for up to 20 consecutive quarters subject to certain restrictions. During any periods in which payments are deferred, in general, we cannot pay any dividend or distribution on our capital stock or redeem, purchase, acquire or make any liquidation on any of our capital stock. We made distributions of approximately $4.8 million on the Mandatorily Redeemable Convertible Preferred Securities for the nine months ended September 30, 2003.

Sale leaseback transactions

1999A sale leaseback transaction

On June 15, 1999, HCLP sold certain compression equipment to Hanover Equipment Trust 1999A (the “Trust 1999A”) and then leased the equipment from the Trust 1999A. Simultaneously with

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the sale leaseback transaction, certain lenders made loans to the Trust 1999A of $194 million (together with an investor commitment of $6 million) sufficient to cover the purchase price of the equipment. The loans are structured in two tranches and are secured by an assignment of the lease and a security interest in the equipment. The loan agreement contains certain financial covenants that are substantially similar to our bank credit facility. The loans, which bear interest at the Eurodollar rate or the adjusted base rate plus, in each case, a spread, mature on June 14, 2004. We intend to use the net proceeds from our proposed offering of senior notes together with available cash to repay this loan.

The Trust 1999A compression equipment leases and the related guarantees are HCLP’s senior obligations and rank equally in right of payment with all of HCLP’s existing and future senior debt, including its obligations under the bank credit facility. The lenders have a security interest in the inventory, equipment and certain other property of Hanover’s domestic subsidiaries, and Hanover pledged 66% of the equity in certain of its foreign subsidiaries in order to secure HCLP’s obligations under the compression equipment leases.

2000A sale leaseback transaction

In March 2000, HCLP entered into a $200 million sale leaseback of certain compression equipment with Hanover Equipment Trust 2000A (the “Trust 2000A”). Under the March agreement, HCLP received $100 million in proceeds from the sale of compression equipment at closing and in August 2000, HCLP completed the second half of the equipment lease and received an additional $100 million for the sale of additional compression equipment. Simultaneously with the sale lease back transaction, certain lenders made loans to Trust 2000A (together with an investor commitment) sufficient to cover the purchase price of the equipment. The loans are structured in two tranches and are secured by an assignment of the lease and a security interest in the equipment. The loan agreement contains certain financial covenants that are substantially similar to our bank credit facility. The loans, which bear interest at the Eurodollar rate or the adjusted base rate plus, in each case, a spread, mature on March 13, 2005.

The Trust 2000A compression equipment leases and the related guarantees are HCLP’s senior obligations and rank equally in right of payment with all of HCLP’s existing and future senior debt, including its obligations under the bank credit facility. The lenders have a security interest in the inventory, equipment and certain other property of Hanover’s domestic subsidiaries, and Hanover pledged 66% of the equity in certain of its foreign subsidiaries in order to secure HCLP’s obligations under the compression equipment leases.

2000B sale leaseback transaction

In October 2000, HCLP completed a $173 million sale leaseback of certain compression equipment with Hanover Equipment Trust 2000B (the “Trust 2000B”). Simultaneously with the sale leaseback transaction, certain lenders made loans to the Trust 2000B (together with an investor commitment) sufficient to cover the purchase price of the equipment. The loans are structured in two tranches and are secured by an assignment of the lease and a security interest in the equipment. The loan agreement contains certain financial covenants that are substantially similar to our bank credit facility. The loans, which bear interest at the Eurodollar rate or the adjusted base rate plus, in each case, a spread, mature on October 26, 2005.

The Trust 2000B compression equipment leases and the related guarantees are HCLP’s senior obligations and rank equally in right of payment with all of HCLP’s existing and future senior debt, including its obligations under the bank credit facility. The lenders have a security interest

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in the inventory, equipment and certain other property of Hanover’s domestic subsidiaries, and Hanover pledged 66% of the equity in certain of its foreign subsidiaries in order to secure HCLP’s obligations under the compression equipment leases.

2001 sale leaseback transactions

In August 2001 and in connection with the POC acquisition, HCLP completed two sale leaseback transactions with two separate trusts involving certain compression equipment. Under the first transaction, HCLP received proceeds of $309.3 million from Hanover Equipment Trust 2001A (the “Trust 2001A”) from the sale of compression equipment. Simultaneously, the Trust 2001A issued notes in the principal amount of $300 million through a private placement under Rule 144A under the Securities Act. The notes are secured by an assignment of the lease and a security interest in the equipment. The agreements under which the notes were issued contain various financial covenants which require, among other things, that we meet our specified quarterly financial ratios and restricts, among other things, our ability to incur additional indebtedness or sell assets. The notes, which bear interest at 8.5% semiannually, mature on September 1, 2008.

Under the second sale leaseback transaction, HCLP received additional proceeds of $257.8 million from Hanover Equipment Trust 2001B (the “Trust 2001B”) from the sale of compression equipment. Simultaneously, the Trust 2001B issued notes in the principal amount of $250 million through a private placement under Rule 144A under the Securities Act. The notes are secured by an assignment of the lease and a security interest in the equipment. The notes, which bear interest at 8.75% semiannually, mature on September 1, 2011.

The Trust 2001A and Trust 2001B compression equipment leases and the related guarantees are HCLP’s senior subordinated obligations, and those obligations rank junior in right of payment to all of HCLP’s senior debt. Certain of the lease obligations will be guaranteed by Hanover only upon the occurrence of certain events of default, and, if it comes into effect, this conditional guarantee will also be made on a senior subordinated basis. The remaining lease obligations under the Trust 2001A and Trust 2001B compression equipment leases are fully and unconditionally guaranteed by Hanover on a senior subordinated basis.

Under the 1999 and 2000 compression equipment operating lease agreements, the equipment was sold and leased back by HCLP for a five-year period and HCLP will continue to deploy the equipment under our normal operating procedures. At any time, HCLP has options to repurchase the equipment at fair market value.

As of September 30, 2003, HCLP had residual value guarantees in the amount of approximately $881 million under the lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of HCLP’s purchase options.

Prior to July 1, 2003, each of the above-mentioned transactions was recorded as a sale leaseback of the equipment and was recorded as an operating lease. In January 2003, the FASB issued FIN 46, an interpretation of ARB 51. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale and leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of

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tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense.

Term mortgage loan

HCLP executed a $5 million term note dated September 23, 1997 payable to Wells Fargo Bank (Texas), National Association. The term note was issued in connection with the refinancing of our Houston Fabricating Facility, our headquarters and our Colorado County, Texas Fabricating Facility. The term loan bears interest at the lesser of the applicable LIBOR rate, plus two percent, or the maximum rate allowed by law. The term loan matures on September 1, 2004. The term loan is secured by 83 acres of land located in Colorado County, Texas and approximately 28 acres of land located in Harris County, Texas and fixtures located thereon.

Other

As of September 30, 2003, we had guaranteed approximately $51.3 million in obligations of non-consolidated affiliates, which are not included as a liability on our balance sheet.

Senior notes

In June 2003, we filed a shelf registration statement with the SEC pursuant to which we may from time to time publicly offer equity, debt or other securities in an aggregate amount not to exceed $700 million. The shelf registration statement was subsequently declared effective by the SEC on November 19, 2003. We are offering the notes pursuant to this shelf registration statement and we intend to issue $200 million in aggregate principal amount of senior notes, which will be guaranteed by HCLP on a senior subordinated basis, pursuant to the shelf registration statement concurrently with the offering of the notes. We intend to use the net proceeds from the offering of the senior notes together with available cash to repay outstanding indebtedness under our 1999A equipment lease notes due June 2004. The sale of the notes offered hereby and the sale of the senior notes are not contingent upon each other. There can be no assurances that we will be able to complete the sale of the senior notes.

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Description of notes

We will issue the notes under a senior indenture between us and Wachovia Bank, National Association, as trustee, as supplemented by a supplemental indenture to issue the notes. The terms of the notes include those expressly set forth in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939.

This description of notes is intended to be a useful overview of the material provisions of the notes and the indenture. Since this description of notes is only a summary, you should refer to the indenture for a complete description of our obligations and your rights. If the description of the notes varies between this prospectus supplement and the “Description of Debt Securities” in the accompanying prospectus, you should rely on the information contained in this prospectus supplement which supersedes the description in the accompanying prospectus with respect thereto. For purposes of this description, the terms “we,” “our” and “us” refer only to Hanover Compressor Company and not to any of its subsidiaries.

General

The notes will be our general unsecured obligations, will rank equally in right of payment with all of our other senior debt and will be limited to $100,000,000 aggregate principal amount (or $115,000,000 if the underwriters’ option is exercised in full). Payment in full of the principal amount of the notes will be due at maturity on January 15, 2014. The notes will not be guaranteed by any of our subsidiaries.

Holders may convert each of their notes into shares of our common stock initially at a conversion rate of              shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $             per share of common stock) at any time following the initial issue date of the notes and before the close of business on the business day immediately preceding January 15, 2014, unless previously redeemed or repurchased by us. The conversion rate will be subject to adjustment upon the occurrence of certain events described below under “—Conversion rights—Conversion rate adjustments.”

The notes are redeemable by us on or after January 15, 2011 upon the occurrence of the events described below under “—Redemption by us” at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest, if any. The notes are also subject to repurchase by us at the option of the holders upon a change in control, as described below under “—Repurchase at option of holders upon a change in control” at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if any.

Interest

The notes will bear interest at the annual rate shown on the front cover of this prospectus supplement from December             , 2003, or from the most recent date to which interest has been paid or provided for, payable on January 15 and July 15 of each year, commencing July 15, 2004 until the principal is paid or made available for payment, to the person in whose name the note is registered at the close of business on the preceding January 1 or July 1, as the case may be.

Redemption by us

We may not redeem the notes prior to January 15, 2011. At any time on or after January 15, 2011 but prior to January 15, 2013, we may redeem the notes, in whole or in part, for cash, at a

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redemption price equal to 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has exceeded 135% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date on which we mail the redemption notice (which date shall be at least 20 days but not more than 60 days prior to the redemption date). At any time on or after January 15, 2013, we may redeem the notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

However, if a redemption date is an interest payment date, the semi-annual payment of interest becoming due on such date will be payable to the holder of record as of the relevant record date, and the redemption price will not include such payment.

The redemption date will be the date specified in our redemption notice as the date that the notes will be redeemed.

The “last reported sale price” of our common stock on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average asked prices) on that date as reported in composite transactions for the principal U.S. securities exchange on which our common stock is traded or, if our common stock is not listed on a U.S. national or regional securities exchange, as reported by the Nasdaq National Market.

If our common stock is not listed for trading on a U.S. national or regional securities exchange and not reported by the Nasdaq National Market on the relevant date, the “last reported sale price” will be the last quoted bid price per share for our common stock in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If our common stock is not so quoted, the “last reported sale price” will be the average of the midpoint of the last bid and ask prices per share for our common stock on the relevant date from each of at least three nationally recognized independent investment banking firms selected by us for this purpose.

If we do not redeem all of the notes, the trustee will select the notes to be redeemed in principal amounts of $1,000 or whole multiples of $1,000 by the method the trustee considers fair and appropriate. If any notes are to be redeemed in part only, a new note or notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a holder’s notes is selected for partial redemption and the holder thereafter converts a portion of its notes, the converted portion will be deemed to be taken from the portion selected for redemption.

In the event of any redemption in part, we will not be required to:

• issue, register the transfer of or exchange any note during a period of 15 days before the mailing of the redemption notice, or

• register the transfer of or exchange any note so selected for redemption, in whole or in part, except the unredeemed portion of any note being redeemed in part.

Conversion rights

Holders of the notes may convert each of their notes into shares of our common stock initially at a conversion rate of              shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $             per share of common stock) at any time following the initial issue date of the notes and before the close of business on the business day

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immediately preceding January 15, 2014, unless previously redeemed or repurchased by us. A holder may convert fewer than all of such holder’s notes so long as the notes converted are an integral multiple of $1,000 principal amount. The right to convert a note called for redemption or delivered for repurchase will terminate at the close of business on the business day immediately preceding the redemption or repurchase date, as the case may be, for that note, unless we default in making the payment due upon redemption or repurchase.

A holder may exercise the right of conversion by delivering the note, if in certificated form, at the office or agency of the conversion agent, accompanied by a properly signed and completed notice of conversion, a copy of which may be obtained from the trustee. A holder of a note will cease to have any further rights as a holder of such note at the time of conversion. The conversion date will be the date on which the note and the properly signed and completed notice of conversion are so delivered. As promptly as practicable after the conversion date, we will issue and deliver to the conversion agent a certificate or certificates for the number of full shares of our common stock issuable upon conversion, together with payment in lieu of any fraction of a share, which will then be delivered by the conversion agent to the holder. Shares of our common stock issuable upon conversion of the notes, in accordance with the provisions of the indenture, will be fully paid and nonassessable and will rank equally with the other shares of our common stock outstanding from time to time. If a note is surrendered for partial conversion, we will also issue to the holder of that note a new note in a principal amount equal to the unconverted portion of the surrendered note.

If a holder has already delivered a repurchase notice as described below under “—Repurchase at option of holders upon a change in control” with respect to a note, the holder may not surrender that note for conversion until the holder has withdrawn the repurchase notice in accordance with the terms of the indenture.

Except as described below, holders that surrender notes for conversion on a date that is not an interest payment date under the indenture are not entitled to receive any interest for the period from the next preceding interest payment date to the date of conversion. However, holders of notes on a regular record date, including notes surrendered for conversion after such date, will receive the interest payable on the notes on the next succeeding interest payment date. Accordingly, any note surrendered for conversion during the period from the close of business on a regular record date to the opening of business on the next succeeding interest payment date must be accompanied by payment of an amount equal to the interest payable on that interest payment date on the principal amount of the notes being surrendered for conversion. However, no payment will be required upon the conversion of any note, or portion thereof, that has been called for redemption or that is eligible for repurchase if, as a result, the right to convert such note would terminate during the period between the regular record date and the close of business on the next succeeding interest payment date.

Holders of our common stock issued upon conversion will not be entitled to receive any dividends payable to holders of our common stock as of any record date before the close of business on the conversion date. We will not issue any fractional shares upon conversion but, instead, will pay an appropriate amount in cash based on the last reported sale price of our common stock at the close of business on the trading day immediately preceding the conversion date.

A holder surrendering a note for conversion will not be required to pay any taxes or other governmental charges in respect of the issue or delivery of our common stock upon conversion. However, we will not be required to pay any tax or similar governmental charge that may be

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payable in respect of any transfer involved in the issue or delivery of our common stock in a name other than that of the holder of the note so surrendered, and we will not issue or deliver certificates representing shares of our common stock unless the person requesting such issue has paid to us the amount of any such tax or governmental charge or has established to our satisfaction that any such tax or governmental charge has been paid.

For a discussion of the federal income tax consequences of a conversion of the notes into our common stock, see “Important U.S. federal income tax considerations.”

Conversion rate adjustments

The conversion rate may be adjusted in certain events, including:

• the payment of a dividend or other distribution in shares of our common stock to holders of our common stock;

• the issuance to all holders of our common stock of rights, options or warrants entitling them to subscribe for or purchase shares of our common stock, or securities convertible into shares of our common stock, at a price per share less than the current market price of our common stock on the record date for the determination of stockholders entitled to receive the rights, options or warrants, as applicable;

• the subdivision, combination or reclassification of our common stock;

• the distribution to all holders of our common stock of cash, evidences of our indebtedness, shares of our capital stock or other property, including securities, but excluding

• those dividends, distributions, rights, options and warrants referred to in the first two bullet points above, and

• dividends and distributions paid exclusively in cash to which the next bullet point applies;

• a distribution to all holders of our common stock consisting exclusively of cash; and

• the successful completion of a tender offer made by us or any of our subsidiaries for our common stock which involves an aggregate consideration that, combined together with:

• any cash and the fair market value of other consideration payable in respect of any other tender offer by us or any of our subsidiaries for our common stock expiring within the 12 months preceding the expiration of the tender offer in respect of which no adjustment has been made; and

• the aggregate amount of any all cash distributions referred to in the immediately preceding bullet point to all holders of our common stock within the 12 months preceding the expiration of the tender offer in respect of which no adjustment has been made;

exceeds 10% of our market capitalization on the expiration of such tender offer.

With respect to the fourth bullet above, if we distribute to all holders of our common stock any capital stock of, or similar equity interests in, a subsidiary or other business unit of ours, then the conversion rate will be adjusted based on the market value of the securities so distributed

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relative to the market value of our common stock, in each case based on the average last reported sale prices of those securities (where such closing prices are available) for the 10 trading days commencing on and including the fifth trading day after the date on which ex-dividend trading commences for such distribution on the principal U.S. national or regional exchange or other market on which the securities are then listed or quoted.

With respect to the fourth and fifth bullets above, if we distribute cash, then the conversion rate shall be increased so that it equals the rate determined by multiplying the conversion rate in effect on the record date with respect to the cash distribution by a fraction, (1) the numerator of which shall be the current market price of our common stock on the record date, and (2) the denominator of which shall be the same price of a share on the record date less the per share amount of the distribution. For the purposes of this subsection, “current market price” shall mean the average of the daily last reported sale prices of our common stock for the ten consecutive trading days ending on the earlier of the date of determination and the day before the ex-dividend date with respect to the distribution requiring such computation.

We reserve the right to make any additional adjustments in the conversion rate as we consider necessary in order that any event treated for U.S. federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients. No adjustment of the conversion rate will be required until the cumulative adjustments amount to 1.0% or more of the conversion rate. We will compute any adjustments to the conversion rate as provided in the indenture and will give notice of such adjustments to the holders of notes then outstanding.

We may from time to time increase the conversion rate for any period of at least 20 days if our board of directors determines that an increase would be in our best interests, which determination will be conclusive. We will give at least 15 days’ prior notice of the increase to the holders of the notes then outstanding. No increase shall be taken into account for purposes of determining whether the last reported sale price of our common stock exceeds the conversion price by 105% in connection with an event which would otherwise be a change in control.

No adjustment to the conversion rate will be made if the holder will otherwise participate in the distribution without conversion or in the following other cases:

• upon the issuance of any shares of our common stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on our securities and the investment of additional optional amounts in shares of our common stock under any plan;

• upon the issuance of any shares of our common stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by us or any of our subsidiaries;

• upon the issuance of any shares of our common stock pursuant to any option, warrant, right or exercisable, exchangeable or convertible security not described in the preceding bullet and outstanding as of the date the notes are first issued, including our 4.75% Convertible Senior Notes due 2008 and the 7¼% Mandatorily Redeemable Convertible Preferred Securities of our subsidiary, Hanover Compressor Capital Trust; or

• for a change in the par value of our common stock.

In the event of (1) any reclassification of our common stock, (2) a consolidation, merger or binding share exchange involving us or (3) a sale or other disposition to another person or entity

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of all or substantially all of our assets, in which holders of our common stock would be entitled to receive stock, other securities, cash or other property for their common stock, upon conversion of their notes holders will be entitled to receive the same type of consideration which they would have been entitled to if they had converted their notes into our common stock immediately prior to any of these events.

If we make a distribution of property to our stockholders that would be taxable to them as a dividend for U.S. federal income tax purposes, and, under the anti-dilution provisions of the indenture, the number of shares of common stock into which notes are convertible is increased, that increase will be deemed for U.S. federal income tax purposes to be the payment of a taxable dividend to holders of notes. This might occur with distributions of our evidences of indebtedness or assets, but generally would not occur with stock dividends on common stock or rights to subscribe for common stock. See “Important U.S. federal income tax considerations.”

Repurchase at option of holders upon a change in control

Within 30 days after the occurrence of a change in control, we must deliver to all holders of notes then outstanding, with a copy to the trustee, written notice of the change in control and of the resulting repurchase right described below. The holder of any outstanding note will then have the right to require us to repurchase, for cash, all or any portion of the note that is an integral multiple of $1,000 not previously called for redemption. To exercise this right, the holder must deliver to the trustee irrevocable written notice of such exercise, together with the note, on or before the 30th day after the date on which we notified the holders of such change in control. The repurchase price will be equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

A change in control will be deemed to have occurred if at any time after the original issue date of the notes any of the following occurs:

• the acquisition, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, by any person, other than us, any of our subsidiaries or any of our employee benefit plans, of beneficial ownership of shares of our capital stock entitling that person to exercise 50% or more of the total voting power of all shares of our capital stock entitled to vote generally in elections of directors; or

• the consolidation or merger of our company with or into any other entity, any merger of another entity into us, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of our assets to another person or entity, other than:

• any transaction (x) that does not result in any reclassification, conversion, exchange or cancellation of our outstanding shares of capital stock and (y) pursuant to which holders of our common stock immediately prior to such transaction are entitled to exercise, directly or indirectly, 50% or more of the total voting power of all shares of the capital stock entitled to vote generally in the election of directors of the continuing or surviving entity immediately after such transaction, and

• any merger which is effected solely to change our jurisdiction of incorporation and results in a reclassification, conversion or exchange of outstanding shares of common stock solely into shares of common stock of the surviving person or entity.

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“Beneficial ownership” will be determined in accordance with Rule 13d-3 promulgated by the SEC under the Securities Exchange Act of 1934. “Person” includes any syndicate or group which would be deemed to be a “person” under Section 13(d)(3) of the Securities Exchange Act of 1934.

However, a change in control will not be deemed to have occurred if either:

• the last reported sale price of our common stock for any five trading days within the period of 10 consecutive trading days ending immediately after the later of the change in control or the public announcement of the change in control, in the case of a change in control under the first bullet point above, or the period of 10 consecutive trading days ending immediately before the change in control, in the case of a change in control under the second bullet point above, equals or exceeds 105% of the conversion price in effect on each such trading day; or

• all of the consideration, excluding cash payments for fractional shares and cash payments made pursuant to dissenters’ appraisal rights, in a merger or consolidation otherwise constituting a change in control under the first or second bullet point in the preceding paragraph consists of shares of common stock traded on a national securities exchange or quoted on the Nasdaq National Market, or will be so traded or quoted immediately following such merger or consolidation, and as a result of such merger or consolidation the notes become convertible solely into such common stock.

For purposes of these provisions, the conversion price is equal to $1,000 divided by the conversion rate.

Rule 13e-4 under the Securities Exchange Act of 1934 requires that we disseminate certain information to security holders in the event of an issuer tender offer and this requirement may apply in the event that the repurchase option becomes available to holders of the notes. We will comply with this rule to the extent applicable at that time.

Ranking

The notes will be our general unsecured obligations, ranking equally in right of payment with all of our other senior debt. The notes will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. In addition, because we are a holding company and conduct substantially all of our operations through our subsidiaries, the notes will be structurally subordinated to all of our subsidiaries’ indebtedness and other liabilities, including trade payables, lease obligations and other guarantees of some of our other indebtedness. Our rights to receive any assets of any of our subsidiaries upon its liquidation or reorganization, and the resulting right of the holders of notes to participate in those assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors, except to the extent that we are recognized as a creditor of that subsidiary. If we are recognized as a creditor of that subsidiary, our claims would still be subordinate to any security interest in the assets of that subsidiary and any indebtedness of that subsidiary senior to us. As of September 30, 2003, after giving effect to this offering and our concurrent offering of $200 million of senior notes and the application of the net proceeds, and the closing of our Proposed Bank Credit Facility, our subsidiaries had approximately $1,088.4 million of debt outstanding (excluding intercompany indebtedness and guarantees of debt of Hanover).

The indenture does not limit our ability or the ability of any of our subsidiaries to incur indebtedness, including senior debt.

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Consolidation, merger or sale of assets

We may not consolidate or merge with or into any other person or entity or transfer, convey, sell, lease or otherwise dispose of all or substantially all of our assets, unless:

• the person or entity formed by such consolidation or merger, or the person or entity to which our assets are transferred or otherwise disposed of, is a corporation, limited liability company, partnership or trust organized and existing under the laws of the United States, any state thereof or the District of Columbia and expressly assumes our obligations under the indenture;

• immediately after such transaction, no event of default, and no event which, after notice or lapse of time or both, would become an event of default, shall have occurred and be continuing; and

• we deliver to the trustee the officer’s certificate and opinion of counsel required pursuant to the terms of the indenture.

Upon any permitted consolidation, merger or disposition, the surviving or successor person or entity will succeed to all of our obligations under the indenture and the notes and, except in the case of a lease, we will be discharged from such obligations.

Events of default

Each of the following will be an “event of default” under the indenture with respect to the notes:

• failure to pay principal of any note when due;

• failure to pay interest on any note when due, continuing for a period of 30 days;

• failure to provide a notice to holders of outstanding notes in the event of a change in control, failure to pay the repurchase price in connection with a change in control or otherwise, or failure to comply with our agreements described under “—Consolidation, merger or sale of assets;”

• failure to comply with any of our other agreements contained in the indenture or in the notes, continuing for a period of 60 days after written notice to us by the trustee or the holders of at least 25% in aggregate principal amount of the outstanding notes;

• default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any debt for money borrowed by us or any of our subsidiaries, other than debt owed to us or a subsidiary of ours, whether such debt now exists, or is created after the date of the indenture, which default:

• is caused by a failure to pay principal of, or interest on, such debt prior to the expiration of any grace period provided in such debt; or

• results in the acceleration of such debt prior to its stated maturity;

and, in each case, the principal amount of any such debt, together with the principal amount of any other such debt under which there has been a payment default or the maturity of which has been so accelerated, aggregates $20.0 million or more;

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• failure by us or any of our subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts that a reputable and creditworthy insurance company has acknowledged liability for in writing), which judgments are not paid, discharged or stayed for a period of 60 days; and

• certain events of bankruptcy, insolvency or reorganization of our company, any of our significant subsidiaries (as defined in the indenture) or any group of subsidiaries that together would constitute a significant subsidiary.

In general, the trustee is required to give notice of a default with respect to the notes to the holders of those notes. However, the trustee may withhold notice of any such default (except a default in payment of principal of or interest on any note) if the trustee determines it is in the interests of the holders of the notes to do so.

If there is a continuing event of default with respect to the notes, then the trustee or the holders of at least 25% in principal amount of the outstanding notes may accelerate the maturity of all notes, except in the case of an event of default pursuant to the last bullet point above, in which case the maturity of the notes shall be automatically accelerated. However, the holders of a majority in principal amount of the outstanding notes may, under certain circumstances provided in the indenture, rescind and annul the acceleration and waive any past defaults. A continuing default in payment of principal of, or interest on, the notes may be waived only by all holders of outstanding notes. For more information on waivers of defaults, see “—Modification and waiver” below.

Prior to an event of default, the trustee is required to perform only the specific duties stated in the indenture, and after an event of default, the trustee must exercise the same degree of care as a prudent individual would exercise or use under the circumstances in the conduct of his or her own affairs.

Except during the continuance of an event of default, the trustee may refuse to exercise any of its rights or powers at the request or direction of any of the holders of notes, unless those holders have offered to the trustee satisfactory security or indemnity. Subject to certain limitations specified in the indenture, the holders of a majority in principal amount of the notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee with respect to the notes.

No holder of any note may institute any proceeding with respect to the indenture or any remedy thereunder, unless:

• that holder has previously given to the trustee written notice of a continuing event of default with respect to the notes;

• the holders of at least 25% in aggregate principal amount of the outstanding notes have made written request, and offered satisfactory indemnity, to the trustee to institute that proceeding as trustee;

• the trustee has failed to institute such proceeding within 60 days after receipt of the written request and offer of indemnity; and

• the trustee has not received during such 60-day period from the holders of a majority in aggregate principal amount of the outstanding notes a direction inconsistent with such request.

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However, these limitations do not apply to a suit for the enforcement of payment of the principal of, or interest on, a note on or after the respective due dates or of the right to convert a note.

We must furnish annually to the trustee an officer’s certificate stating whether or not, to the knowledge of the certifying officer, we are in default under the indenture and, if so, specifying each default and its status. We must also notify the trustee, within five days after its occurrence, of any default, its status and what action we are taking or propose to take in respect of the default.

Modification and waiver

We may modify or amend certain of our rights and obligations and the rights of the holders of notes under the indenture, and certain past defaults by us may be waived, with the consent of the holders of a majority in aggregate principal amount of the outstanding notes. But, we may not make any modification or amendment without the consent of every holder of outstanding notes affected that would:

• change the stated maturity of the principal of, or any installment of interest on, any note;

• reduce the amount of any principal of, or interest on, any note payable upon redemption, repurchase or repayment;

• change the city of any place of payment or the currency of payment of principal of, or interest on, any note, including any payment of the redemption or repurchase price in respect of that note;

• impair the right to institute suit for the enforcement of any payment on or with respect to any note or the right to convert the note;

• reduce the percentage in aggregate principal amount of outstanding notes required for modifications or amendments to the indenture or required for a waiver of defaults;

• adversely affect the right of holders to convert or to require us to repurchase any note other than as provided in the indenture, except as otherwise allowed or contemplated by provisions concerning consolidation, merger, sale or other disposition of all or substantially all of our assets; or

• modify any of the preceding provisions.

In certain circumstances, we may modify or amend the indenture without the consent of the holders of outstanding notes to effect the assumption of our obligations under the indenture by a surviving or successor person or entity, to impose additional restrictions and events of default with respect to the notes, to correct any mistakes or defects in the indenture, to add a guarantor or for other specified purposes.

The indenture contains provisions for convening meetings of the holders of the notes to consider matters affecting their interests.

Calculations in respect of notes

We will be responsible for making all calculations called for under the notes. These calculations include, but are not limited to, determinations of the last reported sale prices of our common

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stock, accrued interest payable on the notes and the conversion price or rate. We will make all these calculations in good faith and, absent manifest error, our calculations will be final and binding on holders of notes. We will provide a schedule of our calculations to each of the trustee and the conversion agent, and each of the trustee and conversion agent is entitled to rely upon the accuracy of our calculations without independent verification. The trustee will forward our calculations to any holder of notes upon the request of that holder.

The trustee

The trustee for the holders of the notes issued under the indenture will be Wachovia Bank, National Association. Subject to the Trust Indenture Act, the trustee may engage in other transactions with us or any of our affiliates. However, if the trustee becomes our creditor, the indenture and the Trust Indenture Act limit the rights of the trustee to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise, and if the trustee acquires any conflicting interest as described in the Trust Indenture Act after a default has occurred and is continuing, it must eliminate that conflict or resign.

We will initially appoint the trustee as the paying agent, security registrar and conversion agent for the notes. In these capacities, the trustee will be responsible for:

• maintaining a record of the aggregate holdings of notes represented by the global note described below and accepting notes for exchange and registration of transfer;

• ensuring that payments of principal and interest received by the trustee from us in respect of the notes are duly paid to The Depository Trust Company, or DTC, or its nominees;

• transmitting to us any notices from holders of the notes;

• accepting conversion notices and related documents and transmitting the relevant items to us; and

• delivering certificates representing the common stock issued upon conversion of the notes.

Each security registrar will keep a security register at its office in which, subject to any reasonable regulations we may prescribe, we will provide for registration of notes and registration of transfers of notes. We may vary or terminate the appointment of any paying agent, security registrar or conversion agent, or appoint additional or other agents, or approve any change in the office through which any agent acts. However, we will at all times maintain a paying agent in the Borough of Manhattan, The City of New York. We will give notice to the holders of the notes of any resignation or removal of the trustee or any appointment of a successor trustee, and we will notify the trustee of any appointment or termination of any paying agent, security registrar or conversion agent, and of any change in the office through which any agent acts.

If the trustee resigns or is removed as permitted under the indenture or a vacancy otherwise occurs in the office of trustee, we will promptly appoint a successor trustee, subject to the right of the holders of a majority in aggregate principal amount of the outstanding notes to appoint a permanent successor trustee within one year after such resignation, removal or vacancy. The resignation or removal of the retiring trustee will become effective when the successor trustee

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delivers to us and the retiring trustee written acceptance of its appointment. At our request, the retiring or removed trustee, after payment of all sums owing to it, will transfer to the successor trustee all of its rights and powers and any property held by it in its capacity as trustee with respect to the notes.

Form, denomination, transfer, exchange and book-entry procedures

The notes will be issued only in fully registered form, without interest coupons, in minimum denominations of $1,000 and integral multiples in excess of $1,000.

The notes initially will be represented by one or more notes in registered, global form, referred to as global notes. The global notes will be deposited upon issuance with the trustee as custodian for DTC, New York, New York, and registered in the name of DTC or its nominee, for credit to an account of a direct or indirect participant in DTC as described below.

Transfers of beneficial interests in the global notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants, which may change from time to time.

Generally, the global notes may be transferred, in whole and not in part, only to DTC, its nominees and their successors. Beneficial interests in the global notes may not be exchanged for notes in certificated form, except in the limited circumstances described under “Description of Debt Securities—Global Securities” in the accompanying prospectus.

Certain book-entry procedures for global notes

Beneficial interests in global notes will be shown on, and transfers of global notes will be made only through, records maintained by DTC and its participants. If you are not a participant in DTC, you may beneficially own notes held by DTC only through a participant.

The descriptions of the operations and procedures of DTC that follow are provided solely as a matter of convenience. These operations and procedures are solely within DTC’s control and are subject to changes by DTC from time to time. We take no responsibility for these operations and procedures and urge you to contact DTC or its participants directly to discuss these matters.

DTC has provided us the following information:

• DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered under the provisions of Section 17A of the Securities Exchange Act of 1934.

• DTC was created to hold securities for its participants and to facilitate the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants’ accounts, thereby eliminating the need for physical movement of securities certificates.

• Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations.

• DTC is owned by a number of its participants and by The New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc.

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• Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

• The rules applicable to DTC and its participants are on file with the SEC.

As long as DTC, or its nominee, is the registered holder of a global note, we, the trustee and the paying agent, if any, will treat DTC or such nominee as the sole owner of the notes represented by such global note for all purposes. Except in the limited circumstances described under “Description of Debt Securities—Global Securities” in the accompanying prospectus, owners of beneficial interests in a global note:

• will not be entitled to have any portion of the notes represented by that global note registered in their names;

• will not receive or be entitled to receive physical delivery of the notes in certificated form; and

• will not be considered the owners or holders of the global note, or the notes represented by that global note, under the indenture or the notes.

Accordingly, each person owning a beneficial interest in a global note must rely on the procedures of DTC and, if such person is not a participant, those of the participant through which that person owns its interest, in order to exercise any rights of a holder under the indenture or the notes.

The laws of some states require that certain persons take physical delivery of securities that they own in definitive form. The ability to transfer beneficial interests in a global note to those persons may be limited because global notes are not represented by physical certificates. Since DTC can act only on behalf of its participants, which in turn act on behalf of indirect participants and certain banks, the lack of a physical certificate may also adversely affect the ability of a person owning a beneficial interest in a global note to pledge its interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of those interests.

On each relevant payment date, we will wire transfer the principal of, interest on, or redemption or repurchase price of, the notes to DTC or its nominee, as the case may be, as the registered owner of the global note. Accordingly, we, the trustee and any paying agent will have no direct responsibility or liability to pay amounts due on the global notes to owners of beneficial interests in the global notes.

DTC has advised us that its current practice, upon receipt of any payment of principal, interest or the redemption or repurchase price, is to credit participants’ accounts on the payment date in amounts proportionate to their respective beneficial interests in the global note as shown on DTC’s records. In addition, it is DTC’s current practice to assign any consenting or voting rights to participants whose accounts are credited with notes on a record date, by using an omnibus proxy. Payments by participants to owners of beneficial interests in the global notes and voting by participants will be governed by standing instructions and customary practices between the participants and owners of beneficial interests, as is the case with notes held for the account of customers registered in “street name.” But payments will be the responsibility of the participants and not of DTC, the trustee, any paying agent or us.

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Redemption notices will be sent to DTC or its nominee. If less than all of the notes are being redeemed, DTC’s practice is to determine by lot the amount of the holdings of each participant in the issue to be redeemed.

DTC has advised us that it will take any action permitted to be taken by a holder of notes, including the presentation of notes for exchange as described below and the conversion of notes:

•     only at the direction of one or more participants to whose account with DTC beneficial interests in the global notes are credited; and

•     only in respect of the portion of the aggregate principal amount of the notes as to which the participant or participants has or have given that direction.

However, if there is an event of default under the notes, DTC reserves the right to exchange the global notes for notes in certificated form and to distribute the notes to its participants.

Although DTC has agreed to the foregoing procedures in order to facilitate transfers of beneficial ownership interests in the global notes among participants, it is under no obligation to perform or to continue to perform those procedures, and those procedures may be discontinued at any time.

None of us, the trustee or any of our respective agents will have any responsibility for the performance by DTC or its participants of their respective obligations under the rules and procedures governing DTC’s operations, including maintaining, supervising or reviewing the records relating to, or payments made on account of, beneficial ownership interests in global notes.

Payment and conversion

The principal of the notes will be paid in U.S. dollars, against surrender of the notes at the office or agency of the trustee in the Borough of Manhattan, The City of New York, by dollar check or by transfer to a dollar account maintained by the holder with a bank in New York City. Payment of interest on a note in certificated form may be made by dollar check mailed to the person entitled to the interest at that person’s address as it appears in our security register, or, upon written application by the holder to the security registrar not later than the relevant record date, by transfer to a dollar account maintained by the holder with a bank in the United States. Transfers to dollar accounts will be made only to holders of an aggregate principal amount of notes in excess of $2,000,000.

As previously stated, payments in respect of the principal of, and interest on, any global note registered in the name of DTC or its nominee will be payable by the trustee to DTC or its nominee, as the case may be, in its capacity as the registered holder under the indenture. Under the terms of the indenture, we and the trustee will treat the persons in whose names the notes, including the global notes, are registered as the owners of those notes for the purpose of receiving payments and for any and all other purposes. Consequently, we, the trustee and any paying agent will have no responsibility or liability for:

• any aspect of DTC’s records or any participant’s records relating to, or payments made on account of, beneficial ownership interests in the global notes;

• maintaining, supervising or reviewing any of DTC’s records or any participant’s records relating to the beneficial ownership interests in the global notes; or

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• any other matter relating to the actions and practices of DTC or any of its participants.

Any payment on a note due on any day that is not a business day at the place of payment may be made the next succeeding business day with the same force and effect as if made on the due date, and no interest will accrue on the payment for the period from and after that date.

Certificated notes may be surrendered for conversion at the office of the conversion agent. In the case of global notes, conversion will be effected by DTC upon notice from the holder of a beneficial interest in a global note in accordance with its rules and procedures. Notes surrendered for conversion must be accompanied by a conversion notice and any payments in respect of interest, as applicable, as described above under “—Conversion rights.”

All money for the payment of principal of, or interest on, any note that is deposited with the trustee or any paying agent or then held by us in trust which remains unclaimed at the end of two years after the payment has become due and payable may be repaid to us. Thereafter, the holder of such note will look only to us for payment and no interest will accrue on the amount that we hold.

Notices

Notices to holders of the notes will be given by mail to their addresses as they appear in the security register.

Notice of a redemption of notes will be given at least once not less than 20 nor more than 60 days prior to the redemption date. A redemption notice will be irrevocable and will specify the redemption date.

Replacement of notes

If we issue certificated notes, we will replace those notes that become mutilated, destroyed, stolen or lost at the expense of the holder upon delivery to the trustee of the mutilated notes or evidence of the loss, theft or destruction of the notes satisfactory to us and the trustee. In the case of a lost, stolen or destroyed note, indemnity satisfactory to the trustee and us may be required at the expense of the holder of such note before a replacement note will be issued, and we may require payment of any related tax or other governmental charge and any other expenses connected with replacing the note.

Governing law

The indenture and the notes will be governed by and construed in accordance with the laws of the State of New York.

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Important U.S. federal income tax considerations

The following discussion summarizes the material U.S. federal income tax considerations of the acquisition, ownership and disposition of the notes and common stock into which the notes may be converted by an initial beneficial owner of the notes. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable Treasury Regulations promulgated thereunder, judicial authority and administrative interpretations, as of the date hereof, all of which are subject to change, possibly with retroactive effect, or are subject to different interpretations.

In this discussion, we do not purport to address all tax considerations that may be important to a particular holder in light of the holder’s circumstances, or to certain categories of investors that may be subject to special rules, such as:

• financial institutions,

• insurance companies,

• regulated investment companies,

• tax-exempt organizations,

• dealers in securities or currencies,

• certain persons whose functional currency is not the U.S. dollar,

• U.S. expatriates, or

• persons who hold the notes as part of a hedge, conversion transaction, straddle or other risk reduction transaction.

This discussion is limited to initial holders who purchase the notes for cash at the “issue price” (the first price to the public, not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers, at which a substantial amount of the notes are sold for money), and who hold the notes as capital assets (within the meaning of section 1221 of the Code). If a partnership holds notes or common stock, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If you are a partner or a partnership acquiring the notes or common stock, you should consult your own tax advisor about the U.S. federal income tax consequences of acquiring, holding and disposing of the notes or common stock. This discussion also does not address the tax considerations arising under the laws of any foreign, state, local, or other jurisdiction.

INVESTORS CONSIDERING THE PURCHASE OF NOTES ARE STRONGLY ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE APPLICABILITY AND EFFECT OF STATE, LOCAL OR FOREIGN TAX LAWS AND TAX TREATIES.

Consequences to U.S. holders

You are a “U.S. holder” for purposes of this discussion if you are a beneficial owner of a note or common stock and you are for U.S. federal income tax purposes:

• an individual who is a U.S. citizen or U.S. resident alien;

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• a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, that was created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia;

• an estate whose income is subject to U.S. federal income taxation regardless of its source; or

• a trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or that has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

Interest on the notes

It is expected that the notes will be issued without original issue discount for U.S. federal income tax purposes. Accordingly, if you are a U.S. holder, you will generally be required to recognize as ordinary income any interest paid or accrued on the notes, in accordance with your regular method of accounting for U.S. federal income tax purposes.

Disposition of the notes

You will generally recognize capital gain or loss on the sale, redemption, exchange, retirement or other disposition of a note. This gain or loss will equal the difference between your adjusted tax basis in the note and the proceeds you receive, excluding any proceeds attributable to accrued interest which will be recognized as ordinary interest income to the extent you have not previously included the accrued interest in income. The proceeds you receive will include the amount of any cash and the fair market value of any other property received for the note. The gain or loss will be long-term capital gain or loss if you held the note for more than one year. Long-term capital gains of individuals, estates and trusts currently are taxed at a maximum rate of 15%, subject to adjustment in future taxable years. The deductibility of capital losses may be subject to limitation.

Conversion of the notes into common stock

You generally will not recognize any income, gain or loss upon conversion of a note into common stock except with respect to cash received in lieu of a fractional share of common stock and common stock received with respect to accrued interest. Gain or loss recognized on the receipt of cash paid in lieu of a fractional share will equal the difference between the amount of cash received and the amount of the adjusted tax basis allocable to the fractional share. The fair market value of common stock received with respect to accrued interest will be taxed as a payment of interest. See “Consequences to U.S. holders—Interest on the notes.” The adjusted tax basis of shares of common stock you receive on conversion will equal the adjusted tax basis of the note converted (reduced by the portion of the adjusted tax basis allocated to any fractional share of common stock exchanged for cash, and increased by the amount of income recognized with respect to accrued interest). The holding period of the common stock you receive on conversion will generally include the period during which the converted notes were held prior to conversion, except that the holding period of any stock received with respect to accrued interest will commence on the day after conversion.

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Dividends

If, after you convert a note into common stock, we make a distribution in respect of that stock, the distribution will be treated as a dividend taxable to you to the extent it is paid from our current or accumulated earnings and profits. If the distribution exceeds our current and accumulated earnings and profits, the excess will be treated first as a tax-free return of your investment, up to your basis in the common stock. Any remaining excess will be treated as capital gain. If you are a U.S. corporation, you generally will be entitled to claim a deduction equal to a portion of any dividends received, subject to certain limitations and conditions. Under recently enacted legislation, dividends are generally taxed to non-corporate U.S. holders at a maximum rate of 15%, subject to certain limitations and conditions. This preferential rate is scheduled to expire for taxable years beginning on or after January 1, 2009.

Consequences of conversion rate adjustments

The conversion rate of the notes is subject to adjustment under certain circumstances. Section 305 of the Code and the Treasury Regulations issued thereunder may treat the holders of the notes as having received a constructive distribution if and to the extent that certain adjustments to the conversion rate increase the proportionate interest of a holder of notes in the fully diluted common stock, whether or not such holder ever exercises its conversion privilege.

For example, in the event that we are required to increase the conversion rate of the notes because we distribute cash dividends to holders of our common stock (see “Description of the notes—Conversion rate adjustments”), then you will be treated as currently receiving a constructive distribution, taxable as a dividend, equal to the value, as of the date of the constructive distribution, of the additional common stock that you would be entitled to receive upon a conversion of the notes by virtue of the increase in the conversion rate. It is not clear whether such constructive distributions deemed paid to individuals would be eligible for the preferential rates of U.S. federal income tax applicable in respect of certain dividends received under recently enacted legislation. It is also unclear whether corporate holders would be entitled to claim the dividends received deduction with respect to any such constructive distributions. Moreover, if a full adjustment to the conversion rate of the notes is not made to reflect a stock dividend or other event increasing the proportionate interests of the holders of outstanding common stock in our assets or earnings and profits, then such increase in the proportionate interests of the holders of the common stock generally will be treated as a distribution to such holders. Therefore, you may recognize income in the event of a deemed distribution even though you may not receive any cash or property. Adjustments to the conversion rate made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing dilution in the proportionate interests of the holders of the notes, however, will generally not be considered to result in a constructive distribution. For example, a reasonable increase in the conversion rate in the event of stock dividends or distributions of rights to subscribe for our common stock will generally not be a constructive distribution.

Disposition of common stock

You will generally recognize capital gain or loss on a sale or exchange of common stock. Your gain or loss will equal the difference between the proceeds you receive in the disposition and your adjusted tax basis in the stock. The gain or loss recognized will be long-term capital gain or loss if you held the stock for more than one year.

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Information reporting and backup withholding

Information reporting will apply to payments of interest and principal on notes, payments of dividends on common stock and proceeds of the sale or other disposition of notes or common stock held by you, and backup withholding (currently at a rate of 28%) may apply unless you provide the appropriate intermediary with a taxpayer identification number, certified under penalties of perjury, as well as certain other information or otherwise establish an exemption from backup withholding. Any amount withheld under the backup withholding rules is allowable as a credit against your U.S. federal income tax liability, if any, and a refund may be obtained if the amounts withheld exceed your actual U.S. federal income tax liability and you provide the required information or appropriate claim form to the Internal Revenue Service (“IRS”).

Consequences to non-U.S. holders

You are a non-U.S. holder for purposes of this discussion if you are a beneficial owner of notes and you are not a U.S. holder.

Interest on the notes

If you are a non-U.S. holder, payments of interest on the notes generally will be exempt from withholding of U.S. federal income tax under the “portfolio interest” exemption if you properly certify as to your foreign status as described below, and:

• you do not own, actually or constructively, 10% or more of our voting stock; and

• you are not a “controlled foreign corporation” that is related to us.

The portfolio interest exemption and several of the special rules for non-U.S. holders described below generally apply only if you appropriately certify as to your foreign status. You can generally meet this certification requirement by providing a properly executed IRS Form W-8BEN (or successor form) or appropriate substitute form to us, or our paying agent. If you hold the notes through a financial institution or other agent acting on your behalf, you may be required to provide appropriate certifications to the agent. Your agent will then generally be required to provide appropriate certifications to us or our paying agent, either directly or through other intermediaries. Special rules apply to foreign partnerships, estates and trusts, and in certain circumstances certifications as to the foreign status of partners, trust owners or beneficiaries may have to be provided to us or our paying agent. In addition, special rules apply to qualified intermediaries that enter into withholding agreements with the IRS.

If you cannot satisfy the requirements described above, payments of interest made to you will be subject to a 30% U.S. federal withholding tax, unless you provide us with a properly executed IRS Form W-8BEN (or successor form) claiming an exemption from (or a reduction of) withholding under the benefit of an applicable tax treaty, or the payments of interest are effectively connected with your conduct of a trade or business in the U.S. and you meet the certification requirements described below. See “—Income or gain effectively connected with a U.S. trade or business.”

Disposition of the notes

You generally will not be subject to U.S. federal income tax on any gain realized on the sale, redemption, exchange, retirement or other disposition of a note unless:

• the gain is effectively connected with the conduct by you of a U.S. trade or business (or in the case of an applicable tax treaty, attributable to your permanent establishment in the U.S.);

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• you are an individual who has been present in the U.S. for 183 days or more in the taxable year of disposition and certain other requirements are met; or

• we are, or were within the shorter of the five-year period preceding such disposition and the period the U.S. holder held the note, a “U.S. real property holding corporation” (“USRPHC”), subject to the discussion below.

In general, we would be a USRPHC if interests in real estate comprised most of our assets. We believe that we are not and do not anticipate becoming a USRPHC for U.S. federal income tax purposes. Even if we are a USRPHC, so long as our common stock continues to be regularly traded on an established securities market, only a non-U.S. holder (i) who owns within the time period described above more that 5% of the notes if the notes are regularly traded on an established securities market, (ii) who owns notes with a value greater than 5% of our common stock as of the latest date such notes were acquired if the notes are not traded on a regular securities market, or (iii) who actually or constructively owns within the time period described above more than 5% of our common stock will be subject to U.S. tax on the disposition thereof.

Non-U.S. holders that meet any of the ownership requirements discussed above are strongly encouraged to consult their own tax advisors with respect to the U.S. tax consequences of the ownership and disposition of the notes and common stock.

Conversion of the notes

You generally will not recognize any income, gain or loss upon conversion of a note into common stock. Any gain recognized as a result of the receipt of cash in lieu of a fractional share of stock would also generally not be subject to U.S. federal income tax. See “Consequences to non-U.S. holders—Sale of common stock” below.

Dividends

Dividends paid to you on common stock received on conversion of a note will generally be subject to a 30% U.S. federal withholding tax unless you provide us with a properly executed IRS Form W-8BEN (or successor form) claiming an exemption from (or a reduction of) withholding under the benefit of an applicable tax treaty, or the payment of dividends are effectively connected with your conduct of a trade or business in the U.S. and you meet the certification requirements described below. See “Consequences to non-U.S. holders—Income or gain effectively connected with a U.S. trade or business.”

Conversion rate adjustment

The conversion rate of the notes is subject to adjustment in certain circumstances. Certain such adjustments could give rise to a constructive distribution to you. See “Consequences to U.S. holders—Consequences of conversion rate adjustments.” In such case, the constructive distribution would be subject to the rules above regarding withholding of U.S. federal tax on dividends in respect of common stock. See “Consequences to non-U.S. holders—Dividends.” It is possible that U.S. federal tax on the constructive distribution would be withheld from the interest paid to you on the notes.

Sale of common stock

You will generally not be subject to U.S. federal income tax on any gains realized on the sale or exchange or other disposition of common stock unless one of the exceptions described in “Consequences to non-U.S. holders—Disposition of the notes” above is applicable to you.

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Income or gain effectively connected with a U.S. trade or business

The preceding discussion of the tax consequences of the purchase, ownership and disposition of the notes and common stock by you generally assumes that you are not engaged in a U.S. trade or business. If any interest on the notes, dividends on common stock or gain from the sale, exchange or other taxable disposition of the notes or common stock is effectively connected with a U.S. trade or business conducted by you, (or in the case of an applicable treaty, attributable to your permanent establishment in the U.S.) then the income or gain will be subject to U.S. federal income tax at regular graduated income tax rates, but will not be subject to withholding tax if certain certification requirements are satisfied. You can generally meet the certification requirements by providing a properly executed IRS Form W-8ECI or appropriate substitute form to us, or our paying agent. If you are eligible for the benefits of a tax treaty between the U.S. and your country of residence, any “effectively connected” income or gain will generally be subject to U.S. federal income tax only if it is also attributable to a permanent establishment maintained by you in the U.S. If you are a corporation, that portion of your earnings and profits that is effectively connected with your U.S. trade or business (or in the case of an applicable tax treaty, attributable to your permanent establishment in the U.S.) also may be subject to a “branch profits tax” at a 30% rate, although an applicable tax treaty may provide for a lower rate.

Information reporting and backup withholding

Payments to non-U.S. holders of interest on a note and dividends on common stock, and amounts withheld from such payments, if any, generally will be required to be reported to the IRS and to you.

U.S. backup withholding tax generally will not apply to payments to a non-U.S. holder if the statement described in “Consequences to non-U.S. holders—Interest on the notes” is duly provided by the holder or the holder otherwise establishes an exemption, provided that we do not have actual knowledge or reason to know that the holder is a U.S. person.

Payment of the proceeds of a sale of a note or share of common stock effected by the U.S. office of a U.S. or foreign broker will be subject to information reporting requirements and backup withholding unless you properly certify under penalties of perjury as to your foreign status and certain other conditions are met or you otherwise establish an exemption. Information reporting requirements and backup withholding generally will not apply to any payment of the proceeds of the sale of a note or share of common stock effected outside the U.S. by a foreign office of a broker. However, unless such a broker has documentary evidence in its records that you are a non-U.S. holder and certain other conditions are met, or you otherwise establish an exemption, information reporting will apply to a payment of the proceeds of the sale of a note or share of common stock effected outside the U.S. by such a broker if it:

• is a U.S. person;

• derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S.;

• is a controlled foreign corporation for U.S. federal income tax purposes; or

• is a foreign partnership that, at any time during its taxable year, has more than 50% of its income or capital interests owned by U.S. persons or is engaged in the conduct of a U.S. trade or business.

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Any amount withheld under the backup withholding rules may be credited against your U.S. federal income tax liability and any excess may be refundable if the proper information is provided to the IRS.

The preceding discussion of certain U.S. federal income tax considerations is for general information only and is not tax advice. Each prospective investor is strongly encouraged to consult its own tax advisor regarding the particular U.S. federal income and estate, state, local and foreign tax consequences of purchasing, holding, and disposing of our notes or common stock.

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Underwriting

Subject to the terms and conditions set forth in the underwriting agreement among us and the underwriters, we have agreed to sell to each underwriter, and each underwriter has severally agreed to purchase from us, the principal amount of the notes that appears opposite its name in the table below:

Underwriter	Principal amount of notes
J.P. Morgan Securities Inc.	$
Credit Suisse First Boston LLC
Banc One Capital Markets, Inc.
Citigroup Global Markets Inc.
Scotia Capital (USA) Inc.
Wachovia Capital Markets, LLC
Total	$	100,000,000

The obligations of the underwriters under the underwriting agreement, including their agreement to purchase notes from us, are several and not joint. Those obligations are also subject to various conditions in the underwriting agreement being satisfied. The underwriters have agreed to purchase all of the notes if any of them are purchased.

The underwriters initially propose to offer the notes to the public at the public offering price that appears on the cover of this prospectus supplement. The underwriters may offer the notes to selected dealers at the public offering price minus a concession of up to 1.8% of the principal amount. After the initial offering, the underwriters may change the public offering price and any other selling terms.

In the underwriting agreement, we have agreed that:

•  We will not offer or sell any of our debt securities having a term of more than one year (other than the notes and the notes to be issued in connection with the proposed offering of our senior notes) for a period of 90 days after the date of this prospectus supplement without the prior consent of J.P. Morgan Securities Inc. and Credit Suisse First Boston LLC.

•  We will pay our own expenses related to the offering, which we estimate will be $            .

We will indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or contribute payments that the underwriters may be required to make in respect of those liabilities.

We have granted the underwriters an option, exercisable for 30 days following the initial closing date, to purchase up to an additional $15,000,000 in aggregate principal amount of notes to cover over-allotments, if any, on the same terms and conditions as the original $100,000,000 principal amount of notes being purchased. To the extent the option is exercised, each underwriter must purchase an aggregate principal amount of notes approximately proportionate to that underwriter’s initial purchase commitment.

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Our executive officers and directors have agreed, subject to limited exceptions, that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the present intention to make any offer, sale, pledge or arrangement for a period of 60 days after the date of this prospectus supplement, without, in each case, the prior written consent of J.P. Morgan Securities Inc. and Credit Suisse First Boston LLC.

The notes are a new issue of securities, and there is currently no established trading market for the notes. We do not intend to apply for the notes to be listed on any securities exchange or to arrange for the notes to be quoted on any quotation system. The underwriters have advised us that they intend to make a market in the notes, but they are not obligated to do so. The underwriters may discontinue any market making in the notes at any time in their sole discretion. Accordingly, we cannot assure you that a liquid trading market will develop, or if developed, will continue, for the notes, that the notes will be able to be sold at a particular time or that the prices received when the notes are sold will be favorable.

In connection with the offering, the underwriters may engage in overallotment, stabilizing transactions and syndicate covering transactions. Overallotment involves sales in excess of the offering size, which creates a short position for the underwriters. Stabilizing transactions involve bids to purchase the notes in the open market for the purpose of pegging, fixing or maintaining the price of the notes. Syndicate covering transactions involve purchases of the notes in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions and syndicate covering transactions may cause the price of the notes to be higher than it would otherwise be in the absence of those transactions. If the underwriters engage in stabilizing or syndicate covering transactions, they may discontinue them at any time.

The underwriters or their affiliates have from time to time provided investment banking, commercial banking and financial advisory services to us and our affiliates, for which they have received customary compensation. The underwriters and their affiliates may provide similar services in the future. In addition, J.P. Morgan Securities Inc., Citigroup Global Markets Inc., Banc One Capital Markets, Inc., Wachovia Capital Markets, LLC, and Scotia Capital (USA) Inc. are acting as underwriters with respect to our proposed offering of senior notes. Wachovia Capital Markets, LLC is an affiliate of the trustee for the notes, Wachovia Bank, National Association. Furthermore, affiliates of several of the underwriters are lenders under our credit facility. Because more than 10% of the net proceeds of this offering will be paid to affiliates of the underwriters, this offering is being conducted pursuant to Conduct Rule 2710(c)(8) of the National Association of Securities Dealers, Inc. (“NASD”). That rule requires that the yield at which the notes are to be distributed to the public can be no lower than that recommended by a “qualified independent underwriter,” as defined by the NASD. Simmons & Company International has served in that capacity and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus supplement is a part. Simmons & Company International will receive $150,000 from Hanover as compensation for such role.

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Legal matters

Certain legal matters with respect to the notes will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Vinson & Elkins L.L.P. represents PricewaterhouseCoopers LLP and not Hanover in connection with the putative securities class action lawsuit against PricewaterhouseCoopers LLP and Hanover involving the restatement of Hanover’s financial statements. PricewaterhouseCoopers LLP is not a party to Hanover’s agreement to settle the putative securities class action lawsuit. Certain legal matters with respect to the notes will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.

Experts

The financial statements as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this prospectus supplement have been so included in reliance on the report (which contains an explanatory paragraph relating to Hanover’s changing its method of accounting for goodwill and other intangibles in 2002 and derivatives in 2001 and the restatement of the 2001 and 2000 financial statements for certain revenue recognition matters) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

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PROSPECTUS

Hanover Compressor Company

$700,000,000

Debt Securities

Guarantees of Debt Securities

Common Stock

Preferred Stock

Depositary Shares

Securities Warrants

Stock Purchase Contracts

Stock Purchase Units

Guarantees of Debt Securities by

Hanover Compression Limited Partnership

We may offer and sell the securities listed above from time to time in one or more classes or series and in amounts, at prices and on terms that we will determine at the time of the offering. The aggregate initial offering prices of the securities offered under this prospectus will not exceed $700,000,000. Any debt securities we issue under this prospectus may be guaranteed by our principal operating subsidiary, Hanover Compression Limited Partnership.

This prospectus provides you with a general description of the securities that may be offered. Each time securities are offered, we will provide a prospectus supplement and attach it to this prospectus. The prospectus supplement will contain more specific information about the offering and the terms of the securities being offered, including any guarantee by our subsidiary, Hanover Compression Limited Partnership. The supplements may also add, update or change information contained in this prospectus. This prospectus may not be used to offer or sell securities without a prospectus supplement describing the method and terms of the offering.

You should carefully read this prospectus and any accompanying prospectus supplement, together with the documents we incorporate by reference, before you invest in any of our securities.

Investing in any of our securities involves risk. You should consider the risk factors described in any accompanying prospectus supplement or any of the documents we incorporate by reference.

Our common stock is listed on the New York Stock Exchange under the symbol “HC.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus is dated November 19, 2003

TABLE OF CONTENTS

About This Prospectus	1
Where You Can Find More Information	1
Forward–Looking Statements	2
About Our Company	4
Use of Proceeds	4
Ratios of Earnings to Fixed Charges and Earnings to Fixed Charges and Preferred Stock Dividends	5
Description of Debt Securities	6
Description of Common Stock and Preferred Stock	17
Description of Depositary Shares	20
Description of Securities Warrants	22
Description of Stock Purchase Contracts and Stock Purchase Units	24
Plan of Distribution	25
Legal Matters	26
Experts	26

You should rely only on the information contained or incorporated by reference in this prospectus and any prospectus supplement. We have not authorized any dealer, salesman or other person to provide you with additional or different information. This prospectus and any prospectus supplement are not an offer to sell or the solicitation of an offer to buy any securities other than the securities to which they relate and are not an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. You should not assume that the information in this prospectus or any prospectus supplement or in any document incorporated by reference in this prospectus or any prospectus supplement is accurate as of any date other than the date of the document containing the information.

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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission, which we refer to as the “SEC,” using a “shelf” registration process. Under this shelf registration process, we may, over time, offer and sell any combination of the securities described in this prospectus in one or more offerings up to a total dollar amount of $700,000,000. This prospectus provides you with a general description of the securities we may offer. Each time we offer securities, we will provide a prospectus supplement and attach it to this prospectus. The prospectus supplement will contain specific information about the terms of the offering and the securities being offered at that time. A prospectus supplement may also add, update or change information contained in this prospectus. Any statement that we make in this prospectus will be modified or superceded by any inconsistent statement made by us in a prospectus supplement. You should read both this prospectus and any accompanying prospectus supplement together with the additional information described under the heading “Where You Can Find More Information.”

Unless the context requires otherwise or unless otherwise noted, all references in this prospectus or any prospectus supplement to “Hanover,” “we,” “us” or “our” are to Hanover Compressor Company and its subsidiaries, on a consolidated basis.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus does not contain all of the information included in the registration statement and all of the exhibits and schedules thereto. For further information about the registrants, you should refer to the registration statement. Summaries of agreements or other documents in this prospectus are not necessarily complete. Please refer to the exhibits to the registration statement for complete copies of such documents.

Hanover files annual, quarterly and current reports, proxy statements and other information with the SEC (File No. 1-13071). Hanover Compression Limited Partnership (“HCLP”) files annual, quarterly and current reports and other information with the SEC (File No. 333-75814-01). Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330.

Hanover’s common stock is listed on the New York Stock Exchange under the symbol “HC.” Hanover’s reports, proxy statements and other information may be read and copied at the New York Stock Exchange at 30 Broad Street, New York, New York 10005.

The SEC allows us to “incorporate by reference” the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. Hanover and HCLP incorporate by reference the documents listed below and all documents either registrant subsequently files with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until all of the securities described in this prospectus are sold or until we terminate this offering:

• Hanover’s Annual Report on Form 10-K for the year ended December 31, 2002;

• Hanover’s Quarterly Reports on Form10-Q/A for the three months ended March 31,2003 and on Form 10-Q for the three months ended June 30, 2003 and September 30, 2003;

• Hanover’s Current Reports on Forms 8-K, filed with the SEC on February 3, 2003, February 6, 2003, February 7, 2003, February 12, 2003, March 5, 2003 (excluding the information furnished in Item 9 thereof, which is not deemed filed and which is not incorporated by reference herein), March 17, 2003, May 14, 2003, July 28, 2003 and November 18, 2003;

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• the description of Hanover’s common stock contained in its Form 8-A registration statement filed on June 9, 1997;

• HCLP’s Special Financial Report on Form 10-K for the year ended December 31, 2002;

• HCLP’s Quarterly Reports on Form 10-Q for the three months ended March 31 2003, June 30, 2003 and September 30, 2003; and

• all filings Hanover or HCLP make pursuant to the Securities Exchange Act of 1934 after the date of filing this registration statement with the SEC and prior to the effectiveness of this registration statement.

You may request a copy of these filings (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing), at no cost, by writing us at the following address or calling us at the following number:

Hanover Compressor Company

Attention: Corporate Secretary

12001 N. Houston Rosslyn

Houston, Texas 77086

(281) 447-5175

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this prospectus, any prospectus supplement and the documents we incorporate by reference herein may include “forward-looking statements” intended to qualify for the safe harbors liability established by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate,” or words of similar import. Similarly, statements that describe our future plans, objectives or goals or future revenues or other financial metrics are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated as of the date of this prospectus, any prospectus supplement or the documents we incorporate by reference herein, as applicable. These risks and uncertainties include:

• our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment;

• a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas production equipment;

• reduced profit margins resulting from increased pricing pressure in our business;

• the loss of market share through competition;

• the introduction of competing technologies by other companies;

• changes in economic or political conditions in the countries in which we do business;

• currency fluctuations;

• losses due to the inherent risks associated with our operations, including equipment defects, malfunctions and failures and natural disasters;

• governmental safety, health, environmental and other regulations, which could require us to make significant expenditures;

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• legislative changes in the countries in which we do business;

• our inability to successfully integrate acquired businesses;

• our inability to properly implement new enterprise resource planning systems used for integration of our accounting, operations and information systems;

• our inability to retain key personnel;

• war, social unrest, terrorist attacks and/or the responses thereto;

• our inability to generate sufficient cash, access capital markets, refinance existing debt or incur indebtedness to fund our business;

• our inability to comply with covenants in our debt agreements and the agreements related to our compression equipment lease obligations;

• the decreased financial flexibility associated with our significant cash requirements and substantial debt, including our compression equipment lease obligations;

• our inability to reduce our debt relative to our total capitalization;

• our inability to execute our exit and sale strategy with respect to assets classified on our balance sheet as discontinued operations and held for sale;

• our inability to conclude the agreed-upon settlement of the securities-related litigation and adverse results in other litigation brought by plaintiffs that are not party to the settlement;

• fluctuations in our net income attributable to changes in the fair value of our common stock which will be used to fund the settlement of the securities-related litigation; and

• adverse results in the pending investigation by the SEC.

Other factors besides those described in this prospectus, any prospectus supplement or the documents we incorporate by reference herein could also affect our actual results.

You should not unduly rely on these forward-looking statements, which speak only as of the date such statements are made. Except as otherwise required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date such statements are made or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC. All forward-looking statements attributable to Hanover or HCLP are expressly qualified in their entirety by this cautionary statement.

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ABOUT OUR COMPANY

Hanover Compressor Company, a Delaware corporation, together with its subsidiaries, is a global market leader in the full service natural gas compression business and is a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Founded in 1990, and a public company since 1997, our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. In addition, through our ownership of Belleli Energy S.r.l., we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalination plants, primarily for use in Europe and the Middle East.

Hanover Compression Limited Partnership is a Delaware limited partnership and an indirect wholly-owned subsidiary of Hanover. Substantially all of our operations are conducted by HCLP and its subsidiaries and substantially all of our assets are owned by HCLP either directly or through its subsidiaries.

Our executive offices are located at 12001 N. Houston Rosslyn Road, Houston, Texas 77086, and our telephone number is (281) 447-8787. We maintain a website on the Internet at http://www.hanover-co.com. Unless specifically incorporated by reference in this prospectus or any prospectus supplement, information that you may find on our website is not part of this prospectus.

USE OF PROCEEDS

Except as may otherwise be described in a prospectus supplement, the net proceeds from the sale of the securities offered pursuant to this prospectus and any prospectus supplement will be used for general corporate purposes. These purposes may include, but are not limited to:

• reduction or refinancing of debt or other corporate obligations;

• acquisitions;

• capital expenditures; and

• working capital.

Any specific allocation of the net proceeds of an offering of securities to a specific purpose will be determined at the time of the offering and will be described in a prospectus supplement.

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RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

Hanover Compressor Company’s ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends for each of the periods indicated are as follows:

	Year Ended December 31,						Nine Months Ended September 30,
	1998	1999	2000	2001	2002		2003
Ratio of earnings to fixed charges	3.68	2.75	2.11	1.95	(1	)	(2	)
Ratio of earnings to fixed charges and preferred stock dividends	3.68	2.75	2.11	1.95	(1	)	(2	)

(1) Due to Hanover’s loss for the year ended December 31, 2002, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of $96.8 million to achieve a coverage of 1:1. During 2002, we recorded $182.7 million in pre-tax charges. For a description of these pre-tax charges, see footnote 27 in the notes to consolidated financial statements included in Hanover’s Annual Report on Form 10-K for the year ended December 31, 2002.

(2) Due to Hanover’s loss for the nine months ended September 30, 2003, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of approximately $73.7 million to achieve a coverage of 1:1. During this nine month period, we recorded $40.3 million in pre-tax charges related to the settlement of shareholder litigation. For more information regarding these pre-tax charges, see footnote 9 in the notes to condensed consolidated financial statements included in Hanover’s Quarterly Report on Form 10-Q for the three months ended September 30, 2003.

For purposes of computing the ratio of earnings to fixed charges and the ratio of earnings to fixed charges and preferred stock dividends: (i) “earnings” consist of income before income taxes plus fixed charges and (ii) “fixed charges” consist of interest expense (including distributions on mandatorily redeemable convertible preferred securities and amortization of debt discount and expense), capitalized interest, leasing expense and the estimated interest factor attributable to rentals. There was no preferred stock outstanding during any period presented.

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DESCRIPTION OF DEBT SECURITIES

The Debt Securities will be either our senior debt securities (“Senior Debt Securities”) or our subordinated debt securities (“Subordinated Debt Securities”). The Senior Debt Securities and the Subordinated Debt Securities will be issued under separate Indentures among us, our subsidiary HCLP, if it is a guarantor of the Debt Securities, and Wachovia Bank, National Association, or another U.S. banking institution selected by us, as “Trustee.” Senior Debt Securities will be issued under a “Senior Indenture,” and Subordinated Debt Securities will be issued under a “Subordinated Indenture.” Together the Senior Indenture and the Subordinated Indenture are called “Indentures.” The Debt Securities may be issued from time to time in one or more series. When Debt Securities are offered in the future, a prospectus supplement will explain the particular terms of the securities to the extent to which these general provisions may apply or may be varied.

We have summarized selected provisions of the Indentures below. The summary is not complete and is qualified in its entirety by express reference to the provisions of the Indentures. We have filed the forms of each Indenture with the SEC as an exhibit to the registration statement of which this prospectus is a part. In the summary below we have included references to section numbers of the applicable Indentures so that you can easily locate these provisions. Whenever we refer in this prospectus or in the prospectus supplement to particular sections or defined terms of the Indentures, such sections or defined terms are incorporated by reference herein or therein, as applicable. The Indentures will be subject to and governed by certain provisions of the Trust Indenture Act of 1939, and we refer you to the Indentures and the Trust Indenture Act for a statement of such provisions. Capitalized terms used in this summary but not defined here have the meanings specified in the Indentures.

General

The Indentures provide that Debt Securities in separate series may be issued thereunder from time to time without limitation as to aggregate principal amount. We may specify a maximum aggregate principal amount for the Debt Securities of any series. (Section 301) The terms and conditions of the Debt Securities, including the maturity, principal and interest, will be provided for in the supplement to the Indenture relating to the applicable Debt Securities and must be consistent with the applicable Indenture. The Debt Securities will be our unsecured obligations.

The Subordinated Debt Securities will be subordinated in right of payment to the prior payment in full of all of our Senior Debt (as defined in the Subordinated Indenture) as described under “— Subordination of Subordinated Debt Securities” and in the prospectus supplement applicable to any Subordinated Debt Securities. If the prospectus supplement so indicates, the Subordinated Debt Securities will be convertible into our common stock as described in the prospectus supplement.

We currently conduct substantially all of our operations through our subsidiaries, and the holders of Debt Securities (whether Senior Debt Securities or Subordinated Debt Securities) will be effectively subordinated to the creditors of our subsidiaries except to the extent of any guarantee issued by our subsidiaries with respect to such Debt Securities as described in the applicable prospectus supplement. This means that creditors of our subsidiaries will have a claim to the assets of our subsidiaries that is superior to the claim of our creditors, including holders of our Debt Securities. Except to the extent set forth in the applicable prospectus supplement, the Debt Securities will not contain any covenants or other provisions that are intended to afford holders of the Debt Securities special protection in the event of either a change of control or highly leveraged transaction involving us. The Indentures also do not limit the aggregate amount of unsecured indebtedness that we or our subsidiaries may incur or limit the payment of dividends or the acquisition of our stock.

If specified in the prospectus supplement, our principal operating subsidiary HCLP, which we refer to as the “Subsidiary Guarantor,” will unconditionally guarantee (the “Subsidiary Guarantee”) the Debt Securities as described under “—Subsidiary Guarantee” and in the prospectus supplement. The Subsidiary Guarantee will be an unsecured obligation of the Subsidiary Guarantor. Subsidiary Guarantees of Subordinated Debt Securities will

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be subordinated to the Senior Debt of the Subsidiary Guarantor on the same basis as the Subordinated Debt Securities are subordinated to our Senior Debt and, if so indicated in the prospectus supplement, the Subsidiary Guarantee of our Senior Debt Securities may be subordinated to the Senior Debt of the Subsidiary Guarantor in the manner indicated in the prospectus supplement.

The applicable prospectus supplement will set forth the price or prices at which the Debt Securities to be offered will be issued and will, among other provisions, describe the following terms of such Debt Securities:

(1) the title of the Debt Securities;

(2) whether the Debt Securities are Senior Debt Securities or Subordinated Debt Securities and, if Subordinated Debt Securities, the related subordination terms;

(3) whether the Subsidiary Guarantor will provide a Subsidiary Guarantee of the Debt Securities and if so provided whether the Subsidiary Guarantee will be issued on a senior or subordinated basis;

(4) any limit on the aggregate principal amount of the Debt Securities;

(5) the dates on which the principal of the Debt Securities will be payable;

(6) the interest rate which the Debt Securities will bear and the interest payment dates for the Debt Securities;

(7) the places where payments on the Debt Securities will be payable;

(8) any terms upon which the Debt Securities may be redeemed, in whole or in part, at our option;

(9) any sinking fund or other provisions that would obligate us to repurchase or otherwise redeem the Debt Securities;

(10) the portion of the principal amount, if less than all, of the Debt Securities that will be payable upon declaration of acceleration of the Maturity of the Debt Securities;

(11) whether the Debt Securities will be defeasible;

(12) any addition to or change in the Events of Default;

(13) whether the Debt Securities will be convertible into, or exchangeable for, securities or other property of Hanover or another person and, if so, the terms and conditions upon which conversion will be effected, including the initial conversion price or conversion rate and any adjustments thereto, the conversion period and other conversion provisions;

(14) any addition to or change in the covenants in the Indenture applicable to any of the Debt Securities; and

(15) any other terms of the Debt Securities not inconsistent with the provisions of the applicable Indenture. (Section 301)

Debt Securities may be sold at a substantial discount below their principal amount. Special United States federal income tax considerations applicable to Debt Securities sold at an original issue discount may be described in the applicable prospectus supplement. In addition, special United States federal income tax or other considerations applicable to any Debt Securities that are denominated in a currency or currency unit other than United States dollars may be described in the applicable prospectus supplement.

The applicable prospectus supplement relating to any Debt Securities will state the terms, if any, on which such Debt Securities are convertible into, or exchangeable for, securities or other property of Hanover or another person.

Subordination of Subordinated Debt Securities

The indebtedness evidenced by the Subordinated Debt Securities will, to the extent set forth in the Subordinated Indenture with respect to each series of Subordinated Debt Securities, be subordinate in right of

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payment to the prior payment in full of all of our Senior Debt, including the Senior Debt Securities, and it may also be senior in right of payment to all of our other Subordinated Debt. The prospectus supplement relating to any Subordinated Debt Securities will summarize the subordination provisions of the Subordinated Indenture applicable to that series including:

• the applicability and effect of such provisions upon any payment or distribution of our assets to creditors upon any liquidation, dissolution, winding-up, reorganization, assignment for the benefit of creditors or marshaling of assets or any bankruptcy, insolvency or similar proceedings;

• the applicability and effect of such provisions in the event of specified defaults with respect to any Senior Debt, including the circumstances under which and the periods in which we will be prohibited from making payments on the Subordinated Debt Securities; and

• the definition of Senior Debt applicable to the Subordinated Debt Securities of that series and, if the series is issued on a senior subordinated basis, the definition of Subordinated Debt applicable to that series.

The prospectus supplement will also describe as of a recent date the approximate amount of Senior Debt to which the Subordinated Debt Securities of that series will be subordinated.

The failure to make any payment on any of the Subordinated Debt Securities by reason of the subordination provisions of the Subordinated Indenture described in the prospectus supplement will not be construed as preventing the occurrence of an Event of Default with respect to the Subordinated Debt Securities arising from any such failure to make payment.

The subordination provisions described above will not be applicable to payments in respect of the Subordinated Debt Securities from a defeasance trust established in connection with any defeasance or covenant defeasance of the Subordinated Debt Securities as described under “— Defeasance and Covenant Defeasance.”

Subsidiary Guarantee

If specified in the prospectus supplement, HCLP will guarantee the Debt Securities of a series. No other subsidiaries of Hanover will guarantee the Debt Securities, unless otherwise indicated in the prospectus supplement. Unless otherwise indicated in the prospectus supplement, the following provisions will apply to the Subsidiary Guarantee.

Subject to the limitations described below and in the prospectus supplement, the Subsidiary Guarantor will unconditionally guarantee the punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all our obligations under the Indentures and the Debt Securities of a series, whether for principal of, premium, if any, or interest on the Debt Securities or otherwise (all such obligations guaranteed by the Subsidiary Guarantor being called the “Guaranteed Obligations”). The Subsidiary Guarantor will also pay all expenses (including reasonable counsel fees and expenses) incurred by the applicable Trustee in enforcing any rights under a Subsidiary Guarantee. (Section 1302)

In the case of Subordinated Debt Securities, the Subsidiary Guarantee will be subordinated in right of payment to the Senior Debt of the Subsidiary Guarantor on the same basis as the Subordinated Debt Securities are subordinated to our Senior Debt. No payment will be made by the Subsidiary Guarantor under its Subsidiary Guarantee during any period in which payments by us on the Subordinated Debt Securities are suspended by the subordination provisions of the Subordinated Indenture. (Article Fourteen of the Subordinated Indenture)

If specified in the prospectus supplement, the Subsidiary Guarantee of our Senior Debt Securities may be subordinated to the Senior Debt of the Subsidiary Guarantor in the manner indicated in the prospectus supplement.

Each Subsidiary Guarantee will be limited to an amount not to exceed the maximum amount that can be guaranteed by the Subsidiary Guarantor without rendering such Subsidiary Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. (Section 1306)

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Each Subsidiary Guarantee will be a continuing guarantee and will:

(1) remain in full force and effect until either (a) payment in full of all the Guaranteed Obligations (or the applicable Debt Securities are otherwise discharged in accordance with the satisfaction and discharge provisions of the Indentures) or (b) released as described in the following paragraph,

(2) be binding upon the Subsidiary Guarantor and

(3) inure to the benefit of and be enforceable by the applicable Trustee, the Holders and their successors, transferees and assigns.

If the Subsidiary Guarantor ceases to be a Subsidiary, or if we dispose of all or substantially all of the assets or all of the Capital Stock of the Subsidiary Guarantor, whether by way of sale, merger, consolidation or otherwise, in either case the Subsidiary Guarantor will be deemed released and relieved of its obligations under its Subsidiary Guarantee without any further action required on the part of the Trustee or any Holder, and no other person acquiring or owning the assets or Capital Stock of the Subsidiary Guarantor will be required to enter into a Subsidiary Guarantee; provided, in each case, that the transaction or transactions resulting in the Subsidiary Guarantor’s ceasing to be a Subsidiary are carried out pursuant to and in compliance with all of the applicable covenants in the Indentures. Further, if we elect either defeasance and discharge or covenant defeasance as described below under “— Defeasance and Covenant Defeasance,” then the Subsidiary Guarantor will also be deemed released and relieved of its obligations under its Subsidiary Guarantee without any further action required on the part of the Trustee or any Holder. In addition, the prospectus supplement may specify additional circumstances under which the Subsidiary Guarantor can be released from its Subsidiary Guarantee. (Section 1304)

Form, Exchange and Transfer

The Debt Securities of each series will be issuable only in fully registered form, without coupons, and, unless otherwise specified in the applicable prospectus supplement, only in denominations of $1,000 and integral multiples thereof. (Section 302)

At the option of the Holder, subject to the terms of the applicable Indenture and the limitations applicable to Global Securities, Debt Securities of each series will be exchangeable for other Debt Securities of the same series of any authorized denomination and of a like tenor and aggregate principal amount. (Section 305)

Subject to the terms of the applicable Indenture and the limitations applicable to Global Securities, Debt Securities may be presented for exchange as provided above or for registration of transfer (duly endorsed or with the form of transfer endorsed thereon duly executed) at the office of the Security Registrar or at the office of any transfer agent designated by us for such purpose. No service charge will be made for any registration of transfer or exchange of Debt Securities, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Such transfer or exchange will be effected upon the Security Registrar or such transfer agent, as the case may be, being satisfied with the documents of title and identity of the person making the request. The Security Registrar and any other transfer agent initially designated by us for any Debt Securities will be named in the applicable prospectus supplement. (Section 305) We may at any time designate additional transfer agents or rescind the designation of any transfer agent or approve a change in the office through which any transfer agent acts, except that we will be required to maintain a transfer agent in each Place of Payment for the Debt Securities of each series. (Section 1002).

If the Debt Securities of any series (or of any series and specified terms) are to be redeemed in part, we will not be required to (1) issue, register the transfer of or exchange any Debt Security of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption of any such Debt Security that may be selected for redemption and ending at the close of business on the day of such mailing or (2) register the transfer of or exchange any Debt Security so selected for redemption, in whole or in part, except the unredeemed portion of any such Debt Security being redeemed in part. (Section 305)

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Global Securities

Some or all of the Debt Securities of any series may be represented, in whole or in part, by one or more Global Securities which will have an aggregate principal amount equal to that of the Debt Securities represented thereby. Each Global Security will be registered in the name of a Depositary or its nominee identified in the applicable prospectus supplement, will be deposited with such Depositary or nominee or its custodian and will bear a legend regarding the restrictions on exchanges and registration of transfer thereof referred to below and any such other matters as may be provided for pursuant to the applicable Indenture.

Notwithstanding any provision of the Indentures or any Debt Security described in this prospectus, no Global Security may be exchanged in whole or in part for Debt Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any person other than the Depositary for such Global Security or any nominee of such Depositary unless:

(1) the Depositary has notified us that it is unwilling or unable to continue as Depositary for such Global Security or has ceased to be qualified to act as such as required by the applicable Indenture, and in either case we fail to appoint a successor Depositary within 90 days,

(2) an Event of Default with respect to the Debt Securities represented by such Global Security has occurred and is continuing and the Security Registrar has received a written request from the Depositary to issue certificated Debt Securities,

(3) we elect to issue certificated Debt Securities, or

(4) other circumstances exist, in addition to or in lieu of those described above, as may be described in the applicable prospectus supplement.

All Debt Securities issued in exchange for a Global Security or any portion thereof will be registered in such names as the Depositary may direct. (Sections 205 and 305)

As long as the Depositary, or its nominee, is the registered Holder of a Global Security, the Depositary or such nominee, as the case may be, will be considered the sole owner and Holder of such Global Security and the Debt Securities that it represents for all purposes under the Debt Securities and the applicable Indenture. (Section 308) Except in the limited circumstances referred to above, owners of beneficial interests in a Global Security will not be entitled to have such Global Security or any Debt Securities that it represents registered in their names, will not receive or be entitled to receive physical delivery of certificated Debt Securities in exchange therefor and will not be considered to be the owners or Holders of such Global Security or any Debt Securities that is represents for any purpose under the Debt Securities or the applicable Indenture. All payments on a Global Security will be made to the Depositary or its nominee, as the case may be, as the Holder of the security. The laws of some jurisdictions require that some purchasers of Debt Securities take physical delivery of such Debt Securities in definitive form. These laws may impair the ability to transfer beneficial interests in a Global Security.

Ownership of beneficial interests in a Global Security will be limited to institutions that have accounts with the Depositary or its nominee (“participants”) and to persons that may hold beneficial interests through participants. In connection with the issuance of any Global Security, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of Debt Securities represented by the Global Security to the accounts of its participants. Ownership of beneficial interests in a Global Security will be shown only on, and the transfer of those ownership interests will be effected only through, records maintained by the Depositary (with respect to participants’ interests) or any such participant (with respect to interests of persons held by such participants on their behalf). Payments, transfers, exchanges and other matters relating to beneficial interests in a Global Security may be subject to various policies and procedures adopted by the Depositary from time to time. None of us, the Subsidiary Guarantor, the Trustees or the agents of ourself, the Subsidiary Guarantor or the Trustees will have any responsibility or liability for any aspect of the Depositary’s or any participant’s records relating to, or for payments made on account of, beneficial interests in a Global Security, or for maintaining, supervising or reviewing any records relating to such beneficial interests.

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Payment and Paying Agents

Unless otherwise indicated in the applicable prospectus supplement, payment of interest on a Debt Security on any Interest Payment Date will be made to the Person in whose name such Debt Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. (Section 307)

Unless otherwise indicated in the applicable prospectus supplement, principal of and any premium and interest on the Debt Securities of a particular series will be payable at the office of such Paying Agent or Paying Agents as we may designate for such purpose from time to time, except that at our option payment of any interest may be made by check mailed to the address of the Person entitled thereto as such address appears in the Security Register. Unless otherwise indicated in the applicable prospectus supplement, the corporate trust office or agency of the Trustee under the Senior Indenture in The City of New York will be designated as sole Paying Agent for payments with respect to Senior Debt Securities of each series, and the corporate trust office or agency of the Trustee under the Subordinated Indenture in The City of New York will be designated as the sole Paying Agent for payment with respect to Subordinated Debt Securities of each series. Any other Paying Agents initially designated by us for the Debt Securities of a particular series will be named in the applicable prospectus supplement. We may at any time designate additional Paying Agents or rescind the designation of any Paying Agent or approve a change in the office through which any Paying Agent acts, except that we will be required to maintain a Paying Agent in each Place of Payment for the Debt Securities of a particular series. (Sections 202 and 1002)

All moneys paid by us to a Paying Agent for the payment of the principal of or any premium or interest on any Debt Security which remain unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid to us, and the Holder of such Debt Security thereafter may look only to us for payment thereof. (Section 1003)

Consolidation, Merger and Sale of Assets

We may not consolidate with or merge into, or transfer, lease or otherwise dispose of all or substantially all of our assets to, any Person (a “successor Person”), and may not permit any Person to consolidate with or merge into us, unless:

(1) the successor Person (if any) is a corporation, partnership, trust or other entity organized and validly existing under the laws of any domestic jurisdiction and assumes our obligations on the Debt Securities and under the Indentures,

(2) immediately after giving effect to the transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing and

(3) several other conditions, including any additional conditions with respect to any particular Debt Securities specified in the applicable prospectus supplement, are met. (Section 801)

Events of Default

Unless otherwise specified in the prospectus supplement, each of the following will constitute an Event of Default under the applicable Indenture with respect to Debt Securities of any series:

(1) failure to pay principal of or any premium on any Debt Security of that series when due, whether or not, in the case of Subordinated Debt Securities, such payment is prohibited by the subordination provisions of the Subordinated Indenture;

(2) failure to pay any interest on any Debt Securities of that series when due, continued for 30 days, whether or not, in the case of Subordinated Debt Securities, such payment is prohibited by the subordination provisions of the Subordinated Indenture;

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(3) failure to deposit any sinking fund payment, when due, in respect of any Debt Security of that series, whether or not, in the case of Subordinated Debt Securities, such deposit is prohibited by the subordination provisions of the Subordinated Indenture;

(4) failure to perform or comply with the provisions described under “Consolidation, Merger and Sale of Assets”;

(5) failure to perform any of our other covenants in such Indenture (other than a covenant included in such Indenture solely for the benefit of a series other than that series), continued for 30 days after written notice has been given by the applicable Trustee, or the Holders of at least 25% in principal amount of the Outstanding Debt Securities of that series, as provided in such Indenture;

(6) certain events of bankruptcy, insolvency or reorganization affecting us, any Significant Subsidiary or any group of Subsidiaries that together would constitute a Significant Subsidiary; and

(7) in the case of Debt Securities guaranteed by the Subsidiary Guarantor, the Subsidiary Guarantee is held by a final non-appealable order or judgment of a court of competent jurisdiction to be unenforceable or invalid or ceases for any reason to be in full force and effect (other than in accordance with the terms of the applicable Indenture) or the Subsidiary Guarantor or any Person acting on behalf of the Subsidiary Guarantor denies or disaffirms the Subsidiary Guarantor’s obligations under its Subsidiary Guarantee (other than by reason of a release of the Subsidiary Guarantor from its Subsidiary Guarantee in accordance with the terms of the applicable Indenture). (Section 501)

If an Event of Default (other than an Event of Default described in clause (6) above) with respect to the Debt Securities of any series at the time Outstanding shall occur and be continuing, either the applicable Trustee or the Holders of at least 25% in principal amount of the Outstanding Debt Securities of that series by notice as provided in the applicable Indenture may declare the principal amount of the Debt Securities of that series (or, in the case of any Debt Security that is an Original Issue Discount Debt Security or the principal amount of which is not then determinable, such portion of the principal amount of such Debt Security, or such other amount in lieu of such principal amount, as may be specified in the terms of such Debt Security) to be due and payable immediately. If an Event of Default described in clause (6) above with respect to the Debt Securities of any series at the time Outstanding shall occur, the principal amount of all the Debt Securities of that series (or, in the case of any such Original Issue Discount Security or other Debt Security, such specified amount) will automatically, and without any action by the applicable Trustee or any Holder, become immediately due and payable. After any such acceleration, but before a judgment or decree based on acceleration, the Holders of a majority in principal amount of the Outstanding Debt Securities of that series may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal (or other specified amount), have been cured or waived as provided in the applicable Indenture. (Section 502) For information as to waiver of defaults, see “— Modification and Waiver” below.

Subject to the provisions of the Indentures relating to the duties of the Trustees in case an Event of Default shall occur and be continuing, each Trustee will be under no obligation to exercise any of its rights or powers under the applicable Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to such Trustee reasonable indemnity. (Section 603) Subject to such provisions for the indemnification of the Trustees, the Holders of a majority in principal amount of the Outstanding Debt Securities of any series will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Debt Securities of that series. (Section 512)

No Holder of a Debt Security of any series will have any right to institute any proceeding with respect to the applicable Indenture, or for the appointment of a receiver or a trustee, or for any other remedy thereunder, unless:

(1) such Holder has previously given to the Trustee under the applicable Indenture written notice of a continuing Event of Default with respect to the Debt Securities of that series,

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(2) the Holders of at least 25% in principal amount of the Outstanding Debt Securities of that series have made written request, and such Holders have offered reasonable indemnity, to the Trustee to institute such proceeding as trustee and

(3) the Trustee has failed to institute such proceeding, and has not received from the Holders of a majority in principal amount of the Outstanding Debt Securities of that series a direction inconsistent with such request, within 60 days after such notice, request and offer. (Section 507)

However, such limitations do not apply to a suit instituted by a Holder of a Debt Security for the enforcement of payment of the principal of or any premium or interest on such Debt Security on or after the applicable due date specified in such Debt Security or, if applicable, to convert such Debt Security. (Section 508)

We will be required to furnish to each Trustee annually a statement by certain of our officers as to whether or not we, to their knowledge, are in default in the performance or observance of any of the terms, provisions and conditions of the applicable Indenture and, if so, specifying all such known defaults. (Section 1004)

Modification and Waiver

Modifications and amendments of an Indenture may be made by us, the Subsidiary Guarantor and the applicable Trustee with the consent of the Holders of a majority in principal amount of the Outstanding Debt Securities of each series affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each Outstanding Debt Security affected thereby:

(1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Debt Security,

(2) reduce the principal amount of, or any premium or interest on, any Debt Security,

(3) reduce the amount of principal of an Original Issue Discount Security or any other Debt Security payable upon acceleration of the Maturity thereof,

(4) change the currency of payment of principal of, or any premium or interest on, any Debt Security,

(5) impair the right to institute suit for the enforcement of any payment on or any conversion right with respect to any Debt Security,

(6) in the case of Subordinated Debt Securities, modify the subordination or conversion provisions in a manner adverse to the Holders of the Subordinated Debt Securities,

(7) except as provided in the applicable Indenture, release any Subsidiary Guarantee,

(8) reduce the percentage in principal amount of Outstanding Debt Securities of any series, the consent of whose Holders is required for modification or amendment of the applicable Indenture,

(9) reduce the percentage in principal amount of Outstanding Debt Securities of any series necessary for waiver of compliance with certain provisions of the applicable Indenture or for waiver of certain defaults or

(10) modify such provisions with respect to modification and waiver. (Section 902)

The Holders of a majority in principal amount of the Outstanding Debt Securities of any series may waive compliance by us with certain restrictive provisions of the applicable Indenture. (Section 1009) The Holders of a majority in principal amount of the Outstanding Debt Securities of any series may waive any past default under the applicable Indenture, except a default in the payment of principal, premium or interest and certain covenants and provisions of such Indenture which cannot be amended without the consent of the Holder of each Outstanding Debt Security of such series affected. (Section 513)

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The Indentures provide that in determining whether the Holders of the requisite principal amount of the Outstanding Debt Securities have given or taken any direction, notice, consent, waiver or other action under such Indenture as of any date,

(1) the principal amount of an Original Issue Discount Security that will be deemed to be Outstanding will be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Maturity thereof to such date,

(2) if, as of such date, the principal amount payable at the Stated Maturity of a Debt Security is not determinable (for example, because it is based on an index), the principal amount of such Debt Security deemed to be Outstanding as of such date will be an amount determined in the manner prescribed for such Debt Security and

(3) the principal amount of a Debt Security denominated in one or more foreign currencies or currency units that will be deemed to be Outstanding will be the U.S. dollar equivalent, determined as of such date in the manner prescribed for such Debt Security, of the principal amount of such Debt Security (or, in the case of a Debt Security described in clause (1) or (2) above, of the amount described in such clause).

Certain Debt Securities, including those for whose payment or redemption money has been deposited or set aside in trust for the Holders and those that have been fully defeased pursuant to Section 1502, will not be deemed to be Outstanding. (Section 101)

Except in certain limited circumstances, we will be entitled to set any day as a record date for the purpose of determining the Holders of Outstanding Debt Securities of any series entitled to give or take any direction, notice, consent, waiver or other action under the applicable Indenture, in the manner and subject to the limitations provided in such Indenture. In certain limited circumstances, the Trustee will be entitled to set a record date for action by Holders. If a record date is set for any action to be taken by Holders of a particular series, such action may be taken only by persons who are Holders of Outstanding Debt Securities of that series on the record date. To be effective, such action must be taken by Holders of the requisite principal amount of such Debt Securities within a specified period following the record date. For any particular record date, this period will be 180 days or such other period as may be specified by us (or the Trustee, if it set the record date), and may be shortened or lengthened (but not beyond 180 days) from time to time. (Section 104)

Defeasance and Covenant Defeasance

If and to the extent indicated in the applicable prospectus supplement, we may elect, at our option at any time, to have the provisions of Section 1502, relating to defeasance and discharge of indebtedness, or Section 1503, relating to defeasance of certain restrictive covenants applied to the Debt Securities of any series, or to any specified part of a series. (Section 1501)

Defeasance and Discharge.    The Indentures provide that, upon our exercise of our option (if any) to have Section 1502 applied to any Debt Securities, we and, if applicable, the Subsidiary Guarantor will be discharged from all our obligations, and, if such Debt Securities are Subordinated Debt Securities, the provisions of the Subordinated Indenture relating to subordination (but not to conversion, if applicable) will cease to be effective, with respect to such Debt Securities (except for certain obligations to exchange or register the transfer of Debt Securities, to replace stolen, lost or mutilated Debt Securities, to maintain paying agencies and to hold money for payment in trust) upon the deposit in trust for the benefit of the Holders of such Debt Securities of money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and any premium and interest on such Debt Securities on the respective Stated Maturities in accordance with the terms of the applicable Indenture and such Debt Securities. Such defeasance or discharge may occur only if, among other things,

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(1) we have delivered to the applicable Trustee an Opinion of Counsel to the effect that we have received from, or there has been published by, the United States Internal Revenue Service a ruling, or there has been a change in tax law, in either case to the effect that Holders of such Debt Securities will not recognize gain or loss for federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge were not to occur;

(2) no Event of Default or event that with the passing of time or the giving of notice, or both, shall constitute an Event of Default shall have occurred and be continuing;

(3) such deposit, defeasance and discharge will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which we are a party or by which we are bound;

(4) in the case of Subordinated Debt Securities, at the time of such deposit, no default in the payment of all or a portion of principal of (or premium, if any) or interest on any of our Senior Debt shall have occurred and be continuing, no event of default shall have resulted in the acceleration of any of our Senior Debt and no other event of default with respect to any of our Senior Debt shall have occurred and be continuing permitting after notice or the lapse of time, or both, the acceleration thereof; and

(5) we have delivered to the Trustee an Opinion of Counsel to the effect that such deposit shall not cause the Trustee or the trust so created to be subject to the Investment Company Act of 1940. (Sections 1502 and 1504)

Defeasance of Certain Covenants.    The Indentures provide that, upon our exercise of our option (if any) to have Section 1503 applied to any Debt Securities, we may omit to comply with certain restrictive covenants, including those that may be described in the applicable prospectus supplement, the occurrence of certain Events of Default, which are described above in clause (5) (with respect to such restrictive covenants) and clauses (6) and (7) under “— Events of Default” and any that may be described in the applicable prospectus supplement, will not be deemed either to be or result in an Event of Default and, if such Debt Securities are Subordinated Debt Securities, the provisions of the Subordinated Indenture relating to subordination (but not to conversion, if applicable) will cease to be effective, in each case with respect to such Debt Securities. In order to exercise such option, we must deposit, in trust for the benefit of the Holders of such Debt Securities, money or U.S. Government Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and any premium and interest on such Debt Securities on the respective Stated Maturities in accordance with the terms of the applicable Indenture and such Debt Securities. Such covenant defeasance may occur only if we have delivered to the applicable Trustee an Opinion of Counsel that in effect says that Holders of such Debt Securities will not recognize gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and defeasance were not to occur, and the requirements set forth in clauses (2), (3), (4) and (5) above are satisfied. If we exercise this option with respect to any Debt Securities and such Debt Securities were declared due and payable because of the occurrence of any Event of Default, the amount of money and U.S. Government Obligations so deposited in trust would be sufficient to pay amounts due on such Debt Securities at the time of their respective Stated Maturities but may not be sufficient to pay amounts due on such Debt Securities upon any acceleration resulting from such Event of Default. In such case, we would remain liable for such payments. (Sections 1503 and 1504)

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Satisfaction and Discharge

Each Indenture will cease to be of further effect as to all Outstanding Debt Securities of any series issued thereunder, when:

(a) either:

(1) all Debt Securities of that series that have been authenticated (except lost, stolen or destroyed Debt Securities that have been replaced, converted or paid and Debt Securities for whose payment money has theretofore been deposited in trust and thereafter repaid to us) have been delivered to the Trustee for cancellation; or

(2) all Outstanding Debt Securities of that series have become due and payable or will become due and payable at their stated maturity within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee and in any case we or the Subsidiary Guarantor has deposited with the Trustee as trust funds money in an amount sufficient to pay the entire indebtedness of such Outstanding Debt Securities, for principal, premium, if any, and accrued interest to the stated maturity or redemption date;

(b) we or the Subsidiary Guarantor, if applicable has paid or caused to be paid all other sums payable by us or it under the Indenture with respect to such series; and

(c) we have delivered an Officer’s Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge of the Indenture have been satisfied.

Notices

Notices to Holders of Debt Securities will be given by mail to the addresses of such Holders as they may appear in the Security Register. (Sections 101 and 106)

Title

We, the Subsidiary Guarantor, the Trustees and any agent of us, the Subsidiary Guarantor or a Trustee may treat the Person in whose name a Debt Security is registered as the absolute owner of the Debt Security (whether or not such Debt Security may be overdue) for the purpose of making payment and for all other purposes. (Section 308)

Trustees

We may appoint a separate Trustee for any series of Debt Securities. (Section 609) We may maintain banking and other commercial relationships with any Trustee and its affiliates in the ordinary course of business and any Trustee may own Debt Securities and serve as trustee under our other indentures.

Each Indenture will limit the right of the Trustee, if it becomes a creditor of the Subsidiary Guarantor or ourself, to obtain payment of claims in certain cases, or to realize on certain property in respect of any such claim as security or otherwise. (Section 613)

Governing Law

The Indentures, the Subsidiary Guarantee and the Debt Securities will be governed by and construed in accordance with the laws of the State of New York. (Section 112)

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DESCRIPTION OF COMMON STOCK AND PREFERRED STOCK

Hanover Compressor Company’s authorized capital stock currently consists of 200,000,000 shares of common stock, $.001 par value per share, and 3,000,000 shares of preferred stock, $.01 par value per share. The following summary description relating to the capital stock does not purport to be complete. For a detailed description, reference is made to our certificate of incorporation, a copy of which is listed as an exhibit to the registration statement of which this prospectus is a part.

Common Stock

Hanover Compressor Company’s common stock is traded on the New York Stock Exchange under the symbol “HC.”

As of November 7, 2003, 82,297,300 shares of common stock were issued and held of record by approximately 707 holders. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of common stock are not entitled to cumulative voting rights in the election of directors. Subject to any preferential rights with respect to our preferred stock and any restrictions that may be imposed by our debt instruments, holders of common stock are entitled to receive dividends when and as declared by our board of directors out of legally available funds. Dividends may be paid in cash, stock or other form. On liquidation, dissolution, sale or winding up of Hanover, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights. Holders of common stock have no preemptive or subscription rights. The outstanding shares of common stock are, and additional shares of common stock that we issue will be, fully paid and non-assessable.

We have never declared a dividend on our common stock. Our bank credit agreement limits the amount of dividends payable by us (without the lender’s prior approval) on our common stock to no more than 25% of our net income for the period from December 3, 2001 through November 30, 2004. The payment of any such dividends also will be subject to and may be limited by the terms of the outstanding 7¼% Mandatorily Redeemable Convertible Preferred Securities of our subsidiary, Hanover Compressor Capital Trust, or any preferred stock we may issue in the future.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Mellon Investor Services LLC.

Preferred Stock

The prospectus supplement will specify any terms of any series of preferred stock offered by it including:

• the series, the number of shares offered and the liquidation value of the preferred stock,

• the price at which the preferred stock will be issued,

• the dividend rate, the dates on which the dividends will be payable and other terms relating to the payment of dividends on the preferred stock,

• the liquidation preference of the preferred stock,

• whether the preferred stock is redeemable or subject to a sinking fund, and the terms of any such redemption or sinking fund,

• whether the preferred stock is convertible into or exchangeable for any other securities, and the terms of any such conversion or exchange, and

• any additional rights, preferences, qualifications, limitations or restrictions of the preferred stock.

17

The description of the terms of the preferred stock to be set forth in an applicable prospectus supplement will not be complete and will be subject to and qualified in its entirety by reference to the statement of resolution relating to the applicable series of preferred stock. The registration statement of which this prospectus forms a part will include the statement of resolution as an exhibit or incorporate it by reference.

We are authorized to issue 3,000,000 shares of preferred stock. Our board of directors may establish, without stockholder approval, one or more classes or series of preferred stock having the number of shares, designations, relative voting rights, dividend rates, liquidation, and other rights, preferences and limitations that the board of directors may designate. We believe that this power to issue preferred stock provides flexibility in connection with possible corporate transactions. The issuance of preferred stock, however, could adversely affect the voting power of holders of common stock and restrict their rights to receive payments upon liquidation of Hanover. It could also have the effect of delaying, deferring or preventing a change in control of Hanover.

Mandatorily Redeemable Convertible Preferred Securities

In December 1999, we issued $86,250,000 of unsecured 7 ¹/4% Mandatorily Redeemable Convertible Preferred Securities through Hanover Compressor Capital Trust, a Delaware business trust and subsidiary of Hanover. The Convertible Preferred Securities have a liquidation amount of $50 per unit and mature in 30 years, but we may redeem them, in whole or in part, at any time on or after December 20, 2002. The Convertible Preferred Securities provide for annual cash distributions at the rate of 7 ¹/4%, payable quarterly in arrears; however, distributions may be deferred for up to 20 consecutive quarters subject to certain restrictions. During any periods in which distributions are deferred, in general, we cannot pay any dividend or distribution on our capital stock or redeem, purchase, acquire or make any liquidation on any of our capital stock. Each Convertible Preferred Security is convertible into 2.7972 shares of our common stock, subject to adjustment for certain events. We have fully and unconditionally guaranteed the Convertible Preferred Securities.

Special Provisions of Our Certificate of Incorporation and Delaware Law

Section 102(b)(7) of the Delaware General Corporation Law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors’ fiduciary duty of care. Although Section 102(b) does not change directors’ duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our certificate of incorporation limits the liability of directors (in their capacity as directors but not in their capacity as officers) to us or our stockholders to the fullest extent permitted by Section 102(b). Specifically, our directors will not be personally liable for monetary damages for breach of a director’s fiduciary duty as a director, except for liability for:

(a) any breach of the director’s duty of loyalty to Hanover or our stockholders,

(b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,

(c) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or

(d) any transaction from which the director derived an improper personal benefit.

To the maximum extent permitted by law, our certificate of incorporation and bylaws provide for mandatory indemnification of directors and officers and permit indemnification of our officers, employees, and agents against all expense, liability and loss to which they may become subject or which they may incur as a result of being or having been a director, officer, employee or agent of Hanover or our subsidiaries. In addition, we must advance or reimburse directors and may advance or reimburse officers, employees and agents for expenses incurred by them in connection with indemnifiable claims.

18

We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

(a) before that person became an interested stockholder, the corporation’s board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;

(b) upon completion of the transaction that resulted in the interested stockholder’s becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or

(c) following the transaction in which that person became an interested stockholder, the business combination is approved by the corporation’s board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.

Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the corporation and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation’s directors, if that extraordinary transaction is approved or not opposed by a majority of the directors who were directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. “Business combination” includes mergers, assets sales and other transactions resulting in a financial benefit to the stockholder. “Interested stockholder” is a person who, together with affiliates and associates, owns (or, within three years, did own) 15% or more of the corporation’s voting stock.

19

DESCRIPTION OF DEPOSITARY SHARES

General

We may offer fractional shares of preferred stock, rather than full shares of preferred stock. If we decide to offer fractional shares of preferred stock, we will issue receipts for depositary shares. Each depositary share will represent a fraction of a share of a particular series of preferred stock. A prospectus supplement will indicate that fraction. The shares of preferred stock represented by depositary shares will be deposited under a deposit agreement between us and a depositary that is a bank or trust company that meets certain requirements and is selected by us. Each owner of a depositary share will be entitled to all of the rights and preferences of the preferred stock represented by the depositary share. The depositary shares will be evidenced by depositary receipts issued pursuant to the deposit agreement. Depositary receipts will be distributed to those persons purchasing the fractional shares of preferred stock in accordance with the terms of the offering.

This summary of the terms of the deposit agreements and the depositary receipts is not complete. The forms of the deposit agreement and the depositary receipts relating to any particular issue of depositary shares will be filed with the Securities and Exchange Commission on a Current Report on Form 8-K prior to closing our offering of the depositary shares, and you should read such documents for provisions that may be important to you. A prospectus supplement relating to a particular issue of depositary shares will contain the terms of and information relating to that issue of depositary shares.

Dividends and Other Distributions

If we pay a cash distribution or dividend on a series of preferred stock represented by depositary shares, the depositary will distribute such dividends to the record holders of such depositary shares. If the distributions are in property other than cash, the depositary will distribute the property to the record holders of the depositary shares. If, however, the depositary determines that it is not feasible to make the distribution of property, the depositary may, with our approval, sell such property and distribute the net proceeds from such sale to the holders of the preferred stock.

Redemption of Depositary Shares

If we redeem a series of preferred stock represented by depositary shares, the depositary will redeem the depositary shares from the proceeds received by the depositary in connection with the redemption. The redemption price per depositary share will equal the applicable fraction of the redemption price per share of the preferred stock. If fewer than all the depositary shares are redeemed, the depositary shares to be redeemed will be selected by lot or pro rata as the depositary may determine.

Voting the Preferred Stock

Upon receipt of notice of any meeting at which the holders of the preferred stock represented by depositary shares are entitled to vote, the depositary will mail the notice to the record holders of the depositary shares relating to such preferred stock. Each record holder of these depositary shares on the record date, which will be the same date as the record date for the preferred stock, may instruct the depositary as to how to vote the preferred stock represented by such holder’s depositary shares. The depositary will endeavor, insofar as practicable, to vote the amount of the preferred stock represented by such depositary shares in accordance with such instructions, and we will take all action that the depositary deems necessary in order to enable the depositary to do so. The depositary will abstain from voting shares of the preferred stock to the extent it does not receive specific instructions from the holders of depositary shares representing such preferred stock.

20

Amendment and Termination of the Deposit Agreements

The form of depositary receipt evidencing the depositary shares and any provision of a deposit agreement may be amended by agreement between the depositary and us. Any amendment that materially and adversely alters the rights of the holders of depositary shares will not, however, be effective unless such amendment has been approved by the holders of at least a majority of the depositary shares then outstanding. The deposit agreement may be terminated by the depositary or us only if:

(a) all outstanding depositary shares have been redeemed or

(b) there has been a final distribution in respect of the preferred stock in connection with any liquidation, dissolution or winding up of our company and such distribution has been distributed to the holders of depositary receipts.

Charges of Depositary

We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. We will pay charges of the depositary in connection with the initial deposit of the preferred stock and any redemption of the preferred stock. Holders of depositary receipts will pay other transfer and other taxes and governmental charges and any other charges, including a fee for the withdrawal of shares of preferred stock upon surrender of depositary receipts, as are expressly provided in the deposit agreement to be for their accounts.

Withdrawal of Preferred Stock

Upon surrender of depositary receipts at the principal office of the depositary, subject to the terms of the applicable deposit agreement, the owner of the depositary shares may demand delivery of the number of whole shares of preferred stock and all money and other property, if any, represented by those depositary shares. Partial shares of preferred stock will not be issued. If the depositary receipts delivered by the holder evidence a number of depositary shares in excess of the number of depositary shares representing the number of whole shares of preferred stock to be withdrawn, the depositary will deliver to such holder at the same time a new depositary receipt evidencing the excess number of depositary shares. Holders of preferred stock thus withdrawn may not thereafter deposit those shares under the deposit agreement or receive depositary receipts evidencing depositary shares therefor.

Miscellaneous

Each depositary will forward to holders of depositary receipts all reports and communications from us that are delivered to the depositary and that we are required to furnish to the holders of the preferred stock.

Neither we nor the depositary will be liable if we are prevented or delayed by law or any circumstance beyond our control in performing our obligations under a deposit agreement. The obligations of the depositary and us under a deposit agreement will be limited to performance in good faith of our duties thereunder, and we will not be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or preferred stock unless satisfactory indemnity is furnished. We may rely upon written advice of counsel or accountants, or upon information provided by persons presenting preferred stock for deposit, holders of depositary receipts or other persons believed to be competent and on documents believed to be genuine.

Resignation and Removal of Depositary

Any depositary may resign at any time by delivering notice to us of its election to do so, and we may at any time remove the depositary. Any such resignation or removal will take effect upon the appointment of a successor depositary and its acceptance of such appointment. Such successor depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $100,000,000.

21

DESCRIPTION OF SECURITIES WARRANTS

We may issue securities warrants for the purchase of debt securities, preferred stock, depositary shares, common stock or other securities. Securities warrants may be issued independently or together with debt securities, preferred stock, depositary shares, common stock or other securities offered by any prospectus supplement and may be attached to or separate from any such offered securities. Each series of securities warrants will be issued under a separate warrant agreement to be entered into between us and a bank or trust company, as warrant agent, all as set forth in a prospectus supplement relating to the particular issue of securities warrants. The securities warrant agent will act solely as our agent in connection with the securities warrants and will not assume any obligation or relationship of agency or trust for or with any holders of securities warrants or beneficial owners of securities warrants.

This summary of the terms of the security warrant agreements is not complete. A form of the applicable securities warrant agreement will be filed with the Securities and Exchange Commission on a Current Report on Form 8-K prior to the closing of any offering of the applicable warrants, and you should read such document for provisions that may be important to you. A prospectus supplement relating to a particular issue of securities warrants will contain the terms of and information relating to that issue of securities warrants, including, where applicable:

• the designation, aggregate principal amount, currencies, denominations and terms of the series of debt securities purchasable upon exercise of securities warrants to purchase debt securities and the price at which such debt securities may be purchased upon such exercise;

• the number of shares of common stock purchasable upon the exercise of securities warrants to purchase common stock and the price at which such number of shares of common stock may be purchased upon such exercise;

• the number of shares and series of preferred stock or depositary shares purchasable upon the exercise of securities warrants to purchase preferred stock or depositary shares and the price at which such number of shares of such series of preferred stock or depositary shares may be purchased upon such exercise;

• the designation and number of units of other securities purchasable upon the exercise of securities warrants to purchase other securities and the price at which such number of units of such other securities may be purchased upon such exercise;

• the date on which the right to exercise such securities warrants shall commence and the date on which such right shall expire;

• United States federal income tax consequences applicable to such securities warrants;

• the amount of securities warrants outstanding as of the most recent practicable date; and

• any other terms of such securities warrants.

Securities warrants will be issued in registered form only. The exercise price for securities warrants will be subject to adjustment in accordance with a prospectus supplement relating to the particular issue of securities warranties.

Each securities warrant will entitle the holder thereof to purchase such principal amount of debt securities or such number of shares of common stock, preferred stock, depositary shares or other securities at such exercise price as shall in each case be set forth in, or calculable from, a prospectus supplement relating to the securities warrants, which exercise price may be subject to adjustment upon the occurrence of certain events as set forth in such prospectus supplement. After the close of business on the expiration date, or such later date to which such expiration date may be extended by us, unexercised securities warrants will become void. The place or places where, and the manner in which, securities warrants may be exercised shall be specified in a prospectus supplement relating to such securities warrants.

22

Prior to the exercise of any securities warrants to purchase debt securities, common stock, preferred stock, depositary shares or other securities, holders of such securities warrants will not have any of the rights of holders of debt securities, common stock, preferred stock, depositary shares or other securities, as the case may be, purchasable upon such exercise, including the right to receive payments of principal of, premium, if any, or interest, if any, on the debt securities purchasable upon such exercise or to enforce covenants in any applicable indenture, or to receive payments of dividends, if any, on the common stock, preferred stock or depositary shares purchasable upon such exercise, or to exercise any applicable right to vote.

23

DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS

We may issue stock purchase contracts, including contracts obligating holders to purchase from us, and obligating us to sell to holders, a specified number of shares of common stock or other securities at a future date or dates, which we refer to in this prospectus as “stock purchase contracts.” The price per share of the securities and the number of shares of the securities may be fixed at the time the stock purchase contracts are issued or may be determined by reference to a specific formula set forth in the stock purchase contracts. The stock purchase contracts may be issued separately or as part of units consisting of a stock purchase contract and debt securities, preferred securities, warrants or debt obligations of third parties, including U.S. treasury securities, securing the holders’ obligations to purchase the securities under the stock purchase contracts, which we refer to herein as “stock purchase units.” The stock purchase contracts may require holders to secure their obligations under the stock purchase contracts in a specified manner. The stock purchase contracts also may require us to make periodic payments to the holders of the stock purchase units or vice versa, and those payments may be unsecured or refunded on some basis.

This summary of the terms of the stock purchase contracts and stock purchase units is not complete. A form of the applicable stock purchase contracts or stock purchase unit agreements will be filed with the Securities and Exchange Commission on a Current Report on Form 8-K prior to the closing of any offering of the applicable stock purchase contracts or stock purchase units, and you should read such documents for provisions that may be important to you. An accompanying prospectus supplement will describe the terms of the stock purchase contracts or stock purchase units and, if applicable, collateral or depositary arrangements relating to the stock purchase contracts or stock purchase units. Material United States federal income tax considerations applicable to the stock purchase units and the stock purchase contracts will also be discussed in the applicable prospectus supplement.

24

PLAN OF DISTRIBUTION

Any of the securities that may be offered pursuant to this prospectus may be sold in or outside the United States through underwriters or dealers, agents or directly to one or more purchasers, including our existing stockholders in a rights offering. The prospectus supplement relating to any offering of securities will include the following information:

• the terms of the offering;

• the names of any underwriters, dealers or agents;

• the name or names of any managing underwriter or underwriters;

• the purchase price of the securities from us;

• the net proceeds to us from the sale of the securities;

• any delayed delivery arrangements;

• any underwriting discounts, commissions and other items constituting underwriters’ compensation;

• any initial public offering price;

• any discounts or concessions allowed or reallowed or paid to dealers; and

• any commissions paid to agents.

Sale Through Underwriters or Dealers

If we use underwriters in the sale, the underwriters will acquire the securities for their own account. The underwriters may resell the securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Underwriters may offer securities to the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters. Unless we inform you otherwise in the prospectus supplement, the obligations of the underwriters to purchase the securities will be subject to certain conditions, and the underwriters will be obligated to purchase all the offered securities if they purchase any of them. The underwriters may change, from time to time, any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers.

During and after an offering through underwriters, the underwriters may purchase and sell the securities in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the offering. The underwriters may also impose a penalty bid, which means that selling concessions allowed to syndicate members or other broker-dealers for the offered securities sold for their account may be reclaimed by the syndicate if the offered securities are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the offered securities, which may be higher than the price that might otherwise prevail in the open market. If commenced, the underwriters may discontinue these activities at any time.

If we use dealers in the sale of securities, the securities will be sold directly to them as principals. They may then resell those securities to the public at varying prices determined by the dealers at the time of resale.

Direct Sales and Sales Through Agents

We may sell the securities directly. In this case, no underwriters or agents would be involved. We may sell securities upon the exercise of rights that we may issue to our securityholders. We may sell the securities directly to institutional investors or others who may be deemed to be underwriters within the meaning of the Securities Act with respect to any sale of those securities.

25

We may sell the securities through agents we designate from time to time. Unless we inform you otherwise in the prospectus supplement, any agent will agree to use its reasonable best efforts to solicit purchases for the period of its appointment.

Delayed Delivery Contracts

If we so indicate in the prospectus supplement, we may authorize agents, underwriters or dealers to solicit offers from certain types of institutions to purchase securities from us at the public offering price under delayed delivery contracts. These contracts would provide for payment and delivery on a specified date in the future. The contracts would be subject only to those conditions described in the prospectus supplement. The prospectus supplement will describe the commission payable for solicitation of those contracts.

General Information

We may have agreements with the agents, dealers and underwriters to indemnify them against certain civil liabilities, including liabilities under the Securities Act, or to contribute with respect to payments that the agents, dealers or underwriters may be required to make. Agents, dealers and underwriters may be customers of, engage in transactions with or perform services for us in the ordinary course of their business.

LEGAL MATTERS

The validity of securities will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Legal counsel to any underwriters may pass upon legal matters for such underwriters.

EXPERTS

The financial statements incorporated in this prospectus by reference to the Annual Report on Form 10-K of Hanover Compressor Company for the year ended December 31, 2002 and the financial statements incorporated in this prospectus by reference to the Special Financial Report on Form 10-K of Hanover Compression Limited Partnership for the year ended December 31, 2002 have been so incorporated in reliance on the reports (both of which contain an explanatory paragraph relating to their changing the methods of accounting for goodwill and other intangibles in 2002 and derivatives in 2001 and the restatements of the 2001 and 2000 financial statements for certain revenue recognition matters) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.

26

INDEX TO FINANCIAL STATEMENTS

	Page
I Audited Consolidated Financial Statements of Hanover Compressor Company
Years Ended December 31, 2002, 2001 and 2000
Report of Independent Accountants	F-2
Consolidated Balance Sheet	F-3
Consolidated Statement of Operations	F-4
Consolidated Statement of Comprehensive Income (Loss)	F-5
Consolidated Statement of Cash Flows	F-6
Consolidated Statement of Common Stockholders’ Equity	F-8
Notes to Consolidated Financial Statements	F-9
Selected Quarterly Financial Data (unaudited)	F-61
II Unaudited Condensed Consolidated Financial Statements of Hanover Compressor Company
Three and Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheet	F-62
Condensed Consolidated Statement of Operations	F-63
Condensed Consolidated Statement of Comprehensive Income (Loss)	F-64
Condensed Consolidated Statement of Cash Flows	F-65
Notes to Condensed Consolidated Financial Statements	F-66
III Valuation and Qualifying Accounts	F-91

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Hanover Compressor Company

In our opinion, the accompanying consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hanover Compressor Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 9 and 20 to the financial statements, the Company changed its method of accounting for goodwill and other intangibles in 2002 and derivatives in 2001, respectively. As discussed in Notes 22 and 23, the December 31, 2001 and 2000 consolidated financial statements have been restated for certain revenue recognition matters.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 26, 2003

F-2

HANOVER COMPRESSOR COMPANY

CONSOLIDATED BALANCE SHEET

	December 31,
	2002			2001
				Restated
				(See Notes 22 and 23)
ASSETS	(in thousands, except par value and share amounts)
Current assets:
Cash and cash equivalents	$	19,011		$	23,191
Accounts receivable, net		211,722			272,450
Inventory, net		166,004			215,655
Costs and estimated earnings in excess of billings on uncompleted contracts		57,346			59,099
Prepaid taxes		7,664			19,990
Assets held for sale		69,408			—
Other current assets		49,933			24,719
Total current assets		581,088			615,104
Property, plant and equipment, net		1,167,675			1,151,513
Goodwill, net		180,519			242,178
Intangible and other assets		74,058			78,653
Investments in non-consolidated affiliates		150,689			178,328
Total assets	$	2,154,029		$	2,265,776
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	33,741		$	5,553
Accounts payable, trade		72,637			119,077
Accrued liabilities		189,639			155,108
Advance billings		36,156			53,140
Liabilities held for sale		22,259			—
Billings on uncompleted contracts in excess of costs and estimated earnings		14,571			7,152
Total current liabilities		369,003			340,030
Long-term debt		521,203			504,260
Other liabilities		137,332			130,276
Deferred income taxes		112,472			165,492
Total liabilities		1,140,010			1,140,058
Commitments and contingencies (Note 19)
Minority interest		143			—
Mandatorily redeemable convertible preferred securities		86,250			86,250
Common stockholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 80,815,209 and 79,228,179 shares issued, respectively		81			79
Additional paid-in capital		841,657			828,939
Notes receivable—employee stockholders		—			(2,538	)
Deferred employee compensation – restricted stock grants		(2,285	)		—
Accumulated other comprehensive loss		(13,696	)		(6,557	)
Retained earnings		104,194			220,262
Treasury stock—253,115 and 75,739 common shares, at cost, respectively		(2,325	)		(717	)
Total common stockholders’ equity		927,626			1,039,468
Total liabilities and common stockholders’ equity	$	2,154,029		$	2,265,776

The accompanying notes are an integral part of these financial statements.

F-3

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

	Years Ended December 31,
	2002			2001			2000
				Restated			Restated
				(See Notes 22 and 23)
	(in thousands, except per share amounts)
Revenues:
Domestic rentals	$	328,600		$	269,679		$	172,517
International rentals		189,700			131,097			81,320
Parts, service and used equipment		223,845			214,872			113,526
Compressor and accessory fabrication		114,009			223,519			90,270
Production and processing equipment fabrication		149,656			184,040			79,121
Equity in income of non-consolidated affiliates		18,811			9,350			3,518
Gain on change in interest in non-consolidated affiliate		—			—			864
Other		4,189			8,403			5,688
		1,028,810			1,040,960			546,824
Expenses:
Domestic rentals		120,740			95,203			60,336
International rentals		57,579			45,795			27,656
Parts, service and used equipment		179,844			152,701			79,958
Compressor and accessory fabrication		99,446			188,122			76,754
Production and processing equipment fabrication		127,442			147,824			62,684
Selling, general and administrative		153,676			92,172			51,768
Foreign currency translation		16,753			6,658			—
Other		27,607			9,727			—
Depreciation and amortization		151,181			88,823			52,188
Goodwill impairment		52,103			—			—
Leasing expense		91,506			78,031			45,484
Interest expense		43,352			23,904			15,048
		1,121,229			928,960			471,876
Income (loss) from continuing operations before income taxes		(92,419	)		112,000			74,948
Provision for (benefit from) income taxes		(17,576	)		42,388			27,818
Income (loss) from continuing operations		(74,843	)		69,612			47,130
Income (loss) from discontinued operations, net of tax		(875	)		2,965			2,509
Loss from write down of discontinued operations, net of tax		(40,350	)		—			—
Income (loss) before cumulative effect of accounting change		(116,068	)		72,577			49,639
Cumulative effect of accounting change for derivative instruments, net of tax		—			(164	)		—
Net income (loss)	$	(116,068	)	$	72,413		$	49,639
Diluted net income (loss) per share:
Net income (loss)	$	(116,068	)	$	72,413		$	49,639
(Income) loss from discontinued operations, net of tax		41,225			(2,965	)		(2,509	)
Distributions on mandatorily redeemable convertible preferred securities, net of tax		—			4,142			—
Net income (loss) for purposes of computing diluted net income (loss) per share from continuing operations	$	(74,843	)	$	73,590		$	47,130
Basic earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.94	)	$	0.96		$	0.76
Income (loss) from discontinued operations		(0.52	)		0.04			0.04
Net income (loss)	$	(1.46	)	$	1.00		$	0.80
Diluted earnings (loss) per common share:
Income (loss) from continuing operations	$	(0.94	)	$	0.91		$	0.71
Income (loss) from discontinued operations		(0.52	)		0.03			0.04
Net income (loss)	$	(1.46	)	$	0.94		$	0.75
Weighted average common and equivalent shares outstanding:
Basic		79,500			72,355			61,831
Diluted		79,500			81,175			66,366

The accompanying notes are an integral part of these financial statements.

F-4

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
	2002			2001			2000
				Restated			Restated
				(See Notes 22 and 23)
	(in thousands)
Net income (loss)	$	(116,068	)	$	72,413		$	49,639
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		(8,866	)		(6,073	)		—
Foreign currency translation adjustment		1,727			(27	)		(146	)
Comprehensive income (loss)	$	(123,207	)	$	66,313		$	49,493

The accompanying notes are an integral part of these financial statements.

F-5

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

	Years Ended December 31,
	2002			2001			2000
				Restated			Restated
				(See Notes 22 and 23)
				(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(116,068	)	$	72,413		$	49,639
Adjustments:
Depreciation and amortization		151,181			88,823			52,188
Amortization of debt issuance costs and debt discount		121			831			1,050
(Income) loss from discontinued operations, net of tax		41,225			(2,965	)		(2,509	)
Bad debt expense		7,091			4,860			3,198
Gain on sale of property, plant and equipment		(7,769	)		(3,492	)		(10,421	)
Equity in income of non-consolidated affiliates, net of dividends received		(2,223	)		(9,350	)		(3,518	)
Loss (gain) on investments and charges for non-consolidated affiliates		15,950			4,629			(864	)
(Gain) loss on derivative instruments		(3,245	)		7,849			—
Provision for inventory impairment and reserves		13,853			2,336			—
Write down of notes receivable		8,454			—			—
Goodwill impairment		52,103			—			—
Restricted stock compensation expense		423			—			—
Pay-in-kind interest on Schlumberger note		17,163			4,285			—
Deferred income taxes		(19,041	)		30,218			27,882
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		89,457			(20,671	)		(82,767	)
Inventory		4,699			(41,186	)		(36,376	)
Costs and estimated earnings versus billings on uncompleted contracts		33,129			(32,640	)		(7,964	)
Accounts payable and other liabilities		(67,132	)		14,745			42,657
Advance billings		(8,394	)		20,647			(4,156	)
Other		(16,101	)		4,565			13,420
Net cash provided by continuing operations		194,876			145,897			41,459
Net cash provided by (used in) discontinued operations		841			6,877			(11,713	)
Net cash provided by operating activities		195,717			152,774			29,746
Cash flows from investing activities:
Capital expenditures		(250,170	)		(639,883	)		(274,858	)
Payments for deferred lease transaction costs		(1,568	)		(18,177	)		(4,547	)
Proceeds from sale of property, plant and equipment		69,685			590,763			410,915
Proceeds from sale of investment in non-consolidated affiliates		—			3,143			—
Cash used for business acquisitions, net		(10,440	)		(386,056	)		(162,355	)
Cash returned from non-consolidated affiliates		17,429			—			—
Cash used to acquire investments in and advances to unconsolidated affiliates		—			(11,865	)		(4,071	)
Net cash used in continuing operations		(175,064	)		(462,075	)		(34,916	)
Net cash used in discontinued operations		(18,639	)		(20,202	)		(32,565	)
Net cash used in investing activities		(193,703	)		(482,277	)		(67,481	)
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit facility		(500	)		54,500			40,400
Payments for debt issue costs		(644	)		(3,390	)		—
Issuance of common stock, net		—			83,850			59,400
Purchase of treasury stock		(1,608	)		—			—
Proceeds from warrant conversions and stock options exercised		6,661			2,280			3,608
Proceeds from employee stock purchase		277			—			—
Issuance of convertible senior notes, net		—			185,537			—
Repayment of other debt		(7,654	)		(15,571	)		(27,641	)
Proceeds from employee stockholder notes		120			62			1,876
Net cash provided by (used in) continuing operations		(3,348	)		307,268			77,643
Net cash used in discontinued operations		(884	)		(9	)		(54	)
Net cash provided by (used in) financing activities		(4,232	)		307,259			77,589
Effect of exchange rate changes on cash and equivalents		(1,962	)		(49	)		(126	)
Net increase (decrease) in cash and cash equivalents		(4,180	)		(22,293	)		39,728
Cash and cash equivalents at beginning of year		23,191			45,484			5,756
Cash and cash equivalents at end of year	$	19,011		$	23,191		$	45,484

F-6

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

	Years Ended December 31,
	2002			2001			2000
				Restated			Restated
				(See Notes 22 and 23)
	(in thousands)
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts	$	16,817		$	5,707		$	7,051
Income taxes paid (refunded), net	$	(4,212	)	$	1,723		$	1,639
Supplemental disclosure of noncash transactions:
Debt (paid) issued for property, plant and equipment	$	(4,352	)		—		$	12,922
Assets (received) sold in exchange for note receivable	$	258		$	(1,601	)	$	2,783
Common stock issued in exchange for notes receivable	$	274		$	1,069			—
Conversion of deferred stock option liability	$	253		$	1,529			—
Acquisitions of businesses:
Property, plant and equipment acquired	$	11,716		$	606,271		$	202,358
Other assets acquired, net of cash acquired	$	102,204		$	87,865		$	77,097
Investments in non-consolidated affiliates		—		$	140,081			—
Goodwill	$	5,162		$	115,131		$	91,560
Liabilities assumed	$	(72,209	)	$	(118,388	)	$	(63,057	)
Debt issued or assumed	$	(36,433	)	$	(155,462	)		—
Deferred taxes		—		$	(35,212	)	$	(9,029	)
Treasury and common stock issued		—		$	(254,230	)	$	(136,574	)

The accompanying notes are an integral part of these financial statements.

F-7

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS’ EQUITY

Years Ended December 31, 2002, 2001 and 2000

	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)			Treasury stock			Notes receivable-   employee stockholders			Deferred compensation- restricted stock grants			Retained earnings
	Shares	Amount
	(in thousands, except share data)
Balance at December 31, 1999 (Restated See Notes 22 and 23)	57,505,874	$	58	$	272,944		$	(311	)	$	(1,586	)	$	(3,387	)	$	—		$	98,210
Conversion of warrants	684,770		—		—			—			—			—			—			—
Exercise of stock options	994,572		1		3,607			—			—			—			—			—
Cumulative translation adjustment	—		—		—			(146	)		—			—			—			—
Issuance of common stock, net	2,000,000		2		59,398			—			—			—			—			—
Issuance of common stock for acquisitions	5,269,487		5		136,569			—			—			—			—			—
Issuance of 91,727 treasury shares at $35.98 per share	—		—		2,431			—			869			—			—			—
Repayment of employee stockholder notes	—		—		—			—			—			1,876			—			—
Income tax benefit from stock options exercised	—		—		8,813			—			—			—			—			—
Other	—		—		(25	)		—			—			(20	)		—			—
Net income	—		—		—			—			—			—			—			49,639
Balance at December 31, 2000 (Restated See Notes 22 and 23)	66,454,703	$	66	$	483,737		$	(457	)	$	(717	)	$	(1,531	)	$	—		$	147,849
Exercise of stock options	250,161		1		3,808			—			—			—			—			—
Cumulative translation adjustment	—		—		—			(27	)		—			—			—			—
Change in fair value of derivative financial instrument, net of tax	—		—		—			(6,073	)		—			—			—			—
Issuance of common stock, net	2,500,000		2		83,848			—			—			—			—			—
Issuance of common stock for acquisitions	9,980,540		10		254,220			—			—			—			—			—
Issuance of common stock to employees	42,775		—		1,069			—			—			(1,069	)		—			—
Repayment of employee stockholder notes	—		—		—			—			—			62			—			—
Income tax benefit from stock options exercised	—		—		1,618			—			—			—			—			—
Other	—		—		639			—			—			—			—			—
Net income	—		—		—			—			—			—			—			72,413
Balance at December 31, 2001 (Restated see Note 23)	79,228,179	$	79	$	828,939		$	(6,557	)	$	(717	)	$	(2,538	)	$	—		$	220,262
Exercise of stock options	1,422,850		2		6,912			—			—			—			—			—
Cumulative translation adjustment	—		—		—			1,727			—			—			—			—
Change in fair value of derivative financial instrument, net of tax	—		—		—			(8,866	)		—			—			—			—
Issuance of restricted stock grants	142,630		—		2,708			—			—			—			(2,285	)		—
Issuance of common stock to employees	21,550		—		551			—			—			(274	)		—			—
Purchase of 147,322 treasury shares at $8.96 per share	—		—		—			—			(1,320	)		—			—			—
Purchase of 30,054 treasury shares at $9.60 per share	—		—		—			—			(288	)		—			—			—
Repayment of employee stockholder notes	—		—		—			—			—			120			—			—
Income tax benefit from stock options exercised	—		—		2,547			—			—			—			—			—
Reserve for collectibility	—		—		—			—			—			2,692			—			—
Net loss	—		—		—			—			—			—			—			(116,068	)
Balance at December 31, 2002	80,815,209	$	81	$	841,657		$	(13,696	)	$	(2,325	)	$	—		$	(2,285	)	$	104,194

The accompanying notes are an integral part of these financial statements.

F-8

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000

1.    The Company, Business and Significant Accounting Policies

Hanover Compressor Company, through its indirect wholly owned subsidiary Hanover Compression Limited Partnership and its subsidiaries, (“Hanover”, “the Company”, or “We”) is a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for contract natural gas handling applications. We sell this equipment, and provide it on a rental, contract compression, maintenance and acquisition leaseback basis to natural gas production, processing and transportation companies. In conjunction with our maintenance business, we have developed a parts and service business that together can provide solutions to customers that own their own compression equipment, but want to outsource their operations. We also have compressor and oil and gas production equipment fabrication and provide gas processing and treating, gas measurement and oilfield power generation services, primarily to our domestic and international customers as a complement to our compression services. Founded in 1990, and a public company since 1997, our customers include both major and premier independent oil and gas producers and distributors, as well as national oil and gas companies.

Principles of Consolidation

The accompanying consolidated financial statements include Hanover and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated entities in which the Company owns more than a 20% interest and does not have a controlling interest are accounted for using the equity method. Investments in entities in which the company owns less than 20% are held at cost. Prior year amounts have been reclassified to present certain of our businesses as discontinued operations. (See Note 3.)

Use of Estimates in the Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates are reasonable.

The Company’s operations are influenced by many factors, including the global economy, international laws and currency exchange rates. Contractions in the more significant economies of the world could have a substantial negative impact on the rate of the Company’s growth and its profitability. Acts of war or terrorism could influence these areas of risk and the Company’s operations. Doing business in foreign locations subjects the Company to various risks and considerations typical to foreign enterprises including, but not limited to, economic and political conditions in the United States and abroad, currency exchange rates, tax laws and other laws and trade restrictions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

F-9

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Revenue Recognition

Revenue from equipment rentals is recorded when earned over the period of rental and maintenance contracts which generally range from one month to five years. Parts, service and used equipment revenue is recorded as products are delivered and title is transferred or services are performed for the customer.

Compressor, production and processing equipment fabrication revenue is recognized using the percentage-of-completion method. The Company estimates percentage-of-completion for compressor and processing equipment fabrication on a direct labor hour-to-total- labor-hour basis. Production equipment fabrication percentage-of-completion is estimated using the cost-to-total cost basis. The average duration of these projects is typically between four to six months.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, advances to non-consolidated affiliates and notes receivable. The Company believes that the credit risk in temporary cash investments that the Company has with financial institutions is minimal. Trade accounts and notes receivable are due from companies of varying size engaged principally in oil and gas activities throughout the world. The Company reviews the financial condition of customers prior to extending credit and generally does not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry standards. The Company considers this credit risk to be limited due to these companies’ financial resources, the nature of products and the services it provides them and the terms of its rental contracts. Trade accounts receivable is recorded net of estimated doubtful accounts of approximately $5,162,000 and $6,300,000 at December 31, 2002 and 2001, respectively.

Inventory

Inventory consists of parts used for fabrication or maintenance of natural gas compression equipment and facilities, processing and production equipment, and also includes compression units and production equipment that are held for sale. Inventory is stated at the lower of cost or market using the average-cost method.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives as follows:

Compression equipment and facilities	4 to 30 years
Buildings	30 years
Transportation, shop equipment and other	3 to 12 years

Major improvements that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred. When property, plant and equipment is sold, retired or otherwise disposed of, the cost, net of accumulated depreciation is recorded in parts, service and used equipment expenses. Sales proceeds are recorded in parts, service and used equipment revenues.

F-10

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Interest is capitalized in connection with the compression equipment and facilities that are constructed for the Company’s use in its rental operations until such equipment is complete. The capitalized interest is recorded as part of the assets to which it relates and is amortized over the asset’s estimated useful life.

After a review of the estimated economic lives of our compression fleet, on July 1, 2001 we changed our estimate of the useful life of certain compression equipment to range from 15 to 30 years instead of a uniform 15-year depreciable life. Our new estimated lives are based upon our experience, maintenance program and the different types of compressors presently in our rental fleet. The Company believes its new estimate reflects the economic useful lives of the compressors more accurately than a uniform useful life applied to all compressors regardless of their age or performance characteristics. The effect of this change in estimate on 2002 and 2001 was a decrease in depreciation expense of approximately $14,387,000 and $5,000,000 and an increase in net income of approximately $8,632,000 ($0.11 per share) and $3,100,000 ($0.04 per share), respectively.

Computer software

Certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software. Costs related to the preliminary project stage, data conversion and the post-implementation/operation stage of an internal-use computer software development project are expensed as incurred.

Long-Lived Assets

The Company reviews for the impairment of long-lived assets, including property, plant and equipment, intangibles and investments in non-consolidated affiliates whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the assets carrying value as compared to its estimated fair market value.

Goodwill and Intangibles

The excess of cost over net assets of acquired businesses is recorded as goodwill. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. Prior to adoption of SFAS 142 on January 1, 2002, the Company amortized goodwill on a straight-line basis over 15 or 20 years commencing on the dates of the respective acquisitions except for goodwill related to business acquisitions after June 30, 2001. Accumulated amortization was $14,312,000 and $18,365,000 at December 31, 2002 and 2001, respectively. Amortization of goodwill totaled $ -0-, $10,101,000 and $4,442,000 in 2002, 2001 and 2000, respectively. (See Note 9.) Identifiable intangibles are amortized over the assets’ estimated useful lives.

F-11

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Sale and Leaseback Transactions

The Company from time to time enters into sale and leaseback transactions of compression equipment with special purpose entities. Sale and leaseback transactions of compression equipment are evaluated for lease classification in accordance with SFAS No. 13 “Accounting for Leases.” The special purpose entities are not consolidated by the Company when the owners of the special purposes entities have made a substantial residual equity investment of at least three percent that is at risk during the entire term of the lease.

Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments that would change the tax law or rates. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized.

Foreign Currency Translation

The financial statements of subsidiaries outside the U.S., except those located in Latin America and highly inflationary economies, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts are included in accumulated other comprehensive income. For subsidiaries located in Latin America and highly inflationary economies, translation gains and losses are included in net income (loss).

Earnings Per Common Share

Basic earnings (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, warrants to purchase common stock, convertible senior notes and mandatorily redeemable convertible preferred securities, unless their effect would be anti-dilutive.

F-12

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The table below indicates the potential common shares issuable which were included in computing the dilutive potential common shares used in dilutive earnings (loss) per common share:

	Years Ended December 31,
	2002	2001	2000
	(in thousands)
Weighted average common shares outstanding—used in basic earnings (loss) per common share	79,500	72,355	61,831
Net dilutive potential common shares issuable:
On exercise of options	**	3,991	4,258
On exercise of warrants	**	4	277
On conversion of mandatorily redeemable preferred securities	**	4,825	**
On conversion of convertible senior notes	**	**	**
Weighted average common shares and dilutive potential common shares— used in dilutive earnings (loss) per common share	79,500	81,175	66,366

** Excluded from diluted earnings per common share as the effect would have been antidilutive.

The table below indicates the potential common shares issuable which were excluded from diluted potential common shares as their effect would be anti-dilutive.

	Years Ended December 31,
	2002	2001	2000
	(in thousands)
Net dilutive potential common shares issuable:
On exercise of options and restricted stock	2,442	—	—
On exercise of warrants	4	—	—
On conversion of mandatorily redeemable convertible preferred securities	4,825	—	4,825
On conversion of convertible senior notes	4,370	3,399	—

F-13

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Stock-Based Compensation

In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) the Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25 (“APB” 25), “Accounting for Stock Issued to Employees.” The following proforma net income and earnings (loss) per share data illustrates the effect on net income (loss) and net income per share if the fair value method had been applied to all outstanding and unvested stock options in each period.

	Years ended December 31,
	2002			2001			2000
	(in thousands)
Net income (loss) as reported	$	(116,068	)	$	72,413		$	49,639
Add back: Restricted stock grant expense, net of tax		275			—			—
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax		(2,753	)		(3,804	)		(4,598	)
Proforma net income (loss)	$	(118,546	)	$	68,609		$	45,041
Earnings (loss) per share:
Basic as reported	$	(1.46	)	$	1.00		$	0.80
Basic proforma	$	(1.49	)	$	0.95		$	0.73
Diluted as reported	$	(1.46	)	$	0.94		$	0.75
Diluted proforma	$	(1.49	)	$	0.90		$	0.68

Comprehensive Income

Components of comprehensive income (loss) are net income and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income consists of the foreign currency translation adjustment and changes in the fair value of derivative financial instruments, net of tax. At December 31, 2002, the Company’s accumulated other comprehensive loss included $1,243,000 foreign currency translation gain and $14,939,000 loss on fair value of derivative instruments, net of tax. At December 31, 2001, the Company’s accumulated other comprehensive loss included $484,000 foreign currency translation loss and $6,073,000 loss on fair value of derivative instruments, net of tax.

Financial Instruments

The Company utilizes derivative financial instruments to minimize the risks and/or costs associated with financial and global operating activities by managing its exposure to interest rate fluctuation on a portion of its leasing obligations. The Company does not utilize derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133, as amended by SFAS 137 and SFAS 138, requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives

F-14

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. The Company adopted SFAS 133 beginning January 1, 2001. (See Note 20.)

Reclassifications

Certain amounts in the prior years’ financial statements have been reclassified to conform to the 2002 financial statement classification. These reclassifications have no impact on net income.

2.    Business Combinations

Acquisitions were accounted for under the purchase method of accounting. Results of operations of companies acquired are included from the date of acquisition. The Company allocates the cost of the acquired business to the assets acquired and the liabilities assumed based upon fair value estimates thereof. These estimates are revised during the allocation period as necessary when information regarding contingencies becomes available to redefine and requantify assets acquired and liabilities assumed. The allocation period varies for each acquisition but does not exceed one year. To the extent contingencies are resolved or settled during the allocation period, such items are included in the revised purchase price allocation. After the allocation period, the effect of changes in such contingencies is included in results of operations in the periods the adjustments are determined.

Year Ended December 31, 2002

In July 2002, we increased our ownership of Belleli Energy S.r.l. (“Belleli”) to 40.3% from 20.3% by converting a $4,000,000 loan, together with the accrued interest thereon, to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9,410,000 loan, together with the accrued interest thereon, to the other principal owner for additional equity ownership and began consolidating the results of Belleli’s operations.

The following table summarizes the estimated values of the assets acquired and liabilities assumed as of the acquisition date for the Belleli acquisition (in thousands):

	Belleli November 2002
Current assets	$	86,799
Property, plant and equipment		11,836
Intangible assets		22,930
Goodwill		3,641
Total assets acquired		125,206
Short-term debt		(36,433	)
Current liabilities		(58,367	)
Other liabilities		(11,428	)
Total liabilities assumed		(106,228	)
Net assets acquired	$	18,978

F-15

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The Company is in the process of completing its valuation of Belleli’s intangible assets. In connection with its increase in ownership in November 2002, the Company agreed to give the other principal owner the right to buy the Company’s interest in Belleli. This right to buy the Company’s interest expires on June 30, 2003. On July 1, 2003, the Company will have the right to purchase the other principal owner’s interest. During 2002, the Company also purchased certain operating assets of Belleli for approximately $22,400,000 from a bankruptcy estate and leased these assets to Belleli for approximately $1,200,000 per year, for seven years, for use in its operations.

In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC (“Gates”) for approximately $14,400,000 and had loaned approximately $6,000,000 to Gates prior to our acquisition. Gates is a developer and owner of a forty-six megawatt cycle peaking power facility in Fresno County, California. This investment is accounted for as a consolidated subsidiary. This investment has been classified as an asset held for sale and its operating results are reported in income (loss) from discontinued operations. (See Note 3.)

In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC (“Panoche”) for approximately $6,800,000 and had loaned approximately $5,000,000 to Panoche prior to the acquisition of our interest. Panoche is a developer and owner of a forty-nine megawatt cycle peaking power facility in Fresno County, California which is under contract with California Department of Water Resources. This investment is accounted under the equity method of accounting. This investment has been classified as an asset held for sale and the equity income from this non-consolidated subsidiary is reported in income (loss) from discontinued operations. (See Note 3.)

In July 2002, we acquired certain assets of Voyager Compression Services, LLC for approximately $2,500,000 in cash.

Year Ended December 31, 2001

In August 2001, we acquired 100% of the issued and outstanding shares of the Production Operators Corporation’s natural gas compression business, ownership interests in certain joint venture projects in South America, and related assets (“POI”) from Schlumberger for $761,000,000 in cash, Hanover common stock and indebtedness, subject to certain post-closing adjustments pursuant to the purchase agreement (the “POI Acquisition”) which have resulted in an increase in the purchase price to approximately $778,000,000 due to an increase in net assets acquired. Under the terms of the definitive agreement, Schlumberger received approximately $270,000,000 in cash (excluding the amounts paid for the increase in net assets), $150,000,000 in a long-term subordinated note and approximately 8,708,000 Hanover common shares, or approximately 11% of the outstanding shares of Hanover common stock, which are required to be held by Schlumberger for at least three years following the closing date. The ultimate number of shares issued under the purchase agreement was determined based on the nominal value of $283,000,000 divided by the 30-day average closing price of Hanover common stock as defined under the agreement and subject to a collar of $41.50 and $32.50. The estimated fair value of the stock issued was $212,468,000, based on the market value of the shares at the time the number of shares issued was determined reduced by an estimated 20% discount due to the restrictions on the stock’s marketability.

Additionally, as part of the purchase agreement, the Company is required to make a payment of up to $58,000,000 due upon the completion of a financing of the PIGAP II South American joint venture

F-16

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

(“PIGAP”, see Note 19) acquired by the Company. Because the joint venture failed to execute the financing on or before December 31, 2002, Hanover had the right to put our interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by Hanover to the joint venture. In January 2003, we exercised our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover’s interest in the PIGAP II joint venture is subject to certain consents. We are currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003.

The purchase price was a negotiated amount between the Company and Schlumberger and the Company expects the acquisition to be accretive to earnings in future periods. The Company believes the purchase price represents the fair market value of the POI business based on its assets, customer base, reputation, market position (domestic and international) and potential for long-term growth. The Company incurred approximately $14,975,000 in expenses in connection with the acquisition. The POI Acquisition was accounted for as a purchase and is included in our financial statements commencing on September 1, 2001.

As of December 31, 2002 the Company has recorded approximately $70,592,000 in goodwill, of which none will be deductible for tax purposes, related to the POI acquisition which will not be amortized in accordance with the transition provisions of SFAS 142 (See Note 9). In addition, as of December 31, 2002, the Company recorded $9,810,000 in estimated value of identifiable intangible assets which $8,200,000 will be amortized over a 24 month weighted average life and $1,600,000 is included in our basis of the PIGAP joint venture and relates to the option to put the joint venture back to Schlumberger. The purchase price is subject to a contingent payment by Hanover to Schlumberger based on the realization of certain tax benefits by the Company over the next 15 years.

In June 2001, we acquired the assets of J&R International for approximately $3,700,000 in cash and 17,598 shares of the Company’s common stock valued at approximately $654,000.

In April 2001, we acquired certain assets of Power Machinery, Inc. for approximately $2,569,000 in cash and 108,625 shares of the Company’s common stock valued at approximately $3,853,000.

In March 2001, we purchased OEC Compression Corporation (“OEC”) in an all-stock transaction for approximately $101,849,000, including the assumption and payment of approximately $64,594,000 of OEC indebtedness. We paid an aggregate of approximately 1,145,706 shares of Hanover common stock to stockholders of OEC. The acquisition was accounted for under the purchase method of accounting and is included in our financial statements commencing in April 2001.

During 2002 and 2001, the Company completed other acquisitions which were not significant either individually or in the aggregate.

F-17

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The following table summarizes the estimated values of the assets acquired and liabilities assumed as of the acquisition dates for the OEC and POI acquisitions (in thousands):

	POI August 2001			OEC March 2001
Current assets	$	80,091		$	4,451
Property, plant and equipment		487,880			114,841
Intangible assets		8,210			—
Goodwill		67,476			—
Investments in non-consolidated affiliates		140,081			—
Total assets acquired		783,738			119,292
Current liabilities		(47,667	)		(3,114	)
Other liabilities		(20,978	)		(15,531	)
Long-term debt		—			(62,057	)
Total liabilities assumed		(68,645	)		(80,702	)
Net assets acquired	$	715,093		$	38,590

Year Ended December 31, 2000

In October 2000, the Company purchased the common stock of Servicios TIPSA S.A. for approximately $7,750,000 in cash and a $7,750,000 note payable. The note payable was repaid in January 2001.

In September 2000, the Company purchased the Dresser-Rand Company’s compression services division (“DR”) for $177,000,000 including approximately $1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000 of the purchase price was paid in cash with the balance being paid through the issuance to Ingersoll-Rand of 2,919,681 shares of the Company’s newly issued restricted common stock. The estimated value of the stock issued was approximately $80,539,000, based upon quoted market price for the Company’s common stock reduced by a discount due to the restriction on the stock’s marketability. The purchase price is subject to certain post-closing adjustments pursuant to the acquisition agreement which have resulted in approximately a $21,400,000 increase in the purchase price due to increases in the net assets acquired. In connection with the acquisition, the Company has agreed to purchase under normal business terms $25,000,000 worth of products, goods and services from Dresser-Rand Company over a three-year period beginning December 2001.

In September 2000, the Company acquired the common stock of Gulf Coast Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of the Company’s treasury stock valued at $300,000.

In July 2000, the Company completed its acquisition of PAMCO Services International’s natural gas compressor assets for approximately $45,210,000 in cash and a $12,922,000 note payable due on April 10, 2001. The note is payable periodically as idle horsepower is contracted. Approximately $10,599,000 of the note payable was repaid in 2000. In connection with the acquisition, the Company agreed to purchase under normal business terms specified levels of equipment over a three-year period beginning October 2000.

F-18

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In June 2000, the Company purchased common stock of Applied Process Solutions, Inc. (“APSI”) for 2,303,294 shares of the Company’s common stock and assumption of $16,030,000 of APSI’s outstanding debt. The estimated value of the stock issued was approximately $54,816,000, based upon quoted market price for the Company’s common stock reduced by a discount due to the restriction on the stock’s marketability. The assumed debt has been repaid.

In July 2000, the Company purchased the assets of Rino Equipment, Inc. and K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares of the Company’s treasury stock valued at $2,000,000.

In July 2000, the Company purchased the common stock of Compression Components Corporation for approximately $7,972,000 in cash and 27,405 shares of the Company’s treasury stock valued at $1,000,000.

In March 2000, the Company purchased the common stock of Southern Maintenance Services, Inc. (“SMS”) for approximately $1,500,000 in cash, 46,512 shares of the Company’s common stock valued at $1,000,000 and $1,000,000 in notes payable that mature on March 1, 2003.

Pro Forma Information

The pro forma information set forth below assumes the Belleli, POI, and OEC acquisitions are accounted for had the purchases occurred at the beginning of 2001. The remaining acquisitions were not considered material for pro forma purposes. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated at that time (in thousands, except per share amounts):

	Years Ended December 31,
	2002			2001
	(unaudited)			(unaudited)
Revenue	$	1,108,990		$	1,242,216
Net income (loss)		(116,262	)		69,260
Earnings (loss) per common share—basic		(1.46	)		0.88
Earnings (loss) per common share—diluted		(1.46	)		0.84

3.    Discontinued Operations

During the fourth quarter of 2002, Hanover’s Board of Directors approved management’s plan to dispose of the Company’s non-oilfield power generation projects, which were part of its domestic rental business, and certain used equipment businesses, which were part of the Company’s parts and service business. These disposals meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”). SFAS 144 specifically requires that such amounts must represent a component of a business comprised of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. These businesses have been reflected as discontinued operations in the Company’s Consolidated Statement of Operations for the year ended December 31, 2002 and prior period financial statements have been adjusted to reflect the impact of

F-19

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

these discontinued operations. These assets are expected to be sold within one year of December 31, 2002 and the assets and liabilities are reflected as held-for-sale on the Company’s Consolidated Balance Sheet.

During the fourth quarter of 2002, Hanover recognized a pre-tax charge to discontinued operations of approximately $52,282,000 ($36,467,000 after tax) for the estimated loss in fair-value from carrying value expected to be realized at the time of disposal. This amount includes a $19,010,000 pre-tax impairment of goodwill. During the second quarter of 2002, Hanover recognized a pre-tax write-down of $6,000,000 ($3,883,000 after tax) for certain turbines related to the non-oilfield power generation business which has also been reflected as discontinued operations.

        Summary of operating results of the discontinued operations (in thousands):

	Years Ended December 31,
	2002			2001		2000
				Restated		Restated
				(See Notes 22 and 23)
Revenues and other:
Domestic rentals	$	2,870		$	—	$	—
Parts, service and used equipment		20,197			29,168		15,840
Equity in income of non-consolidated affiliates		405			—		—
Other		52			569		122
		23,524			29,737		15,962
Expenses:
Domestic rentals		363			—		—
Parts, service and used equipment		13,485			14,136		8,336
Selling, general and administrative		8,346			8,808		2,864
Depreciation and amortization		1,672			1,737		694
Interest expense		481			9		6
Other		1,309			—		—
		25,656			24,690		11,900
Income (loss) from discontinued operations before income taxes		(2,132	)		5,047		4,062
Provision for (benefit from) income taxes		(1,257	)		2,082		1,553
Income (loss) from discontinued operations	$	(875	)	$	2,965	$	2,509

F-20

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Summary balance sheet data for discontinued operations as of December 31, 2002 (in thousands):

	Used Equipment		Non-Oilfield Power Generation		Total
Current assets	$	20,099	$	13,666	$	33,765
Property plant and equipment		858		28,103		28,961
Non-current assets		—		6,682		6,682
Assets held for sale		20,957		48,451		69,408
Current liabilities		—		3,257		3,257
Non-current liabilities		—		19,002		19,002
Liabilities held for sale		—		22,259		22,259
Net assets held for sale	$	20,957	$	26,192	$	47,149

Goodwill associated with discontinued operations was $21,173,000 at December 31, 2001 net of accumulated amortization of $2,163,000. The goodwill was written off in connection with the write down of these operations to market value during the fourth quarter of 2002. (See Note 9.)

4.    Inventory

Inventory consisted of the following amounts (in thousands):

	December 31,
	2002		2001
			Restated
Parts and supplies	$	114,833	$	146,877
Work in progress		37,790		46,091
Finished goods		13,381		22,687
	$	166,004	$	215,655

During the year ended December 31, 2002, we recorded approximately $13,853,000 in inventory write downs and reserves for parts inventory which was either obsolete, excess or carried at a price above market value. As of December 31, 2002 and 2001, we had inventory reserves of $14,211,000 and $2,101,000, respectively.

F-21

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

5.    Compressor and Production Equipment Fabrication Contracts

Costs, estimated earnings and billings on uncompleted contracts consisted of the following (in thousands):

	December 31,
	2002			2001
Costs incurred on uncompleted contracts	$	234,670		$	129,952
Estimated earnings		21,073			25,654
		255,743			155,606
Less—billings to date		(212,968	)		(103,659	)
	$	42,775		$	51,947

The increase in the costs and billings on uncompleted contracts was due to the consolidation of Belleli, when the Company increased its ownership to 51%. (See Note 2.)

Presented in the accompanying financial statements as follows (in thousands):

	December 31,
	2002			2001
Costs and estimated earnings in excess of billings on uncompleted contracts	$	57,346		$	59,099
Billings on uncompleted contracts in excess of costs and estimated earnings		(14,571	)		(7,152	)
	$	42,775		$	51,947

6.    Property, plant and equipment

Property, plant and equipment consisted of the following (in thousands):

	December 31,
	2002			2001
				Restated
Compression equipment, facilities and other rental assets	$	1,261,241		$	1,171,282
Land and buildings		86,732			55,570
Transportation and shop equipment		75,443			61,848
Other		31,888			23,848
		1,455,304			1,312,548
Accumulated depreciation		(287,629	)		(161,035	)
	$	1,167,675		$	1,151,513

Depreciation expense was $139,427,000, $73,609,000 and $46,155,000 in 2002, 2001 and 2000, respectively. Depreciation expense for 2002 includes $34,485,000 for the impairment of certain idle units of the Company’s compression fleet that are being retired and the acceleration of depreciation of

F-22

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

certain plants and facilities expected to be sold or abandoned. Assets under construction of $116,427,000 and $98,538,000 are included in compression equipment, facilities and other rental assets at December 31, 2002 and 2001, respectively. The Company capitalized $2,470,000, $2,750,000 and $1,823,000 of interest related to construction in process during 2002, 2001, and 2000, respectively.

In August 2001, the Company exercised its purchase option under the 1998 operating lease (see Note 12) for $200,000,000. The depreciable basis of the compressors purchased has been reduced by the deferred gain of approximately $41,993,000 which was recorded at inception of the lease and previously included as an other liability on the Company’s Consolidated Balance Sheet.

7.    Intangible and Other Assets

Intangible and other assets consisted of the following (in thousands):

	December 31,
	2002			2001
				Restated
Deferred debt issuance and leasing transactions costs	$	44,396		$	42,183
Notes receivable		12,769			25,562
Intangibles		25,642			7,210
Other		12,943			13,619
		95,750			88,574
Accumulated amortization		(21,692	)		(9,921	)
	$	74,058		$	78,653

Amortization of intangible and other assets totaled $11,754,000, $5,113,000 and $1,591,000 in 2002, 2001 and 2000, respectively.

Certain notes receivable result from an agreement entered into in 2001 to advance funds to a third party in connection with various power generation development projects. Under the agreement, the Company agreed to advance working capital of up to $12,500,000. At December 31, 2001, $7,500,000 was funded under the agreement. The notes bear interest at the prime lending rate that ranged from 5.5% to 8%, are secured by equipment and mature on April 30, 2002. The remaining notes receivable result primarily from customers for sales of equipment or advances to other parties in the ordinary course of business. During 2002, the Company converted certain of the notes into equity ownership positions in the non-oilfield power generation projects and reclassified certain of these notes to assets held for sale (See Notes 2 and 3) and also recorded a charge in other expense to reserve for certain employee notes. (See Note 26.)

See Note 18 for related party notes receivable.

F-23

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

8.    Investments in Non-Consolidated Affiliates

Investments in affiliates that are not controlled by the Company but where the Company has the ability to exercise significant influence over the operations are accounted for using the equity method. The Company’s share of net income or losses of these affiliates is reflected in the Consolidated Statement of Operations as Equity in income of non-consolidated affiliates. The Company’s primary equity method investments are comprised of entities that own, fabricate, operate, service and maintain compression and other related facilities. The Company’s equity method investments totaled approximately $148,824,000 and $169,222,000 at December 31, 2002 and 2001, respectively.

The Company’s ownership interest and location of each equity investee at December 31, 2002 is as follows:

	Ownership Interest		Location	Type of Business
Pigap II	30.0	%	Venezuela	Gas Compression Plant
El Furrial	33.3	%	Venezuela	Gas Compression Plant
Simco/Harwat Consortium	35.5	%	Venezuela	Gas Compression Plant
Hanover Measurement Services Company LP	50.2	%	United States	Monitoring Services
Servi Compressores, CA	50.0	%	Venezuela	Compression Service Provider
Collicutt Mechanical Services Ltd.	24.1	%	Canada	Compression Service Provider

Summarized balance sheet information for investees accounted for by the equity method follows (on a 100% basis, in thousands):

	December 31,
	2002		2001
Current assets	$	165,193	$	330,542
Non-current assets		591,283		620,951
Current liabilities		98,697		113,255
Debt payable		173,108		620,884
Owners’ equity		484,671		217,354

Summarized earnings information for these entities for the years ended December 31, 2002, 2001 and 2000 follows (on a 100% basis, in thousands):

	Years ended December 31,
	2002		2001(1)		2000
Revenues	$	333,150	$	201,581	$	86,059
Operating income		87,231		46,097		17,290
Pretax income		77,121		25,417		10,500

(1) Amounts for the joint ventures acquired in connection with the POI business acquisition are included from September 1, 2001.

The most significant investments are the joint ventures (Pigap II, El Furrial and Simco/Harwat) acquired in connection with the POI acquisition completed in August 2001. At December 31, 2002 and

F-24

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

2001, these ventures account for approximately $141,008,000 and $152,443,000 of the equity investments, respectively, and generated equity in earnings for 2002 and 2001 of approximately $21,680,000 and $8,053,000. See Note 24 for subsequent event regarding the Company’s interest in the PIGAP II joint venture. In connection with its investment in El Furrial and Simco/Harwat, the Company guaranteed its portion of the debt in the joint venture related to these projects. At December 31, 2002 the Company has guaranteed approximately $43,512,000 and $13,188,000, respectively, of the debt which is on these joint venture books. These amounts are not recorded on the Company’s books.

The financial data for 2000 includes the Company’s 20% interest in Meter Acquisition Company LP and its 60% interest in Hanover/Enron Venezuela Ltd. The Company sold Meter Acquisition Company LP in 2001 for cash of approximately $3,143,000. The Company purchased the remaining 40% interest in Hanover/Enron Venezuela Ltd. during 2001 for $3,050,000.

The financial data for 2001 includes Belleli, a fabrication company based in Italy. Effective January 2001, the Company agreed to provide certain facilitation services to Belleli and provide Belleli with project financing including necessary guarantees, bonding capacity and other collateral on an individual project basis. Under the arrangement, Belleli was required to present each project to the Company which could be approved at the Company’s sole discretion. The Company received $1,723,000 from Belleli in 2001 for its facilitation services. Under a separate agreement with Belleli, the Company has issued letters of credit on Belleli’s behalf totaling approximately $16,736,000 at December 31, 2002. In November 2002, the Company acquired an additional interest in Belleli bringing the total ownership to 51%. The increase in ownership requires that the Company record its investment in Belleli using the consolidation method of accounting rather than equity method accounting. The results of Belleli’s operations subsequent to the acquisition of the controlling interest, and the assets and liabilities of Belleli as of December 31, 2002, have been consolidated in the financial statements of the Company. (See Note 2.)

During 2000, Collicutt Hanover Services Ltd. (“Collicutt”) sold additional shares that reduced the Company’s ownership percentage to approximately 24%, accordingly, a change in interest gain of $864,000 was recorded in the Consolidated Statement of Operations. In 2002, due to permanent decline in the market value of its investment in Collicut, the Company recorded to Other expense an impairment of $5,000,000.

In the normal course of business, Hanover engages in purchase and sale transactions with Collicut Hanover Services Ltd., which is owned 24% by Hanover. During the period ended December 31, 2002 and 2001, Hanover had sales to this related party of $943,000 and $2,579,000, respectively; and purchases of $19,633,000 and $19,197,000, respectively. At December 31, 2002, Hanover had a net payable to this related party of $111,700.

In the normal course of business, Hanover engages in purchase and sale transactions with Servi-Compressores, which is owned 50% by Hanover. During the period ended December 31, 2002 and 2001, Hanover had sales to this related party of $406,000 and $849,000, respectively and made purchases of $1,859,000 during 2001. At December 31, 2001, Hanover had a net receivable from this related party of $464,000.

F-25

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The Company also holds interests in companies in which it does not exercise significant influence over the operations. These investments are accounted for using the cost method. Cost method investments totaled approximately $1,865,000 and $9,106,000 at December 31, 2002 and 2001, respectively. During 2002, the Company determined that certain of its cost method investments were permanently impaired and therefore recorded in Other expense impairment charges amounting to $7,100,000.

In May 2000, the Company acquired common stock of Aurion Technologies, Inc. (“Aurion”), a technology company formed to develop remote monitoring and data collection services for the compression industry, for $2,511,000 in cash. In 2001, the Company purchased additional shares for approximately $1,250,000, advanced $2,700,000 to Aurion and had an accounts receivable of $1,103,000. Aurion filed for bankruptcy protection in March 2002, and accordingly, the Company recorded in Other expense approximately $5,013,000 during the year ended December 31, 2001 to impair its investment and the unrecoverable amount of the advances. During 2002, the Company recorded an additional charge related to Aurion of $3,850,000.

9.    Goodwill

In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142, amortization of goodwill over an estimated useful life is discontinued. Instead, goodwill will be reviewed for impairment annually or whenever events indicate impairment may have occurred. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. SFAS 142 was effective for Hanover on January 1, 2002. The adoption of SFAS 142 has had an impact on future financial statements, due to the discontinuation of goodwill amortization expense.

The transition provisions of SFAS 142 required the Company to identify its reporting units and perform an initial impairment assessment of the goodwill attributable to each reporting unit as of January 1, 2002. The Company performed its initial impairment assessment and determined that the Company’s reporting units are the same as its business segments and that no impairment existed as of January 1, 2002. However, due to a downturn in its business and changes in the business environment in which the Company operates, the Company completed an additional impairment analysis as of June 30, 2002. As a result of the test performed as of June 30, 2002, the Company recorded an estimated $47,500,000 impairment of goodwill attributable to our production and processing equipment fabrication business unit. The second step of goodwill impairment test required the Company allocate the fair value of the reporting unit to the production and processing equipment businesses’ assets. The Company performed the second step of the goodwill impairment test in the third quarter of 2002 and determined that no adjustment to the impairment, recorded in the second quarter, was required. The fair value of reporting units was estimated using a combination of the expected present value of future cash flows and the market approach. In the fourth quarter of 2002, the Company recorded a $4,603,000 goodwill impairment related to our pump division which we expect to sell in 2003.

F-26

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The table below presents the change in the net carrying amount of goodwill for the year ended December 31, 2002 (in thousands):

	December 31, 2001		Acquisitions		Purchase Adjustment and Other Adjustments			Goodwill Written Off Related to Discontinued Operations			Goodwill Impairment			December 31, 2002
Domestic rentals	$	89,696	$	—	$	4,959		$	—		$	—		$	94,655
International rentals		33,984		—		675			—			—			34,659
Parts, service and used equipment		51,822		—		(121	)		(19,010	)		—			32,691
Compressor and accessory fabrication		19,176		—		—			—			(4,603	)		14,573
Production and processing equipment		47,500		3,941		—			—			(47,500	)		3,941
Total	$	242,178	$	3,941	$	5,513		$	(19,010	)	$	(52,103	)	$	180,519

Hanover’s adjusted net income and earnings per share, adjusted to exclude goodwill amortization expense, for the twelve months ended December 31, 2001 and 2000 are as follows (in thousands, except per share data):

	2001		2000
	Restated		Restated
Net income	$	72,413	$	49,639
Goodwill amortization, net of tax		8,846		4,280
Adjusted net income	$	81,259	$	53,919
Basic earnings per share, as reported	$	1.00	$	0.80
Goodwill amortization, net of tax		0.12		0.07
Adjusted basic earnings per share	$	1.12	$	0.87
Diluted earnings per share, as reported	$	0.94	$	0.75
Goodwill amortization, net of tax		0.11		0.06
Adjusted diluted earnings per share	$	1.05	$	0.81

10.    Accrued Liabilities

Accrued liabilities are comprised of the following (in thousands):

	December 31,
	2002		2001
Accrued salaries, bonuses and other employee benefits	$	21,024	$	14,843
Accrued income and other taxes		24,095		15,536
Accrued leasing expense		23,465		21,990
Additional purchase price for DR (Note 2)		—		1,798
Additional purchase price for POI (Note 2)		60,740		58,000
Accrued other		60,315		42,941
	$	189,639	$	155,108

F-27

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In December 2002, the Company announced a plan to consolidate certain of its manufacturing facilities and to terminate approximately 500 employees worldwide during 2003. In connection with the planned severance, the Company recorded an expense to selling, general and administrative expenses for $2,720,000 for estimated termination benefits and the amount is included in accrued other liabilities. As of December 31, 2002, no amounts had been paid out for the planned severance.

11.    Debt

Debt consisted of the following (in thousands):

	December 31,
	2002			2001
Bank credit facility	$	156,500		$	157,000
4.75% convertible senior notes due 2008		192,000			192,000
Schlumberger note, interest at 12.5%		167,096			150,000
Real estate mortgage, interest at 3.7%, collateralized by certain land and buildings, payable through September 2004		3,250			3,583
Belleli—factored receivables		15,970			—
Belleli—revolving credit facility		11,964			—
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		8,164			7,230
		554,944			509,813
Less—current maturities		(33,741	)		(5,553	)
Long-term debt	$	521,203		$	504,260

The Company’s bank credit facility as amended and restated to date provides for a $350,000,000 revolving credit facility that matures on November 30, 2004. Advances bear interest at (a) the greater of the administrative agent’s prime rate, the federal funds effective rate, or the base CD rate, or (b) a eurodollar rate, plus, in each case, a specified margin (3.2% and 3.9% weighted average interest rate at December 31, 2002 and 2001, respectively). A commitment fee based upon a percentage of the average available commitment is payable quarterly to the lenders participating in the facility. The fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on the bank credit facility, as of December 31, 2002, we had $52,895,000 in letters of credit outstanding under the Company’s bank credit facility. The credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Giving effect to the covenant limitations in the Company’s bank credit agreement, as amended to date, the availability under the bank credit facility at December 31, 2002 was approximately $120,000,000. The credit facility also limits the payment of cash dividends on the Company’s common stock to 25% of net income for the period from December 2001 through November 30, 2004. In addition, the Company had $3,775,000 in letters of credit outstanding under other letters of credit facilities.

In February 2003, the Company executed an amendment to its bank credit facility and the compression equipment leases that we entered into in 1999 and 2000. The amendment, which was effective December 31, 2002, modifies certain financial covenants to allow the Company greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity

F-28

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in the Company’s interest cost as a result of the amendment will depend on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover’s foreign subsidiaries. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million to the lenders under these agreements. We also agreed to a restriction on our capital expenditures during 2003, which under the agreement cannot exceed $200,000,000.

In March 2001, the Company issued $192,000,000 principal amount of 4.75% convertible senior notes due 2008 (see Note 15).

In connection with the POI Acquisition on August 31, 2001, the Company issued a $150,000,000 subordinated acquisition note to Schlumberger, which matures December 15, 2005. Interest on the note accrues and is payable-in-kind at the rate of 8.5% annually for the first six months after issuance and periodically increases in increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under the note, interest will accrue at a rate of 2% above the then applicable rate. The note is subordinated to all of the Company’s indebtedness other than indebtedness to fund future acquisitions. In the event that the Company completes an offering of equity securities, the Company is required to apply the proceeds of the offering to repay amounts outstanding under the note as long as no default exists or would exist under our other indebtedness as a result of such payment.

In November 2002, the Company increased its ownership in Bellel to 51%. (See Note 2). Belleli has financed its growth through the factoring of its receivables. Such factoring is typically short term in nature and at December 31, 2002 bore interest at a weighted average rate of 3.3%. In addition, Belleli has revolving credit facilities of $11,964,000 at December 31, 2002 at a weighted average rate of 3.0% which expire in 2003 and are secured by letters of credit issued by Hanover of $6,717,000.

Maturities of long-term debt at December 31, 2002 are (in thousands): 2003—$33,741; 2004—$160,194; 2005—$167,734; 2006—$549; 2007—$186; and $192,540 thereafter.

12.    Leasing Transactions

The Company has entered into five transactions involving the sale of equipment by Hanover and its subsidiaries to special purpose entities, which in turn lease the equipment back to us. At the time, these transactions had a number of advantages over other sources of capital then available to the Company. The sale and leaseback transactions (1) enabled Hanover to affordably extend the duration of its financing arrangements, (2) reduced Hanover’s cost of capital and (3) provided access to a source of capital other than traditional bank financing.

Prior to the first sale and leaseback transaction in 1998, the Company financed growth in compression assets by drawing down on our bank credit facility with a commercial bank. While highly flexible and well priced, the line of credit represented a short term funding strategy to finance long-term

F-29

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

assets. Sale and leaseback transactions can reduce refinancing risk by extending the duration of our capital commitments.

Sale and leaseback transactions also provided capital to the Company at a lower cost compared to other sources then available to us. Lenders to the special purpose entities do not require as high a rate of interest because their capital risk is mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. This had the effect of reducing our leasing expense relative to an unsecured borrowing rate. The Company will continue to evaluate sale-leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise.

The Company believes that the sale and leaseback transactions represent a source of capital in addition to the commercial bank financing traditionally utilized by the Company. This diversification of the Company’s capital sources has broadened its access to capital to allow it to expand operations.

In August 2001 and in connection with the POI Acquisition, we completed two sale and leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease for $200,000,000. Under one transaction, we received $309,300,000 proceeds from the sale of compression equipment. Under the second transaction, we received $257,750,000 from the sale of additional compression equipment. Both transactions are recorded as a sale and leaseback of the equipment and are recorded as operating leases. Under the first transaction, the equipment was sold and leased back by us for a seven year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12,750,000 in addition to quarterly rental payments of approximately $215,000. Under the second transaction, the equipment was sold and leased back by us for a ten year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10,938,000 in addition to quarterly rental payments of approximately $188,000. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through December 31, 2002, we incurred transaction costs of approximately $18,607,000 related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

In October 2000, we completed a $172,589,000 sale and leaseback of compression equipment. In March 2000, we entered into a separate $200,000,000 sale and leaseback of compression equipment. Under the March agreement, we received proceeds of $100,000,000 from the sale of compression equipment at the first closing in March 2000 and in August 2000, we completed the second half of the equipment lease and received an additional $100,000,000 for the sale of additional compression equipment. In June 1999 and in July 1998, we completed two other separate $200,000,000 sale and leaseback transactions of compression equipment. Under the lease agreements, the equipment was sold and leased back by us for a five year term and will be utilized by us in the normal course of our business. We have options to repurchase the equipment under the 2000 and 1999 leases as defined under certain conditions by the lease agreements. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7,470,000 in transactions costs for the leases entered into in 2000 and 1999 which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions.

F-30

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The following table summarizes the proceeds, net book value of equipment sold, deferred gain on equipment sale, the residual guarantee (maximum exposure to loss) and the lease termination date for equipment leases (in thousands of dollars):

Lease	Sale Proceeds		Net Book Value		Deferred Gain		Residual Value Guarantee		Lease Termination Date
June 1999	$	200,000	$	166,356	$	33,644	$	166,000	June 2004
March and August 2000		200,000		166,922		33,078		166,000	March 2005
October 2000		172,589		155,692		16,897		142,299	October 2005
August 2001		309,300		306,034		3,266		232,000	September 2008
August 2001		257,750		235,877		21,873		175,000	September 2011

These transactions are recorded as a sale and leaseback of the equipment and the leases are treated as operating leases. We made guarantees under the lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms which are based on negotiation between Hanover and third party lessors, were supported by equipment appraisals and analysis. We believe that the market value of the equipment at the end of the lease will exceed the guaranteed residual values due to our predictive and preventive maintenance programs, routine overhaul practices and the expected demand for compression equipment in the future. We review the value of the equipment whenever events or circumstances indicate that a decrease in market value may have occurred as a result of foreseeable obsolescence or a decrease in market demand. If the fair value of the equipment was less than the guaranteed residual value, we would accrue additional lease expense for the amount that would be payable upon termination of the lease. All gains on the sale of the equipment are deferred until the end of the respective lease terms. Should we not exercise our purchase options under the lease agreements, the deferred gains will be recognized to the extent they exceed any final rent payments and any other payments required under the lease agreements.

As a result of the lease transactions, we incurred approximately $94,751,000, $70,435,000, and $45,484,000 in lease expense for the years ended December 31, 2002, 2001 and 2000, respectively. The following future minimum lease payments are due under the leasing arrangements exclusive of any final rent payments or purchase option payments (in thousands): 2003—$83,703; 2004—$76,418; 2005—$62,332; 2006—$48,987; 2007—$48,987; and $100,537 thereafter.

In connection with the compression equipment leases entered into in August 2001, the Company was obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes which are registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the time line required by the agreements, the Company was required to pay additional lease expense in the amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased the Company’s lease expense by $5,067,000 during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

F-31

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In February 2003, we executed an amendment to our bank credit facility and the compression equipment leases entered into in 1999 and 2000. (See Note 11.)

13.    Income Taxes

The components of income (loss) from continuing operations before income taxes were as follows (in thousands):

	Years ended December 31,
	2002			2001		2000
				Restated		Restated
Domestic	$	(115,733	)	$	62,128	$	54,684
Foreign		23,314			49,872		20,264
	$	(92,419	)	$	112,000	$	74,948

The provision for (benefit from) income taxes from continuing operations consisted of the following (in thousands):

	Years ended December 31,
	2002			2001		2000
				Restated		Restated
Current tax provision (benefit):
Federal	$	(9,551	)	$	1,136	$	2,048
State		(227	)		560		449
Foreign		11,243			10,474		(2,561	)
Total current		1,465			12,170		(64	)
Deferred tax provision (benefit):
Federal		(10,738	)		25,085		16,284
State
Foreign		(8,303	)		5,133		11,598
Total deferred		(19,041	)		30,218		27,882
Total provision for (benefit from) income taxes	$	(17,576	)	$	42,388	$	27,818

F-32

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The provision for (benefit from) income taxes for 2002, 2001 and 2000 resulted in effective tax rates of 19.0%, 37.8% and 37.1%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows (in thousands):

	Years ended December 31,
	2002			2001			2000
				Restated			Restated
Federal income tax at statutory rate	$	(32,347	)	$	39,200		$	26,231
State income taxes, net of federal benefit		(148	)		364			291
Foreign effective rate/U.S. rate differential (including foreign valuation allowances)		(8,020	)		(2,775	)		(64	)
U.S. impact of foreign operations, net of federal benefit		7,894			3,458			1,305
Nondeductible goodwill		10,117			1,118			875
U.S. valuation allowance		2,609			—			—
Other, net		2,319			1,023			(820	)
	$	(17,576	)	$	42,388		$	27,818

Deferred tax assets (liabilities) are comprised of the following (in thousands):

	December 31,
	2002			2001
				Restated
Deferred tax assets:
Net operating losses	$	157,928		$	64,787
Investment in joint ventures		11,208			—
Inventory		7,097			3,039
Alternative minimum tax credit carryforward		5,351			15,152
Derivative instruments		9,656			6,452
Accrued liabilities		13,478			3,980
Intangibles		15,297			316
Other		9,003			9,387
Gross deferred tax assets		229,018			103,113
Valuation allowance		(23,371	)		—
		205,647			103,113
Deferred tax liabilities:
Property, plant and equipment		(313,483	)		(263,108	)
Other		(4,636	)		(5,497	)
Gross deferred tax liabilities		(318,119	)		(268,605	)
	$	(112,472	)	$	(165,492	)

The Company has U.S. net operating loss carryforwards at December 31, 2002 of approximately $381,000,000 expiring in 2006 to 2022. At December 2002, the Company has an alternative minimum tax credit carryforward of approximately $5,351,000 that does not expire. At December 31, 2002, the Company has approximately $70,200,000 of net operating loss carryforwards in certain non-U.S.

F-33

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

jurisdictions. Of these, approximately $1,400,000 have no expiration date, and the remaining $68,800,000 will expire in future years through 2011. A valuation allowance has been provided, primarily for net operating loss carryforwards that are not expected to be utilized. The valuation allowance increased by $20,762,000 due to current year losses in non-U.S. tax jurisdictions with short net operating loss carryforward periods, including Argentina and Venezuela.

In 2001, the Company recorded approximately $35,212,000 of additional deferred income tax liability resulting from the 2001 acquisition transactions. (See Note 2.)

The Company has not recorded a deferred income tax liability for additional income taxes that would result from the distribution of earnings of its foreign subsidiaries if they were actually repatriated. The Company intends to reinvest the undistributed earnings of its foreign subsidiaries indefinitely.

14.    Mandatorily Redeemable Convertible Preferred Securities

In December 1999, the Company issued $86,250,000 of unsecured Mandatorily Redeemable Convertible Preferred Securities (the “Convertible Preferred Securities”) through Hanover Compressor Capital Trust, a Delaware business trust and wholly-owned finance subsidiary of the Company. The Convertible Preferred Securities have a liquidation amount of $50 per unit. The Convertible Preferred Securities mature in 30 years but the Company may redeem them partially or in total any time on or after December 20, 2002. The Convertible Preferred Securities also provide for annual cash distributions at the rate of 7.25%, payable quarterly in arrears; however, payments may be deferred up to 20 quarters subject to certain restrictions. The Company recorded approximately $6,253,000, during 2002, 2001 and 2000, for distributions related to Convertible Preferred Securities, which are included as a component of interest expense in the accompanying consolidated statement of operations. Each Convertible Preferred Security is convertible into 2.7972 shares of Hanover common stock, subject to certain conditions. The Company has fully and unconditionally guaranteed the Convertible Preferred Securities. The Company incurred approximately $3,587,000 in transaction costs that are included in other assets, and recorded $121,000, $120,000 and $116,000 of amortization for December 31, 2002, 2001 and 2000, respectively. The transaction costs are being amortized over the term of the Convertible Preferred Securities. The fair value of the Convertible Preferred Securities is approximately $62,963,000 at December 31, 2002.

15.    Common Stockholders’ Equity

Convertible Senior Notes Offering

In March 2001, the Company issued $192,000,000 principal amount of 4.75% convertible senior notes due 2008. The notes mature on March 15, 2008 and are subject to call beginning on March 15, 2004. The notes are convertible into shares of the Company’s common stock at a conversion price of approximately $43.94 per share. In addition, the Company may decrease the conversion price by any amount for any period of time, subject to approval by the Board of Directors and within the terms of the indenture. The Company received approximately $185,537,000 of proceeds from the sale, net of underwriting and offering costs. The fair value of the convertible senior notes is approximately $153,696,000 at December 31, 2002.

F-34

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Stock Offerings

In March 2001, the Company completed a public offering of 2,500,000 newly issued shares of the Company’s common stock. The Company realized approximately $83,850,000 of proceeds from the offering, net of underwriting and offering costs.

In May 2000, the Company completed a private placement of 2,000,000 newly issued shares of common stock to an institutional investor for cash of $59,400,000, net of offering costs.

Stock Split

In June 2000, the Company completed a 2-for-1 stock split effected in the form of a 100% stock dividend. All common stock, additional paid-in capital and earnings per common share information have been restated for all periods presented to reflect this stock split. In addition, the Board of Directors approved an increase of authorized shares of common stock to 200,000,000.

Notes Receivable-Employee Stockholders

Under various stock purchase plans, the Company’s employees were eligible to purchase shares of Hanover stock at fair market value in exchange for cash and/or notes receivable. The notes are collateralized by the common stock and the general credit of the employee, bear interest at a prime rate, and are generally payable on demand or at the end of a four-year period. The notes were recorded as a reduction of common stockholders’ equity. Due to the decline in the price of the Company’s stock which secured a portion of the notes, during 2002, the Company recorded a reserve for these notes receivable.

Other

As of December 31, 2002, warrants to purchase approximately 4,000 shares of common stock at $.005 per share were outstanding. The warrants expire in August 2005.

See Note 2 for a description of other common stock transactions.

16.    Stock Options

The Company has employee stock option plans that provide for the granting of options to purchase common shares. The options are generally issued with an exercise price equal to the fair market value on the date of grant and are exercisable over a ten-year period. Options granted typically vest over a three to four year period. No compensation expense related to stock options was recorded in 2002, 2001 and 2000.

In April 2002, the Company granted 151,048 restricted shares of our common stock to certain employees as part of an incentive compensation plan. The restricted stock grants vest equally over four years. As of December 31, 2002, 142,630 restricted shares were outstanding under the plan. We will recognize compensation expense equal to the fair value of the stock at the date of grant over the vesting period related to these grants. During 2002, we recognized $423,000 in compensation expense related to these grants.

F-35

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In June 2000, the Company purchased APSI, which had existing stock option programs in place. The Company converted the outstanding APSI stock options into the Company’s stock options as of the purchase date at a conversion ratio equal to the exchange ratio under the merger agreement. As a result, 127,813 options were converted at a weighted-average per share exercise price of approximately $12.88. Approximately 60,307 of the options vested on the date of closing of the APSI acquisition with the remaining options vesting at varying dates through 2003.

The following is a summary of stock option activity for the years ended December 31, 2002, 2001 and 2000:

	Shares		Weighted average price per share
Options outstanding, December 31, 1999	8,797,004		$	6.24
Options granted	—			—
APSI acquisition	127,813			12.88
Options canceled	(11,562	)		9.78
Options exercised	(994,572	)		3.68
Options outstanding, December 31, 2000	7,918,683			6.63
Options granted	43,575			25.00
Options canceled	(47,622	)		12.48
Options exercised	(250,161	)		9.12
Options outstanding, December 31, 2001.	7,664,475			6.62
Options granted	1,497,706			13.35
Options canceled	(261,323	)		10.29
Options exercised	(1,422,850	)		4.69
Options outstanding, December 31, 2002.	7,478,008			8.21

The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2002:

	Options outstanding				Options exercisable
Range of exercise prices	Shares	Weighted average remaining life in years	Weighted average exercise price		Shares	Weighted average exercise price
$0.00-2.50	2,086,918	2.4	$	2.25	2,086,918	$	2.25
$2.51-5.00	506,387	.8		2.94	506,387		2.94
$5.01-7.50	142,724	3.2		5.84	142,724		5.84
$7.51-10.00	3,192,051	5.0		9.77	2,741,051		9.75
$10.01-12.50	296,213	6.5		12.17	250,713		12.50
$12.51-15.00	970,005	8.6		14.51	118,723		14.50
$15.01-17.50	175,000	9.3		17.29	—		—
$17.51-20.00	14,000	9.3		18.43	—		—
$20.01-22.50	30,145	2.2		20.09	—		—
$22.51-25.00	64,565	8.6		25.00	6,911		25.00
	7,478,008				5,853,427

F-36

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The weighted-average fair value at date of grant for options where the exercise price equals the market price of the stock on the grant date was $13.35 and $25.00 per option during 2002 and 2001, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company did not grant any stock options in 2000. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:

	2002		2001		2000
Expected life	6 years		6 years		N/A
Interest rate	4.4	%	4.0	%	N/A
Volatility	39.3	%	35.4	%	N/A
Dividend yield	0	%	0	%	N/A

See Note 1 for stock based compensation proforma impact on net income.

17.    Benefit Plans

The Company’s 401(k) retirement plan provides for optional employee contributions up to the IRS limitation and discretionary employer matching contributions. The Company recorded matching contributions of $1,472,000, $1,062,000, and $594,000 during the years ended December 31, 2002, 2001 and 2000, respectively.

18.    Related Party and Certain Other Transactions

Transactions with GKH Entities

The Company and GKH Partners, L.P. (“GKH”) are parties to a stockholders agreement that provides, among other things, for GKH Investments, L.P.’s rights of visitation and inspection and the Company’s obligation to provide Rule 144A information to prospective transferees of the Common Stock.

GKH and other stockholders (collectively, the “Holders”) who, as of December 31, 2002, together beneficially own approximately 11% of the outstanding Common Stock, are, together with the Company, parties to a Third Amended Registration Rights Agreement dated December 5, 1995 (the “GKH Rights Agreement”). The GKH Rights Agreement generally provides that if the Company proposes to register shares of its capital stock or any other securities under the Securities Act of 1933, then upon the request of those Holders owning in the aggregate at least 2.5% of the Common Stock (the “Registrable Securities”) then held by all of the Holders, the Company will use its reasonable best efforts to cause the Registrable Securities so requested by the Holders to be included in the applicable registration statement, subject to underwriters’ cutbacks. The Company is required to pay all

F-37

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

registration expenses in connection with registrations of Registrable Securities effected pursuant to the GKH Rights Agreement.

William S. Goldberg, who was at the time a Managing Director of GKH Partners, acted as Chief Financial Officer of the Company during 2001 and into 2002 and served as Vice Chairman of the Board beginning in February 2002. Mr. Goldberg resigned as Chief Financial Officer in February 2002 and resigned as Vice Chairman of the Board and as a member of the Board in August 2002. Mr. Goldberg did not receive cash remuneration from the Company. The Company did reimburse GKH Partners for certain travel and related expenses incurred by Mr. Goldberg in connection with his efforts on the Company’s behalf.

GKH has advised the Company that it is in the process of dissolving and “winding up” its affairs. On November 12, 2002, GKH informed the Company that GKH has advised its limited partners that it is extending the wind-up process of the partnership for an additional twelve months from January 25, 2003 until January 25, 2004. On December 3, 2002, GKH, as nominee for GKH Private Limited, and GKH Investments, L.P. made a partial distribution of 10,000,000 shares out of a total of 18,274,795 shares held by GKH to its limited and general partners. As part of the wind-up process, GKH may liquidate or distribute substantially all of its assets, including the remaining shares of the Common Stock owned by GKH, to its partners.

In August 2001, Hanover paid a $4,650,000 fee to GKH as payment for services rendered in connection with Hanover’s acquisition of POI and related assets. Pursuant to an agreement with GKH which provides for compensation to GKH for services, Hanover paid a management fee of $45,000 per month from November 2001 until terminated February 2002.

Hanover leases certain compression equipment to an affiliate of Cockrell Oil and Gas, LP, which was owned 50% by GKH until January 2001. The lease is on a month-to-month basis. For the years ended 2001 and 2000, approximately $76,000 and $228,540 respectively, was billed under the lease.

Transactions with Schlumberger Entities

In August 2001, the Company purchased Production Operators Corporation and related assets (the “POI Acquisition”) from the Schlumberger Companies (as defined below). Schlumberger Limited (Schlumberger Limited and the Schlumberger Companies, collectively are referred to as “Schlumberger”) owns, directly or indirectly, all of the equity of the Schlumberger Companies. Pursuant to the Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31, 2001 (the “Schlumberger Rights Agreement”), between Schlumberger Technology Company, Camco International Inc., Schlumberger Surenco, S.A., Schlumberger Oilfield Holdings Limited, Operational Services, Inc. (collectively, the “Schlumberger Companies”) and Hanover, Hanover granted to each of the Schlumberger Companies certain registration rights in connection with shares of the Common Stock received by the Schlumberger Companies as consideration in the POI acquisition (the “Hanover Stock”). The registration rights granted to the Schlumberger Companies include (i) the right, subject to certain restrictions, to register the Hanover Stock in any registration of securities initiated by Hanover within the period of time beginning on the third anniversary of the date of the Schlumberger Rights Agreement and ending on the tenth anniversary of the date of the Schlumberger Rights Agreement (such period of time, the “Registration Period”), and (ii) the right, subject to certain restrictions, to demand up to five registrations of the Hanover Stock within the Registration Period. Hanover is

F-38

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

required to pay all registration expenses in connection with registrations of Hanover Stock pursuant to the Schlumberger Rights Agreement. For a period of three years from the date of the Schlumberger Rights Agreement, the Schlumberger Companies are prohibited from, directly or indirectly, selling or contracting to sell any of the Hanover Stock. The Schlumberger Rights Agreement also provides that none of the Schlumberger Companies shall, without Hanover’s written consent, (i) acquire or propose to acquire, directly or indirectly, greater than twenty-five percent (25%) of the shares of Hanover common stock, (ii) make any public announcement with respect to, or submit a proposal for, any extraordinary transaction involving Hanover, (iii) form or join in any group with respect to the matters set forth in (i) above, or (iv) enter into discussions or arrangements with any third party with respect to the matters set forth in (i) above.

Schlumberger has the right under the POI purchase agreement, so long as Schlumberger owns at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. In August 2001, Schlumberger designated Mr. René Huck, a Vice President of Schlumberger Ltd., as a nominee to serve on our Board of Directors. Schlumberger has advised the Company that it will not designate a nominee for 2003 and thus Mr. Huck will not stand for re-election. For the years ended December 31, 2002, 2001 and 2000, Hanover generated revenues of approximately $6,034,000, $1,379,000 and $918,000 in business dealings with Schlumberger. In addition, Hanover made purchases of equipment and services of approximately $7,599,000 from Schlumberger during 2002.

As part of the purchase agreement entered into with respect to the POI Acquisition, the Company was required to make a payment of up to $58,000,000 plus interest from the proceeds of and due upon the completion of a financing of PIGAP II, a South American joint venture acquired by Hanover from Schlumberger. (See Note 8.) Because the joint venture failed to execute the financing on or before December 31, 2002, the Company had the right to put its interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by the Company to the joint venture. In January 2003, the Company exercised its right to put its interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of the Company’s interest in the joint venture back to Schlumberger is subject to receipt of necessary consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties agreed to postpone the closing date of the transfer to no later than May 31, 2003.

In connection with the POI Acquisition, the Company issued a $150,000,000 subordinated acquisition note to Schlumberger, which matures December 15, 2005. Interest on the subordinated acquisition note accrues and is payable-in-kind at the rate of 8.5% annually for the first six months after issuance and periodically increases in increments of 1% to 2% per annum to a maximum interest rate 42 months after issuance of 15.5%. In the event of an event of default under the subordinated acquisition note, interest will accrue at a rate of 2% above the then applicable rate. The subordinated acquisition note is subordinated to all of the Company’s indebtedness other than certain indebtedness to fund future acquisitions. In the event that the Company completes an offering of equity securities, the Company is required to apply the proceeds of the offering to repay amounts outstanding under the subordinated acquisition note as long as no default exists or would exist under the Company’s other indebtedness as a result of such payment.

F-39

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In August 2001, the Company entered into a five-year strategic alliance with Schlumberger intended to result in the active support of Schlumberger in fulfilling certain of our business objectives. The principal components of the strategic alliance include (1) establishing the Company as Schlumberger’s most favored supplier of compression, natural gas treatment and gas processing equipment worldwide, (2) Schlumberger’s coordination and cooperation in further developing the Company’s international business by placing Hanover personnel in Schlumberger’s offices in six top international markets and (3) providing the Company with access to consulting advice and technical assistance in enhancing its field automation capabilities.

Other Related Party Transactions

In January 2002, Hanover advanced cash of $100,000 to Robert O. Pierce, Senior Vice President – Manufacturing and Procurement, in return for a promissory note. The note bore interest at 4.0%, matured on September 30, 2002, and was unsecured. On September 18, 2002, the Board of Directors approved the purchase of 30,054 shares of Hanover common stock from Mr. Pierce at $9.60 per share for a total of $288,500. The price per share was determined by reference to the closing price quoted on the New York Stock Exchange on September 18, 2002. The Board of Directors determined to purchase the shares from Mr. Pierce because it was necessary for him to sell shares to repay his loan with the Company as well as another outstanding loan. The loans matured during a blackout period under our insider trading policy and therefore Mr. Pierce could not sell shares of Hanover stock in the open market to repay the loans. Mr. Pierce’s loan from the Company was repaid in full in September 2002.

During 2001, the Company sold equipment totaling approximately $12,004,000 to an affiliate of Enron Capital and Trade Resources Corp. During 2001, the Company learned that Enron had sold its investment in the Company’s stock and thus is no longer a related party to the Company.

In exchange for notes, Hanover has loaned approximately $8,922,000 to employees, some of who were subject to margin calls, which together with accrued interest were outstanding as of December 31, 2002. In December 2002, Hanover’s Board of Directors eliminated the practice of extending loans to employees and executive officers and there are no loans outstanding with any current executive officer of the Company. Due to the decline in Hanover’s stock price and other collectibility concerns, the Company has recorded a charge in other expense to reserve $6,021,000 for non-executive officer loans.

Ted Collins, Jr., a Director of the Company owns 100% of Azalea Partners, which in turn owns 13% of Energy Transfer Group, LLC (“ETG”). The Company owns a 10% interest in ETG and ETG owns a 1% interest in Energy Transfer Hanover Ventures, LP, (“Energy Ventures”) a subsidiary of the Company. The Company advanced working capital to ETG in 2002, for certain costs incurred by ETG for the performance of services relating to Energy Ventures’ power generation business. During the fiscal year ended December 31, 2002, the largest aggregate amount advanced under this arrangement was $400,000. The advances do not bear interest. At December 31, 2002, the Company had $400,000 in advances outstanding to ETG. In 2002, ETG billed the Company $1,899,000 for services rendered to reimburse ETG for expenses incurred on behalf of Energy Ventures during the year. In 2002, the Company recorded sales of approximately $470,000 related to equipment leases and parts sales to ETG.

F-40

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

In connection with the restatements announced by the Company in 2002, certain officers and directors have been named as defendants in putative stockholder class actions, stockholder derivative actions and have been involved with the investigation being conducted by the Staff of the Securities and Exchange Commission. Pursuant to the indemnification provisions of the Company’s articles of incorporation and bylaws, the Company has advanced legal fees to certain employees, officers and directors involved in these proceedings. In this connection, expenses incurred on behalf of indemnified officers and directors during 2002 total $999,000. Of this amount $392,000 was incurred on behalf of a former officer and director, William S. Goldberg; $375,000 was incurred on behalf of former officers Michael J. McGhan, Charles D. Erwin and Joe C. Bradford; $149,000 was incurred on behalf of directors Ted Collins, Jr., Robert R. Furgason, René Huck, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, who were serving during 2001; and $83,000 was incurred on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon T. Hall.

Transactions with Former Executive Officers

Michael J. McGhan. Mr. McGhan served as Chief Executive Officer and President of the Company since October 1991 and served as a director of the Company since March 1992. Mr. McGhan also served as an officer and director of certain Hanover subsidiaries during his tenure. Mr. McGhan resigned from all positions held with the Company on August 1, 2002. In 2001, the Company advanced cash of $2,200,000 to Mr. McGhan, in return for promissory notes. The notes bear interest at 4.88%, mature on April 11, 2006, and are collateralized by personal real estate and Hanover common stock with full recourse. 411,914 shares of Hanover Common Stock owned by Mr. McGhan are held secured as collateral for this $2,200,000 loan. In January 2002, the Company advanced additional cash of $400,000 to Mr. McGhan in return for a promissory note. The note bore interest at 4.0% and was repaid in full in September 2002. Set forth below is information concerning the indebtedness of Mr. McGhan to Hanover as of December 31, 2002, 2001, and 2000.

Year	Aggregate Note Principal Amount Outstanding at Period End		Largest Note Principal Amount Outstanding during each Period		Weighted Average Rate of Interest at Period End
2002	$	2,200,000	$	2,600,000	4.88	%
2001	$	2,200,000	$	2,200,000	4.88	%
2000	$	—	$	—	—

On July 29, 2002, the Company purchased 147,322 shares of the Common Stock from Mr. McGhan for $8.96 per share for a total of $1,320,000. The price per share was determined by reference to the closing price quoted on the New York Stock Exchange on July 29, 2002. The Board of Directors determined to purchase the shares from Mr. McGhan because he was subject to a margin call during a blackout period under the Hanover insider trading policy, and therefore, could not sell such shares to the public to cover the margin call without being in violation of the policy.

On August 1, 2002, the Company entered into a Separation Agreement with Mr. McGhan. The agreement sets forth a mutual agreement to sever the relationships between Mr. McGhan and Hanover, including the employment relationships of Mr. McGhan with Hanover and its affiliates. In the agreement, the parties also documented their understandings with respect to: (i) the posting of

F-41

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

additional collateral by Mr. McGhan to secure repayment of loans owed by Mr. McGhan to Hanover; and (ii) certain waivers and releases by Mr. McGhan. In the agreement, Mr. McGhan made certain representations as to the status of the outstanding loans payable by Mr. McGhan to Hanover, the documentation for the loans and the enforceability of his obligations under the loan documents. The loans were not modified and must be repaid in accordance with their original terms. In addition, the agreement provided that Mr. McGhan may exercise his vested stock options pursuant to the post-termination exercise periods set forth in the applicable plan. Since the date of the agreement, Mr. McGhan has exercised all such vested stock options and the net shares from such exercise have been posted as collateral for his outstanding indebtedness to the Company. In addition, Mr. McGhan agreed, among other things, not to compete with Hanover and not to solicit Hanover employees or customers under terms described in the agreement for a period of twenty-four months after the effective date of the agreement. In consideration for this non-compete/non-solicitation agreement, Hanover agreed to pay Mr. McGhan $33,333 per month for a period of eighteen months after the effective date of the agreement.

Charles D. Erwin. Mr. Erwin served as Chief Operating Officer of the Company since April 2001 and served as Senior Vice President—Sales and Marketing since May 2000. Mr. Erwin resigned from these positions on August 2, 2002. In 2000, the Company advanced $824,087 to Mr. Erwin in return for a promissory note. In 2002 and 2001, according to the terms of the original note, the Company recorded compensation expense and forgave $207,382 and $145,118 of such indebtedness (which included $42,565 and $62,709 of accrued interest), respectively. The balance of the loan was repaid in full by Mr. Erwin in December 2002. Set forth below is information concerning the indebtedness of Mr. Erwin to Hanover as of December 31, 2001, 2001 and 2000: 

Year	Aggregate Note Principal Amount Outstanding at Period End		Largest Note Principal Amount Outstanding during each Period		Weighted Average Rate of Interest at Period End
2002	$	—	$	631,800	4.3	%
2001	$	631,800	$	769,148	4.8	%
2000	$	769,148	$	824,087	9.5	%

On August 2, 2002, the Company entered into a Separation Agreement with Mr. Erwin. The agreement sets forth a mutual agreement to sever the relationships between Mr. Erwin and Hanover, including the employment relationships of Mr. Erwin with Hanover and its affiliates. In the agreement, the parties also documented their understandings with respect to: (i) the posting of additional collateral by Mr. Erwin to secure repayment of an outstanding loan owed by Mr. Erwin to Hanover; (ii) certain waivers and releases by Mr. Erwin; and (iii) the payment of a reasonable and customary finders fee for certain proposals brought to Hanover’s attention by Mr. Erwin during the twenty-four month period after the effective date of the agreement. In the agreement, Mr. Erwin has made certain representations as to the status of an outstanding loan payable by Mr. Erwin to Hanover, the documentation for the loan and the enforceability of the his obligations under the loan documents. The loan was not modified and as noted above this note was repaid in full in December 2002. In addition, the agreement provides that Mr. Erwin may exercise his vested stock options pursuant to the post-termination exercise periods set forth in the applicable plan. Since the date of the agreement, Mr. Erwin has exercised all such vested stock options. Mr. Erwin’s non-vested stock options were forfeited as of August 2, 2002. In addition,

F-42

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Mr. Erwin agreed, among other things, not to compete with Hanover and not to solicit Hanover employees or customers under terms described in the agreement for a period of twenty-four months after the effective date of the agreement. In consideration for this non-compete/non-solicitation agreement, Hanover agreed to pay Mr. Erwin $20,611 per month for a period of eighteen months after the effective date of the agreement.

Joe C. Bradford. In August 2002, our Board of Directors did not reappoint Mr. Bradford to the position of Senior Vice President—Worldwide Operations Development, which he held since May 2000. On September 27, 2002, Mr. Bradford resigned his employment with Hanover. In 2000, the Company advanced $764,961 to Mr. Bradford in return for a promissory note that matures in June 2004. In 2002 and 2001, according to the terms of the note, the Company recorded compensation expense and forgave $192,504 and $134,706 of such indebtedness (which included $39,512 and $58,210 of accrued interest), respectively. Set forth below is information concerning the indebtedness of Mr. Bradford to Hanover as of December 31, 2002, 2001 and 2000:

Year	Aggregate Note Principal Amount Outstanding at Period End		Largest Note Principal Amount Outstanding during each Period		Weighted Average Rate of Interest at Period End
2002	$	535,473	$	579,845	4.3	%
2001	$	579,845	$	706,022	4.8	%
2000	$	706,022	$	764,961	9.5	%

19.    Commitments and Contingencies

Rent expense, excluding lease payments for the leasing transactions described in Note 12, for 2002, 2001 and 2000 was approximately $4,142,000, $4,008,000, and $2,159,000 respectively. Commitments for future minimum rental payments exclusive of those disclosed in Note 12 under noncancelable operating leases with terms in excess of one year at December 31, 2002 are (in thousands): 2003—$4,947; 2004—$4,000; 2005—$2,617; 2006—$590; 2007—$94 and $131 thereafter.

F-43

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Hanover has issued the following guarantees which are not recorded on the Company’s Consolidated Balance Sheet:

	Term	Maximum Potential Undiscounted Payments as of December 31, 2002
		(in thousands)
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium (1)	2003	$	13,188
El Furrial (1)	2013		43,512
Other:
Leased compression equipment residual value	2004-2011		881,299
Performance guarantees through letters of credit (2)	2003-2007		14,635
Standby letters of credit	2003-2004		42,035
Bid bonds and performance bonds (2)	2003-2007		72,341
		$	1,067,010

(1) The Company has guaranteed the debt within this non-consolidated affiliate up to the Company’s ownership percentage in such affiliate. (See Note 8).

(2) The Company has issued guarantees to third parties to ensure performance of its obligations some of which may be fulfilled by third parties.

As part of the POI acquisition, as of December 31, 2002 we were required to pay up to $58.0 million to Schlumberger from the proceeds of the financing of PIGAP II, a South American joint venture, a minority interest of which was acquired by Hanover in the acquisition of POI. Because the joint venture failed to execute the financing on or before December 31, 2002, we had the right to put our interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by Hanover to the joint venture. In January 2003, we exercised our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover’s interest in the joint venture back to Schlumberger is subject to certain consents. Hanover is currently in discussions with Schlumberger to explore the possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest in the joint venture. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003. At December 31, 2002, the Company expected the $58,000,000 obligation together with accrued interest to be paid in 2003, this obligation is recorded in accrued liabilities in the accompanying balance sheet. The purchase price is also subject to a contingent payment by Hanover to Schlumberger based on the realization of certain tax benefits by Hanover over the next 15 years.

Commencing in February 2002, approximately 15 putative securities class action lawsuits were filed against us and certain of our officers and directors in the United States District Court for the Southern District of Texas. These class actions have been consolidated into one case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A. O’Connor. The plaintiffs in these

F-44

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

securities actions purport to represent purchasers of our common stock during various periods ranging from May 15, 2000 through January 28, 2002. The complaints assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. The court entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel. A consolidated amended complaint is currently due to be filed on or before April 7, 2003.

Commencing in February 2002, four derivative lawsuits were filed in the United States District Court for the Southern District of Texas, two derivative lawsuits were filed in state district court for Harris County, Texas (one of which was nonsuited and the second of which was removed to Federal District Court for the Southern District of Texas) and one derivative lawsuit was filed in the Court of Chancery for the State of Delaware in and for New Castle County. These derivative lawsuits, which were filed by certain of our shareholders purportedly on behalf of the Company, allege, among other things, that our directors breached their fiduciary duties to shareholders and seek unspecified amounts of damages, interest and costs, including legal fees. The derivative actions in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002. With that consolidation, the currently pending derivative lawsuits are:

Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Harbor Finance Partners, derivatively on behalf of Hanover Compressor Company	Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant	H-02-0761	United States District Court for the Southern District of Texas	03/01/02
Coffelt Family, LLC, derivatively on behalf of Hanover Compressor Company	Michael A. O’Connor, Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein, Alvin V. Shoemaker, and Robert R. Furgason, Defendants and Hanover Compressor Company, Nominal Defendant	19410-NC	Court of Chancery for the State of Delaware State Court in New Castle County	02/15/02

Motions are currently pending for appointment of lead counsel in the consolidated derivative actions in the Southern District of Texas. Currently, the Company will be required to file an answer or otherwise move with respect to the derivative action filed in Delaware by May 3, 2003. The Board of Directors has formed a Special Litigation Committee to address the issues raised by the derivative suits. Subject to the work of that Committee and its instructions, we intend to defend these cases vigorously.

The putative class action securities lawsuit and the derivative lawsuits are at an early stage. Consequently, it is premature at this time to predict liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such actions. An adverse outcome in these actions could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

On November 14, 2002, the Securities and Exchange Commission issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements.

F-45

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

We are cooperating fully with the Fort Worth District Office staff of the Securities and Exchange Commission. It is too soon to determine whether the outcome of this investigation will have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

In January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and John Petti filed a putative securities class action against PricewaterhouseCoopers LLP, which is Hanover’s auditor. The alleged class is all persons who purchased the equity or debt securities of Hanover Compressor Company or its affiliates from March 8, 2000 through and including October 23, 2002. On February 13, 2003, the court consolidated this action with Civil Action No. H-02-0410.

On March 26, 2003, Ann Angleopoulos filed a putative class action against Hanover, Michael McGhan, Michael O’Conner, Chad Deaton and other purportedly unknown defendants. The alleged class is comprised of persons who between November 8, 2000 and the present participated in or were beneficiaries of The Hanover Companies Retirement and Savings Plan, which was established by Hanover pursuant to Section 401(k) of the United States Internal Revenue Code of 1986, as amended. The purported class action seeks relief under the Employee Retirement Income Security Act based upon Hanover’s and the individual defendants’ alleged mishandling of the Company’s 401(k) Plan. The Company has not yet been served with the complaint in this action.

As of December 31, 2002, the Company has paid approximately $7,734,000 in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuits and the Securities and Exchange Commission investigation. Of this amount, the Company has paid approximately $999,000 on behalf of officers and directors in connection with the above-named proceedings. The Company intends to pay the litigation costs of its officers and directors, subject to the limitations imposed by Delaware law and the Company’s certificate of incorporation and bylaws. The Company expects to be reimbursed for all or a portion of these litigation expenses from the Company’s directors’ and officers’ insurance policies.

In the ordinary course of business the Company is involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. (See Note 26.)

20.    Accounting for Derivatives

We adopted SFAS 133, as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133 requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. Prior to 2001, we entered into two interest rate swaps which were outstanding at December 31, 2002 with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and now expire in July 2003. The difference paid or received on the swap transactions is recorded as an accrued lease liability and is recognized in leasing expense. On January 1, 2001, in accordance with the transition provisions of

F-46

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

SFAS 133, we recorded a loss resulting from the cumulative effect of an accounting change in the statement of operations of approximately $164,000, net of tax benefit of $89,000. During the year ended December 31, 2002 and 2001, we recognized an unrealized gain of approximately $3,245,000 and an additional unrealized loss of approximately $7,596,000, respectively, related to the change in the fair value of these interest rate swaps, which are included as a component of leasing expense in the accompanying consolidated statement of operations, because these swaps did not meet the specific hedge criteria as a result of the counterparty’s option to extend the interest rate swaps. Further, management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty. At December 31, 2002, we recorded approximately $4,606,000 in accrued liabilities with respect to the fair value adjustment related to these interest rate swaps. The fair value of these interest rate swaps will fluctuate with changes in interest rates over their remaining terms and the fluctuations will be recorded in the statement of income.

During the second quarter of 2001, we entered into three additional interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:

Lease	Maturity Date	Strike Rate	Notional Amount
March 2000	3/11/05	5.2550%	$100,000,000
August 2000	3/11/05	5.2725%	$100,000,000
October 2000	10/26/05	5.3975%	$100,000,000

These three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the year ended December 31, 2002 and 2001, we recorded a loss of approximately $13,640,000 and $9,343,000 million, respectively, net of tax of $4,774,000 and $3,270,000 with respect to these three swaps, in other comprehensive income. As of December 31, 2002, a total of approximately $11,476,000 was recorded in accrued current liabilities and approximately $11,507,000 in other long-term liabilities with respect to the fair value adjustment related to these three swaps.

The counterparties to the interest rate swap agreements are major international financial institutions. We continually monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us.

21.    New Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets (“SFAS 143”). SFAS 143 establishes the accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. This statement is effective for Hanover on January 1, 2003. The Company is currently assessing the new standard and does not believe it will have a material impact on its consolidated results of operations, cash flows or financial position.

In August 2001, the FASB issued SFAS 144. The new rules supersede SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (“SFAS 121”). The new rules retain many of the fundamental recognition and measurement provisions of SFAS 121, but significantly change the criteria for classifying an asset as held-for-sale. SFAS 144 is effective for fiscal

F-47

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

years beginning after December 15, 2001. The Company has adopted the new standard, which had no material effect on its consolidated results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The Statement updates, clarifies and simplifies existing accounting pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 are effective for us on January 1, 2003. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. The Company has adopted the provisions of the new standard related to SFAS 13, which had no material effect on its consolidated results of operations, cash flows or financial position.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3. We will adopt the provision of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 will be effective for interim periods beginning after June 15, 2003. The Company is currently evaluating the impact of adoption of EITF 00-21 on its financial position and results of operations.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure provisions which are included within these financials and is currently evaluating the impact of adoption of the recognition and measurement provisions of FIN 45 on its financial position and results of operations.

In December 2002, the FASB issued Statement of SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has

F-48

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

adopted the disclosure provisions which are included within these financials and is currently evaluating the impact of adoption of SFAS 148 on its financial position and results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51”. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). FIN 46 applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 will require us to include in our consolidated financial statements the special purpose entities that lease compression equipment to us beginning in July 2003. If these special purpose entities had been consolidated in Hanover’s financial statements as of December 31, 2002, Hanover would add approximately $1,031,000,000 in compressor equipment and approximately $1,140,000,000 in debt to its balance sheet and reverse $109,000,000 of deferred gains that were recorded on its balance sheet as a result of the sale and leaseback transactions. In addition, Hanover would record depreciation expense on the compression equipment for prior periods (net of tax) as part of the cumulative effect of the adoption of FIN 46 and would record depreciation expense in future periods. The Company is currently evaluating the impact of recording depreciation for prior periods. After the adoption of FIN 46, the Company estimates that it will record approximately $20,000,000 per year in additional depreciation expense on its leased compression equipment.

22.    April 2002 Restatement

In conjunction with a review of our joint ventures and other transactions conducted by counsel under the direction of the Audit Committee in early 2002, the Company determined to restate its financial statements for the year ended December 31, 2000. See Note 23 for information regarding the further restatement of the 2000 consolidated financial statements.

The transactions involved in the April 2002 restatement, which are detailed further below are: (i) the Cawthorne Channel project in Nigeria initially conducted through the Hampton Roads Shipping Investors II, L.L.C. joint venture; (ii) the acquisition of two compressors in a non-monetary exchange transaction; (iii) a compressor sale transaction; and (iv) the sale of a turbine engine. The impact of the restatement for the year ended December 31, 2000 is summarized below:

F-49

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

	As Filed (1)		Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture			Acquisitions of Compressors In Non-Monetary Exchange			Compressor Sale Transaction			Sale of Turbine Engine			Restated (1)
	(in thousands except per share amounts)
Revenues:
Rentals	$	254,515	$	—		$	—		$	—		$	—		$	254,515
Parts, service and used equipment		133,340		—			—			(12,004	)		(7,500	)		113,836
Compressor fabrication		96,838		(6,568	)		—			—			—			90,270
Production and processing equipment fabrication		88,572		(9,451	)		—			—			—			79,121
Gain on sale of other assets		5,743		—			(2,225	)		—			—			3,518
Gain on change in interest in non-consolidated affiliate		864		—			—			—			—			864
Other		4,768		—			—			—			—			4,768
Total revenues		584,640		(16,019	)		(2,225	)		(12,004	)		(7,500	)		546,892
Expenses:
Rentals		87,992		—			—			—			—			87,992
Parts, service and used equipment		94,106		—			—			(7,954	)		(6,194	)		79,958
Compressor fabrication		81,996		(5,242	)		—			—			—			76,754
Production and processing equipment fabrication		69,281		(6,597	)		—			—			—			62,684
Selling, general and administrative		51,742		26			—			—			—			51,768
Depreciation and amortization		52,188		—			—			—			—			52,188
Lease expense		45,484		—			—			—			—			45,484
Interest expense		14,836		212			—			—			—			15,048
Total expenses		497,625		(11,601	)		—			(7,954	)		(6,194	)		471,876
Income (loss) from continuing operations before income taxes		87,015		(4,418	)		(2,225	)		(4,050	)		(1,306	)		75,016
Provision for (benefit from) income taxes		32,309		(1,644	)		(827	)		(1,507	)		(486	)		27,845
Income (loss) from continuing operations		54,706		(2,774	)		(1,398	)		(2,543	)		(820	)		47,171
Income (loss) from discontinued operations		3,993		—			—			—			—			3,993
Net income (loss)	$	58,699	$	(2,774	)	$	(1,398	)	$	(2,543	)	$	(820	)	$	51,164
Basic earnings per common share:
Income from continuing operations	$	0.89													$	0.77
Income from discontinued operations		0.06														0.06
Net income	$	0.95													$	0.83
Diluted earnings per common share:
Income from continuing operations	$	0.82													$	0.71
Income from discontinued operations		0.06														0.06
Net income	$	0.88													$	0.77

(1) As reclassified for 2002 presentation, see Note 3 for a discussion of discontinued operations.

F-50

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture

Cawthorne Channel is a project to build, own and operate barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway as part of the performance of a contract between Global Energy and Refining Ltd. (“Global”) and Shell Petroleum Development Company of Nigeria Limited, the Nigerian operating unit of The Royal/Dutch Shell Group (“Shell”). The Company entered into a contract with Global in June 1999 to fabricate and lease facilities to Global to assist Global in fulfilling its obligations under its contract with Shell. Subsequently, the Company acquired 1,000,000 shares of preferred stock in Global in settlement of a $1.1 million debt owed by Global to the Company.

In September 2000, the Company and an unrelated third party formed a joint venture known as Hampton Roads Shipping Investors II, L.L.C. (“Hampton Roads”) which was to own the gas processing facilities and lease them to Global. The Company held a 25% interest in Hampton Roads, and the third party held the remaining 75% interest. The Company’s initial capital contribution to Hampton Roads was $1,250,000 and the third party’s initial capital contribution was $3,750,000. The Company entered into a turnkey construction contract with Hampton Roads to fabricate the barges for the Cawthorne Channel project for $51,000,000. The barges were to be used pursuant to a 10-year contract with Shell to commence September 30, 2001. During the first quarter of 2001, the scope of the project was reduced requiring less costly gas processing facilities of approximately $43,000,000 and the contract term was extended to 15 years with a projected start date of September 2003. Since the lease had not started yet, the Company recorded no income attributable to its equity ownership in the venture.

The Company accounted for the work performed under the turnkey construction contract using the percentage of completion method of accounting, and recorded 75% of the revenue and net income, based on the third party’s ownership share of Hampton Roads. Based upon the discovery of a commitment by the Company to loan Hampton Roads up to $43,500,000 for the purpose of paying the balance of the turnkey construction contract and a guarantee by the Company to refund the capital contributed by the third party should certain conditions not be met, the Company concluded that it had retained substantial risk of ownership with respect to the third party’s interest. Accordingly, the Company determined to treat the project as if the Company had owned 100% of the project from its inception and reversed the revenue and net income previously recognized.

In February 2002, the Company purchased the 75% interest in Hampton Roads that it did not own. The Company now owns 100% of the venture and will recognize the rental revenues pursuant to its contract with Global once startup begins.

Acquisition of Compressors In Non-Monetary Exchange

In the third quarter of 2000, the Company acquired two compressors in a non-monetary exchange transaction with an independent oil and gas producer. In the transaction, the Company acquired the two compressors in exchange for certain gas reservoir rights that the Company had obtained in settlement of a payment default by one of its customers. The Company accounted for the transaction as an exchange of non-monetary assets and recorded $2,225,000 in revenue and pre-tax income in 2000. In 2002, the Company discovered that it had made certain guarantees with respect to the performance of the oil and gas reservoir rights. Therefore, the Company concluded that the earnings process was not complete in the third quarter of 2000 and that the Company retained an ongoing risk

F-51

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

of not recovering the fair value of the compressors received in exchange for the oil and gas properties. Based on this analysis, the Company restated its financial results for the third quarter of 2000 to reverse the $2,225,000 in revenue it had originally recognized on the transaction.

Compressor Sale Transaction

The Company sold 33 gas compressors to a gas pipeline system then controlled by Enron for $12,004,000 pursuant to invoices issued in December 2000. The Company recorded $4,050,000 of pre-tax income from the transaction in the fourth quarter of 2000. In January 2001, the Company entered into an agreement with its customer to provide transition services and settle claims between the parties arising from the operation of the compressors prior to their sale. The agreement also provided for the issuance of a bill of sale. Upon further evaluation of the transaction, the Company determined to recognize revenue and net income in January 2001 when the bill of sale was issued.

Sale of Turbine Engine

In the fourth quarter of 2000, the Company entered the non-oil field power generation market to take advantage of rising electricity demand and purchased used turbines to carry out this effort. In connection with this effort, the Company agreed to sell a turbine to a third party on extended credit and recognized revenues of $7,500,000 and $1,306,000 of pre-tax income in the fourth quarter of 2000. In early 2001, the third party assigned their interest in the turbine to another unrelated third party. The Company was ultimately paid for the turbine in December 2001. Based on the information provided to the Company at the time of the April 2002 restatement, the Company determined that revenue should have been recognized for this transaction in the fourth quarter of 2001 when payment was received and collectability was assured. As a result of the discovery of new information, the Company determined to restate the sale of the turbine engine recorded in the fourth quarter of 2001. See Sale and Purchase of Turbine Engine in Note 23.

Reclassification

The Company determined that the deferred gain related to the 1999 and 2000 leases was calculated in error. A reclassification between property, plant and equipment and other liabilities has been made to correct this matter. This reclassification had no impact on net income.

23.    November 2002 Restatement

In October 2002, a special committee of the Board of Directors together with the Audit Committee of the Board and company management, aided by outside legal counsel, completed an extensive investigation of transactions recorded during 2001, 2000 and 1999, including those transactions restated by the Company in April 2002 (see Note 22). As a result of this investigation, the Company determined, to restate its financial results further for the years ended 2001 and 2000 and 1999.

The transactions involved in the November 2002 restatement, which are detailed below, are: (i) sale of compression and production equipment; (ii) a delay penalty; (iii) a turbine sale and purchase; (iv) an agreement to provide technical assistance to an Indonesian company; (v) a scrap sale transaction; (vi) the sale of certain used compression equipment; and (vii) the recording of pre-acquisition revenues associated with a business acquired by Hanover. In addition, the Company restated the following transactions by reversing their impact from the quarter originally recorded in 2000 and recording them in a subsequent quarter of 2000: (i) the sale of an interest in a power plant in Venezuela; (ii) an agreement to provide services to a company ultimately acquired by Hanover; and (iii) the sale of four used compressors. These three transactions are not reflected in the tables below because they had no impact on the overall financial results for 2001 or 2000.

F-52

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The impact of the November 2002 restatement for the year ended December 31, 2000 is summarized below:

	As Filed April 2002(1)		Indonesia Technical Assistance Revenue			Scrap Sale Transaction			Sale of Used Compression Equipment			Pre- Acquisition Revenue			Sale Of Compression And Production Equipment			Delay Penalty		Restated(1)
	(in thousands, except per share amounts)
Revenues:
Rentals	$	254,515	$	(678	)	$	—		$	—		$	—		$	—		$	—	$	253,837
Parts, service and used equipment		113,836		—			—			—			—			(310	)		—		113,526
Compressor fabrication		90,270		—			—			—			—			—			—		90,270
Production and processing equipment fabrication		79,121		—			—			—			—			—			—		79,121
Equity in income of non-consolidated affiliates		3,518		—			—			—			—			—			—		3,518
Gain on change in interest in non-consolidated affiliate		864		—			—			—			—			—			—		864
Other		4,768		—			—			—			—			—			920		5,688
Total revenues		546,892		(678	)		—			—			—			(310	)		920		546,824
Expenses:
Rentals		87,992		—			—			—			—			—			—		87,992
Parts, service and used equipment		79,958		—			—			—			—			—			—		79,958
Compressor fabrication		76,754		—			—			—			—			—			—		76,754
Production and processing equipment fabrication		62,684		—			—			—			—			—			—		62,684
Selling, general and administrative		51,768		—			—			—			—			—			—		51,768
Depreciation and amortization		52,188		—			—			—			—			—			—		52,188
Lease expense		45,484		—			—			—			—			—			—		45,484
Interest expense		15,048		—			—			—			—			—			—		15,048
Total expenses		471,876		—			—			—			—			—			—		471,876
Income (loss) from continuing operations before income taxes		75,016		(678	)		—			—			—			(310	)		920		74,948
Provision for (benefit from) income taxes		27,845		(258	)		—			—			—			(118	)		349		27,818
Income (loss) from continuing operations		47,171		(420	)		—			—			—			(192	)		571		47,130
Income (loss) from discontinued operations, net of tax		3,993		—			(434	)		(372	)		(678	)		—			—		2,509
Net income (loss)	$	51,164	$	(420	)	$	(434	)	$	(372	)	$	(678	)	$	(192	)	$	571	$	49,639
Basic earnings per common share:
Income from continuing operations	$	0.77																		$	0.76
Income from discontinued operations		0.06																			0.04
Net income	$	0.83																		$	0.80
Diluted earnings per common share:
Income from continuing operations	$	0.71																		$	0.71
Income from discontinued operations		0.06																			0.04
Net income	$	0.77																		$	0.75

(1) As reclassified for 2002 presentation, see Note 3 for a discussion of discontinued operations.

F-53

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The impact of the November 2002 restatement for the year ended December 31, 2001 is summarized below:

	As Filed April 2002 (1)			Turbine Sale and Purchase			Indonesia Technical Assistance Revenue			Overstatement of Mark to Market Expense			Scrap Sale Transaction		Sale Of Compression And Production Equipment			Restated (1)
	(in thousands, except per share amounts)
Revenues:
Rentals	$	400,776		$	—		$	—		$	—		$	—	$	—		$	400,776
Parts, service and used equipment		222,648			(7,500	)		(276	)		—			—		—			214,872
Compressor fabrication		223,519			—			—			—			—		—			223,519
Production and processing equipment fabrication		184,040			—			—			—			—		—			184,040
Equity in income of non-consolidated affiliates		9,350			—			—			—			—		—			9,350
Other		8,403			—			—			—			—		—			8,403
Total		1,048,736			(7,500	)		(276	)		—			—		—			1,040,960
Expenses:
Rentals		140,998			—			—			—			—		—			140,998
Parts, service and used equipment		158,607			(6,194	)		(428	)		—			—		716			152,701
Compressor fabrication		188,122			—			—			—			—		—			188,122
Production and processing equipment fabrication		147,824			—			—			—			—		—			147,824
Selling, general and administrative		92,172			—			—			—			—		—			92,172
Depreciation and amortization		88,823			—			—			—			—		—			88,823
Lease expense		79,274			—			—			(1,243	)		—		—			78,031
Interest expense		23,904			—			—			—			—		—			23,904
Foreign currency translation		6,658			—			—			—			—		—			6,658
Other		9,727			—			—			—			—		—			9,727
Total expenses		936,109			(6,194	)		(428	)		(1,243	)		—		716			928,960
Income (loss) from continuing operations before income taxes		112,627			(1,306	)		152			1,243			—		(716	)		112,000
Provision for (benefit from) income taxes		42,627			(496	)		58			472			—		(273	)		42,388
Income (loss) from continuing operations		70,000			(810	)		94			771			—		(443	)		69,612
Income from discontinued operations net of taxes		2,801			—			—			—			164		—			2,965
Net income (loss) before cumulative effect of accounting change		72,801			(810	)		94			771			164		(443	)		72,577
Cumulative effect of accounting change for derivative instruments, net of income tax		(164	)		—			—			—			—		—			(164	)
Net income (loss)	$	72,637		$	(810	)	$	94		$	771		$	164	$	(443	)	$	72,413
Basic earnings per common share:
Income from continuing operations	$	0.96																$	0.96
Income from discontinued operations		0.04																	0.04
Net income	$	1.00																$	1.00
Diluted earnings per common share:
Income from continuing operations	$	0.92																$	0.91
Income from discontinued operations		0.03																	0.03
Net income	$	0.95																$	0.94

(1) As reclassified for 2002 presentation, see note 3 for a discussion of discontinued operations.

F-54

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

	As filed		Restatement Items			Restated
	(in thousands)
Inventory	$	216,405	$	(750	)	$	215,655
Property, plant and equipment, net		1,153,691		(2,178	)		1,151,513
Goodwill, net		245,478		(3,300	)		242,178
Intangible and other assets		79,615		(962	)		78,653
Total assets		2,272,966		(7,190	)		2,265,776
Other liabilities		131,519		(1,243	)		130,276
Deferred income taxes		167,704		(2,212	)		165,492
Total liabilities		1,143,513		(3,455	)		1,140,058
Retained earnings		223,997		(3,735	)		220,262
Total liabilities and common stockholders’ equity		2,272,966		(7,190	)		2,265,776

Sale of Compression and Production Equipment

In the fourth quarter of 1999, the Company recorded three transactions totaling $4,170,000 in revenue from the sale of used compression and production equipment. An additional $310,000 in revenue was recorded on one of the transactions in the second quarter of 2000. Based on further evaluation of the terms of the three transactions, the Company determined that the sales were consignment sales and should not have recognized revenue or income on these transactions. The receivables recorded by the Company in 1999 in two of the transactions were cleared in 2000 when the Company purchased the buyer of the compression and production equipment in business acquisition transactions. The Company ultimately repurchased the equipment sold in the third transaction back from the buyer. In the second quarter of 2001, the Company resold a portion of the compression equipment originally recorded as sold in 1999 and should have recorded an additional $716,000 pre-tax expense on the sale.

Delay Penalty

In July 1999, the Company entered into a Contract Gas Processing Master Equipment and Operating Agreement (the “Agreement”) with a customer. The customer failed to satisfy certain conditions of the Agreement for which it later agreed to pay up to $1,100,000 as a delay penalty. The Company and the customer executed an addendum to the original Agreement effective February 25, 2000 whereby the customer acknowledged the amount of penalty that would be paid. In 1999, the Company recognized and recorded $920,000 of this penalty as revenue. The Company determined that the penalty should not have been recognized until it had executed the addendum to the Agreement in February 2000. Later in 2000, the Company entered into a Stock Issuance Agreement with the customer whereby the Company purchased an equity interest in the customer in exchange for the amount the customer owed to the Company for the delay payment.

Turbine Engine Sale and Purchase

As described in Note 22 under the heading “Sale of Turbine Engine” above, in the fourth quarter of 2000, the Company entered into an agreement to sell a turbine to a third party. In the April 2002 restatement, based on information provided to the Company at that time, the Company restated the

F-55

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

transaction to recognize the $7,500,000 in revenue in the fourth quarter of 2001, when full payment was received. Through the Company’s subsequent investigation, it discovered that in the fourth quarter of 2001, the Company purchased an interest in a turbine engine package from a third party for $8,000,000. The third party was the same entity that had ultimately purchased the Company’s turbine engine. Based upon an evaluation of this new information, the Company has determined to account for these transactions as a non-monetary exchange, rather than a sale and purchase transaction. Accordingly, the revenue and related expense which was recorded in the fourth quarter of 2001 was reversed.

Indonesian Technical Assistance Revenue

In the second quarter of 2000, the Company entered into an agreement to provide technical assistance services to an independent oil and gas producer in Indonesia. Under the agreement, the Company purchased for $1.1 million an option to acquire a controlling interest in the Indonesian company as well as certain inventory. Based on the agreement, the Company recognized revenue of $378,000 in the first quarter of 2000, $300,000 in the second quarter of 2000, $138,000 in the second quarter of 2001, and $138,000 in the third quarter of 2001. The Company has determined, following a review of the transaction, that the payments made to the Company are more properly characterized as a return of the Company’s investment in the option rather than as payments for the provision of services. Accordingly, the Company determined that the payments received from the Indonesian company should be recorded as a return of investment in the option instead of revenue.

Overstatement of Mark to Market Expense

In the fourth quarter of 2001, the Company overstated by $1,243,000 the mark to market expense related to its interest rate swaps that are recorded in other expense.

Scrap Sale Transaction

In the third quarter of 2000, the Company recorded $700,000 of revenue from the sale of scrap inventory to an independent salvage metal company, pursuant to invoices issued in September 2000. Based upon the evaluation of when the scrap inventory was delivered and paid for in connection with this transaction, the Company has determined that no revenue should have been recorded in 2000 and that it should have recognized $264,000 in revenue on this transaction in the fourth quarter of 2001. Accordingly, the $700,000 of revenue was reversed in 2000.

Sale of Used Compression Equipment

In the fourth quarter of 2000, the Company recognized $1,500,000 in revenue and $1,200,000 in pre-tax income from the sale of used compression equipment by a Company subsidiary. The compression equipment was acquired as a result of the acquisition of a subsidiary by the Company less than six months prior to the sale of the equipment. Upon further evaluation of the transaction, the Company determined that the compression equipment should have been valued at $900,000 (instead of $300,000) in the allocation of the purchase price and the gain on the sale should be reduced by $600,000 with a corresponding adjustment made to reduce goodwill.

F-56

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

Pre-Closing Revenue

In the second quarter of 2000, the Company completed negotiations for the acquisition of used equipment companies. The Company entered into acquisition agreements with effective dates of June 1, 2000 which were not completed until July 2000. The Company recorded $2,085,000 in revenue and $965,000 in pre-tax income in the second quarter of 2000 and $442,000 in revenue and $128,000 in pre-tax income in the third quarter of 2000, reflecting the results of the acquired entities for the period between the effective date of the acquisitions and the closing of the acquisitions. Upon further evaluation of this matter, the Company determined that these pre-closing results should not have been recorded.

Power Plant Sale

In the second quarter of 2000, the Company sold a 25% interest in a Venezuelan power plant to Energy Transfer Group, LLC (“ETG”) in an exchange of non similar assets. The Company accounted for the transaction as a sale and recorded a gain on sale of other assets of $1,250,000 in the second quarter of 2000. In 2000, the Company and ETG also discussed the possible purchase by the Company of an interest in a power generation facility in Florida with the Company making a payment toward that purchase in the second quarter of 2000. In the fourth quarter of 2000, these discussions resulted in the purchase by Hanover of a 10% interest in ETG. Upon further evaluation of this transaction, the Company determined that the revenue and pre-tax income from the exchange of the interest in the Venezuelan power plant should be moved from the second quarter of 2000 to the fourth quarter of 2000 to align with the completion of the exchange.

Management Fee Transaction

In the second quarter of 2000 the Company recorded $450,000 in revenue for management services provided to Ouachita Energy Corporation, a compression services company, pursuant to an invoice dated June 30, 2000. In the third quarter of 2000, the Company reversed the revenue, because the management fee was not agreed to by both parties until the fourth quarter of 2000. Upon further evaluation of the transaction, the Company determined that the reversal of revenue should have occurred in the second quarter of 2000.

Compressor Sale Transaction

In connection with the sale of four compressors, the Company recorded revenue of $1,486,000 and pre-tax income of $1,081,000 in the first quarter of 2000, and revenue of $750,000 and pre-tax income of $468,000 in the third quarter of 2000. Based upon further examination of the transaction, the Company has determined that it should have recognized the income from this transaction in the fourth quarter of 2000, when title to the equipment was transferred, rather than in the first and third quarters of 2000.

24.    Subsequent Events

In January 2003, we exercised our right to put our interest in the PIGAP II joint venture (See Note 8) back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. The consummation of the transfer of Hanover’s interest in PIGAP II back to Schlumberger is subject to certain consents. Hanover is currently in discussions with Schlumberger to explore the

F-57

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

possibility of entering into a new agreement under which Hanover would retain the 30% ownership interest PIGAP II. In light of the ongoing discussions between Hanover and Schlumberger relating to the put, the parties have agreed to postpone the closing date to no later than May 31, 2003.

In February 2003, the Company executed an amendment to its bank credit facility and certain compression equipment leases that we entered into in 1999 and 2000. (See Note 11.) The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow the Company greater flexibility in accessing the capacity under the bank credit facility to support its short-term liquidity needs. In addition, at the higher end of the Company’s permitted consolidated leverage ratio, the amendment would increase the commitment fee under the bank credit facility by 0.125% and increase the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in the Company’s interest costs as a result of the amendment will depend on the Company’s consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by the Company. As part of the amendment, the Company granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and the Company’s domestic subsidiaries, and pledged 66% of the equity interest in certain of Hanover’s foreign subsidiaries. In consideration for obtaining the amendment, the Company agreed to pay approximately $1.8 million in fees to the lenders under these agreements.

25.    Industry Segments and Geographic Information

The Company manages its business segments primarily on the type of product or service provided. The Company has five principal industry segments: Rentals—Domestic, Rentals—International, Parts, Service and Used Equipment, Compressor Fabrication and Production and Processing Equipment Fabrication. The Rentals segments provide natural gas compression rental and maintenance services to meet specific customer requirements. The Compressor Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet unique customer specifications. The Production and Processing Equipment Fabrication Segment designs, fabricates and sells equipment utilized in the production of crude oil and natural gas.

The Company evaluates the performance of its segments based on segment gross profit. Segment gross profit for each segment includes direct operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation distributions on mandatorily redeemable convertible preferred securities, change in value of derivative instruments, goodwill impairment, other expenses and income taxes. Amounts defined as “Other” include equity in income of nonconsolidated affiliates, results of other insignificant operations and corporate related items primarily related to cash management activities. Revenues include sales to external customers and intersegment sales. Intersegment sales are accounted for at cost, except for compressor fabrication sales which are accounted for on an arms length basis. Intersegment sales and any resulting profits are eliminated in consolidation. Identifiable assets are tangible and intangible assets that are identified with the operations of a particular segment or geographic region, or which are allocated when used jointly. Capital expenditures include fixed asset purchases.

No single customer accounts for 10% or more of the Company’s revenues for during any of the periods presented. One vendor accounted for approximately $41,200,000 of the Company’s purchases in 2000.

F-58

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

The following tables present sales and other financial information by industry segment and geographic region for the years ended December 31, 2002, 2001 and 2000.

Industry Segments

	Domestic rentals		International rentals		Parts, service and used equipment		Compressor fabrication		Production equipment fabrication		Other		Eliminations			Consolidated
	(in thousands of dollars)
2002:
Revenues from external customers	$	328,600	$	189,700	$	223,845	$	114,009	$	149,656	$	23,000	$	—		$	1,028,810
Intersegment sales		—		6,718		54,249		60,790		12,848		5,057		(139,662	)		—
Total revenues		328,600		196,418		278,094		174,799		162,504		28,057		(139,662	)		1,028,810
Gross profit		207,860		132,121		44,001		14,563		22,214		23,000		—			443,759
Identifiable assets		763,161		792,554		92,609		90,639		245,366		169,700		—			2,154,029
Capital expenditures		120,581		101,349		1,093		441		26,706		—		—			250,170
Depreciation and amortization		90,160		54,249		1,233		1,282		4,257		—		—			151,181
2001: (Restated)
Revenues from external customers	$	269,679	$	131,097	$	214,872	$	223,519	$	184,040	$	17,753	$	—		$	1,040,960
Intersegment sales		—		2,858		72,930		112,748		7,110		4,600		(200,246	)		—
Total revenues		269,679		133,955		287,802		336,267		191,150		22,353		(200,246	)		1,040,960
Gross profit		174,476		85,302		62,171		35,397		36,216		17,753		—			411,315
Identifiable assets		867,544		683,829		145,010		153,198		194,081		222,114		—			2,265,776
Capital expenditures		450,172		137,805		6,763		399		24,626		20,118		—			639,883
Depreciation and amortization		45,743		33,685		1,259		4,774		3,362		—		—			88,823
2000: (Restated)
Revenues from external customers	$	172,517	$	81,320	$	113,526	$	90,270	$	79,121	$	10,070	$	—		$	546,824
Intersegment sales		—		1,200		31,086		89,963		3,653		7,413		(133,315	)		—
Total revenues		172,517		82,520		144,612		180,233		82,774		17,483		(133,315	)		546,824
Gross profit		112,181		53,664		33,568		13,516		16,437		10,070		—			239,436
Identifiable assets		428,332		431,362		13,226		202,390		125,377		45,485		—			1,246,172
Capital expenditures		214,460		58,801		—		874		723		—		—			274,858
Depreciation and amortization		29,568		15,117		—		4,381		3,122		—		—			52,188

Geographic Data

	United States		International(1)		Consolidated
	(in thousands of dollars)
2002:
Revenues from external customers	$	692,823	$	335,987	$	1,028,810
Identifiable assets	$	1,068,003	$	1,086,026	$	2,154,029
2001: (Restated)
Revenues from external customers	$	730,702	$	310,258	$	1,040,960
Identifiable assets	$	1,319,084	$	946,692	$	2,265,776
2000: (Restated)
Revenues from external customers	$	424,837	$	121,987	$	546,824
Identifiable assets	$	760,105	$	486,067	$	1,246,172

(1) International operations include approximately $104,043,000 and $77,171,000 of revenues and $430,989,000 and $467,801,000 of identifiable assets for 2002 and 2001, respectively, related to operations and investments in Venezuela. Approximately $141,008,000 and $152,443,000 of the identifiable assets in 2002 and 2001, respectively, relates to the joint ventures acquired in connection with the POI acquisition completed in August 2001. (See Note 8).

F-59

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2002, 2001 and 2000

26.    Other Expense

Other expense during 2002 included $15,950,000 in charges for investments in four non-consolidated affiliates which have experienced a decline in value which we believe to be other than temporary, a $500,000 write off of a purchase option for an acquisition which was abandoned, a $8,454,000 write down of notes receivable and $2,703,000 in other non-operating costs. Included in the $8,454,000 write down of notes receivable is a $6,021,000 reserve established for loans to employees who are not executive officers.

Other expenses during 2001 were $9,727,000 which included a $2,750,000 bridge loan commitment fee associated with Hanover’s acquisition of POI, a $5,013,000 write down of an investment in Aurion, a $965,000 litigation settlement and $999,000 in other non-operating expenses.

27.    Restructuring, Impairment and Other Charges

During 2002, the Company recorded restructuring, impairment and other charges. Below is a summary of these pre-tax charges and the line on the Company’s Consolidated Statement of Operations which was impacted by the charges (in thousands):

Inventory reserves—(in Parts and service and used equipment expense)	$	6,800
Severance and other charges (in Selling, general and administrative)		6,160
Write off of idle equipment and assets to be sold or abandoned (in Depreciation and amortization		34,485
Goodwill impairments		52,103
Non-consolidated affiliate write downs/charges (in Other expense)		15,950
Write down of discontinued operations		58,282
Note receivable reserves (in Other expense)		8,454
Write-off of abandoned purchase option (in Other expense)		500
	$	182,734

For a further description of these charges see Notes 3, 4, 6, 7, 8, 9 and 26.

F-60

HANOVER COMPRESSOR COMPANY

SELECTED QUARTERLY UNAUDITED FINANCIAL DATA

The table below sets forth selected unaudited financial information for each quarter of the two years:

	1st quarter		2nd quarter(1)			3rd quarter		4th quarter (2)(3)
	(in thousands, except per share amounts)
2002:
Revenue(4)	$	255,526	$	262,220		$	249,367	$	261,697
Gross profit(4)		108,756		110,108			117,993		106,902
Net income		5,034		(55,241	)		9,059		(74,920	)
Earnings per common and common equivalent share:
Basic	$	0.06	$	(0.70	)	$	0.11	$	(0.93	)
Diluted	$	0.06	$	(0.70	)	$	0.11	$	(0.93	)
2001: (Restated)
Revenue(4)	$	222,786	$	235,203		$	274,720	$	308,251
Gross profit(4)		89,132		92,549			109,251		120,383
Net income		19,809		20,752			19,848		12,004
Earnings per common and common equivalent share:
Basic	$	0.30	$	0.30		$	0.27	$	0.15
Diluted	$	0.27	$	0.28		$	0.26	$	0.14

(1) During the second quarter of 2002, the Company recorded a $47,500,000 goodwill impairment, $6,000,000 write down of assets held for sale, a $6,100,000 inventory reserve, a $500,000 write off of a purchase option for an acquisition which was abandoned and $14,100,000 write down related to investments in certain non-consolidated affiliates.

(2) The Company incurred other expenses during the fourth quarter of 2001 which included a $5,013,000 write down of an investment in Aurion, a $965,000 litigation settlement, and $999,000 in other non-operating expenses. In addition, the Company incurred a $5,511,000 translation loss related to its foreign operations, primarily in Argentina and Venezuela.

(3) The Company incurred other expenses during the fourth quarter of 2002 which included a $8,454,000 write down of notes receivable and a $1,850,000 write off related to Aurion. In addition, during the fourth quarter of 2002, the Company recorded i) $52,282,000 pre-tax charge for the estimated loss in fair-value from the carrying value expected to be realized at the time of disposal of its discontinued operations; ii) $34,485,000 in additional impairment to reduce the carrying value of certain idle compression equipment that are being retired and the acceleration of depreciation related to certain plants and facilities expected to be sold or abandoned; iii) $4,603,000 goodwill impairment related to the Company’s pump division which is expected to be sold in 2003; and iv) $2,720,000 in employee separation costs.

(4) Amounts reflect reclassifications for discontinued operations. (See Note 3).

F-61

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands of dollars, except for par value and share amounts)

(unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	33,455		$	19,011
Restricted cash—securities settlement escrow		29,581			—
Accounts receivable, net of allowance of $8,086 and $5,162		207,515			211,722
Inventory, net		158,571			166,004
Costs and estimated earnings in excess of billings on uncompleted contracts		60,275			57,346
Prepaid taxes		5,743			7,664
Assets held for sale		22,696			69,408
Other current assets		40,442			49,933
Total current assets		558,278			581,088
Property, plant and equipment, net		2,046,687			1,167,675
Goodwill, net		205,347			180,519
Intangible and other assets		62,340			74,058
Investments in non-consolidated affiliates		169,755			150,689
Total assets	$	3,042,407		$	2,154,029
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	40,551		$	31,997
Current maturities of long-term debt		197,762			1,744
Accounts payable, trade		62,688			72,637
Accrued liabilities		150,100			189,639
Advance billings		28,794			36,156
Liabilities held for sale		957			22,259
Billings on uncompleted contracts in excess of costs and estimated earnings		21,710			14,571
Total current liabilities		502,562			369,003
Long-term debt		1,516,590			521,203
Other liabilities		52,035			137,332
Deferred income taxes		33,836			112,472
Total liabilities		2,105,023			1,140,010
Commitments and contingencies (Note 9)
Minority interest		34,628			143
Mandatorily redeemable convertible preferred securities		86,250			86,250
Common stockholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 82,422,276 and 80,815,209 shares issued, respectively		82			81
Additional paid-in capital		854,316			841,657
Deferred employee compensation—restricted stock grants		(6,101	)		(2,285	)
Accumulated other comprehensive income (loss)		2,685			(13,696	)
Retained earnings		(32,151	)		104,194
Treasury stock—253,115 common shares, at cost		(2,325	)		(2,325	)
Total common stockholders’ equity		816,506			927,626
Total liabilities and common stockholders’ equity	$	3,042,407		$	2,154,029

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-62

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands of dollars, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Revenues:
Domestic rentals	$	82,823		$	80,818		$	241,728		$	249,276
International rentals		49,519			53,915			151,973			143,612
Parts, service and used equipment		45,581			47,597			118,327			172,826
Compressor and accessory fabrication		24,039			26,783			81,839			85,284
Production and processing equipment fabrication		65,202			35,022			211,152			99,771
Equity in income of non-consolidated affiliates		7,581			3,782			16,873			13,928
Other		452			1,450			3,356			2,416
		275,197			249,367			825,248			767,113
Expenses:
Domestic rentals		31,833			31,130			94,043			89,358
International rentals		17,757			13,866			47,682			39,855
Parts, service and used equipment		35,307			35,236			85,781			143,904
Compressor and accessory fabrication		22,347			23,244			73,950			73,884
Production and processing equipment fabrication		59,095			28,256			188,802			84,329
Selling, general and administrative		40,164			36,769			119,658			107,644
Foreign currency translation		1,536			461			1,336			13,339
Provision for estimated cost of litigation settlement		(3,500	)		—			40,253			—
Other		2,446			—			2,951			14,837
Depreciation and amortization		56,199			30,771			126,886			82,367
Leasing expense		—			23,081			43,139			68,206
Interest expense		32,849			10,514			57,283			31,137
Goodwill impairment		—			—			—			47,500
		296,033			233,328			881,764			796,360
Income (loss) from continuing operations before income taxes		(20,836	)		16,039			(56,516	)		(29,247	)
Provision for (benefit from) income taxes		(7,940	)		6,180			(18,463	)		7,412
Income (loss) from continuing operations		(12,896	)		9,859			(38,053	)		(36,659	)
Income (loss) from discontinued operations, net of tax		761			(800	)		1,178			(606	)
Loss from write-downs of discontinued operations, net of tax		(10,908	)		—			(12,560	)		(3,883	)
Cumulative effect of accounting change, net of tax		(86,910	)		—			(86,910	)		—
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Diluted net income (loss) per share:
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Loss from discontinued operations, including write-downs, net of tax		10,147			800			11,382			4,489
Cumulative effect of accounting change, net of tax		86,910			—			86,910			—
Net income (loss) for purposes of computing diluted net income (loss) per share from continuing operations	$	(12,896	)	$	9,859		$	(38,053	)	$	(36,659	)
Basic income (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.12		$	(0.47	)	$	(0.46	)
Loss from discontinued operations, including write-downs		(0.12	)		(0.01	)		(0.15	)		(0.06	)
Cumulative effect of accounting change, net of tax		(1.07	)		—			(1.07	)		—
Net income (loss)	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Diluted income (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.12		$	(0.47	)	$	(0.46	)
Loss from discontinued operations, including write-downs		(0.12	)		(0.01	)		(0.15	)		(0.06	)
Cumulative effect of accounting change, net of tax		(1.07	)		—			(1.07	)		—
Net income (loss)	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Weighted average common and equivalent shares outstanding:
Basic		81,439			79,438			80,907			79,338
Diluted		81,439			81,255			80,907			79,338

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-63

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(in thousands of dollars)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		2,106			(6,339	)		2,794			(8,837	)
Foreign currency translation adjustment		1,000			(2,040	)		13,587			604
Comprehensive income (loss)	$	(106,847	)	$	680		$	(119,964	)	$	(49,381	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-64

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

(unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities:
Net loss	$	(136,345	)	$	(41,148	)
Adjustments:
Depreciation and amortization		126,886			82,367
Amortization of debt issuance costs and debt discount		90			90
Loss from discontinued operations, net of tax		11,382			4,489
Cumulative effect of accounting change, net of tax		86,910			—
Bad debt expense		3,030			2,800
Gain on sale of property, plant and equipment		(528	)		(7,033	)
Equity in income of non-consolidated affiliates, net of dividends received		(16,770	)		(7,357	)
Loss on investments and charges for non-consolidated affiliates		—			12,100
Gain on derivative instruments		(2,078	)		(1,530	)
Provision for inventory impairment and reserves		2,838			7,826
Provision for estimated cost of litigation settlement, in excess of cash paid		35,135			—
Goodwill impairment		—			47,500
Restricted stock compensation expense		732			254
Pay-in-kind interest on Schlumberger notes		15,914			12,199
Deferred income taxes		(27,276	)		3,935
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(615	)		64,249
Inventory		317			(8,997	)
Costs and estimated earnings versus billings on uncompleted contracts		16,319			25,968
Accounts payable and other liabilities		(23,799	)		(63,841	)
Advance billings		(8,496	)		(6,224	)
Other		(584	)		(6,616	)
Net cash provided by continuing operations		83,062			121,031
Net cash provided by discontinued operations		2,202			446
Net cash provided by operating activities		85,264			121,477
Cash flows from investing activities:
Capital expenditures		(105,189	)		(183,154	)
Payments for deferred lease transaction costs		(1,580	)		(1,569	)
Proceeds from sale of property, plant and equipment		21,970			51,741
Cash used for business acquisitions		(15,000	)		(7,400	)
Proceeds from business divestitures		500			—
Cash returned from non-consolidated affiliates		—			4,009
Cash used to acquire investments in and advances to non-consolidated affiliates		(401	)		—
Net cash used in continuing operations		(99,700	)		(136,373	)
Net cash provided by (used in) discontinued operations		23,729			(17,079	)
Net cash used in investing activities		(75,971	)		(153,452	)
Cash flows from financing activities:
Net borrowings on bank credit facility		15,500			35,500
Payments for debt issue costs		(831	)		(581	)
Purchase of treasury stock		—			(1,609	)
Proceeds from warrant conversions and stock options exercised		5,274			1,810
Proceeds from employee stock purchase		—			276
Net borrowings (repayments) of other debt		3,307			(2,103	)
Proceeds from employee stockholder notes		—			55
Net cash provided by continuing operations		23,250			33,348
Net cash used in discontinued operations		(18,538	)		(509	)
Net cash provided by financing activities		4,712			32,839
Effect of exchange rate changes on cash and equivalents		439			(1,869	)
Net increase (decrease) in cash and cash equivalents		14,444			(1,005	)
Cash and cash equivalents at beginning of period		19,011			23,191
Cash and cash equivalents at end of period	$	33,455		$	22,186

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-65

HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Hanover Compressor Company (“Hanover”, “we”, “us”, “our” or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. It is the opinion of our management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position, results of operations, and cash flows of Hanover for the periods indicated. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. These interim results are not necessarily indicative of results for a full year.

Earnings Per Common Share

Basic earnings (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, convertible senior notes and mandatorily redeemable preferred securities, unless their effect would be anti-dilutive.

The table below indicates the potential common shares issuable which were included in computing the dilutive potential common shares used in diluted earnings (loss) per common share (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Weighted average common shares outstanding—used in basic earnings (loss) per common share	81,439	79,438	80,907	79,338
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock	**	1,813	**	**
On exercise of warrants	**	4	**	**
On conversion of mandatorily redeemable convertible preferred securities	**	**	**	**
On conversion of convertible senior notes	**	**	**	**
Weighted average common shares and dilutive potential common shares—used in diluted earnings (loss) per common share	81,439	81,255	80,907	79,338

** Excluded from diluted earnings (loss) per common share as the effect would have been anti-dilutive.

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The table below indicates the potential common shares issuable which were excluded from net dilutive potential common shares issuable as their effect would be anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock	1,998	—	1,891	2,549
On exercise of options-exercise price greater than average market value at end of period	1,834	1,531	3,991	1,531
On exercise of warrants	4	—	4	4
On conversion of mandatorily redeemable convertible preferred securities	4,825	4,825	4,825	4,825
On conversion of convertible senior notes	4,370	4,370	4,370	4,370
	13,031	10,726	15,081	13,279

Stock-Based Compensation

Certain of our employees participate in stock option plans that provide for the granting of options to purchase Hanover common shares. In accordance with Statement of Financial Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) Hanover measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The following pro forma net income (loss) and earnings (loss) per share data illustrates the effect on net income (loss) and net earnings (loss) per share if the fair value method had been applied to all outstanding and unvested stock options in each period (in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss) as reported	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Add back: Restricted stock grant expensed, net of tax		256			110			476			165
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax		(757	)		(663	)		(1,799	)		(1,539	)
Pro forma net income (loss)	$	(110,454	)	$	8,506		$	(137,668	)	$	(42,522	)
Income (loss) per share:
Basic, as reported	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Basic, pro forma	$	(1.36	)	$	0.11		$	(1.70	)	$	(0.54	)
Diluted, as reported	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Diluted, pro forma	$	(1.36	)	$	0.10		$	(1.70	)	$	(0.54	)

In July 2003, we granted 430,000 restricted shares of Hanover common stock to certain employees as part of an incentive compensation plan. The restricted stock grants vest equally over

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four years. As of September 30, 2003, 514,000 restricted shares were outstanding under our incentive compensation plans. We will recognize compensation expense equal to the fair value of the stock at the date of grant over the vesting period related to these grants. During the nine months ended September 30, 2003 and 2002, we recognized $732,000 and $254,000, respectively, in compensation expense related to these grants.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2003 financial statement classification as more fully discussed in Notes 11 and 13. These reclassifications have no impact on net income. See Note 13 for a discussion of discontinued operations.

2.      BUSINESS ACQUISITIONS AND COMBINATIONS

2003 Acquisitions

In August 2003, we exercised our option to acquire the remaining 49% interest in Belleli Energy S.r.l. . (“Belleli”), for approximately $15 million. Belleli is an Italian-based engineering, procurement and construction company that engineers and manufactures desalination plants and heavy wall reactors for refineries and processing plants for use primarily in Europe and the Middle East. Belleli has three manufacturing facilities, one in Mantova, Italy and two in the United Arab Emirates (Jebel Ali and Hamriyah). In November 2002, Hanover increased its ownership in Belleli to 51% and began consolidating the results of Belleli’s operations. We are in the process of completing our valuation of Belleli’s intangible assets and expect that our evaluation will be completed in the fourth quarter of 2003.

2002 Acquisitions

In July 2002, we increased our ownership of Belleli to 40.3% from 20.3% by converting a $4.0 million loan, together with the accrued interest thereon, to Belleli into additional equity ownership. In November 2002, we increased our ownership to 51% by exchanging a $9.4 million loan, together with the accrued interest thereon, to the other principal owner of Belleli for additional equity ownership and began consolidating the results of Belleli’s operations.

In connection with our increase in ownership in November 2002, we had certain rights to purchase the remaining interest in Belleli and the right to market the entire company to a third party. During 2002, we also purchased certain operating assets of Belleli for approximately $22.4 million from a bankruptcy estate and leased these assets to Belleli for approximately $1.2 million per year, for seven years, for use in its operations.

In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC (“Gates”) for approximately $14.4 million and had loaned approximately $6 million to Gates prior to our acquisition. Gates is a developer and owner of a forty-six megawatt cycle power facility in Fresno County, California. This investment was accounted for as a consolidated subsidiary and was classified as an asset held for sale and its operating results were reported in income (loss) from discontinued operations, until sold in September 2003. See Note 13 for a discussion of discontinued operations.

In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC (“Panoche”) for approximately $6.8 million and had loaned approximately $5.0 million to Panoche prior to the acquisition of our interest. Panoche is a developer and owner of a forty-nine megawatt cycle power facility in Fresno County, California, which is under contract with the California Department of Water

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Resources. This investment was classified as an asset held for sale and the equity income (loss) from this non-consolidated subsidiary was reported in income (loss) from discontinued operations, until sold in June 2003. See Note 13 for a discussion of discontinued operations.

In July 2002, we acquired certain assets of Voyager Compression Services, LLC a natural gas compression services company located in Gaylord, Michigan, for approximately $2.5 million in cash.

3.    INVENTORIES

Inventory consisted of the following amounts (in thousands):

	September 30, 2003		December 31, 2002
Parts and supplies	$	109,950	$	114,833
Work in progress		38,292		37,790
Finished goods		10,329		13,381
	$	158,571	$	166,004

As of September 30, 2003 and December 31, 2002 we had inventory valuation reserves of approximately $13.4 million and $14.2 million, respectively.

4.    PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

	September 30, 2003			December 31, 2002
Compression equipment, plants and related facilities and other rental assets	$	2,393,790		$	1,261,241
Land and buildings		90,182			86,732
Transportation and shop equipment		75,830			75,443
Other		42,537			31,888
		2,602,339			1,455,304
Accumulated depreciation		(555,652	)		(287,629	)
	$	2,046,687		$	1,167,675

During the quarter ended September 30, 2003, we recorded a $14.4 million impairment charge in depreciation expense to write-down a portion of our rental fleet to be sold or scrapped.

On July 1, 2003, we adopted the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”) as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. See Note 6 for a discussion of the impact of our partial adoption of FIN 46.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.    DEBT

Short-term debt consisted of the following (in thousands):

	September 30, 2003		December 31, 2002
Belleli—factored receivables	$	22,815	$	15,970
Belleli—revolving credit facility		12,441		11,964
Other, interest at 5.0%, due 2004		5,295		4,063
Short-term debt	$	40,551	$	31,997

In November 2002, we increased our ownership in Belleli to 51%. In August 2003, we exercised our option to purchase the remaining interest not owned by us (see Note 2). Belleli has financed its operations through the factoring of its receivables. Such factoring is typically short term in nature and at September 30, 2003 bore interest at a weighted average rate of 4.0%. In addition, Belleli’s revolving credit facilities bore interest at a weighted average rate of 3.7% and 3.0% at September 30, 2003 and December 31, 2002, respectively. These revolving credit facilities expire in December 2003 and are partially secured by letters of credit issued and outstanding under Hanover’s bank credit facility of $9.4 million as of September 30, 2003.

Long-term debt consisted of the following (in thousands):

	September 30, 2003			December 31, 2002
Bank credit facility	$	172,000		$	156,500
4.75% convertible senior notes due 2008		192,000			192,000
1999A equipment lease notes, interest at 3.4%, due June 2004*		194,000			—
2000A equipment lease notes, interest at 3.4%, due March 2005*		193,600			—
2000B equipment lease notes, interest at 3.4%, due October 2005*		167,411			—
2001A equipment lease notes, interest at 8.5%, due September 2008*		300,000			—
2001B equipment lease notes, interest at 8.8%, due September 2011*		250,000			—
Schlumberger note, interest at 13.5%		—			167,096
Schlumberger note, zero coupon accreting interest at 11.0%, due 2007		180,536			—
PIGAP note, interest at 6.0%, due 2053		59,756			—
Real estate mortgage, interest at 3.19%, collateralized by certain land and buildings, payable through September 2004		3,000			3,250
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		2,049			4,101
		1,714,352			522,947
Less—current maturities		(197,762	)		(1,744	)
Long-term debt	$	1,516,590		$	521,203

* See Note 6 for a discussion of the impact of adoption of FIN 46.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Maturities of long-term debt (excluding interest to be accrued thereon) at September 30, 2003 are (in thousands): 2003—$367; 2004—$369,511; 2005—$361,511; 2006—$407; 2007—$180,577; 2008—$492,045; and $309,934 thereafter.

In February 2003, we executed an amendment to our bank credit facility (our “bank credit facility”) and the agreements related to certain of our compression equipment lease obligations that we entered into in 1999 and 2000. The amendment, which was effective as of December 31, 2002, modified certain financial covenants to allow us greater flexibility in accessing the capacity under the bank credit facility to support our short-term liquidity needs. In addition, at the higher end of our permitted consolidated leverage ratio, the amendment increased the commitment fee under the bank credit facility by 0.125% and increased the interest rate margins used to calculate the applicable interest rates under all of the agreements by up to 0.75%. Any increase in our interest costs as a result of the amendment as compared to the bank credit facility prior to the amendment depends on our consolidated leverage ratio at the end of each quarter, the amount of indebtedness outstanding and the interest rate quoted for the benchmark selected by us. As part of the amendment, we granted the lenders under these agreements a security interest in the inventory, equipment and certain other property of Hanover and its domestic subsidiaries, and pledged 66% of the equity interest in certain of our foreign subsidiaries. This amendment also restricts our capital spending to $200 million in 2003. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements.

Our bank credit facility as so amended provides for a $350 million revolving credit facility that matures on November 30, 2004. Advances bear interest at (a) the greater of the administrative agent’s prime rate, the federal funds effective rate, or the base CD rate, or (b) a eurodollar rate, plus, in each case, a specified margin (3.4% and 3.2% weighted average interest rate at September 30, 2003 and December 31, 2002, respectively). A commitment fee based upon a percentage of the average available commitment is payable quarterly to the lenders participating in the bank credit facility. This fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on our bank credit facility, as of September 30, 2003, we had $71.7 million in letters of credit outstanding under the bank credit facility. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Our bank credit facility also limits the payment of cash dividends on our common stock to 25% of our net income for the period from December 1, 2001 through November 30, 2004.

As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. Giving effect to the covenant limitations in our bank credit facility, the liquidity available under that facility as of September 30, 2003 was approximately $25 million. Our cash balance amounted to $33.5 million at September 30, 2003. Because our bank credit facility will mature in November 2004, it will be reported as a current liability on our balance sheet for the year ended December 31, 2003, if not amended or replaced prior to such date.

While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment lease obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility. With respect to the more restrictive financial covenants that will be in effect at March 31, 2004, if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at such date. However, we currently have bank commitments totaling $345 million for a new bank credit facility (the “Proposed Bank Credit Facility”) with different and/or less restrictive covenants which would apply to us for fiscal quarters ending after December 31, 2003. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at March 31, 2004.

The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financings to refinance a portion of our existing indebtedness and satisfaction of other customary conditions. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility, including in particular the requirement to effect at least $275 million of new financings on required terms. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions in certain of our other debt agreements. Such defaults would have a material adverse effect on the Company’s liquidity, financial position and operations.

In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements), or our “coverage ratio,” is greater than 2.25 to 1.0 and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereon. The indentures and agreements for our 2001A and 2001B sale leaseback transactions define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of September 30, 2003, Hanover’s coverage ratio was less than 2.25 to 1.0 and therefore as of such date we could not incur indebtedness other than under our bank credit facility and up to an additional

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing indebtedness. We believe the Proposed Credit Facility is within the types of refinancing indebtedness allowed under these agreements.

In January 2003, we gave notice of our intent to exercise our right to put our interest in the PIGAP II joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as part of its purchase of Production Operators Corporation’s natural gas compression business, ownership interest in certain joint venture projects in South America, and related assets (“POC”) from Schlumberger in August 2001. PIGAP II is a joint venture that operates a natural gas compression facility in Venezuela and is currently owned 70% by a subsidiary of The Williams Companies Inc. and 30% by us. On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from us in August 2001 as part of the purchase price for the acquisition of POC. As a result, we retained our ownership interest in PIGAP II.

A comparison of the primary financial terms of the original $150 million subordinated note and the restructured note are shown in the table below.

Primary Financial Term	Restructured Note	Original Note
Principal Outstanding at March 31, 2003:	$171 million	$171 million
Maturity:	March 31, 2007	December 31, 2005
Interest Rate:	Zero coupon accreting at 11.0% fixed	13.5%, 14.5% beginning March 1, 2004, 15.5% beginning March 1, 2005
Schlumberger First Call Rights on Hanover Equity Issuance:	None	Schlumberger had first call on any Hanover equity offering proceeds
Call Provision:	Hanover cannot call the Note prior to March 31, 2006	Callable at any time

As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. Under the restructured terms, the maturity of the restructured note has been extended to March 31, 2007, from the original maturity of December 31, 2005. The note is a zero coupon note with original issue discount accreting at 11.0% for its remaining life, up to a total principal amount of $262.6 million payable at maturity. The note will accrue an additional 2.0% interest upon the occurrence and during the continuance of an event of default under the note. The note will also accrue an additional 3.0% interest if Hanover’s consolidated leverage ratio, as defined in the note agreement, exceeds 5.18 to 1.0 as of the end of two consecutive fiscal quarters. Notwithstanding the foregoing, the note will accrue additional interest of a total of 3.0% if both of the previously mentioned circumstances occur. The note also contains a covenant that limits our ability to incur additional indebtedness if Hanover’s consolidated leverage ratio exceeds 5.6 to 1.0, subject to certain exceptions. Schlumberger will no longer have a first call on any proceeds from the issuance of any shares of capital stock or other equity interests by Hanover and the note is not callable by Hanover until March 31, 2006. As agreed

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

upon with Schlumberger, Hanover has agreed to bear the cost of and has filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) covering the resale of the restructured note by Schlumberger.

Also on May 14, 2003, we agreed with Schlumberger Surenco, an affiliate of Schlumberger, to the modification of the repayment terms of a $58 million obligation that was accrued as a contingent liability on our balance sheet since the acquisition of POC and was associated with the PIGAP II joint venture. The obligation was converted into a non-recourse promissory note (“PIGAP Note”) payable by Hanover Cayman Limited, our indirect wholly-owned consolidated subsidiary, with a 6% interest rate compounding semi-annually until maturity in December 2053. This note was paid in full in October 2003 upon closing of the project financing by the PIGAP II joint venture (see Note 14).

For financial accounting purposes, the above described changes to the restructured subordinated note and PIGAP Note were not considered an extinguishment of debt, but have been accounted for as debt modifications which resulted in no income or expense recognition related to the transaction.

6.    LEASING TRANSACTIONS AND ACCOUNTING CHANGE FOR FIN 46

Leasing Transactions

We are the lessee in five transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (i) enabled us to affordably extend the duration of our financing arrangements and (ii) reduced our cost of capital.

Prior to our first sale leaseback transaction in 1998, we financed our growth in compression assets by drawing down on our bank credit facility with a commercial bank. While highly flexible and well priced, the bank credit facility represented a short term funding strategy to finance long-term assets. Sale leaseback transactions can reduce refinancing risk by extending the duration of our capital commitments.

Sale leaseback transactions also provided capital to us at a lower cost compared to other sources then available to us. Lenders to the special purpose entities did not require as high a rate of interest because their capital risk is mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. The reduced capital risk associated with our sale leaseback transactions had the effect of reducing our leasing expense as compared to an unsecured borrowing. We will continue to evaluate sale leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise.

We also believe that the sale leaseback transactions represent a source of capital in addition to the commercial bank financing that we traditionally use. This diversification of our capital sources has broadened our access to capital and allowed us to expand our operations.

In August 2001 and in connection with the acquisition of POC, we completed two sale leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease for $200.0 million. Under one sale

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

leaseback transaction, we received $309.3 million in proceeds from the sale of compression equipment. Under the second sale leaseback transaction, we received $257.8 million in proceeds from the sale of additional compression equipment. Under the first transaction, the equipment was sold and leased back by us for a seven year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $0.2 million. Under the second transaction, the equipment was sold and leased back by us for a ten year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $0.2 million. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through September 30, 2003, we incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

In October 2000, we completed a $172.6 million sale leaseback transaction of compression equipment. In March 2000, we entered into a separate $200.0 million sale leaseback transaction involving certain compression equipment. Under the March transaction, we received proceeds of $100.0 million from the sale of compression equipment at the first closing in March 2000, and in August 2000, we completed the second half of the equipment lease and received an additional $100.0 million for the sale of additional compression equipment. In June 1999, we completed a $200.0 million sale leaseback transaction involving certain compression equipment. Under these lease agreements, the equipment was sold and leased back by us for a five year term and will be used by us in our business. We have options to repurchase the equipment under the 2000 and 1999 leases, subject to certain conditions set forth in these lease agreements. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.5 million in transaction costs for the leases entered into in 2000 and 1999, which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions.

The following table summarizes the proceeds and the residual guarantee (maximum exposure to loss) and the lease termination date for equipment leases (in thousands of dollars):

Lease	Sale Proceeds		Residual Value Guarantee		Lease Termination Date
1999A equipment lease	$	200,000	$	166,000	June 2004
2000A equipment lease		200,000		166,000	March 2005
2000B equipment lease		172,589		142,299	October 2005
2001A equipment lease		309,300		232,000	September 2008
2001B equipment lease		257,750		175,000	September 2011
	$	1,139,639	$	881,299

We made residual value guarantees under these lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms, which are based on negotiation between Hanover and third party lessors, were supported by equipment appraisals and analysis.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the compression equipment leases entered into in August 2001, the Company was obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes registered under the Securities Act of 1933. Because of the restatement of our financial statements, the exchange offering was not completed pursuant to the time line required by the agreements and the Company was required to pay additional lease expense in an amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased the Company’s lease expense by $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

In February 2003, we executed an amendment to our bank credit facility and the compression equipment leases entered into in 1999 and 2000 (see Note 5).

Accounting Change

Prior to July 1, 2003, these five lease transactions were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

7.    ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	September 30, 2003		December 31, 2002
Accrued salaries, bonuses and other employee benefits	$	29,737	$	21,024
Accrued income and other taxes		23,237		24,095
Accrued leasing expense		—		23,465
Additional purchase price for POC		—		60,740
Current portion of hedge instruments		12,233		16,082
Litigation settlement accrual		34,558		—
Accrued interest		8,325		2,939
Accrued other		42,010		41,294
	$	150,100	$	189,639

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The decrease of $60.7 million for the additional purchase price for POC is due to the reclassification of a $58 million contingent liability and accrued interest associated with the PIGAP II joint venture that was restructured into the PIGAP Note (see Note 5).

8.    ACCOUNTING FOR DERIVATIVES

We adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended by SFAS 137 and SFAS 138, effective January 1, 2001. SFAS 133 requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings. Prior to 2001, we entered into two interest rate swaps with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $4.1 million and $1.5 million, respectively, related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002 and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts, which were reported as “Change in Fair Value of Derivative Financial Instruments” in our Consolidated Statement of Operations and have been reclassified as interest and lease expense in the attached Condensed Consolidated Statement of Operations. The fair value of these interest rate swaps fluctuated with changes in interest rates over their terms and the fluctuations were recorded in our statement of operations.

During the second quarter of 2001, we entered into three additional interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:

Lease	Maturity Date	Strike Rate	Notional Amount
March 2000	March 11, 2005	5.2550%	$100,000,000
August 2000	March 11, 2005	5.2725%	$100,000,000
October 2000	October 26, 2005	5.3975%	$100,000,000

These three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the nine months ended September 30, 2003 and 2002, we recorded income of approximately $4.3 million and a loss of $13.6 million, respectively, related to these three swaps, ($2.8 million and $8.8 million, net of tax) in other comprehensive income. As of September 30, 2003, a total of approximately $12.2 million was recorded in current liabilities and approximately $6.5 million in long-term liabilities with respect to the fair value adjustment related to these three swaps.

The counterparties to the interest rate swap agreements are major international financial institutions. We continually monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us.

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9.    COMMITMENTS AND CONTINGENCIES

Hanover has issued the following guarantees which are not recorded on our accompanying balance sheet:

	Term	Maximum Potential Undiscounted Payments as of September 30, 2003
		(in thousands)
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium (1)	2005	10,296
El Furrial (1)	2013	41,027
Other:
Performance guarantees through letters of credit (2)	2003-2007	33,898
Standby letters of credit	2003-2004	37,811
Bid bonds and performance bonds (2)	2003-2007	76,290

(1) We have guaranteed the amount included above, which is a percentage of the total debt of this non-consolidated affiliate equal to our ownership percentage in such affiliate.

(2) We have issued guarantees to third parties to ensure performance of our obligations some of which may be fulfilled by third parties.

As part of the POC acquisition purchase price, Hanover may be required to make a contingent payment to Schlumberger based on the realization of certain tax benefits by Hanover over the next 15 years. To date we have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

Litigation and Securities and Exchange Commission Investigation

Commencing in February 2002, approximately 15 putative securities class action lawsuits were filed against us and certain of our current and former officers and directors in the United States District Court for the Southern District of Texas. These class actions (together with subsequently filed actions) were consolidated into one case, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A. O’Connor. The complaints asserted various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and sought unspecified amounts of compensatory damages, interest and costs, including legal fees. The court entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel. On September 5, 2003, lead plaintiffs filed an amended complaint in which they continued to seek relief under Sections 10(b) and 20(a) of the Securities Exchange Act against Hanover, certain former officers and directors and our auditor, PricewaterhouseCoopers LLP, on behalf of themselves and the class of persons who purchased Hanover securities between May 4, 1999 and December 23, 2002.

Commencing in February 2002, four derivative lawsuits were filed in the United States District Court for the Southern District of Texas, two derivative lawsuits were filed in state district court for Harris County, Texas (one of which was nonsuited and the second of which was removed to Federal

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District Court for the Southern District of Texas) and one derivative lawsuit was filed in the Court of Chancery for the State of Delaware in and for New Castle County. These derivative lawsuits, which were filed by certain of our shareholders purportedly on behalf of Hanover, alleged, among other things, that our directors breached their fiduciary duties to shareholders and sought unspecified amounts of damages, interest and costs, including legal fees. The derivative lawsuits in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002 into the Harbor Finance Partners derivative lawsuit. With that consolidation, the pending derivative lawsuits were:

Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Harbor Finance Partners, Derivatively on behalf of Hanover Compressor Company	Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant	H-02-0761	United States District Court for the Southern District of Texas	03/01/02
Coffelt Family, LLC, derivatively on behalf of Hanover Compressor Company	Michael A. O’Connor, Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein, Alvin V. Shoemaker, and Robert R. Furgason, Defendants and Hanover Compressor Company, Nominal Defendant	19410-NC	Court of Chancery for the State of Delaware State Court in New Castle County	02/15/02

On October 2, 2003, the Harbor Finance Partners derivative lawsuit was consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust securities class action.

On and after March 26, 2003, three plaintiffs filed separate putative class actions against Hanover, certain named individuals and other purportedly unknown defendants, in the United States District Court for the Southern District of Texas. The alleged class is comprised of persons who participated in or were beneficiaries of The Hanover Companies Retirement and Savings Plan, which was established by Hanover pursuant to Section 401(k) of the United States Internal Revenue Code of 1986, as amended. The purported class action seeks relief under the Employee Retirement Income Security Act (ERISA) based upon Hanover’s and the individual defendants’ alleged mishandling of Hanover’s 401(k) Plan. The three ERISA putative class actions are entitled: Kirkley v. Hanover, Case No. H-03-1155; Angleopoulos v. Hanover, Case No. H-03-1064; and Freeman v. Hanover, Case No. H-03-1095. On August 1, 2003, the three ERISA class actions were consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust federal securities class action. On October 9, 2003, a consolidated amended complaint was filed by the plaintiffs in the ERISA class action against Hanover, Michael McGhan, Michael O’Connor and William Goldberg , which included the same allegations as indicated above, and was filed on behalf of themselves and a class of persons who purchased or held Hanover securities in their 401(k) Plan between May 4, 1999 and December 23, 2002.

On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to court approval, will settle the claims underlying the securities class actions, the ERISA class actions and the shareholder derivative actions described above. The terms of the proposed settlement provide for us

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to: (i) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (ii) issue 2.5 million shares of our common stock, and (iii) issue a contingent note with a principal amount of $6.7 million. The note is payable, together with accrued interest, on March 31, 2007 but can be extinguished (with no monies owing under it) if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our Board. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the consolidated securities class action.

GKH Investments, L.P. and GKH Private Limited (collectively “GKH”), which together own approximately ten percent of Hanover’s outstanding common stock and which sold shares in the Company’s March 2001 secondary offering of common stock, are parties to the proposed settlement and have agreed to settle claims against them that arise out of that offering as well as other potential securities, ERISA, and derivative claims. The terms of the proposed settlement provide for GKH to transfer 2.5 million shares of Hanover common stock from their holdings or from other sources.

In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in Hanover’s statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by us. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 5, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us to the settlement. In the third quarter of 2003, we recorded a reduction in the charge of $3.5 million to adjust our estimate of the settlement due to additional change in the value of such stock since June 30, 2003.

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Based on the terms of the settlement agreement, we determined that a liability related to these lawsuits was probable and that the value was reasonably estimable. Accordingly, we evaluated the individual components of the settlement in consideration of existing market conditions and established an estimate for the cost of the litigation settlement. The details of this estimate are as follows (in thousands):

	Amended First Quarter Estimated Settlement			Second & Third Quarter Adjustment To Estimated Settlement			Total
Cash	$	30,050		$	—		$	30,050
Estimated fair value of note to be issued		5,194			—			5,194
Common stock to be issued by Hanover		26,600			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

The $5.2 million estimated fair value of the note to be issued was based on the present value of the future cash flows discounted at borrowing rates currently available to us for debt with similar terms and maturities. Utilizing a market-borrowing rate of 11%, the principal value and stipulated interest rate required by the note of 5% per annum, an estimated discount of $1.5 million was computed on the note to be issued. Upon the issuance of the note, the discount will be amortized to interest expense over the term of the note. Because the note could be extinguished without a payment (if our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007), we will be required to record an asset in future periods for the value of the embedded derivative, as required by SFAS 133, when the note is issued. This asset will be marked to market in future periods with any increase or decrease included in our statement of operations.

As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts which are expected to be paid in the next twelve months. During the second quarter, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon approval of the settlement by the court, we will record such amounts in liabilities and stockholders’ equity, respectively, and will include the shares in our outstanding shares used for earnings per share calculations.

The final value of the settlement may differ significantly from the estimates currently recorded depending on the market value of our common stock when approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

On July 18, 2003, the parties entered into an Amended Memorandum of Understanding which did not alter the aggregate amount to be paid under the settlement described above, but in which the

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counsel for the named plaintiffs in the Angleopoulos and the Freeman ERISA class actions agreed to become parties to the settlement. As partial consideration therefore, it was agreed that an additional $0.8 million (for a total of $1.8 million) from the settlement fund that was previously designated for relief for the securities class actions would be reallocated to provide relief in connection with the ERISA class actions. On October 13, 2003, the parties entered into a Second Amended and Restated Memorandum of Understanding that included an additional $225,000 contribution to the settlement (to be funded equally by Hanover and GKH) and by which counsel in the Harbor Finance derivative action became a party to the settlement. As part of this arrangement, Hanover agreed to certain additional governance procedures including certain enhancements to its code of conduct.

On October 23, 2003, the parties to the Second Amended and Restated Memorandum of Understanding entered into a Stipulation of Settlement which, subject to court approval, will fully and finally resolve all of the securities class actions, ERISA class actions and shareholder derivative actions filed against Hanover and certain other individuals. PricewaterhouseCoopers LLP is not a party to the Stipulation of Settlement and will remain a defendant in the federal securities class action. On October 24, 2003, the parties moved the court for preliminary approval of the proposed settlement and sought permission to provide notice to the potentially affected persons and to set a date for a final hearing to approve the proposed settlement. The settlement, therefore, remains subject to court approval and could be the subject of an objection by potentially affected persons.

On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the transactions underlying and other matters relating to the restatements of our financial statements announced in 2002. We have cooperated with the Fort Worth District Office Staff of the SEC in its investigation. Based upon our discussions to date with the Fort Worth District Office Staff of the SEC, we currently believe that a settlement of the investigation will be reached on terms that we do not believe will have a material adverse impact on our business, consolidated financial position, results of operations or cash flows. However, we can give no assurances in this regard, and we expect any settlement with the SEC to include findings of violations of the securities laws by us with respect to certain of the restated transactions. We understand that any resolution of the investigation reached by us with the Fort Worth District Office Staff of the SEC will have no legal effect until it is reviewed and, if appropriate, approved by the SEC in Washington, D.C., and we cannot predict what action might ultimately be taken against us by the SEC. As such, we do not anticipate announcing any resolution of the investigation unless and until such resolution is approved by the SEC in Washington, D.C.

As of September 30, 2003, we had incurred approximately $14.0 million in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuit and the SEC investigation. Of this amount, we advanced approximately $2.2 million on behalf of current and former officers and directors in connection with the above-named proceedings. We intend to advance the litigation costs of our officers and directors, subject to the limitations imposed by Delaware and other applicable law and Hanover’s certificate of incorporation and bylaws. We expect to incur approximately $4.4 million in additional legal fees and administrative expenses in connection with the settlement of the securities-related litigation, the SEC investigation and advances on behalf of current and former officers and directors for legal fees.

On June 25, 1999, we notified the Air Quality Bureau of the Environmental Protection Division, New Mexico Environment Department of potential violations of regulatory and permitting requirements. The violations included failure to conduct required performance tests, failure to file required notices and failure to pay fees for compressor units located on sites for more than one year. We promptly paid the required fees and corrected the violations. On June 12, 2001, after the violations had been corrected, the Director of the Division issued a compliance order to us in connection with the alleged violations.

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The compliance order assessed a civil penalty of $15,000 per day per regulatory violation and permit; no total penalty amount was proposed in the compliance order. On October 3, 2003, the Division notified us that the total proposed penalty would be $759,072. However, since the alleged violations had been self-disclosed, that amount was reduced to $189,768. We expect to respond to the penalty assessment, challenging some of the calculations, and will propose an alternative settlement amount, which we expect to be less than $100,000.

In the ordinary course of business we are involved in various other pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

10.    RELATED-PARTY TRANSACTIONS

In connection with the restatements announced by Hanover in 2002, certain present and former officers and directors have been named as defendants in putative stockholder class actions, stockholder derivative actions and have been involved with the investigation being conducted by the Staff of the SEC. Pursuant to the indemnification provisions of our certificate of incorporation and bylaws, we paid legal fees on behalf of certain employees, officers and directors involved in these proceedings. In connection with these proceedings, we advanced, on behalf of indemnified officers and directors, during 2002 and the first nine months of 2003, $1.1 million and $1.1 million, respectively, in the aggregate.

During 2002, $0.4 million was advanced on behalf of former director and officer William S. Goldberg; $0.3 million was advanced on behalf of former director and officer Michael J. McGhan; $0.1 million was advanced on behalf of former officer Charles D. Erwin; $0.1 million was advanced on behalf of former officer Joe S. Bradford; $0.1 million was advanced on behalf of directors Ted Collins, Jr., Robert R. Furgason, Rene Huck (former director), Melvyn N. Klein, Michael A. O’Connor (former director), and Alvin V. Shoemaker, who were elected prior to 2002; and $0.1 million was advanced on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon T. Hall who were elected during 2002.

During 2003, $0.3 million was advanced on behalf of former director and officer William S. Goldberg; $0.2 million was advanced on behalf of former director and officer Michael J. McGhan; $0.1 million was advanced on behalf of former officer Charles D. Erwin; $0.1 million was advanced on behalf of former officer Joe S. Bradford; and $0.4 million was advanced on behalf of various employees of the Company.

In 2001, the Company advanced cash of $2.2 million in return for promissory notes to Michael J. McGhan, Hanover’s former president and chief executive officer who resigned on August 1, 2002. The notes bore interest at 4.88%, matured on April 11, 2006, and were collateralized by personal real estate and Hanover common stock with full recourse. On May 19, 2003, Mr. McGhan paid in full the $2.2 million loan together with the applicable accrued interest.

On May 14, 2003, Hanover entered into agreements with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture, to restructure a $150 million subordinated promissory note and to modify the repayment terms of a $58 million obligation (see Notes 5 and 14).

On July 30, 2003, the Company’s subsidiary, Hanover Compression Limited Partnership (“HCLP”) entered into a Membership Interest Redemption Agreement pursuant to which its 10%

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interest in Energy Transfer Group, LLC (“ETG”) was redeemed, and as a result HCLP withdrew as a member of ETG. In consideration for the surrender of HCLP’s 10% membership interest in ETG, pursuant to a Partnership Interest Purchase Agreement dated as of July 30, 2003, subsidiaries of ETG sold to subsidiaries of the Company their entire 1% interest in Energy Transfer Hanover Ventures, L.P. (“Energy Ventures”). As a result of the transaction, the Company now owns, indirectly, 100% of Energy Ventures. The Company’s 10% interest in ETG was carried on the Company’s books for no value. Ted Collins, Jr., a Director of the Company, owns 100% of Azalea Partners, which in turn owns 13% of ETG.

11.    NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets” (“SFAS 143”). SFAS 143 establishes the accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. This statement became effective for Hanover on January 1, 2003. The adoption of this new standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). The Statement updates, clarifies and simplifies existing accounting pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 became effective for us on January 1, 2003. The provisions of SFAS 145 related to SFAS 13 are effective for transactions occurring after May 15, 2002. We have adopted the provisions of the new standard, which had no material effect on our consolidated results of operations, cash flows or financial position.

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3. We adopted the provision of SFAS 146 for restructuring activities initiated after December 31, 2002, which had no material effect on our financial statements. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 became effective for interim periods beginning after June 15, 2003. We have adopted the provisions of EITF 00-21, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and

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the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on our consolidated results of operations, cash flow or financial position.

In December 2002, the FASB issued Statement of SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 were effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We have adopted the disclosure provisions that are included within these financial statements.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). FIN 46 applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some, but not all, of the variable interest entities they hold.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

We have a consolidated subsidiary trust that has Mandatorily Redeemable Preferred Securities outstanding which have a liquidation value of $86.3 million. These securities are reported on our balance sheet as Mandatorily Redeemable Convertible Preferred Securities. The trust may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes in connection with our adoption of FIN 46, if any, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed above.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of this Statement will be applied prospectively. We have adopted the provisions SFAS 149, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). The Statement changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, the FASB issued Staff Position 150-4 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $34.6 million in sale leaseback obligations that are currently reported as “Minority interest” on our Condensed Consolidated Balance Sheet pursuant to FIN 46 (see Note 6). These Minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of September 30, 2003, the yield rates on the outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At September 30, 2003, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

12.    REPORTABLE SEGMENTS

We manage our business segments primarily based upon the type of product or service provided. We have five principal industry segments: Domestic Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; and Production and Processing Equipment

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HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fabrication. The Domestic and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets. The Parts, Service and Used Equipment segment provides a full range of services to support the surface production needs of customers from installation and normal maintenance and services to full operation of a customer’s owned assets and surface equipment as well as sales of used equipment. The Compressor and Accessory Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet unique customer specifications. The Production and Processing Equipment Fabrication Segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas and engineering, procurement and construction of heavy wall reactors for refineries and desalination plants.

We evaluate the performance of our segments based on segment gross profit. Segment gross profit for each segment includes direct operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation, provision for estimated cost of litigation settlement, goodwill impairment, other expenses and income taxes. Amounts defined as “Other” include equity in income of nonconsolidated affiliates, results of other insignificant operations and corporate related items primarily related to cash management activities. Revenues include sales to external customers and intersegment sales. Intersegment sales are accounted for at cost, except for compressor fabrication sales which are accounted for on an arms length basis. Intersegment sales and any resulting profits are eliminated in consolidation. Identifiable assets are tangible and intangible assets that are identified with the operations of a particular segment or geographic region, or which are allocated when used jointly.

The following tables present sales and other financial information by industry segment for the three months ended September 30, 2003 and 2002.

	Domestic rentals		International rentals		Parts, service and used equipment		Compressor fabrication		Production equipment fabrication		Other		Eliminations			Consolidated
	(in thousands)
September 30, 2003:
Revenues from external customers	$	82,823	$	49,519	$	45,581	$	24,039	$	65,202	$	8,033	$	—		$	275,197
Intersegment sales		—		4,785		14,100		5,569		4,658		—		(29,112	)		—
Total revenues		82,823		54,304		59,681		29,608		69,860		8,033		(29,112	)		275,197
Gross profit		50,990		31,762		10,274		1,692		6,107		8,033		—			108,858
Identifiable assets		1,589,273		823,688		71,982		86,922		256,730		213,812		—			3,042,407
September 30, 2002:
Revenues from external customers	$	80,818	$	53,915	$	47,597	$	26,783	$	35,022	$	5,232	$	—		$	249,367
Intersegment sales		—		341		7,728		11,671		1,847		4,511		(26,098	)		—
Total revenues		80,818		54,256		55,325		38,454		36,869		9,743		(26,098	)		249,367
Gross profit		49,688		40,049		12,361		3,539		6,766		5,232		—			117,635
Identifiable assets		906,727		738,315		128,282		100,437		136,352		198,505		—			2,208,618

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HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present sales and other financial information by industry segment for the nine months ended September 30, 2003 and 2002.

	Domestic rentals		International rentals		Parts, service and used equipment		Compressor fabrication		Production equipment fabrication		Other		Eliminations			Consolidated
	(in thousands)
September 30, 2003:
Revenues from external customers	$	241,728	$	151,973	$	118,327	$	81,839	$	211,152	$	20,229	$	—		$	825,248
Intersegment sales		—		14,020		54,673		10,190		17,643		—		(96,526	)		—
Total revenues		241,728		165,993		173,000		92,029		228,795		20,229		(96,526	)		825,248
Gross profit		147,685		104,291		32,546		7,889		22,350		20,229		—			334,990
September 30, 2002:
Revenues from external customers	$	249,276	$	143,612	$	172,826	$	85,284	$	99,771	$	16,344	$	—		$	767,113
Intersegment sales		—		1,057		39,689		56,625		8,211		8,397		(113,979	)		—
Total revenues		249,276		144,669		212,515		141,909		107,982		24,741		(113,979	)		767,113
Gross profit		159,918		103,757		28,922		11,400		15,442		16,344		—			335,783

13.    DISCONTINUED OPERATIONS

During 2002, Hanover’s Board of Directors approved management’s plan to dispose of our non-oilfield power generation projects, which were part of our domestic rental business, and certain used equipment businesses, which were part of our parts and service business. These disposals meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”). SFAS 144 specifically requires that such amounts must represent a component of a business composed of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. These businesses have been reflected as discontinued operations in our statement of operations for the periods ended September 30, 2003 and 2002. We believe we will sell the majority of these assets during the remainder of 2003 or early in 2004 and the assets and liabilities are reflected as assets held for sale on our balance sheet.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summary of operating results of the discontinued operations (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003			2002
Revenues and other:
Domestic rentals	$	1,018	$	1,126		$	4,394		$	1,126
Parts, service and used equipment		5,468		4,970			12,755			15,187
Equity in income of non-consolidated affiliates		—		—			550			—
Other		16		(192	)		(77	)		(40	)
		6,502		5,904			17,622			16,273
Expenses:
Domestic rentals		179		196			972			196
Parts, service and used equipment		3,575		3,653			8,334			9,679
Selling, general and administrative		1,425		2,361			5,380			6,223
Depreciation and amortization		—		707			—			874
Interest expense		196		216			796			216
Other		—		5			371			15
		5,375		7,138			15,853			17,203
Income (loss) from discontinued operations before income taxes		1,127		(1,234	)		1,769			(930	)
Provision for (benefit from) income taxes		366		(434	)		591			(324	)
Income (loss) from discontinued operations	$	761	$	(800	)	$	1,178		$	(606	)

Summary balance sheet data for discontinued operations as of September 30, 2003 (in thousands):

	Used Equipment		Non-Oilfield Power Generation		Total
Current assets	$	9,685	$	10,724	$	20,409
Property, plant and equipment		901		1,384		2,285
Non-current assets		—		2		2
Assets held for sale		10,586		12,110		22,696
Current liabilities		—		957		957
Liabilities held for sale		—		957		957
Net assets held for sale	$	10,586	$	11,153	$	21,739

Loss from the write-downs of discontinued operations was $10.9 million during the three months ended September 30, 2003 and include approximately $5.6 million in write-downs for power generation assets and $5.3 million in write-downs related to our used equipment businesses. During the nine months ended September 30, 2003, loss from the write-downs of discontinued operations were $12.6 million including approximately $7.3 million related to power generation and $5.3 million related to used equipment businesses. During the nine months ended September 30, 2002, loss from the write-downs of discontinued operations were $3.9 million related to our power generation assets. The losses relate to write-downs of our discontinued operations to their estimated market value.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In May 2003, we announced that we had agreed to sell our 49% membership interest in Panoche and our 92.5% membership interest in Gates to Hal Dittmer and Fresno Power Investors Limited Partnership, who currently own the remaining interests in Panoche and Gates. Panoche and Gates own gas-fired peaking power plants of 49 megawatts and 46 megawatts, respectively. The Panoche transaction closed in June 2003 and the Gates transaction closed in September 2003. Total consideration for the transactions was approximately $27.2 million consisting of approximately $6.4 million in cash, $2.8 million in notes that mature in May 2004, a $0.5 million note that matures in September 2005 and the release of our obligations under a capital lease from GE Capital to Gates that had an outstanding balance of approximately $17.5 million at the time of the Gates closing. In addition, we were released from a $12 million letter of credit from us to GE Capital that was provided as additional credit support for the Gates capital lease.

14.    SUBSEQUENT EVENT

In October 2003, our PIGAP II joint venture, which repressurizes oil fields in eastern Venezuela for Petroleos de Venezuela, S.A., closed a $230 million project financing that is non-recourse to Hanover. Proceeds from the loan were used to repay Williams and Hanover, based on their respective ownership percentages, for the initial funding of construction-related costs. We own 30% of the project and received approximately $78.5 million from the financing and a distribution of earnings from the project of which approximately $59.9 million was used to pay off the PIGAP Note described in Note 5.

F-90

SCHEDULE II

HANOVER COMPRESSOR COMPANY

VALUATION AND QUALIFYING ACCOUNTS

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Deductions			Balance at End of Period
	(in thousands)
Allowance for doubtful accounts deducted from accounts receivable in the balance sheet
2002	$	6,300	$	7,091	$	8,229	(1)	$	5,162
2001		2,659		4,860		1,219	(1)		6,300
2000		1,730		3,198		2,269	(1)		2,659
Allowance for obsolete and slow moving inventory deducted from inventories in the balance sheet(3)
2002	$	2,101	$	13,853	$	1,743	(2)	$	14,211
2001		560		2,336		795	(2)		2,101
Allowance for deferred tax assets not expected to be realized
2002	$	—	$	23,371	$	—		$	23,371
Allowance for employee loans
2002	$	—	$	6,021	$	—		$	6,021

(1) Uncollectible accounts written off, net of recoveries.

(2) Obsolete inventory written off at cost, net of value received.

(3) Amounts for 2000 were not material.

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