THE CORPORATE LIBRARY

Related Party Transactions and Outside Related Director Information

Hanover Compressor Company (HC)

3/24/2006 Proxy Information

Transactions with Schlumberger Entities

In August 2001, we purchased Production Operators Corporation (“POC”) from Schlumberger Technology Company (“STC”), Camco International Inc (“CAMCO”), Schlumberger Surenco, S.A. (“Surenco”), Schlumberger Oilfield Holdings Limited (“SOHL”), and Operational Services, Inc. On July 8, 2005, we entered into Amendment No. 2 to the Purchase Agreement dated June 28, 2001 by and among Hanover, Hanover Compression Limited Partnership, and STC, for itself and as successor in interest to Camco, Surenco, and SOHL. STC, Surenco and SOHL, collectively are referred to as “Schlumberger Companies”’. 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 Amendment No. 2, Schlumberger agreed to eliminate its right to designate a director to serve on our Board of Directors in order for Schlumberger to position itself to have maximum flexibility in terms of its ownership of its shares of our Common Stock. Schlumberger previously had the right under the POC purchase agreement, so long as Schlumberger owned at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. Schlumberger currently has no representative who sits on our Board of Directors. As of December 31, 2005, Schlumberger sold all of their Hanover Common Stock and is no longer considered a related party.

For the year ended December 31, 2005, Hanover did not realize revenue in business dealings with Schlumberger. Hanover made purchases of equipment and services of approximately $0.5 million from Schlumberger during 2005. In August 2001, we 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 Hanover 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 Hanover’s international business by making Schlumberger’s offices in certain international markets available to Hanover personnel and (3) providing Hanover with access to consulting advice and technical assistance in enhancing its field automation capabilities.

Transaction Involving Director

Ted Collins, Jr., a director of the Company, owns 100% of Azalea Partners, which owns approximately 15% of Energy Transfer Group, LLC (“ETG”). For the year ended December 31, 2005, we recorded sales of approximately $25.5 million related to equipment leases and sales to ETG. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership, each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow in the amount of $0.5 million during 2005.

4/13/2005 Proxy Information

In connection with the restatements of our financial statements announced in 2002, certain of our directors and former officers were named as defendants in certain consolidated derivative, class action and ERISA lawsuits (the “Securities Litigation”) and were involved with an investigation conducted by t4/13/2005he Staff of the SEC.

On February 9, 2004, the United States District Court for the Southern District of Texas entered three Orders and Final Judgments, approving a settlement on the terms agreed upon in the Stipulation of Settlement with respect to the Securities Litigation (the “Settlement”). The court also entered an Order and Final Judgment approving the plans of allocation with respect to each action, as well as an Order and Final Judgment approving the schedule of attorneys’ fees for counsel for the settling plaintiffs. The time in which these Orders and Final Judgments may be appealed expired on March 10, 2004 without any appeal being lodged. The Settlement has therefore become final and is being implemented according to its terms. The terms of the Settlement provided for us to contribute the following to a settlement fund (“the Settlement Fund”): (1) 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) 2.5 million shares of our Common Stock, and (3) a contingent note with a principal amount of $6.7 million. During the third quarter of 2004, the contingent note was extinguished under the terms of the note (with no money owing under it) since our Common Stock traded above the average price of $12.25 per share for 15 consecutive trading days.

With respect to the SEC investigation, in December 2003, we entered into a settlement with the SEC, concluding the SEC investigation into the transactions underlying, and other matters relating to, the restatement of Hanover’s financial statements for fiscal years 1999, 2000 and 2001. Without admitting or denying any of the SEC’s findings, we consented to the entry of a cease and desist order requiring future compliance with certain periodic reporting, record keeping and internal control provisions of the securities laws. The settlement did not impose any monetary penalty on the Company and required no additional restatements of our historical financial statements.

In connection with these proceedings, we advanced expenses on behalf of indemnified officers and directors of approximately $0.1 million during 2004.

Transactions with GKH Entities

Hanover and GKH Investments, L.P. and GKH Private Limited (collectively “GKH”), were parties to a stockholders agreement that provided, among other things, for GKH’s rights of visitation and inspection and our obligation to provide Rule 144A information to prospective transferees of the Common Stock.

On December 3, 2002, GKH made a partial distribution of 10.0 million shares out of a total of 18.3 million shares of our Common Stock held by GKH to its limited and general partners. In addition, we received a letter on March 11, 2004 from the administrative trustee of the GKH Liquidating Trust indicating it and one of its affiliates had decided to distribute 5.8 million shares of the remaining 8.3 million shares of Hanover Common Stock owned by the GKH Liquidating Trust (formerly held by GKH) and its affiliate to the relevant beneficiaries. In April 2004, GKH contributed the remaining 2.5 million shares of our Common Stock held by GKH to the Settlement Fund referenced above.

Transactions with Schlumberger Entities

In August 2001, we purchased Production Operators Corporation (“POC”) 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, we granted to each of the Schlumberger Companies certain registration rights in connection with shares of Common Stock received by the Schlumberger Companies as consideration in the POC 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 us 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. We are 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 were prohibited from, directly or indirectly, selling or contracting to sell any of the Hanover Stock. The Schlumberger Rights Agreement also provided that during such three-year period, none of the Schlumberger Companies could, without our written consent, (i) acquire or propose to acquire, directly or indirectly, greater than twenty-five percent (25%) of the shares of 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 POC purchase agreement, so long as Schlumberger owns at least 5% of our Common Stock and subject to certain restrictions, to nominate one representative to serve on our Board of Directors. Schlumberger currently has no representative who serves on our Board of Directors.

In August 2001, we 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 Hanover 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 Hanover’s international business by placing Hanover personnel in Schlumberger’s offices in six top international markets, and (3) providing Hanover with access to consulting advice and technical assistance in enhancing its field automation capabilities. For the year ended December 31, 2004, Hanover made purchases of equipment and services of approximately $0.5 million from Schlumberger.

Transaction Involving Director

Ted Collins, Jr., a director of the Company, owns 100% of Azalea Partners, which owns approximately 14% of Energy Transfer Group, LLC (“ETG”). For the year ended December 31, 2004, we recorded sales of approximately $0.2 million related to equipment leases and parts sales to ETG. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership, each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow in the amount of $0.8 million during 2004.

4/13/2004 Proxy Information

William S. Goldberg has served as Vice Chairman of Hanover Compressor Company since February 2002, and served as Chief Financial Officer from May 2000 until February 2002.

Michael J. McGhan served as President and Chief Executive Officer of Hanover Compressor Company from October 1991 through 2002 and served as Chief Operating Officer from December 1990 through October 1991.

On July 30, 2003, our subsidiary, Hanover Compression Limited Partnership (“HCLP”) entered into a Membership Interest Redemption Agreement pursuant to which HCLP’s 10% 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 HCLP their entire 1% interest in Energy Transfer Hanover Ventures, L.P. (“Energy Ventures”). As a result of the transaction, we now own, indirectly, 100% of Energy Ventures. Our 10% interest in ETG was carried on our books for no value. Ted Collins, Jr., a Director of Hanover, owned 100% of Azalea Partners, which at the time of the transaction, owned 13% of ETG. We advanced working capital to ETG, 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, 2003, the largest aggregate amount advanced under this arrangement was $0.4 million. The advances did not bear interest. In 2003, ETG billed Hanover $0.5 million for services rendered to reimburse ETG for expenses incurred on behalf of Energy Ventures during the year, and we recorded sales of approximately $2.8 million related to equipment leases and parts sales to ETG.

In connection with the restatements of our financial statements announced in 2002, certain of our directors and former officers were named as defendants in certain consolidated derivative, class action and ERISA lawsuits (the “Securities Litigation”) and were involved with an investigation conducted by the Staff of the SEC.

On February 9, 2004, the United States District Court for the Southern District of Texas entered three Orders and Final Judgments, approving a settlement on the terms agreed upon in the Stipulation of Settlement with respect to the Securities Litigation (the “Settlement”). The court also entered an Order and Final Judgment approving the plans of allocation with respect to each action, as well as an Order and Final Judgment approving the schedule of attorneys’ fees for counsel for the settling plaintiffs. The time in which these Orders and Final Judgments may be appealed expired on March 10, 2004 without any appeal being lodged. The Settlement has therefore become final and will be implemented according to its terms. The terms of the Settlement provided for us to contribute the following to a settlement fund (“the Settlement Fund”): (1) 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) 2.5 million shares of our Common Stock, and (3) a contingent note with a principal amount of $6.7 million.

With respect to the SEC investigation, in December 2003, we entered into a settlement with the SEC, concluding the SEC investigation into the transactions underlying, and other matters relating to, the restatement of Hanover’s financial statements for fiscal years 1999, 2000 and 2001. Without admitting or denying any of the SEC’s findings, we consented to the entry of a cease and desist order requiring future compliance with certain periodic reporting, record keeping and internal control provisions of the securities laws. The settlement did not impose any monetary penalty on the Company and required no additional restatements of our historical financial statements.

In connection with these proceedings, we advanced expenses on behalf of indemnified officers and directors of approximately $1.2 million during 2003. Of this amount, $47,000 was incurred on behalf of directors Ted Collins, Jr., Robert R. Furgason, and Alvin V. Shoemaker and former directors René Huck, Melvyn N. Klein, and Michael A. O’Connor; and $16,000 was incurred on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon T. Hall.

See the description of transactions involving Ted Collins, a director of the Company, under “INFORMATION REGARDING CORPORATE GOVERNANCE, THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD— Compensation Committee Interlocks and Insider Participation.”

Transactions with GKH Entities

GKH Investments, L.P. and GKH Partners, L.P. (collectively, “GKH”) who, as of December 31, 2003, together beneficially owned approximately 10% of our outstanding Common Stock, and other stockholders (collectively with GKH, the “Holders”) are, together with Hanover, parties to a Third Amended and Restated Registration Rights Agreement dated December 5, 1995 (the “GKH Rights Agreement”). The GKH Rights Agreement generally provides that if we propose to register shares of our 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 shares of Common Stock subject to the GKH Rights Agreement (the “Registrable Securities”) then held by all of the Holders, we will use our 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. We are also obligated to effect the registration of Registrable Securities upon the written request of Holders representing 18% of our outstanding shares of Common Stock. We are required to pay all registration expenses in connection with registrations of Registrable Securities effected pursuant to the GKH Rights Agreement.

GKH has advised us that it is in the process of dissolving and “winding up” its affairs. On November 12, 2002, GKH informed us that GKH advised its limited partners that it was 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 10.0 million shares out of a total of 18.3 million 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 Common Stock owned by GKH, to its partners. On March 11, 2004, we received a letter from the administrative trustee of the GKH Liquidating Trust indicating that it and one of its affiliates had decided to distribute 5.8 million shares of the 8.3 million shares of our Common Stock owned by the GKH Liquidating Trust (formerly held by GKH) and its affiliate to the relevant beneficiaries. The remaining 2.5 million shares of Common Stock held by GKH were paid into the Settlement Fund, which is described on page 13.

GKH which, prior to March 11, 2004 owned approximately 10% of our outstanding Common Stock and which sold shares in the March 2001 secondary offering of our Common Stock, are parties to the 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 Settlement provide for GKH to transfer 2.5 million shares of our Common Stock from their holdings or from other sources to the Settlement Fund.

On May 12, 2003, in connection with GKH’s agreement to contribute 2.5 million shares to the Settlement, we agreed to pay GKH 50% of any cash contributions made by third parties which reduces the value of our contribution toward the Settlement from our own assets. In October 2003, we entered into a settlement agreement with a third party service provider, whereby such third party agreed, among other things, to make a $500,000 cash payment to Hanover and to issue a $100,000 credit for fees and other charges. In October 2003, a Memorandum of Understanding relating to the Settlement of the Securities Litigation was amended to provide, among other things, for the settlement of the Harbor Finance Partners (“Harbor Finance”) action (which action was not originally included in the Securities Litigation Settlement) in exchange for an additional cash contribution by us to the Settlement Fund in the amount of $225,000. In addition, the May 12, 2003 agreement with GKH was amended to include, when calculating the amount owed to GKH for additional cash contributions made by third parties, the third party service providers’ $100,000 credit for fees and other charges and the additional $225,000 that Hanover paid to settle the Harbor Finance action. Pursuant to the May 12, 2003 agreement with GKH, in March 2004, we paid GKH 50% of the difference between the amount Hanover received from this third party service provider, less the additional amount we contributed to the Settlement to settle the Harbor Finance claim, or $187,500.

Transactions with Schlumberger Entities

In August 2001, we purchased Production Operators Corporation (“POC”) 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, we granted to each of the Schlumberger Companies certain registration rights in connection with shares of Common Stock received by the Schlumberger Companies as consideration in the POC 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 us 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. We are 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 during such three-year period, none of the Schlumberger Companies shall, without our written consent, (i) acquire or propose to acquire, directly or indirectly, greater than twenty-five percent (25%) of the shares of 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 POC purchase agreement, so long as Schlumberger owns at least 5% of our Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. Schlumberger currently has no representative who sits on our Board of Directors.

As part of the purchase agreement entered into with respect to the POC acquisition, we were required to make a payment of up to $58.0 million 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. 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 us to the joint venture. In January 2003, we gave notice of our intent to exercise 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. In May 2003, in connection with the agreement to terminate our right to put our interest in PIGAP II back to Schlumberger we agreed with Schlumberger Surenco, an affiliate of Schlumberger, to the modification of the repayment terms of the $58.0 million obligation. The obligation was converted into a non-recourse promissory note with a 6% interest rate compounding semi-annually until maturity in December 2053 (the “PIGAP Note”). In October 2003, the PIGAP II joint venture closed on the project’s financing and distributed approximately $78.5 million to us, of which approximately $59.9 million was used to pay off the PIGAP Note. In connection with the agreement to terminate our right to put our interest in PIGAP II back to Schlumberger, 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 our acquisition of POC’s natural gas compression business, ownership interest in certain joint venture projects in South America (including PIGAP II), and related assets. 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 and were subsequently sold by Schlumberger in a registered public offering in December 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 its consolidated leverage ratio exceeds 5.6 to 1.0, subject to certain exceptions. Pursuant to our agreement with Schlumberger, we paid all of the legal costs and other expenses relating to the registered public offering of the Zero Coupon Notes in the amount of $0.8 million.

In August 2001, we 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 Hanover 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 our international business by placing our personnel in Schlumberger’s offices in six top international markets and (3) providing us with access to consulting advice and technical assistance in enhancing its field automation capabilities. During 2003, we received approximately $0.5 million in payments from Schlumberger to reimburse us for our efforts in connection with the alliance.

Employment Arrangements with Management

Chad C. Deaton. We have entered into an agreement with Mr. Deaton in which we agreed that if we terminate Mr. Deaton, who serves as President and Chief Executive Officer, within 12 months after a change of control occurs, or during that period Mr. Deaton terminates his employment for good reason, Mr. Deaton would be entitled to a severance payment equal to three times the sum of his annual base salary and target bonus, and we would accelerate the vesting of all long-term incentives as well as the Company match in the 401(k) Plan. If we terminate Mr. Deaton without cause at any time other than the 12 months following a change of control, Mr. Deaton would be entitled to a severance payment equal to his annual base salary. In either of these circumstances, we would reimburse Mr. Deaton for his health insurance premiums for a period of up to eighteen months following his termination. If we terminate Mr. Deaton with cause, or Mr. Deaton terminates his employment without good reason, we are not obligated to make any severance payments to Mr. Deaton.

John E. Jackson. The Board has authorized the Company to enter into an agreement that provides that if we terminate Mr. Jackson, who serves as Senior Vice President and Chief Financial Officer, within 12 months after a change of control occurs, or during that period Mr. Jackson terminates his employment for good reason, Mr. Jackson would be entitled to a severance payment equal to three times the sum of his annual base salary and target bonus, and we would accelerate the vesting of all long-term incentives as well as the Company match in the 401(k) Plan. If we terminate Mr. Jackson with cause, or Mr. Jackson terminates his employment without good reason, we are not obligated to make any severance payments to Mr. Jackson. Mark S. Berg. Through a letter agreement dated February 24, 2004, Mr. Berg, who served as Senior Vice President and General Counsel, terminated his employment with the Company effective March 31, 2004. Under the letter agreement, we agreed to pay Mr. Berg a bonus in the amount of $260,100 for 2003 performance and a lump sum payment in the amount of $351,900. In addition, we agreed to continue to provide health and welfare benefits at the employee rate until the earlier of (i) one year following the effective date of the agreement or (ii) the date on which Mr. Berg receives the opportunity to obtain health and welfare benefits from a new employer. All of Mr. Berg’s unvested stock options and restricted stock were forfeited as of his termination date. Under the letter agreement, Mr. Berg has agreed to provide consulting services to assist us in the transition to a new general counsel. A copy of the letter agreement was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003.

Peter G. Schreck. The Board has authorized the Company to enter into an agreement that provides that if we terminate Mr. Schreck, who serves as Vice President— Treasurer, within 12 months after a change of control occurs, or during that period Mr. Schreck terminates his employment for good reason, Mr. Schreck would be entitled to a severance payment equal to one and one-half times the sum of his annual salary and target bonus, and we would accelerate the vesting of all long-term incentives as well as the Company match in the 401(k) Plan. If we terminate Mr. Schreck with cause, or Mr. Schreck terminates his employment without good reason, we are not obligated to make any severance payments to Mr. Schreck.

Stephen P. York. The Board has authorized the Company to enter into an agreement that provides that if we terminate Mr. York, who serves as Vice President— Controller, within 12 months after a change of control occurs, or during that period Mr. York terminates his employment for good reason, Mr. York would be entitled to a severance payment equal to one and one-half times the sum of his annual salary and target bonus, and we would accelerate the vesting of all long-term incentives as well as the Company match in the 401(k) Plan. If we terminate Mr. York with cause, or Mr. York terminates his employment without good reason, we are not obligated to make any severance payments to Mr. York.

4/15/2003 Proxy Information

Transactions with GKH Entities

Melvyn N. Klein, a director of the Company, is the sole stockholder of JAKK Holdings Corp., which is a general partner of GKH Partners. GKH Partners is the general partner of GKH Investments. The Company and GKH Partners are parties to a stockholders agreement that provides, among other things, for GKH Investments' rights of visitation and inspection and the Company's obligation to provide Rule 144A information to prospective transferees of the Common Stock.

GKH Partners and other stockholders (collectively, the "Holders"), who as of March 31, 2003, together beneficially own approximately 11% of the outstanding Common Stock, are 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 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 in 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 received compensation from the Company in the form of stock options for his service as Chief Financial Officer and Vice Chairman of the Board. The Company reimbursed GKH Partners for certain travel and related expenses incurred by Mr. Goldberg in connection with his efforts on the Company's behalf.

Pursuant to an agreement with GKH Partners, which provides for compensation to GKH Partners for services, including Mr. Goldberg's service as Chief Financial Officer, the Company paid a management fee of $45,000 per month from November 2001 until the agreement terminated in February 2002.

GKH Partners has advised the Company that it is in the process of dissolving and "winding up" its affairs. On November 12, 2002, GKH Partners informed the Company that GKH Partners 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 Partners, as nominee for GKH Private Limited, and GKH Investments, advised the Company that they had made a partial distribution of 10,000,000 shares out of a total of 18,274,795 shares held by them to their respective limited and general partners. As part of the wind-up process, GKH Partners and GKH Investments have advised the Company that they may liquidate or distribute substantially all of their respective assets, including the remaining shares of the Common Stock held by them.

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 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 during such three-year period 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 the outstanding 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 purchase and sale agreement entered into with respect to the POI Acquisition, so long as Schlumberger owns at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on the Company's Board of Directors. In August 2001, Schlumberger designated Mr. Rene Huck, a Vice President of Schlumberger Limited, as a nominee to serve on the Company's 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 year ended December 31, 2002, Hanover generated revenues of approximately $6,034,000 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 and sale agreement entered into with respect to the POI Acquisition, the Company was required to make a payment of up to $58 million plus interest from the proceeds of and due upon the completion of a financing of PIGAP II, a South American joint venture project, a 30% interest in which was acquired by Hanover as part of the POI Acquisition. 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 million 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 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 note as long as no default exists or would exist under the Company's other indebtedness as a result of such payment.

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 the Company's 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 the 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 NYSE 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 timely repay his promissory note with the Company as well as a loan with a third party. The loans matured during a blackout period under the Company's insider trading policy, and therefore Mr. Pierce could not sell such shares in the open market to repay the loans without being in violation of the policy. Mr. Pierce's loan from the Company was repaid in full in September 2002.

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 $1,085,000 in the aggregate. Of this amount, $375,000 was incurred on behalf of former director William S. Goldberg; $316,000 was incurred on behalf of former officer Michael J. McGhan; $59,000 on behalf of former officer Charles D. Erwin; and $86,000 on behalf of former officer Joe S. Bradford; $149,000 was incurred on behalf of directors Ted Collins, Jr., Robert R. Furgason, Rene 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.

Ted Collins is a director and member of the Compensation Committee of the Company and 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 and 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.

Mr. Grijalva, who is Chairman of the Board and a member of the Compensation Committee, served as interim President and Chief Financial Officer from August 2 to August 19, 2002, but did not receive additional compensation for such interim service.