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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2002

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number. 333-64745

PENHALL INTERNATIONAL CORP.

(Exact Name of registrant as specified in its charter)


|                                                                       |  |                                                   
|---------------------------------------------------------------------- |  | --------------------------------------------------
|ARIZONA
(State or other jurisdiction of
incorporation or organization) |  | 86-0634394
(I.R.S. Employer
Identification Number)

1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)

(714) 772-6450
(Registrants telephone number, including area code)

Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes      [X]      No

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

|                                 |  |                                           
|-------------------------------- |  | ------------------------------------------
|CLASS AND TITLE OF
CAPITAL STOCK |  | SHARES OUTSTANDING AS OF
February 13, 2003
|                                 |  |                                           
|Common Stock, $.01 Par Value     |  | 986,552                                   









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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|Part 1. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|Part II  Other Information  
|                              | Items 1-5 are not applicable                                                                 
|                              | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURES                   
|CERTIFICATIONS               



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##### Table of Contents



PENHALL INTERNATIONAL CORP.

INDEX

|                                                                                              |                        |                                                                                                                      |    |  |          |  | 
|--------------------------------------------------------------------------------------------- | ---------------------- | -------------------------------------------------------------------------------------------------------------------- | -- |  | -------- |  | 
|                                                                                              |                        |                                                                                                                      |    |  | Page No.
|                                                                                              |                        |                                                                                                                      |    |  |         
|Part I  Financial Information                                                                |                        |                                                                                                                      |    | 
|Item 1. Financial Statements                                                                  |                        |                                                                                                                      |    | 
|                                                                                              |                        | Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2002                                      |    |  | 3        | 
|                                                                                              |                        | Condensed Consolidated Statements of Operations for the three and six month periods ended December 31, 2001 and 2002 |    |  | 4        | 
|                                                                                              |                        | Condensed Consolidated Statements of Cash Flows for the six month periods ended December 31, 2001 and 2002           |    |  | 5        | 
|                                                                                              |                        | Notes to Condensed Consolidated Financial Statements                                                                 |    |  | 6        | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                        |                                                                                                                      | 18 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                        |                                                                                                                      | 21 | 
|Item 4. Controls and Procedures                                                               |                        |                                                                                                                      | 21 | 
|Part II  Other Information                                                                   |                        |                                                                                                                      |    | 
|Items 1-5 are not applicable                                                                  |                        |                                                                                                                      |    | 
|Item 6. Exhibits and Reports on Form 8-K                                                      |                        |                                                                                                                      |    | 
|                                                                                              | a) Reports on Form 8-K |                                                                                                                      |    |  |         
|                                                                                              | None                   |                                                                                                                      |    |  |         

2



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##### Table of Contents






Part 1. Financial Information




Item 1. Financial Statements

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |            |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------- | ----------- | ---------- | ----------- | ------------ | ------------ | ---------- | ----------- | -
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             | June 30,   |             | December 31,
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             | 2002       |             | 2002        
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |             
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | ASSETS                                |             |            |             |              |              |            |             |  
|Current assets:                                                                                                                                                                                                                   |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |             
|                                                                                                                                                                                                                                  |  | Cash and cash equivalents                                                                                                                                                  |                                                                | $                                     | 6,205,000   |            |             | $            | 1,996,000    |           
|                                                                                                                                                                                                                                  |  | Receivables:                                                                                                                                                               |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | Contract and trade receivables                                 |                                       |             | 31,361,000 |             |              |              | 29,221,000 |            
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | Contract retentions due upon completion and acceptance of work |                                       |             | 4,756,000  |             |              |              | 5,159,000  |            
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | Income taxes                                                   |                                       |             | 1,990,000  |             |              |              | 600,000    |            
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | 38,107,000                                                     |                                       |             |            | 34,980,000  |             
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | Less allowance for doubtful receivables                        |                                       |             | 1,421,000  |             |              |              | 1,425,000  |            
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | Net receivables                       |             |            | 36,686,000  |              |              |            | 33,555,000  |  
|                                                                                                                                                                                                                                  |  | Costs and estimated earnings in excess of billings on uncompleted contracts                                                                                                |                                                                |                                       | 2,514,000   |            |             |              | 2,461,000    |           
|                                                                                                                                                                                                                                  |  | Deferred tax assets                                                                                                                                                        |                                                                |                                       | 3,133,000   |            |             |              | 3,133,000    |           
|                                                                                                                                                                                                                                  |  | Inventories                                                                                                                                                                |                                                                |                                       | 1,895,000   |            |             |              | 2,357,000    |           
|                                                                                                                                                                                                                                  |  | Prepaid expenses and other current assets                                                                                                                                  |                                                                |                                       | 2,375,000   |            |             |              | 2,114,000    |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | Total current assets                  |             |            | 52,808,000  |              |              |            | 45,616,000  |  
|Property, plant and equipment, at cost:                                                                                                                                                                                           |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |             
|                                                                                                                                                                                                                                  |  | Land                                                                                                                                                                       |                                                                |                                       | 5,004,000   |            |             |              | 5,004,000    |           
|                                                                                                                                                                                                                                  |  | Buildings and leasehold improvements                                                                                                                                       |                                                                |                                       | 8,822,000   |            |             |              | 8,753,000    |           
|                                                                                                                                                                                                                                  |  | Construction and other equipment                                                                                                                                           |                                                                |                                       | 121,890,000 |            |             |              | 120,777,000  |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            | 135,716,000                                                    |                                       |             |            | 134,534,000 |             
|                                                                                                                                                                                                                                  |  | Less accumulated depreciation and amortization                                                                                                                             |                                                                |                                       | 69,449,000  |            |             |              | 74,153,000   |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | Net property, plant and equipment     |             |            | 66,267,000  |              |              |            | 60,381,000  |  
|Goodwill, net of accumulated amortization                                                                                                                                                                                         |  |                                                                                                                                                                            | 9,053,000                                                      |                                       |             |            | 9,053,000   |             
|Debt issuance costs, net of accumulated amortization                                                                                                                                                                              |  |                                                                                                                                                                            | 3,177,000                                                      |                                       |             |            | 2,822,000   |             
|Other assets, net                                                                                                                                                                                                                 |  |                                                                                                                                                                            | 1,610,000                                                      |                                       |             |            | 1,436,000   |             
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  | $                                                                                                                                                                          | 132,915,000                                                    |                                       |             | $          | 119,308,000 |             
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | LIABILITIES AND STOCKHOLDERS DEFICIT |             |            |             |              |              |            |             |  
|Current liabilities:                                                                                                                                                                                                              |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |             
|                                                                                                                                                                                                                                  |  | Current installments of long-term debt                                                                                                                                     |                                                                | $                                     | 9,217,000   |            |             | $            | 9,026,000    |           
|                                                                                                                                                                                                                                  |  | Trade accounts payable                                                                                                                                                     |                                                                |                                       | 9,726,000   |            |             |              | 8,015,000    |           
|                                                                                                                                                                                                                                  |  | Accrued liabilities                                                                                                                                                        |                                                                |                                       | 17,783,000  |            |             |              | 16,351,000   |           
|                                                                                                                                                                                                                                  |  | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                                                |                                                                |                                       | 680,000     |            |             |              | 1,051,000    |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | Total current liabilities             |             |            | 37,406,000  |              |              |            | 34,443,000  |  
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|Long-term debt, excluding current installments                                                                                                                                                                                    |  |                                                                                                                                                                            | 19,753,000                                                     |                                       |             |            | 9,412,000   |             
|Senior notes                                                                                                                                                                                                                      |  |                                                                                                                                                                            | 100,000,000                                                    |                                       |             |            | 100,000,000 |             
|Deferred tax liabilities                                                                                                                                                                                                          |  |                                                                                                                                                                            | 9,339,000                                                      |                                       |             |            | 9,339,000   |             
|Senior Exchangeable Preferred Stock, redemption value $15,075,000 and $15,894,000 at June 30, 2002 and December 31, 2002, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2002 and December 31, 2002   |  |                                                                                                                                                                            | 15,075,000                                                     |                                       |             |            | 15,894,000  |             
|Series A Preferred Stock, redemption value $17,332,000 and $18,505,000 at June 30, 2002 and December 31, 2002, respectively Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2002 and December 31, 2002 |  |                                                                                                                                                                            | 17,332,000                                                     |                                       |             |            | 18,501,000  |             
|Stockholders deficit:                                                                                                                                                                                                            |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |             
|                                                                                                                                                                                                                                  |  | Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,791 shares at June 30, 2002 and 18,798 shares at December 31, 2002 |                                                                |                                       | 31,200,000  |            |             |              | 33,327,000   |           
|                                                                                                                                                                                                                                  |  | Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,127 at June 30, 2002 and 1,021,870 shares at December 31, 2002                     |                                                                |                                       | 10,000      |            |             |              | 10,000       |           
|                                                                                                                                                                                                                                  |  | Additional paid-in capital                                                                                                                                                 |                                                                |                                       | 2,044,000   |            |             |              | 2,082,000    |           
|                                                                                                                                                                                                                                  |  | Treasury stock, at cost, 34,796 common shares at June 30, 2002 and 35,318 common shares at December 31, 2002                                                               |                                                                |                                       | (317,000    | )          |             |              | (336,000     | )         
|                                                                                                                                                                                                                                  |  | Accumulated deficit                                                                                                                                                        |                                                                |                                       | (98,927,000 | )          |             |              | (103,364,000 | )         
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                | Total stockholders deficit           |             |            | (65,990,000 | )            |              |            | (68,281,000 | )
|                                                                                                                                                                                                                                  |  | Commitments and contingencies                                                                                                                                              |                                                                |                                       |             |            |             |              |              |           
|                                                                                                                                                                                                                                  |  | $                                                                                                                                                                          | 132,915,000                                                    |                                       |             | $          | 119,308,000 |             
|                                                                                                                                                                                                                                  |  |                                                                                                                                                                            |                                                                |                                       |             |            |             |              |              |           

See accompanying notes to condensed consolidated financial statements

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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |            |  
|--------------------------------------------------------------- | ------------------------------------------------- | - | ------------------- | --------- | ------------------ | - | ---------- | --------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | -
|                                                                |                                                   |   | THREE MONTH PERIODS |           | SIX MONTH PERIODS 
|                                                                |                                                   |   | ENDED DECEMBER 31,  |           | ENDED DECEMBER 31,
|                                                                |                                                   |   |                     |           |                   
|                                                                |                                                   |   | 2001                |           | 2002               |   | 2001       |           | 2002
|                                                                |                                                   |   |                     |           |                    |   |            |           |     
|Revenues                                                        |                                                   | $ | 37,674,000          |           |                    | $ | 42,044,000 |           |      | $ | 86,831,000 |            |  | $ | 88,620,000 |           
|Cost of revenues                                                |                                                   |   | 27,768,000          |           |                    |   | 32,795,000 |           |      |   | 62,321,000 |            |  |   | 68,890,000 |           
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|                                                                | Gross profit                                      |   |                     | 9,906,000 |                    |   |            | 9,249,000 |      |   |            | 24,510,000 |  |   |            | 19,730,000 |  
|General and administrative expenses                             |                                                   |   | 6,895,000           |           |                    |   | 6,732,000  |           |      |   | 14,949,000 |            |  |   | 14,010,000 |           
|Other operating income                                          |                                                   |   | 274,000             |           |                    |   | 397,000    |           |      |   | 556,000    |            |  |   | 889,000    |           
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|                                                                | Earnings before interest expense and income taxes |   |                     | 3,285,000 |                    |   |            | 2,914,000 |      |   |            | 10,117,000 |  |   |            | 6,609,000  |  
|Interest expense                                                |                                                   |   | 3,579,000           |           |                    |   | 3,547,000  |           |      |   | 7,307,000  |            |  |   | 7,145,000  |           
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|                                                                | Earnings (loss) before income taxes               |   |                     | (294,000  | )                  |   |            | (633,000  | )    |   |            | 2,810,000  |  |   |            | (536,000   | )
|Income tax expense (benefit)                                    |                                                   |   | (123,000            | )         |                    |   | (228,000   | )         |      |   | 1,150,000  |            |  |   | (193,000   | )         
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|Net earnings (loss)                                             |                                                   |   | (171,000            | )         |                    |   | (405,000   | )         |      |   | 1,660,000  |            |  |   | (343,000   | )         
|Accretion of preferred stock to redemption value                |                                                   |   | (897,000            | )         |                    |   | (1,008,000 | )         |      |   | (1,769,000 | )          |  |   | (1,988,000 | )         
|Accrual of cumulative dividends on preferred stock              |                                                   |   | (942,000            | )         |                    |   | (1,068,000 | )         |      |   | (1,850,000 | )          |  |   | (2,106,000 | )         
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|Net loss available to common stockholders                       |                                                   | $ | (2,010,000)         | )         |                    | $ | (2,481,000 | )         |      | $ | (1,959,000 | )          |  | $ | (4,437,000 | )         
|                                                                |                                                   |   |                     |           |                    |   |            |           |      |   |            |            |  |   |            |           
|Loss per share basic and diluted                                |                                                   | $ | (2.04               | )         |                    | $ | (2.52      | )         |      | $ | (1.99      | )          |  | $ | (4.50      | )         
|Weighted average number of shares outstanding basic and diluted |                                                   |   | 985,079             |           |                    |   | 986,368    |           |      |   | 984,193    |            |  |   | 986,262    |           

See accompanying notes to condensed consolidated financial statements

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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |           |           |            |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------------- | --------- | ------------------ | ---------- | ----------- | --------- | --------- | ---------- | -
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           | SIX MONTH PERIODS 
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           | ENDED DECEMBER 31,
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                   
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           | 2001               |            | 2002       
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|Cash flows provided by operating activities:                           |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       | Net earnings (loss)                                                                        |                                                                         | $                                            | 1,660,000                                                                   |           |                    | $          | (343,000    | )        
|                                                                       | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            |                                                                         | Depreciation and amortization                |                                                                             |           | 8,386,000          |            |             |           | 8,502,000 |           
|                                                                       |                                                                                            |                                                                         | Amortization of debt issuance costs          |                                                                             |           | 443,000            |            |             |           | 468,000   |           
|                                                                       |                                                                                            |                                                                         | Provision for doubtful accounts              |                                                                             |           | 145,000            |            |             |           | 307,000   |           
|                                                                       |                                                                                            |                                                                         | Gain on sale of assets                       |                                                                             |           | (92,000            | )          |             |           | (157,000  | )         
|                                                                       |                                                                                            |                                                                         | Changes in operating assets and liabilities: |                                                                             |           |                    |            |             |           |           |           
|                                                                       |                                                                                            |                                                                         |                                              | Receivables                                                                 |           |                    | 4,872,000  |             |           |           | 2,824,000  |  
|                                                                       |                                                                                            |                                                                         |                                              | Inventories, prepaid expenses and other assets                              |           |                    | (132,000   | )           |           |           | (201,000   | )
|                                                                       |                                                                                            |                                                                         |                                              | Costs and estimated earnings in excess of billings on uncompleted contracts |           |                    | 487,000    |             |           |           | 53,000     |  
|                                                                       |                                                                                            |                                                                         |                                              | Trade accounts payable and accrued liabilities                              |           |                    | (3,825,000 | )           |           |           | (4,465,000 | )
|                                                                       |                                                                                            |                                                                         |                                              | Billings in excess of costs and estimated earnings on uncompleted contracts |           |                    | (995,000   | )           |           |           | 371,000    |  
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            |                                                                         |                                              | Net cash provided by operating activities                                   |           |                    | 10,949,000 |             |           |           | 7,359,000  |  
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|Cash flows from investing activities:                                  |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       | Proceeds from sale of assets                                                               |                                                                         |                                              | 223,000                                                                     |           |                    |            | 396,000     |          
|                                                                       | Capital expenditures                                                                       |                                                                         |                                              | (5,704,000                                                                  | )         |                    |            | (2,681,000  | )        
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            |                                                                         |                                              | Net cash used in investing activities                                       |           |                    | (5,481,000 | )           |           |           | (2,285,000 | )
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|Cash flows from financing activities:                                  |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       | Borrowings under long-term debt                                                            |                                                                         |                                              | 42,806,000                                                                  |           |                    |            | 31,860,000  |          
|                                                                       | Repayments of long-term debt                                                               |                                                                         |                                              | (47,458,000                                                                 | )         |                    |            | (42,392,000 | )        
|                                                                       | Debt issuance costs                                                                        |                                                                         |                                              |                                                                            |           |                    |            | (113,000    | )        
|                                                                       | Book overdraft                                                                             |                                                                         |                                              | (1,062,000                                                                  | )         |                    |            | 1,322,000   |          
|                                                                       | Proceeds from issuance of common stock                                                     |                                                                         |                                              | 213,000                                                                     |           |                    |            | 38,000      |          
|                                                                       | Repurchase of common stock and Series B preferred stock                                    |                                                                         |                                              | (21,000                                                                     | )         |                    |            | (35,000     | )        
|                                                                       | Issuance of Series B preferred stock                                                       |                                                                         |                                              | 158,000                                                                     |           |                    |            | 37,000      |          
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            |                                                                         |                                              | Net cash used in financing activities                                       |           |                    | (5,364,000 | )           |           |           | (9,283,000 | )
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            |                                                                         |                                              | Net change in cash and cash equivalents                                     |           |                    | 104,000    |             |           |           | (4,209,000 | )
|Cash and cash equivalents at beginning of period                       |                                                                                            |                                                                         | 1,030,000                                    |                                                                             |           |                    | 6,205,000  |            
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|Cash and cash equivalents at end of period                             |                                                                                            | $                                                                       | 1,134,000                                    |                                                                             |           | $                  | 1,996,000  |            
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|Supplemental disclosure of cash flow information:                      |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       |                                                                                            | Cash paid during the period for:                                        |                                              |                                                                             |           |                    |            |             |           |          
|                                                                       |                                                                                            |                                                                         |                                              | Income taxes                                                                |           | $                  | 721,000    |             |           | $         |           |  
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       |                                                                                            |                                                                         |                                              | Interest                                                                    |           | $                  | 6,829,000  |             |           | $         | 6,619,000  |  
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|Supplemental disclosure of noncash investing and financing activities: |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       |                                                                                            | Borrowings related to capital leases and equipment financing agreements |                                              | $                                                                           | 300,000   |                    |            | $           |          |          
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |            
|                                                                       |                                                                                            | Accretion of preferred stock to redemption value                        |                                              | $                                                                           | 1,769,000 |                    |            | $           | 1,988,000 |          
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          
|                                                                       |                                                                                            | Accrual of cumulative dividends on preferred stock                      |                                              | $                                                                           | 1,850,000 |                    |            | $           | 2,106,000 |          
|                                                                       |                                                                                            |                                                                         |                                              |                                                                             |           |                    |            |             |          

See accompanying notes to condensed consolidated financial statements

5



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002
(Unaudited)

(1) Basis Of Presentation

Penhall International, Inc. (PII) was founded in 1957 and was
incorporated in the state of California on April 19, 1988. On August 4, 1998,
$100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall
Acquisition Corp., an Arizona corporation formed by an unrelated third party
(the Third Party) to effect the recapitalization of PII. As part of the
recapitalization, a series of mergers (the Recapitalization Mergers) were
consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned
subsidiary of PII, became the corporate parent of PII, the Third Party acquired
a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete
Cutting, Inc. became the successor obligor of the Senior Notes. Following the
consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc.
changed its name to Penhall International Corp., and PII changed its name to
Penhall Rental Corp. Penhall Rental Corp. was dissolved and merged into Penhall
International Corp. effective July 1, 2002.

Under accounting principles generally accepted in the United States of
America, the Recapitalization Mergers were accounted for as a leveraged
recapitalization transaction in a manner similar to a pooling-of-interests.
Under this method, the transfer of controlling interest in PII to the
Third-Party did not change the accounting basis of the assets and liabilities
in PIIs separate stand-alone financial statements.

The accompanying unaudited condensed consolidated financial statements of
Penhall International Corp. (Penhall or the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.

Results of operations for the six month period ended December 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2003. The unaudited condensed consolidated financial statements
included herein should be read in conjunction with the Companys audited
consolidated financial statements and footnotes thereto included in the Form
10-K for the year ended June 30, 2002.

Loss Per Share

Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is calculated by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period plus the impact of assumed potential diluted
securities. The dilutive effect of outstanding options is reflected in diluted
loss per share by application of the treasury stock method. For the three and
six month periods ended December 31, 2001 diluted loss per share is the same as
basic loss per share as there are no assumed potential dilutive securities.
During the three and six month periods ended December 31, 2002, diluted loss
per share is the same as basic loss per share as options to purchase 9,260
shares of common stock were not included in the computation of diluted loss per
share for the three and six month periods ended December 31, 2002 as the effect
would have been anti-dilutive.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires the Company
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, the Company evaluates its estimates,
including those related to long-term construction contracts, accounts
receivable, goodwill, long-lived assets, self-insurance, contingencies and

6



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

litigation. The Company bases its estimates on current information, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the
recognition of revenue that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies
affects its more significant judgments and estimates used in the preparation of
its consolidated financial statements:

Revenue Recognition on Long-Term Construction Contracts

Revenue from construction operations is recorded using the
percentage-of-completion method of accounting. The Company has two types of
contracts. The first type of contract is fixed unit in which the percentage of
completion is determined based on the units completed as a percentage of
estimated total units. The second type of contract is lump sum in which
percentage of completion is determined based on costs to date as compared to
total estimated costs at completion. If estimated total costs on any contract
indicate a loss, the Company provides currently for the total loss anticipated
on the contract. For long-term contracts, which extend beyond fiscal year ends,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which facts requiring the revision become
known. All remaining revenue and costs are recognized as work is performed.

Valuation of Long-Lived Assets and Goodwill

We
assess the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include:



| |  |  | Significant underperformance relative to expected historical or projected future operating results;          
| | - |  | -------------------------------------------------------------------------------------------------------------
| |  |  | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
| |  |  | Significant negative industry or economic trends;                                                            
| |  |  | Unanticipated competition; and                                                                               
| |  |  | EBITDA relative to net book value                                                                            

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 141, Business Combinations and
No. 142 Goodwill and Other Intangible Assets. SFAS requires that the purchase
method of accounting be used for all business combinations completed after June
30, 2001, clarifies the recognition of intangible assets separately from
goodwill and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain. SFAS No. 142, which was effective for
fiscal years beginning after December 15, 2001, requires that ratable
amortization of goodwill be replaced with periodic tests of goodwill impairment
and that intangible assets, other than goodwill, which have determinable useful
lives, be amortized over their useful lives. The Company has adopted these
accounting standards effective July 1, 2002. As of December 31, 2002, we have
completed the transitional impairment analysis under SFAS No. 142, no indicated
impairment of goodwill was identified. There were no adjustments to
identifiable intangible assets useful lives or recorded balances as a result
of the adoption of SFAS No. 142. We will perform an annual impairment analysis
of goodwill as required by SFAS No. 142. The following is a reconciliation of
net income and earnings per share between the amounts reported in the first
quarter of 2001 and the adjusted amounts reflecting these new accounting rules:

|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------- |  | ------------------ | ---------- | ---------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                      |  | Three Months Ended |            | Six Months Ended
|                                                      |  | December 31,       |            | December 31,    
|                                                      |  |                    |            |                 
|                                                      |  | 2001               |            | 2002             |  | 2001 |            | 2002
|                                                      |  |                    |            |                  |  |      |            |     
|Net loss:                                             |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Reported loss available to common stockholders        |  | $                  | (2,010,000 | )                |  | $    | (2,481,000 | )    |  | $ | (1,959,000 | ) |  | $ | (4,437,000 | )
|Add back: Goodwill amortization (net of income taxes) |  |                    | 90,000     |                  |  |      |           |      |  |   | 179,000    |   |  |   | -          |  
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Adjusted net loss                                     |  | $                  | (1,920,000 | )                |  | $    | (2,481,000 | )    |  | $ | (1,780,000 | ) |  | $ | (4,437,000 | )
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Basic and diluted loss per share:                     |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Reported basic loss per share                         |  | $                  | (2.04      | )                |  | $    | (2.52      | )    |  | $ | (1.99      | ) |  | $ | (4.50      | )
|Add back: Goodwill amortization (net of income taxes) |  |                    | 0.09       |                  |  |      |           |      |  |   | 0.18       |   |  |   | -          |  
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Adjusted basic and diluted loss per share             |  | $                  | (1.95      | )                |  | $    | (2.52      | )    |  | $ | (1.81      | ) |  | $ | (4.50      | )
|                                                      |  |                    |            |                  |  |      |            |      |  |   |            |   |  |   |            |  

7



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##### Table of Contents



On August 16, 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. The statement requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is
incurred. When the liability is initially recorded, the entity increases the
carrying amount of the related long-lived asset. Over time, accretion of the
liability is recognized each period, and the capitalized cost is depreciated
over the useful life of the related asset. Upon settlement of the liability an
entity either settles the obligation for its recorded amount or incurs a gain
or loss upon settlement. The Company has adopted this statement effective July
1, 2002. The adoption of SFAS No. 143 did not have a material impact on the
Companys financial position or results from operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, which supercedes SFAS No. 121 and
certain sections of APB Opinion No. 30. SFAS No. 144 classifies long-lived
assets as either (1) to be held and used, (2) to be disposed of by other than
sale, or (3) to be disposed of by sale. This standard introduces a
probability-weighted cash flow estimation approach to deal with situations in
which alternative courses of action to recover the carrying amount of a
long-lived asset are under consideration or a range is estimated for the amount
of possible future cash flows. The Company adopted this statement beginning
July 1, 2002. The adoption of this standard did not have a material impact on
the Companys financial position or results of operations.

In April 2002, the Financial Accounting Standards Board, (FASB), issued
Statement of Financial Accounting Standards No. 145, Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which among other things provides guidance in reporting gains and
losses from extinguishments of debt and accounting for leases. The Company will
adopt this statement in fiscal year 2004 and is currently reviewing this
statement to determine its impact. However, the Company does not expect the
adoption of this standard to have a material impact on its financial position
or its results of operations.

On July 30, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS 146 nullifies EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). It requires that a liability be recognized for those
costs only when the liability is incurred, that is, when it meets the
definition of a liability in the FASBs conceptual framework. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. The Company does not expect that the adoption of SFAS 146
will have a material impact on its financial position or results from
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. FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
Company does not expect adoption of FIN 45 to have a material impact on the
Companys results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation,to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 clarifies when variable interest entities are
consolidated by business enterprises where the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, which is provided through
other interests that will absorb some or all of the expected losses of the
entity, or, where equity investors lack certain characteristics of a
controlling financial interest. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company did not have any
investments in any variable interest entities at December 2002 and will apply
the provisions of FIN No. 46 prospectively to investments in variable interest
entities made after February 1, 2003.

(2) Commitments and Contingencies

Litigation

There are various lawsuits and claims pending against and claims being
pursued by the Company and its subsidiaries arising out of the normal course of
business. It is managements present opinion, based in part upon the advise of
legal counsel, that the outcome of these proceedings will not have a material
effect on the Companys consolidated financial statements taken as a whole.

8



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

(3) Condensed Consolidating Financial Information

The following consolidating financial information is presented for
purposes of complying with the reporting requirements of the Guarantor
Subsidiaries, (Penhall Rental Corp. and Penhall Company). Effective July 1,
2002, Penhall Rental was merged into Penhall International Corp. Accordingly,
consolidating financial information as of and for the three and six months
ended December 31, 2002 does not include Penhall Rental Corp. Separate
financial statements and other disclosures with respect to the Guarantor
Subsidiaries are not presented because the Company believes that such financial
statements and other information would not provide additional information that
is material to investors.

The condensed consolidating financial information presents condensed
financial statements as of June 30, 2002 and December 31, 2002 and for the
three and six month periods ended December 31, 2001 and 2002 of:



| | (a) |  | Penhall International Corp. on a parent company only basis (Parent) (carrying its investments in the subsidiaries under the equity method),
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | the Guarantor Subsidiaries (Penhall Rental Corp. (through dissolution effective July 1, 2002) and Penhall Company and subsidiaries),         
|
| | (c) |  | elimination entries necessary to consolidate the parent company and its subsidiaries, and                                                    
|
| | (d) |  | the Company on a consolidated basis.                                                                                                         

9



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |            | 
|----------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------- | ----------- | ------------- | ---------- | ---------- | ---------- | --------- | ---------- | ------------ | ---------- | ------------ | ---------- | ----------- | ----------- | ----------- | ----------- | ----------- | ----------- | ---------- | ---------- | 
|                                                |                                                                             |                                                                             |                           |             | JUNE 30, 2002
|                                                |                                                                             |                                                                             |                           |             |              
|                                                |                                                                             |                                                                             |                           |             | PENHALL       |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |           
|                                                |                                                                             |                                                                             |                           |             | INTER-        |            | PENHALL    |            |           |            |              |            |              |            |             |             |             |             |            
|                                                |                                                                             |                                                                             |                           |             | NATIONAL      |            | RENTAL     |            | PENHALL   |            |              |            |              |            |             |             |            
|                                                |                                                                             |                                                                             |                           |             | CORP.         |            | CORP.      |            | COMPANY   |            | ELIMINATIONS |            | CONSOLIDATED
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |             
|Assets                                          |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |            
|                                                | Current assets:                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |           
|                                                |                                                                             | Receivables, net                                                            |                           | $           | 1,990,000     |            |            | $          |          |            |              | $          | 34,696,000   |            |             | $           |            |             |             | $           | 36,686,000 |           
|                                                |                                                                             | Inventories                                                                 |                           |             |              |            |            |            |          |            |              |            | 1,895,000    |            |             |             |            |             |             |             | 1,895,000  |           
|                                                |                                                                             | Costs and estimated earnings in excess of
billings on uncompleted contracts |                           |             |              |            |            |            |          |            |              |            | 2,514,000    |            |             |             |            |             |             |             | 2,514,000  |           
|                                                |                                                                             | Intercompany assets                                                         |                           |             | 28,303,000    |            |            |            |          |            |              |            |             |            |             |             | (28,303,000 | )           |             |             |           |           
|                                                |                                                                             | Other current assets                                                        |                           |             | 242,000       |            |            |            | 6,143,000 |            |              |            | 5,328,000    |            |             |             |            |             |             |             | 11,713,000 |           
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           
|                                                |                                                                             |                                                                             | Total current assets      |             |               | 30,535,000 |            |            |           | 6,143,000  |              |            |              | 44,433,000 |             |             |             | (28,303,000 | )           |             |            | 52,808,000 | 
|                                                | Net property, plant and equipment                                           |                                                                             |                           |            |               |            |            | 9,078,000  |           |            |              | 57,189,000 |              |            |             |            |             |             |             | 66,267,000  |           
|                                                | Other assets, net                                                           |                                                                             |                           | 3,177,000   |               |            |            |           |           |            |              | 10,663,000 |              |            |             |            |             |             |             | 13,840,000  |           
|                                                | Investment in parent                                                        |                                                                             |                           |            |               |            |            | 4,001,000  |           |            |              |           |              |            |             | (4,001,000  | )           |             |             |            |           
|                                                | Investment in subsidiaries                                                  |                                                                             |                           | 63,239,000  |               |            |            |           |           |            |              |           |              |            |             | (63,239,000 | )           |             |             |            |           
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           
|                                                |                                                                             | $                                                                           | 96,951,000                |             |               | $          | 19,222,000 |            |           | $          | 112,285,000  |            |              | $          | (95,543,000 | )           |             | $           | 132,915,000 |            
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           
|Liabilities and Stockholders Equity (Deficit): |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |            
|                                                | Current installments of long-term debt                                      |                                                                             | $                         | 6,061,000   |               |            | $          | 3,000      |           |            | $            | 3,153,000  |              |            | $           |            |             |             | $           | 9,217,000   |           
|                                                | Trade accounts payable                                                      |                                                                             |                           | 4,000       |               |            |            |           |           |            |              | 9,722,000  |              |            |             |            |             |             |             | 9,726,000   |           
|                                                | Accrued liabilities                                                         |                                                                             |                           | 5,178,000   |               |            |            | 2,000      |           |            |              | 12,603,000 |              |            |             |            |             |             |             | 17,783,000  |           
|                                                | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                                                             |                           |            |               |            |            |           |           |            |              | 680,000    |              |            |             |            |             |             |             | 680,000     |           
|                                                | Intercompany liabilities                                                    |                                                                             |                           |            |               |            |            | 26,245,000 |           |            |              | 2,058,000  |              |            |             | (28,303,000 | )           |             |             |            |           
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           
|                                                |                                                                             |                                                                             | Total current liabilities |             |               | 11,243,000 |            |            |           | 26,250,000 |              |            |              | 28,216,000 |             |             |             | (28,303,000 | )           |             |            | 37,406,000 | 
|                                                | Long-term debt, excluding current installments                              |                                                                             |                           | 15,290,000  |               |            |            | 183,000    |           |            |              | 4,280,000  |              |            |             |            |             |             |             | 19,753,000  |           
|                                                | Senior notes                                                                |                                                                             |                           | 100,000,000 |               |            |            |           |           |            |              |           |              |            |             |            |             |             |             | 100,000,000 |           
|                                                | Deferred tax liabilities                                                    |                                                                             |                           |            |               |            |            | (157,000   | )         |            |              | 9,496,000  |              |            |             |            |             |             |             | 9,339,000   |           
|                                                | Senior Exchangeable Preferred stock                                         |                                                                             |                           | 15,075,000  |               |            |            |           |           |            |              |           |              |            |             |            |             |             |             | 15,075,000  |           
|                                                | Series A Preferred stock                                                    |                                                                             |                           | 17,332,000  |               |            |            |           |           |            |              |           |              |            |             |            |             |             |             | 17,332,000  |           
|                                                | Stockholders equity (deficit)                                              |                                                                             |                           | (61,989,000 | )             |            |            | (7,054,000 | )         |            |              | 70,293,000 |              |            |             | (67,240,000 | )           |             |             | (65,990,000 | )         
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           
|                                                |                                                                             | $                                                                           | 96,951,000                |             |               | $          | 19,222,000 |            |           | $          | 112,285,000  |            |              | $          | (95,543,000 | )           |             | $           | 132,915,000 |            
|                                                |                                                                             |                                                                             |                           |             |               |            |            |            |           |            |              |            |              |            |             |             |             |             |             |             |            |           

10



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2002



---

|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |            | 
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------- | ----------- | ------------- | --------- | ----------- | ---------- | ------------ | ---------- | ------------ | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | ---------- | 
|                                               |                                                                             |                                                                             |                      |             | Penhall       |           |             |            |              |            |              |             |            |            |             |             |           
|                                               |                                                                             |                                                                             |                      |             | International |           | Penhall     |            |              |            |              |             |            |            |            
|                                               |                                                                             |                                                                             |                      |             | Corp.         |           | Company     |            | Eliminations |            | Consolidated
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |             
|Assets                                         |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |            
|                                               | Current assets:                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |           
|                                               |                                                                             | Receivables, net                                                            |                      | $           | 596,000       |           |             | $          | 32,959,000   |            |              | $           |           |            |             | $           | 33,555,000 |           
|                                               |                                                                             | Inventories                                                                 |                      |             |              |           |             |            | 2,357,000    |            |              |             |           |            |             |             | 2,357,000  |           
|                                               |                                                                             | Costs and estimated earnings in excess of
billings on uncompleted contracts |                      |             |              |           |             |            | 2,461,000    |            |              |             |           |            |             |             | 2,461,000  |           
|                                               |                                                                             | Intercompany assets                                                         |                      |             |              |           |             |            | 3,356,000    |            |              |             | (3,356,000 | )          |             |             |           |           
|                                               |                                                                             | Other current assets                                                        |                      |             | 2,215,000     |           |             |            | 5,028,000    |            |              |             |           |            |             |             | 7,243,000  |           
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             |                                                                             | Total current assets |             |               | 2,811,000 |             |            |              | 46,161,000 |              |             |            | (3,356,000 | )           |             |            | 45,616,000 | 
|                                               | Net property, plant and equipment                                           |                                                                             |                      | 8,934,000   |               |           |             | 51,447,000 |              |            |              |            |            |            |             | 60,381,000  |           
|                                               | Other assets, net                                                           |                                                                             |                      | 2,813,000   |               |           |             | 10,498,000 |              |            |              |            |            |            |             | 13,311,000  |           
|                                               | Investment in subsidiary                                                    |                                                                             |                      | 70,720,000  |               |           |             |           |              |            |              | (70,720,000 | )          |            |             |            |           
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | $                                                                           | 85,278,000           |             |               | $         | 108,106,000 |            |              | $          | (74,076,000  | )           |            | $          | 119,308,000 |            
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           
|Liabilities and Stockholders Equity (Deficit) |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |            
|                                               | Current installments of long-term debt                                      |                                                                             | $                    | 6,003,000   |               |           | $           | 3,023,000  |              |            | $            |            |            |            | $           | 9,026,000   |           
|                                               | Trade accounts payable                                                      |                                                                             |                      | 4,000       |               |           |             | 8,011,000  |              |            |              |            |            |            |             | 8,015,000   |           
|                                               | Accrued liabilities                                                         |                                                                             |                      | 5,176,000   |               |           |             | 11,175,000 |              |            |              |            |            |            |             | 16,351,000  |           
|                                               | Billings in excess of costs and estimated earnings on uncompleted contracts |                                                                             |                      |            |               |           |             | 1,051,000  |              |            |              |            |            |            |             | 1,051,000   |           
|                                               | Intercompany liabilities                                                    |                                                                             |                      | 3,356,000   |               |           |             |           |              |            |              | (3,356,000  | )          |            |             |            |           
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | Total current liabilities                                                   |                      |             | 14,539,000    |           |             |            | 23,260,000   |            |              |             | (3,356,000 | )          |             |             | 34,443,000 |           
|                                               | Long-term debt, excluding current installments                              |                                                                             |                      | 4,782,000   |               |           |             | 4,630,000  |              |            |              |            |            |            |             | 9,412,000   |           
|                                               | Senior notes                                                                |                                                                             |                      | 100,000,000 |               |           |             |           |              |            |              |            |            |            |             | 100,000,000 |           
|                                               | Deferred tax liabilities                                                    |                                                                             |                      | (157,000    | )             |           |             | 9,496,000  |              |            |              |            |            |            |             | 9,339,000   |           
|                                               | Senior Exchangeable Preferred stock                                         |                                                                             |                      | 15,894,000  |               |           |             |           |              |            |              |            |            |            |             | 15,894,000  |           
|                                               | Series A Preferred stock                                                    |                                                                             |                      | 18,501,000  |               |           |             |           |              |            |              |            |            |            |             | 18,501,000  |           
|                                               | Stockholders equity (deficit)                                              |                                                                             |                      | (68,281,000 | )             |           |             | 70,720,000 |              |            |              | (70,720,000 | )          |            |             | (68,281,000 | )         
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | $                                                                           | 85,278,000           |             |               | $         | 108,106,000 |            |              | $          | (74,076,000  | )           |            | $          | 119,308,000 |            
|                                               |                                                                             |                                                                             |                      |             |               |           |             |            |              |            |              |             |            |            |             |             |            |           

11



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |           |  
|----------------------------------- | ------------------------------------------------- | - | ------------------------------------------ | ---------- | ------- | - | --------- | --------- | ------------ | - | ------------ | ---------- |  | - | ---------- | ---------- | - | - | ---------- | --------- | -
|                                    |                                                   |   | THREE MONTH PERIOD ENDED DECEMBER 31, 2001
|                                    |                                                   |   |                                           
|                                    |                                                   |   | Penhall                                    |            | Penhall |   |           |           |              |   |              |            |  |   |            |            |  
|                                    |                                                   |   | International                              |            | Rental  |   | Penhall   |           |              |   |              |            |  |   |            |            |  
|                                    |                                                   |   | Corp.                                      |            | Corp.   |   | Company   |           | Eliminations |   | Consolidated
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |             
|Revenues                            |                                                   | $ |                                           |            |         | $ | 2,808,000 |           |              | $ | 39,157,000   |            |  | $ | (4,291,000 | )          |   | $ | 37,674,000 |          
|Cost of revenues                    |                                                   |   |                                           |            |         |   |          |           |              |   | 28,001,000   |            |  |   | (233,000   | )          |   |   | 27,768,000 |          
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |          
|                                    | Gross profit                                      |   |                                            |           |         |   |           | 2,808,000 |              |   |              | 11,156,000 |  |   |            | (4,058,000 | ) |   |            | 9,906,000 |  
|General and administrative expenses |                                                   |   | 88,000                                     |            |         |   | 98,000    |           |              |   | 8,435,000    |            |  |   | (1,726,000 | )          |   |   | 6,895,000  |          
|Royalties                           |                                                   |   |                                           |            |         |   |          |           |              |   | 2,332,000    |            |  |   | (2,332,000 | )          |   |   |           |          
|Other operating income, net         |                                                   |   | 2,000                                      |            |         |   |          |           |              |   | 272,000      |            |  |   |           |            |   |   | 274,000    |          
|Equity earnings in subsidiaries     |                                                   |   | 1,965,000                                  |            |         |   |          |           |              |   |             |            |  |   | (1,965,000 | )          |   |   |           |          
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |          
|                                    | Earnings before interest expense and income taxes |   |                                            | 1,879,000  |         |   |           | 2,710,000 |              |   |              | 661,000    |  |   |            | (1,965,000 | ) |   |            | 3,285,000 |  
|Interest expense                    |                                                   |   | 3,538,000                                  |            |         |   | 5,000     |           |              |   | 36,000       |            |  |   |           |            |   |   | 3,579,000  |          
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |          
|                                    | Earnings (loss) before income taxes               |   |                                            | (1,659,000 | )       |   |           | 2,705,000 |              |   |              | 625,000    |  |   |            | (1,965,000 | ) |   |            | (294,000  | )
|Income tax expense (benefit)        |                                                   |   | (1,488,000                                 | )          |         |   | 1,109,000 |           |              |   | 256,000      |            |  |   |           |            |   |   | (123,000   | )        
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |          
|                                    | Net earnings (loss)                               |   | $                                          | (171,000   | )       |   | $         | 1,596,000 |              |   | $            | 369,000    |  |   | $          | (1,965,000 | ) |   | $          | (171,000  | )
|                                    |                                                   |   |                                            |            |         |   |           |           |              |   |              |            |  |   |            |            |   |   |            |          

12



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |           |           |  
|----------------------------------- | -------------------------------------------------------- | ----------------------------------- | --------- | ------------------------------------------ | --------- | ------- | ---------- | ------------ | --------- | ------------ | ---------- | ------- | ---------- | - | ---------- | --------- | --------- | -
|                                    |                                                          |                                     |           | THREE MONTH PERIOD ENDED DECEMBER 31, 2002
|                                    |                                                          |                                     |           |                                           
|                                    |                                                          |                                     |           | Penhall                                    |           |         |            |              |           |              |            |         |            |   |            |          
|                                    |                                                          |                                     |           | International                              |           | Penhall |            |              |           |              |            |         |            |  
|                                    |                                                          |                                     |           | Corp.                                      |           | Company |            | Eliminations |           | Consolidated
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |             
|Revenues                            |                                                          | $                                   | 2,914,000 |                                            |           | $       | 42,044,000 |              |           | $            | (2,914,000 | )       |            | $ | 42,044,000 |          
|Cost of revenues                    |                                                          |                                     |          |                                            |           |         | 32,795,000 |              |           |              |           |         |            |   | 32,795,000 |          
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          
|                                    |                                                          | Gross profit                        |           |                                            | 2,914,000 |         |            |              | 9,249,000 |              |            |         | (2,914,000 | ) |            |           | 9,249,000 |  
|General and administrative expenses |                                                          |                                     | 193,000   |                                            |           |         | 6,936,000  |              |           |              | (397,000   | )       |            |   | 6,732,000  |          
|Royalties                           |                                                          |                                     |          |                                            |           |         | 2,517,000  |              |           |              | (2,517,000 | )       |            |   |           |          
|Other operating income, net         |                                                          |                                     | (7,000    | )                                          |           |         | 404,000    |              |           |              |           |         |            |   | 397,000    |          
|Equity earnings in subsidiary       |                                                          |                                     | 62,000    |                                            |           |         |           |              |           |              | (62,000    | )       |            |   |           |          
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          
|                                    | Earnings (loss) before interest expense and income taxes |                                     |           | 2,776,000                                  |           |         |            | 200,000      |           |              |            | (62,000 | )          |   |            | 2,914,000 |          
|Interest expense                    |                                                          |                                     | 3,462,000 |                                            |           |         | 85,000     |              |           |              |           |         |            |   | 3,547,000  |          
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          
|                                    |                                                          | Earnings (loss) before income taxes |           |                                            | (686,000  | )       |            |              | 115,000   |              |            |         | (62,000    | ) |            |           | (633,000  | )
|Income tax expense (benefit)        |                                                          |                                     | (281,000  | )                                          |           |         | 53,000     |              |           |              |           |         |            |   | (228,000   | )        
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          
|Net earnings (loss)                 |                                                          | $                                   | (405,000  | )                                          |           | $       | 62,000     |              |           | $            | (62,000    | )       |            | $ | (405,000   | )        
|                                    |                                                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          

13



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |            | 
|----------------------------------- | ------------------------------------------------- | - | ------------- | ---------- | ------- | - | ---------------------------------------- | --------- | ------------ | - | ------------ | ---------- |  | - | ---------- | ---------- | - | - | ---------- | ---------- | 
|                                    |                                                   |   |               |            |         |   | SIX MONTH PERIOD ENDED DECEMBER 31, 2001 |           |              |   |             
|                                    |                                                   |   |               |           
|                                    |                                                   |   | Penhall       |            | Penhall |   |                                          |           |              |   |              |            |  |   |            |            |  
|                                    |                                                   |   | International |            | Rental  |   | Penhall                                  |           |              |   |              |            |  |   |           
|                                    |                                                   |   | Corp.         |            | Corp.   |   | Company                                  |           | Eliminations |   | Consolidated
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |             
|Revenues                            |                                                   | $ |              |            |         | $ | 6,264,000                                |           |              | $ | 90,145,000   |            |  | $ | (9,578,000 | )          |   | $ | 86,831,000 |           
|Cost of revenues                    |                                                   |   |              |            |         |   |                                         |           |              |   | 62,554,000   |            |  |   | (233,000   | )          |   |   | 62,321,000 |           
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |           
|                                    | Gross profit                                      |   |               |           |         |   |                                          | 6,264,000 |              |   |              | 27,591,000 |  |   |            | (9,345,000 | ) |   |            | 24,510,000 | 
|General and administrative expenses |                                                   |   | 188,000       |            |         |   | 191,000                                  |           |              |   | 18,507,000   |            |  |   | (3,937,000 | )          |   |   | 14,949,000 |           
|Royalties                           |                                                   |   |              |            |         |   |                                         |           |              |   | 5,408,000    |            |  |   | (5,408,000 | )          |   |   |           |           
|Other operating income, net         |                                                   |   | 2,000         |            |         |   |                                         |           |              |   | 554,000      |            |  |   |           |            |   |   | 556,000    |           
|Equity earnings in subsidiary       |                                                   |   | 6,034,000     |            |         |   |                                         |           |              |   |             |            |  |   | (6,034,000 | )          |   |   |           |           
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |           
|                                    | Earnings before interest expense and income taxes |   |               | 5,848,000  |         |   |                                          | 6,073,000 |              |   |              | 4,230,000  |  |   |            | (6,034,000 | ) |   |            | 10,117,000 | 
|Interest expense                    |                                                   |   | 7,231,000     |            |         |   | 10,000                                   |           |              |   | 66,000       |            |  |   |           |            |   |   | 7,307,000  |           
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |           
|                                    | Earnings (loss) before income taxes               |   |               | (1,383,000 | )       |   |                                          | 6,063,000 |              |   |              | 4,164,000  |  |   |            | (6,034,000 | ) |   |            | 2,810,000  | 
|Income tax expense (benefit)        |                                                   |   | (3,043,000    | )          |         |   | 2,486,000                                |           |              |   | 1,707,000    |            |  |   |           |            |   |   | 1,150,000  |           
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |           
|Net earnings                        |                                                   | $ | 1,660,000     |            |         | $ | 3,577,000                                |           |              | $ | 2,457,000    |            |  | $ | (6,034,000 | )          |   | $ | 1,660,000  |           
|                                    |                                                   |   |               |            |         |   |                                          |           |              |   |              |            |  |   |            |            |   |   |            |           

14



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |            |  
|----------------------------------- | ------------------------------------------------- | - | ---------------------------------------- | --------- | ------- | - | ------------ | ---------- | ------------ | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                    |                                                   |   | SIX MONTH PERIOD ENDED DECEMBER 31, 2002
|                                    |                                                   |   |                                         
|                                    |                                                   |   | Penhall                                  |           |         |   |              |            |              |   |            |            |   |   |           
|                                    |                                                   |   | International                            |           | Penhall |   |              |            |              |   |            |            |  
|                                    |                                                   |   | Corp.                                    |           | Company |   | Eliminations |            | Consolidated
|                                    |                                                   |   |                                          |           |         |   |              |            |             
|Revenues                            |                                                   | $ | 6,107,000                                |           |         | $ | 88,620,000   |            |              | $ | (6,107,000 | )          |   | $ | 88,620,000 |           
|Cost of revenues                    |                                                   |   |                                         |           |         |   | 68,890,000   |            |              |   |           |            |   |   | 68,890,000 |           
|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Gross profit                                      |   |                                          | 6,107,000 |         |   |              | 19,730,000 |              |   |            | (6,107,000 | ) |   |            | 19,730,000 |  
|General and administrative expenses |                                                   |   | 384,000                                  |           |         |   | 14,416,000   |            |              |   | (790,000   | )          |   |   | 14,010,000 |           
|Royalties                           |                                                   |   |                                         |           |         |   | 5,317,000    |            |              |   | (5,317,000 | )          |   |   |           |           
|Other operating income, net         |                                                   |   | 1,000                                    |           |         |   | 888,000      |            |              |   |           |            |   |   | 889,000    |           
|Equity earnings in subsidiaries     |                                                   |   | 427,000                                  |           |         |   |             |            |              |   | (427,000   | )          |   |   |           |           
|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Earnings before interest expense and income taxes |   |                                          | 6,151,000 |         |   |              | 885,000    |              |   |            | (427,000   | ) |   |            | 6,609,000  |  
|Interest expense                    |                                                   |   | 6,983,000                                |           |         |   | 162,000      |            |              |   |           |            |   |   | 7,145,000  |           
|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Earnings (loss) before income taxes               |   |                                          | (832,000  | )       |   |              | 723,000    |              |   |            | (427,000   | ) |   |            | (536,000   | )
|Income tax expense (benefit)        |                                                   |   | (489,000                                 | )         |         |   | 296,000      |            |              |   |           |            |   |   | (193,000   | )         
|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           
|Net earnings (loss)                 |                                                   | $ | (343,000                                 | )         |         | $ | 427,000      |            |              | $ | (427,000   | )          |   | $ | (343,000   | )         
|                                    |                                                   |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           

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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |             |            |  
|------------------------------------------------ | ------------------------------------------------------- | --------------------------------------- | --------- | ---------------------------------------- | ---------- | ------- | --------- | ---------- | ---------- | ------------ | ---------- | ------------ | ---------- | - | ---------- | --------- | --------- | - | ---------- | ----------- | ---------- | -
|                                                 |                                                         |                                         |           | SIX MONTH PERIOD ENDED DECEMBER 31, 2001
|                                                 |                                                         |                                         |           |                                         
|                                                 |                                                         |                                         |           | Penhall                                  |            | Penhall |           |            |            |              |            |              |            |   |            |           |           |  
|                                                 |                                                         |                                         |           | International                            |            | Rental  |           | Penhall    |            |              |            |              |            |   |            |          
|                                                 |                                                         |                                         |           | Corp.                                    |            | Corp.   |           | Company    |            | Eliminations |            | Consolidated
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |             
|Net cash provided by operating activities        |                                                         | $                                       | 2,437,000 |                                          |            | $       | 3,753,000 |            |            | $            | 10,793,000 |              |            | $ | (6,034,000 | )         |           | $ | 10,949,000 |            
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|Cash flows from investing activities:            |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|                                                 | Proceeds from sale of assets                            |                                         |           |                                         |            |         |           |           |            |              |            | 223,000      |            |   |            |          |           |   |            | 223,000     |           
|                                                 | Capital expenditures                                    |                                         |           |                                         |            |         |           |           |            |              |            | (5,704,000   | )          |   |            |          |           |   |            | (5,704,000  | )         
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|                                                 |                                                         | Net cash used in investing activities   |           |                                          |           |         |           |            |           |              |            |              | (5,481,000 | ) |            |           |          |   |            |             | (5,481,000 | )
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|Cash flows from financing activities:            |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|                                                 | Due to (from) affiliates                                |                                         |           | 1,354,000                                |            |         |           | (3,662,000 | )          |              |            | (3,726,000   | )          |   |            | 6,034,000 |           |   |            |            |           
|                                                 | Borrowings under long-term debt                         |                                         |           | 42,750,000                               |            |         |           |           |            |              |            | 56,000       |            |   |            |          |           |   |            | 42,806,000  |           
|                                                 | Repayments of long-term debt                            |                                         |           | (46,890,000                              | )          |         |           | (8,000     | )          |              |            | (560,000     | )          |   |            |          |           |   |            | (47,458,000 | )         
|                                                 | Book overdraft                                          |                                         |           |                                         |            |         |           |           |            |              |            | (1,062,000   | )          |   |            |          |           |   |            | (1,062,000  | )         
|                                                 | Proceeds from issuance of common stock                  |                                         |           | 213,000                                  |            |         |           |           |            |              |            |             |            |   |            |          |           |   |            | 213,000     |           
|                                                 | Repurchase of common stock and Series B
preferred stock |                                         |           | (21,000                                  | )          |         |           |           |            |              |            |             |            |   |            |          |           |   |            | (21,000     | )         
|                                                 | Issuance of Series B preferred stock                    |                                         |           | 158,000                                  |            |         |           |           |            |              |            |             |            |   |            |          |           |   |            | 158,000     |           
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|                                                 |                                                         | Net cash used in financing activities   |           |                                          | (2,436,000 | )       |           |            | (3,670,000 | )            |            |              | (5,292,000 | ) |            |           | 6,034,000 |   |            |             | (5,364,000 | )
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|                                                 |                                                         | Net change in cash and cash equivalents |           |                                          | 1,000      |         |           |            | 83,000     |              |            |              | 20,000     |   |            |           |          |   |            |             | 104,000    |  
|Cash and cash equivalents at beginning of period |                                                         |                                         |          |                                          |            |         | 921,000   |            |            |              | 109,000    |              |            |   |           |           |           |   | 1,030,000  |            
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            
|Cash and cash equivalents at end of period       |                                                         | $                                       | 1,000     |                                          |            | $       | 1,004,000 |            |            | $            | 129,000    |              |            | $ |           |           |           | $ | 1,134,000  |            
|                                                 |                                                         |                                         |           |                                          |            |         |           |            |            |              |            |              |            |   |            |           |           |   |            |            

16



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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2002
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |             |   |            |  
|------------------------------------------------ | ------------------------------------------------------- | - | --------------------------------------------------- | ----------- | ---------------------------------------- | ---------- | --------- | ---------- | ------- | ---------- | ------------ | ---------- | ------------ | ---------- | - | - |  | - | --------- | ----------- | - | ---------- | -
|                                                 |                                                         |   |                                                     |             | SIX MONTH PERIOD ENDED DECEMBER 31, 2002
|                                                 |                                                         |   |                                                     |             |                                         
|                                                 |                                                         |   |                                                     |             | Penhall                                  |            | Penhall   |            |         |            |              |            |              |            |   |   |  |   |          
|                                                 |                                                         |   |                                                     |             | International                            |            | Rental    |            | Penhall |            |              |            |              |            |   |   | 
|                                                 |                                                         |   |                                                     |             | Corp.                                    |            | Corp.     |            | Company |            | Eliminations |            | Consolidated
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |             
|Net cash provided by operating activities        |                                                         | $ | 1,186,000                                           |             |                                          | $          |          |            |         | $          | 6,173,000    |            |              | $          |  |   |  | $ | 7,359,000 |            
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|Cash flows from investing activities:            |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|                                                 | Proceeds from sale of assets                            |   |                                                     |            |                                          |            |           |           |         |            |              | 396,000    |              |            |   |  |  |   |           | 396,000     |  
|                                                 | Capital expenditures                                    |   |                                                     |            |                                          |            |           |           |         |            |              | (2,681,000 | )            |            |   |  |  |   |           | (2,681,000  | )
|                                                 | Cash from Penhall Rental merger                         |   |                                                     | 6,143,000   |                                          |            |           | (6,143,000 | )       |            |              |           |              |            |   |  |  |   |           |            |  
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|                                                 |                                                         |   | Net cash provided by (used in) investing activities |             |                                          | 6,143,000  |           |            |         | (6,143,000 | )            |            |              | (2,285,000 | ) |   |  |  |           |             |   | (2,285,000 | )
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|Cash flows from financing activities:            |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|                                                 | Due to (from) affiliates                                |   |                                                     | 5,414,000   |                                          |            |           |           |         |            |              | (5,414,000 | )            |            |   |  |  |   |           |            |  
|                                                 | Borrowings under long-term debt                         |   |                                                     | 30,820,000  |                                          |            |           |           |         |            |              | 1,040,000  |              |            |   |  |  |   |           | 31,860,000  |  
|                                                 | Repayments of long-term debt                            |   |                                                     | (41,572,000 | )                                        |            |           |           |         |            |              | (820,000   | )            |            |   |  |  |   |           | (42,392,000 | )
|                                                 | Book overdraft                                          |   |                                                     |            |                                          |            |           |           |         |            |              | 1,322,000  |              |            |   |  |  |   |           | 1,322,000   |  
|                                                 | Debt issuance costs                                     |   |                                                     | (104,000    | )                                        |            |           |           |         |            |              | (9,000     | )            |            |   |  |  |   |           | (113,000    | )
|                                                 | Proceeds from issuance of common stock                  |   |                                                     | 38,000      |                                          |            |           |           |         |            |              |           |              |            |   |  |  |   |           | 38,000      |  
|                                                 | Repurchase of common stock and Series B preferred stock |   |                                                     | (35,000     | )                                        |            |           |           |         |            |              |           |              |            |   |  |  |   |           | (35,000     | )
|                                                 | Issuance of Series B preferred stock                    |   |                                                     | 37,000      |                                          |            |           |           |         |            |              |           |              |            |   |  |  |   |           | 37,000      |  
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|                                                 |                                                         |   | Net cash used in financing activities               |             |                                          | (5,402,000 | )         |            |         |           |              |            |              | (3,881,000 | ) |   |  |  |           |             |   | (9,283,000 | )
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|                                                 |                                                         |   | Net change in cash and cash equivalents             |             |                                          | 1,927,000  |           |            |         | (6,143,000 | )            |            |              | 7,000      |   |   |  |  |           |             |   | (4,209,000 | )
|Cash and cash equivalents at beginning of period |                                                         |   |                                                    |             |                                          |            | 6,143,000 |            |         |            | 62,000       |            |              |            |  |   |  |   | 6,205,000 |            
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            
|Cash and cash equivalents at end of period       |                                                         | $ | 1,927,000                                           |             |                                          | $          |          |            |         | $          | 69,000       |            |              | $          |  |   |  | $ | 1,996,000 |            
|                                                 |                                                         |   |                                                     |             |                                          |            |           |            |         |            |              |            |              |            |   |   |  |   |           |            

17



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##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations


The following discussion of the results of operations and financial
condition of Penhall International Corp. (Penhall) should be read in
conjunction with the unaudited condensed consolidated financial statements and
footnotes thereto included in this quarterly report on Form 10-Q and the
Companys audited consolidated financial statements and footnotes thereto
included in the annual report on Form 10-K, filed with the Securities and
Exchange Commission.

General

Penhall was founded in 1957 in Anaheim, California with one piece of
equipment, and today is one of the largest Operated Equipment Rental Services
companies in the United States. Penhall differentiates itself from other
equipment rental companies by providing specialized services in connection with
infrastructure projects through renting equipment along with skilled operators
to serve customers in the construction, industrial, manufacturing, governmental
and residential markets. In addition, Penhall complements its Operated
Equipment Rental Services with fixed-price contracts, which serve to market its
operated equipment rental services business and increase utilization of its
operated equipment rental fleet. Penhall provides its services from thirty
eight locations in seventeen states, with a presence in some of the fastest
growing states in terms of construction spending and population growth.

The operated equipment rental industry is a specialized niche of the
highly fragmented United States equipment rental industry, in which there are
approximately 17,000 companies. Penhall has taken advantage of consolidation
opportunities by acquiring small companies in targeted markets as well as by
establishing new offices in those markets. Since 1998, Penhall has effected
eight strategic acquisitions, including:



| | 1. |  | HSI, a Minnesota-based firm acquired in April 1998,                                                            
| | -- |  | ---------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,              
|
| | 3. |  | Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,                           
|
| | 4. |  | Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,                                 
|
| | 5. |  | Advance Concrete Sawing and
Drilling, Inc., a Bakersfield, California-based company acquired in
September 2000,
|
| | 6. |  | H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2001,                         
|
| | 7. |  | Bob Mack Company, a Visalia, California-based company acquired in March 2002, and                              
|
| | 8. |  | Arizona Curb Cut Company, an Arizona based company in April 2002.                                              

During the same period, Penhall established operations in seven new
markets by opening offices Dallas, Richmond, Fresno, Buffalo, Reno, Seattle and
Cleveland.

Penhall derives its revenues primarily from services provided for
infrastructure related jobs. Penhalls Operated Equipment Rental Services are
complemented by long-term fixed-price contracts. Penhalls revenues are derived
from highway-related projects, building-related projects, airport, residential
and other projects. The following table shows the breakdown of the components
of revenue for the periods indicated:

|                                   |                |   |                                        |        |                                      |  |      |  |       |  |      |       |   |  |   |  |  |   |        |        |       |  |   |  |       |  |      |       |   |   |        |        |       |  |      |       |   |  |  |  |      |   |        |        |  |  |      |       |   | 
|---------------------------------- | -------------- | - | -------------------------------------- | ------ | ------------------------------------ |  | ---- |  | ----- |  | ---- | ----- | - |  | - |  |  | - | ------ | ------ | ----- |  | - |  | ----- |  | ---- | ----- | - | - | ------ | ------ | ----- |  | ---- | ----- | - |  |  |  | ---- | - | ------ | ------ |  |  | ---- | ----- | - | 
|                                   |                |   | THREE MONTH PERIODS ENDED DECEMBER 31, |        | SIX MONTH PERIODS ENDED DECEMBER 31,
|                                   |                |   |                                        |        |                                     
|                                   |                |   | 2002                                   |        | 2001                                 |  | 2002 |  | 2001 
|                                   |                |   |                                        |        |                                      |  |      |  |      
|                                   |                |   |                                        |        |                                      |  |      |  |       |  | % of |       |   |  |   |  |  |   |        |        |       |  |   |  | % of  |  |      |       |   |   | % of   |        |       |  |      |       |   |  |  |  | % of
|                                   |                |   | $                                      |        |                                      |  |      |  | Total |  |      |       |   |  | $ |  |  |   |        |        | Total |  | $ |  | Total |  |      |       |   |   | $      |        | Total
|                                   |                |   |                                        |        |                                      |  |      |  |       |  |      |       |   |  |   |  |  |   |        |        |       |  |   |  |       |  |      |       |   |   |        |        |      
|                                   |                |   | (Dollars in Thousands)                 |        | (Dollars in Thousands)              
|Operated Equipment Rental Services |                | $ | 29,137                                 |        |                                      |  |      |  |       |  | 69.3 | %     |   |  |   |  |  | $ | 28,521 |        |       |  |   |  |       |  | 75.7 | %     |   | $ | 63,512 |        |       |  | 71.7 | %     |   |  |  |  |      | $ | 63,679 |        |  |  | 73.3 | %    
|Contract Services (1)              |                |   | 12,907                                 |        |                                      |  |      |  |       |  | 30.7 | %     |   |  |   |  |  |   | 9,153  |        |       |  |   |  |       |  | 24.3 | %     |   |   | 25,108 |        |       |  | 28.3 | %     |   |  |  |  |      |   | 23,152 |        |  |  | 26.7 | %    
|                                   |                |   |                                        |        |                                      |  |      |  |       |  |      |       |   |  |   |  |  |   |        |        |       |  |   |  |       |  |      |       |   |   |        |        |       |  |      |       |   |  |  |  |      |   |        |        |  |  |      |      
|                                   | Total Revenues |   | $                                      | 42,044 |                                      |  |      |  |       |  |      | 100.0 | % |  |   |  |  |   | $      | 37,674 |       |  |   |  |       |  |      | 100.0 | % |   | $      | 88,620 |       |  |      | 100.0 | % |  |  |  |      |   | $      | 86,831 |  |  |      | 100.0 | %
|                                   |                |   |                                        |        |                                      |  |      |  |       |  |      |       |   |  |   |  |  |   |        |        |       |  |   |  |       |  |      |       |   |   |        |        |       |  |      |       |   |  |  |  |      |   |        |        |  |  |      |      



---

|(1) |  | Contract services revenues exclude services performed by the operated equipment rental divisions on long-term contracts.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

18



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##### Table of Contents



Revenue growth is influenced by infrastructure change, including new
construction, modification and natural disasters, such as the 1989 and 1994
earthquakes in Northern and Southern California. Other factors that influence
Penhalls operations are demand for operated rental equipment, the amount and
quality of equipment available for rent, rental rates and general economic
conditions. Historically, revenues have been seasonal, as weather conditions in
the spring and summer months result in stronger performance in the first and
fourth fiscal quarters than in the second and third fiscal quarters.

The principal components of Penhalls operating costs include the cost of
labor, equipment rental fleet maintenance costs including parts and service,
equipment rental fleet depreciation, insurance and other direct operating
costs. Given the varied, and in some cases specialized, nature of its rental
equipment, Penhall utilizes a range of periods over which it depreciates its
equipment on a straight-line basis. On average, Penhall depreciates its
equipment over an estimated useful life of six years with a 10% residual value.

Results of Operations

Six Months Ended December 31, 2002 Compared to Six months Ended December
31, 2001

Revenues.Revenues for the six months ended December 31, 2002 (Interim
2003) were $88.6 million, an increase of $1.8 million or 2.1 % over the six
months ended December 31, 2001 (Interim 2002). Increased revenues in Interim
2003 were primarily a result of an increase of $2.0 million or 8.4% in
Contract Services in Interim 2003.

Gross Profit.Gross profit totaled $19.7 million in Interim 2003, a
decrease of $4.8 million or 19.5 % from Interim 2002. Gross profit as a
percentage of revenues decreased from 28.2% in Interim 2002 to 22.3% in Interim
2003. The decrease in gross profit from Interim 2002 to Interim 2003 is
primarily attributable to increased competition, cost overruns on some
contracts, and an increase of $1.7 million in insurance costs during Interim
2003. The decrease in gross profit as a percentage of revenues was due to
increased competition, an increase in insurance costs and a decrease in
equipment utilization.

General and Administrative Expenses.General and administrative expenses
were $14.0 million in Interim 2003 compared to $14.9 million in Interim 2002.
As a percent of revenues, general and administrative expenses were 15.8% in
Interim 2003 compared to 17.2% in Interim 2002. The decrease in general and
administrative expenses as a percentage of revenues during Interim 2003 is
primarily attributable to a decrease of $1.2 million in incentive compensation
and $0.3 million in goodwill amortization partially offset by a $0.3 million
increase in insurance costs.

Interest Expense.Interest expense was $7.1 million in Interim 2003
compared to interest expense of $7.3 million in Interim 2002. The decrease in
interest expense is attributable to lower interest rates and decreased
borrowing during Interim 2003.

Income Tax Expense (Benefit).The Company recorded an income tax benefit
of $0.2 million, or 36% of loss before income taxes in Interim 2003, compared
to an income tax provision of $1.2 million, or 41% of earnings before income
taxes in Interim 2002. The income tax benefit is attributable to a loss before
income tax in Interim 2003.

19



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##### Table of Contents



Three months Ended December 31, 2002 Compared to Three months Ended
December 31, 2001

Revenues.Revenues for the three months ended December 31, 2002 (Interim
2003) were $42.0 million, an increase of $4.4 million or 11.6% over the three
months ended December 31, 2001 (Interim 2002). Higher revenues in Interim
2003 were primarily a result of an increase in Contract Services, which
increased from $9.2 million in Interim 2002 to $12.9 million in Interim 2003.

Gross Profit.Gross profit totaled $9.2 million in Interim 2003, a
decrease of $0.7 million or 6.6% from Interim 2002. Gross profit as a
percentage of revenues decreased to 22.0% in Interim 2003 from 26.3% in Interim
2002. The decrease in gross profit is primarily attributable to increased
insurance costs, which increased by $1.2 million during Interim 2003 and losses
on some Contract Services work. The decrease in gross profit as a percentage
of revenues was due primarily to increased insurance costs, increased
competition and a decrease in equipment utilization.

General and Administrative Expenses.General and administrative expenses
were $6.7 million in Interim 2003 compared to $6.9 million in Interim 2002, a
decrease of $0.2 million. As a percent of revenues, general and administrative
expenses were 16.0% in Interim 2003 compared to 18.3% in Interim 2002. The
decrease in general and administrative expenses as a percentage of revenues is
primarily due to the fixed nature of these expenses in addition to increases in
insurance costs, data processing costs and accounting and legal costs which are
offset by decreases in advertising, travel, entertainment, salaries and
incentive compensation.

Interest Expense.Interest expense was $3.5 million in Interim 2003
compared to interest expense of $3.6 million in Interim 2002. The decrease in
interest expense is attributable to lower interest rates and lower borrowings
in Interim 2003.

Income Tax Benefit.The Company recorded an income tax benefit of $0.2
million, or 36.0% of loss before income taxes in Interim 2003 compared to an
income tax benefit of $0.1 million, or 41.8% of loss before income taxes in
Interim 2002. The increase in tax benefit is attributable to a higher loss
before income tax in Interim 2003.

Liquidity and Capital Resources

It is anticipated that the Companys principal uses of liquidity will be
to fund working capital and meet debt service requirements. The Companys
principal sources of liquidity are expected to be cash flow from operations and
borrowings under the New Credit Facility (originated in 1998). The New Credit
Facility consists of two facilities: (i) a six-year senior secured term loan
facility in an aggregate principal amount equal to $20.0 million (the Term
Loan Facility); and (ii) a six-year revolving credit facility in an aggregate
principal amount not to exceed $30.0 million (the Revolving Credit Facility).
The Company drew $20.0 million of loans under the Term Loan Facility (Term
Loans) on the closing date of the New Credit Facility in connection with the
Recapitalization. The Term Loans amortize on a quarterly basis and are payable
in installments under a schedule set forth in the New Credit Facility. Advances
made under the Revolving Credit Facility (Revolving Loans) are due and
payable in full on June 15, 2004. The Term Loans and the Revolving Loans are
subject to mandatory prepayments and reductions in the event of certain
extraordinary transactions or issuances of debt and equity by the Company or
any subsidiary of the Company that guarantees amounts under the New Credit
Facility. Such loans are also required to be prepaid with 75% of the Excess
Cash Flow (as such term is defined in the New Credit Facility) of the Company
or, if the Companys Leverage Ratio (as such term is defined in the New Credit
Facility) is less than 5.25 to 1.0, 50% of such Excess Cash Flow.

|                                                                     |  |  |         |  |  |  |         | 
|-------------------------------------------------------------------- |  |  | ------- |  |  |  | ------- | 
|SUMMARY CASH FLOW DATA (000s) FOR
THE SIX MONTHS ENDED December 31, |  |  | 2001    |  |  |  | 2002    | 
|                                                                    
|Cash and cash equivalents                                            |  |  | $1,134  |  |  |  | $1,996  | 
|                                                                    
|Net cash provided by (used in):                                     
|                                                                    
|Operating activities                                                 |  |  | 10,949  |  |  |  | 7,359   | 
|                                                                    
|Investing activities                                                 |  |  | (5,481) |  |  |  | (2,285) | 
|                                                                    
|Financing activities                                                 |  |  | (5,364) |  |  |  | (9,283) | 
|                                                                    
|Capital expenditures                                                 |  |  | (5,704) |  |  |  | (2,681) | 
|                                                                    

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Cash provided by operating activities decreased to $7.4 million in Interim
2003 from $10.9 million in Interim 2002, a decrease of $3.6 million. Net
earnings decreased $2.0 million from $1.7 million in Interim 2002 to a $0.3
million loss in Interim 2003. In Interim 2003, the Companys net loss and
depreciation plus a decrease in receivables offset by a decrease in trade
accounts payable and accrued liabilities resulted in $7.4 million in net cash
provided by operating activities. In Interim 2002, the Companys net earnings
and depreciation plus a decrease in receivables offset by a reduction in
accounts payable, accrued liabilities and income taxes resulted in $10.9
million in net cash provided from operating activities.

Net cash used in investing activities decreased $3.2 million to $2.3
million in Interim 2003 from $5.5 million in Interim 2002. The reduction in net
cash used in investing activities is primarily attributable to a decrease in
capital expenditures of $3.0 million.

Management estimates that the Companys annual capital expenditures will
be approximately $6.0 million for fiscal 2003.

Net cash used in financing activities in Interim 2003 was a net use of
$9.3 million as compared to a net use of $5.4 million in Interim 2002. In
Interim 2003 and Interim 2002, the Companys financing activities are primarily
a result of borrowings and repayments of long-term debt and a book overdraft.

Historically, the Company has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As
a result of the recapitalization in 1998, however, the Company has substantial
indebtedness and debt service obligations. As of December 31, 2002, the Company
and its subsidiaries had approximately $118.4 million of total indebtedness
outstanding (including the Notes) plus outstanding letters of credit of $7.7
million and a stockholders deficit of approximately $68.3 million. As of
December 31, 2002, approximately $20.7 million of additional borrowing was
available under the Companys New Credit Facility.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

The Company is exposed to interest rate changes primarily as a result of
its notes payable, including Senior Notes, Term Loan and Revolving Loan used to
maintain liquidity and fund capital expenditures and expansion of the Companys
operations. The Companys interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower
its overall borrowing costs. To achieve its objectives the Company borrows
primarily at fixed rates and has the ability to choose interest rates under the
Term Loan and Revolving Loan. The Company does not enter into derivative or
interest rate transactions for speculative purposes.

The table below presents the principal amounts of debt, weighted average
interest rates, fair values and other items required by the year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes as of December 31, 2002.

|                                           |  |                      |       |      |  |      |       |      |  |      |      |            |  |                |         |       |  |   |       |   |  |   |       |   |  |   |         |   |  |   |        |    
|------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ---- | ---------- |  | -------------- | ------- | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ------- | - |  | - | ------ | ---
|                                           |  | Years Ended June 30, |       |      |  |      |       |      |  |      |      |            |  |               
|                                           |  |                      |       |      |  |      |       |      |  | Fair
|                                           |  | 2003                 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |      | Thereafter |  | Total          |         | Value
|                                           |  |                      |       |      |  |      |       |      |  |      |      |            |  |                |         |      
|                                           |  |                      |       |      |  |      |       |      |  |      |      |            |  | (In thousands) |         |       |  |   |       |   |  |   |       |   |  |  
|Fixed rate debt                            |  | $                    | 2,149 |      |  | $    | 2,009 |      |  | $    | 171  |            |  | $              | 100,012 |       |  | $ | 5     |   |  | $ | 166   |   |  | $ | 104,512 |   |  | $ | 61,512 | (2)
|Average interest rate                      |  |                      | 3.29  | %    |  |      | 2.71  | %    |  |      | 3.34 | %          |  |                | 12.00   | %     |  |   | 10.00 | % |  |   | 10.00 | % |  |   | 11.62   | % |  |   | 11.36  | %  
|Variable rate LIBOR debt (1)               |  | $                    | 3,366 |      |  | $    | 8,356 |      |  | $    | 791  |            |  | $              | 1,248   |       |  | $ | 165   |   |  | $ | 0     |   |  | $ | 13,926  |   |  | $ | 13,926 |    
|Weighted average current interest rate (1) |  |                      |       |      |  |      |       |      |  |      |      |            |  |                |         |       |  |   |       |   |  |   |       |   |  |   |         |   |  |   | 4.43   | %  



---

|(1) |  | The Company has different interest rate options for its variable rate debt.                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities.




Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure
(1) that information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commissions (SEC) rules and forms,
and (2) that this information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
November 2002, under the supervision and review of our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them in a timely
manner to material information regarding the Company that is required to be
included in our periodic reports to the SEC. In addition, there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls since our November 2002 evaluation. We
cannot assure you, however, that our system of disclosure controls and
procedures will always achieve its stated goals under all future conditions, no
matter how remote.




Part II  Other Information






| |                             
| | ----------------------------
| | Items 1-5 are not applicable






| |                                          
| | -----------------------------------------
| | Item 6. Exhibits and Reports on Form 8-K.



| |     
| | ----
| | None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |                   |  |  |                                                                   
|----- | ----------------- |  |  | ------------------------------------------------------------------
|Date: | February 13, 2003 |  |  | Penhall
International Corp.
/s/ John T. Sawyer                    
|      |                   |  |  |                                                                   
|      |                   |  |  | John T. SawyerChairman of the Board, President and                
|      |                   |  |  | Chief Executive Officer                                           
|     
|      |                   |  |  | /s/ Jeffrey E. Platt                                              
|      |                   |  |  |                                                                   
|      |                   |  |  | Jeffrey E. PlattVice President-Finance and Chief Financial Officer





22



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##### Table of Contents



PENHALL INTERNATIONAL CORP  10-Q  Quarterly Report




CERTIFICATIONS

I, John T. Sawyer, certify that:



|(1) |  | I have reviewed this quarterly report on Form 10-Q of Penhall International Corp. (the Company)                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
quarterly report;
|   
|(3) |  | Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the periods presented in this quarterly
report;                      
|   
|(4) |  | The Companys other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:                                                                                                            



| | (a) |  | designed such disclosure controls and procedures
to ensure that material information relating to
the Company, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the Companys
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                     



|(5) |  | The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to
the Companys auditors and the audit committee of Companys board of directors (or persons performing
the equivalent function):
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the Companys ability to record,
process, summarize and report financial data and have identified for the Companys
auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that
involves management or other employees who have
a significant role in the Companys internal
controls; and                                                                                                                                     



|(6) |  | The Companys other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

February 13, 2003

/s/ JOHN T. SAWYER




John T. Sawyer
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

23



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##### Table of Contents



PENHALL INTERNATIONAL CORP  10-Q  Quarterly Report

I, Jeffrey E. Platt, certify that:



|(1) |  | I have reviewed this quarterly report on Form 10-Q of Penhall International Corp. (the Company)                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
quarterly report;
|   
|(3) |  | Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the periods presented in this quarterly
report;                      
|   
|(4) |  | The Companys other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:                                                                                                            



| | (a) |  | designed such disclosure controls and procedures
to ensure that material information relating to
the Company, including its consolidated
subsidiaries, is made known to us by others
within those entities, particularly during the
period in which this quarterly report is being
prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the Companys
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                     



|(5) |  | The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to
the Companys auditors and the audit committee of Companys board of directors (or persons performing
the equivalent function):
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could
adversely affect the Companys ability to
record, process, summarize and report financial
data and have identified for the Companys
auditors any material weaknesses in internal
controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that
involves management or other employees who have
a significant role in the Companys internal
controls; and                                                                                                                                     



|(6) |  | The Companys other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

February 13, 2003

/s/ JEFFREY E. PLATT
Jeffrey E. Platt
Vice President-Finance and Chief Financial Officer (Principal Financial Officer)

24