##### Table of Contents



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, 2003

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|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 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 17, 2004
|                                 |  |                                           
|Common Stock, $.01 Par Value     |  | 986,552                                   

Indicate by check mark whether the registrant (1) has 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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o





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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                   
|Exhibit Index                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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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, 2003 and December 31, 2003                                      |    |          | 3 | 
|                                                                                              |                        | Condensed Consolidated Statements of Operations for the three and six month periods ended December 31, 2002 and 2003 |    |          | 5 | 
|                                                                                              |                        | Condensed Consolidated Statements of Cash Flows for the six month periods ended December 31, 2002 and 2003           |    |          | 6 | 
|                                                                                              |                        | Notes to Condensed Consolidated Financial Statements                                                                 |    |          | 7 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                        |                                                                                                                      | 19 |         
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                        |                                                                                                                      | 22 |         
|Item 4. Controls and Procedures                                                               |                        |                                                                                                                      | 22 |         
|Part II  Other Information                                                                   |                        |                                                                                                                      | 22 |         
|Items 1-5 are not applicable                                                                  |                        |                                                                                                                      |    |         
|Item 6. Exhibits and Reports on Form 8-K                                                      |                        |                                                                                                                      | 22 |         
|                                                                                              | a) Reports on Form 8-K |                                                                                                                      |    | 22       |  

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,               |            |                   |             |           
|                                                     |                                                                             |                                                                |                                   |             | 2003                   |            |                   |             |           
|                                                     |                                                                             |                                                                |                                   |             | (Restated, see Note 4) |            | December 31, 2003
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                  
|ASSETS                                               |                                                                             |                                                                |                                   |             |                        |            |                   |            
|Current assets:                                      |                                                                             |                                                                |                                   |             |                        |            |                   |            
|                                                     | Cash and cash equivalents                                                   |                                                                | $                                 | 184,000     |                        |            | $                 | 2,028,000   |           
|                                                     | Receivables:                                                                |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             | Contract and trade receivables                                 |                                   |             | 29,105,000             |            |                   |             | 29,775,000 |           
|                                                     |                                                                             | Contract retentions due upon completion and acceptance of work |                                   |             | 4,105,000              |            |                   |             | 4,497,000  |           
|                                                     |                                                                             | Income taxes                                                   |                                   |             | 2,648,000              |            |                   |             |           |           
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |            
|                                                     |                                                                             |                                                                | 35,858,000                        |             |                        |            | 34,272,000        |            
|                                                     |                                                                             | Less allowance for doubtful receivables                        |                                   |             | 1,592,000              |            |                   |             | 1,530,000  |           
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             |                                                                | Net receivables                   |             |                        | 34,266,000 |                   |             |            | 32,742,000 | 
|                                                     | Costs and estimated earnings in excess of billings on uncompleted contracts |                                                                |                                   | 1,704,000   |                        |            |                   | 2,121,000   |           
|                                                     | Deferred tax assets                                                         |                                                                |                                   | 3,363,000   |                        |            |                   | 3,363,000   |           
|                                                     | Inventories                                                                 |                                                                |                                   | 2,362,000   |                        |            |                   | 2,265,000   |           
|                                                     | Prepaid expenses and other current assets                                   |                                                                |                                   | 3,638,000   |                        |            |                   | 1,822,000   |           
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             |                                                                | Total current assets              |             |                        | 45,517,000 |                   |             |            | 44,341,000 | 
|Property, plant and equipment, at cost:              |                                                                             |                                                                |                                   |             |                        |            |                   |            
|                                                     | Land                                                                        |                                                                |                                   | 5,004,000   |                        |            |                   |            |           
|                                                     | Buildings and leasehold improvements                                        |                                                                |                                   | 8,793,000   |                        |            |                   | 2,254,000   |           
|                                                     | Construction and other equipment                                            |                                                                |                                   | 117,860,000 |                        |            |                   | 115,234,000 |           
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             |                                                                | 131,657,000                       |             |                        |            | 117,488,000       |            
|                                                     | Less accumulated depreciation and amortization                              |                                                                |                                   | 78,256,000  |                        |            |                   | 77,716,000  |           
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             |                                                                | Net property, plant and equipment |             |                        | 53,401,000 |                   |             |            | 39,772,000 | 
|Goodwill                                             |                                                                             |                                                                | 9,053,000                         |             |                        |            | 9,053,000         |            
|Debt issuance costs, net of accumulated amortization |                                                                             |                                                                | 3,316,000                         |             |                        |            | 2,897,000         |            
|Other assets, net                                    |                                                                             |                                                                | 1,186,000                         |             |                        |            | 999,000           |            
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           
|                                                     |                                                                             | $                                                              | 112,473,000                       |             |                        | $          | 97,062,000        |            
|                                                     |                                                                             |                                                                |                                   |             |                        |            |                   |             |           

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------- | ---------------------- | ----------- | ----------------- | ----------- | ------------ | ----------- | -
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             | June 30,               |             |                   |             |             
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             | 2003                   |             |                   |             |             
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             | (Restated, see Note 4) |             | December 31, 2003
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                                              |                                                                                                                                                           |                             |             |                        |             |                   |             |             
|Current liabilities:                                                                                                                                                                                                               |                                                                                                                                                           |                             |             |                        |             |                   |             |             
|                                                                                                                                                                                                                                   | Current installments of long-term debt                                                                                                                    |                             | $           | 2,551,000              |             |                   | $           | 2,382,000    |            
|                                                                                                                                                                                                                                   | Borrowings under revolving credit facility (Note 4)                                                                                                       |                             |             | 14,485,000             |             |                   |             |             |            
|                                                                                                                                                                                                                                   | Trade accounts payable                                                                                                                                    |                             |             | 7,953,000              |             |                   |             | 2,963,000    |            
|                                                                                                                                                                                                                                   | Accrued liabilities and income taxes payable                                                                                                              |                             |             | 10,809,000             |             |                   |             | 10,570,000   |            
|                                                                                                                                                                                                                                   | Current portion of insurance reserves                                                                                                                     |                             |             | 1,569,000              |             |                   |             | 2,816,000    |            
|                                                                                                                                                                                                                                   | Current portion of deferred gain  sale-leaseback                                                                                                         |                             |             |                       |             |                   |             | 133,000      |            
|                                                                                                                                                                                                                                   | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                               |                             |             | 831,000                |             |                   |             | 1,073,000    |            
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |            
|                                                                                                                                                                                                                                   |                                                                                                                                                           | Total current liabilities   |             |                        | 38,198,000  |                   |             |              | 19,937,000  |  
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |            
|Long-term debt, excluding current installments (Note 4)                                                                                                                                                                            |                                                                                                                                                           |                             | 359,000     |                        |             |                   | 146,000     |             
|Deferred gain  sale-leaseback                                                                                                                                                                                                     |                                                                                                                                                           |                             |            |                        |             |                   | 2,517,000   |             
|Long-term portion of insurance reserves                                                                                                                                                                                            |                                                                                                                                                           |                             | 5,158,000   |                        |             |                   | 5,158,000   |             
|Senior notes                                                                                                                                                                                                                       |                                                                                                                                                           |                             | 100,000,000 |                        |             |                   | 100,000,000 |             
|Deferred tax liabilities                                                                                                                                                                                                           |                                                                                                                                                           |                             | 8,221,000   |                        |             |                   | 8,221,000   |             
|Senior Exchangeable Preferred Stock, redemption value $16,744,000 and $17,654,000 at June 30, 2003 and
December 31, 2003, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2003 and
December 31, 2003    |                                                                                                                                                           |                             | 16,744,000  |                        |             |                   | 17,654,000  |             
|Series A Preferred Stock, redemption value $19,737,000 and $21,073,000 at June 30, 2003 and December 31, 2003,
respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2003 and December 31,
2003 |                                                                                                                                                           |                             | 19,737,000  |                        |             |                   | 21,073,000  |             
|Stockholders deficit:                                                                                                                                                                                                             |                                                                                                                                                           |                             |             |                        |             |                   |             |             
|                                                                                                                                                                                                                                   | Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares;
issued and outstanding 18,798
shares at June 30, 2003 and December 31, 2003 |                             |             | 35,546,000             |             |                   |             | 37,949,000   |            
|                                                                                                                                                                                                                                   | Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding
1,021,870 at June 30,
2003 and December 31, 2003                        |                             |             | 10,000                 |             |                   |             | 10,000       |            
|                                                                                                                                                                                                                                   | Additional paid-in capital                                                                                                                                |                             |             | 2,082,000              |             |                   |             | 2,082,000    |            
|                                                                                                                                                                                                                                   | Treasury stock, at cost, 35,318 common shares at June 30, 2003 and December 31, 2003                                                                      |                             |             | (336,000               | )           |                   |             | (336,000     | )          
|                                                                                                                                                                                                                                   | Accumulated deficit                                                                                                                                       |                             |             | (113,246,000           | )           |                   |             | (117,349,000 | )          
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |            
|                                                                                                                                                                                                                                   |                                                                                                                                                           | Total stockholders deficit |             |                        | (75,944,000 | )                 |             |              | (77,644,000 | )
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |            
|                                                                                                                                                                                                                                   | Commitments and contingencies                                                                                                                             |                             | $           | 112,473,000            |             |                   | $           | 97,062,000   |            
|                                                                                                                                                                                                                                   |                                                                                                                                                           |                             |             |                        |             |                   |             |              |            

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,
|                                                                |                                     |   |                     |           |                   
|                                                                |                                     |   | 2002                |           | 2003               |   | 2002       |           | 2003
|                                                                |                                     |   |                     |           |                    |   |            |           |     
|Revenues                                                        |                                     | $ | 42,044,000          |           |                    | $ | 37,875,000 |           |      | $ | 88,620,000 |            |   | $ | 85,399,000 |           
|Cost of revenues                                                |                                     |   | 32,795,000          |           |                    |   | 28,064,000 |           |      |   | 68,890,000 |            |   |   | 64,443,000 |           
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|                                                                | Gross profit                        |   |                     | 9,249,000 |                    |   |            | 9,811,000 |      |   |            | 19,730,000 |   |   |            | 20,956,000 | 
|General and administrative expenses                             |                                     |   | 6,732,000           |           |                    |   | 7,448,000  |           |      |   | 14,010,000 |            |   |   | 14,399,000 |           
|Other operating income                                          |                                     |   | 397,000             |           |                    |   | 432,000    |           |      |   | 889,000    |            |   |   | 621,000    |           
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|                                                                | Earnings from operations            |   |                     | 2,914,000 |                    |   |            | 2,795,000 |      |   |            | 6,609,000  |   |   |            | 7,178,000  | 
|Interest expense                                                |                                     |   | 3,547,000           |           |                    |   | 3,524,000  |           |      |   | 7,145,000  |            |   |   | 7,103,000  |           
|Other income                                                    |                                     |   |                    |           |                    |   | 806,000    |           |      |   |           |            |   |   | 806,000    |           
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|                                                                | Earnings (loss) before income taxes |   |                     | (633,000  | )                  |   |            | 77,000    |      |   |            | (536,000   | ) |   |            | 881,000    | 
|Income tax expense (benefit)                                    |                                     |   | (228,000            | )         |                    |   | 29,000     |           |      |   | (193,000   | )          |   |   | 335,000    |           
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|Net earnings (loss)                                             |                                     |   | (405,000            | )         |                    |   | 48,000     |           |      |   | (343,000   | )          |   |   | 546,000    |           
|Accretion of preferred stock to redemption value                |                                     |   | (1,008,000          | )         |                    |   | (1,140,000 | )         |      |   | (1,988,000 | )          |   |   | (2,246,000 | )         
|Accrual of cumulative dividends on preferred stock              |                                     |   | (1,068,000          | )         |                    |   | (1,224,000 | )         |      |   | (2,106,000 | )          |   |   | (2,403,000 | )         
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|Net loss available to common stockholders                       |                                     | $ | (2,481,000          | )         |                    | $ | (2,316,000 | )         |      | $ | (4,437,000 | )          |   | $ | (4,103,000 | )         
|                                                                |                                     |   |                     |           |                    |   |            |           |      |   |            |            |   |   |            |           
|Loss per share basic and diluted                                |                                     | $ | (2.52               | )         |                    | $ | (2.35      | )         |      | $ | (4.50      | )          |   | $ | (4.16      | )         
|Weighted average number of shares outstanding basic and diluted |                                     |   | 986,368             |           |                    |   | 986,552    |           |      |   | 986,262    |            |   |   | 986,552    |           

See accompanying notes to condensed consolidated financial statements.

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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |           |            |             |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------------------------------------- | --------- | ------------------ | ---------- | ------------ | --------- | ---------- | ----------- | -
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           | SIX MONTH PERIODS 
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           | ENDED DECEMBER 31,
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                   
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           | 2002               |            | 2003        
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|Cash flows provided by operating activities:                           |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|                                                                       | Net earnings (loss)                                                                        |                                                    | $                                            | (343,000                                                                                 | )         |                    | $          | 546,000      |          
|                                                                       | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    | Depreciation and amortization                |                                                                                          |           | 8,502,000          |            |              |           | 7,578,000  |            
|                                                                       |                                                                                            |                                                    | Amortization of debt issuance costs          |                                                                                          |           | 468,000            |            |              |           | 580,000    |            
|                                                                       |                                                                                            |                                                    | Provision for doubtful accounts              |                                                                                          |           | 307,000            |            |              |           | 84,000     |            
|                                                                       |                                                                                            |                                                    | Gain on sale of assets                       |                                                                                          |           | (157,000           | )          |              |           | (1,117,000 | )          
|                                                                       |                                                                                            |                                                    | Changes in operating assets and liabilities: |                                                                                          |           |                    |            |              |           |            |            
|                                                                       |                                                                                            |                                                    |                                              | Receivables                                                                              |           |                    | 2,824,000  |              |           |            | 1,440,000   |  
|                                                                       |                                                                                            |                                                    |                                              | Inventories, prepaid expenses and other assets                                           |           |                    | (201,000   | )            |           |            | 1,913,000   |  
|                                                                       |                                                                                            |                                                    |                                              | Costs and estimated earnings in excess of billings on uncompleted contracts              |           |                    | 53,000     |              |           |            | (417,000    | )
|                                                                       |                                                                                            |                                                    |                                              | Trade accounts payable, accrued liabilities, income taxes payable and
insurance reserves |           |                    | (4,465,000 | )            |           |            | (3,468,000  | )
|                                                                       |                                                                                            |                                                    |                                              | Billings in excess of costs and estimated earnings on uncompleted contracts              |           |                    | 371,000    |              |           |            | 242,000     |  
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    |                                              | Net cash provided by operating activities                                                |           |                    | 7,359,000  |              |           |            | 7,381,000   |  
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|Cash flows from investing activities:                                  |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|                                                                       | Proceeds from sale of assets                                                               |                                                    |                                              | 396,000                                                                                  |           |                    |            | 1,568,000    |          
|                                                                       | Proceeds from sale-leaseback                                                               |                                                    |                                              |                                                                                         |           |                    |            | 11,312,000   |          
|                                                                       | Capital expenditures                                                                       |                                                    |                                              | (2,681,000                                                                               | )         |                    |            | (2,875,000   | )        
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    |                                              | Net cash provided by (used in) investing activities                                      |           |                    | (2,285,000 | )            |           |            | 10,005,000  |  
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|Cash flows from financing activities:                                  |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|                                                                       | Borrowings under long-term debt                                                            |                                                    |                                              | 1,040,000                                                                                |           |                    |            | 27,000       |          
|                                                                       | Repayments of long-term debt                                                               |                                                    |                                              | (882,000                                                                                 | )         |                    |            | (409,000     | )        
|                                                                       | Borrowings under revolving credit facility                                                 |                                                    |                                              | 30,820,000                                                                               |           |                    |            | 127,654,000  |          
|                                                                       | Repayments of revolving credit facility                                                    |                                                    |                                              | (41,510,000                                                                              | )         |                    |            | (142,139,000 | )        
|                                                                       | Debt issuance costs                                                                        |                                                    |                                              | (113,000                                                                                 | )         |                    |            | (161,000     | )        
|                                                                       | Book overdraft                                                                             |                                                    |                                              | 1,322,000                                                                                |           |                    |            | (514,000     | )        
|                                                                       | Proceeds from issuance of common stock                                                     |                                                    |                                              | 38,000                                                                                   |           |                    |            |             |          
|                                                                       | Repurchase of common stock and Series B Preferred Stock                                    |                                                    |                                              | (35,000                                                                                  | )         |                    |            |             |          
|                                                                       | Issuance of Series B Preferred Stock                                                       |                                                    |                                              | 37,000                                                                                   |           |                    |            |             |          
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    |                                              | Net cash used in financing activities                                                    |           |                    | (9,283,000 | )            |           |            | (15,542,000 | )
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    |                                              | Net change in cash and cash equivalents                                                  |           |                    | (4,209,000 | )            |           |            | 1,844,000   |  
|Cash and cash equivalents at beginning of period                       |                                                                                            |                                                    | 6,205,000                                    |                                                                                          |           |                    | 184,000    |             
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|Cash and cash equivalents at end of period                             |                                                                                            | $                                                  | 1,996,000                                    |                                                                                          |           | $                  | 2,028,000  |             
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|Supplemental disclosure of cash flow information:                      |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|                                                                       |                                                                                            | Cash paid (received) during the period for:        |                                              |                                                                                          |           |                    |            |              |           |           
|                                                                       |                                                                                            |                                                    |                                              | Income taxes, net                                                                        |           | $                  | (1,583,000 | )            |           | $          | (2,466,000  | )
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            |                                                    |                                              | Interest                                                                                 |           | $                  | 6,619,000  |              |           | $          | 6,411,000   |  
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|Supplemental disclosure of noncash investing and financing activities: |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |             
|                                                                       |                                                                                            | Accretion of preferred stock to redemption value   |                                              | $                                                                                        | 1,988,000 |                    |            | $            | 2,246,000 |           
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          
|                                                                       |                                                                                            | Accrual of cumulative dividends on preferred stock |                                              | $                                                                                        | 2,106,000 |                    |            | $            | 2,403,000 |           
|                                                                       |                                                                                            |                                                    |                                              |                                                                                          |           |                    |            |              |          

See accompanying notes to condensed consolidated financial statements.

6



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003
(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, 2003 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2004. 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, 2003. The June 30, 2003
consolidated financial statements will be restated, see Note 4. Certain
June 30, 2003 balances (accrued liabilities and current portion
of insurance reserves) have been reclassified to conform to the presentation
used for December 31, 2003.

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, 2002 diluted loss per share is the same as
basic loss per share as options to purchase 9,125 shares of common stock were
not included in the computation of diluted loss per share as the effect would
have been anti-dilutive. For the three and six month periods ended December
31, 2003, diluted loss per share is the same as basic loss per share as options
to purchase 8,585 shares of common stock were not included in the computation
of diluted loss per share 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
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.

7



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

Stock-based Compensation

The Company observes the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) by continuing to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25). The Company applies the
intrinsic value method as outlined in APB No. 25 and related interpretations in
accounting for stock options and share units granted under these programs.
Under the intrinsic value method, no compensation expense is recognized if the
exercise price of the Companys employee stock options equals the market price
of the underlying stock on the date of the grant. Accordingly, no compensation
cost has been recognized on options granted to employees. SFAS No. 123 requires
that the Company provide pro forma information regarding net earnings (loss)
and net earnings (loss) per common share as if compensation cost for the
Companys stock option programs had been determined in accordance with the fair
value method prescribed therein. The Company adopted the disclosure portion of
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure requiring quarterly SFAS No. 123 pro forma disclosure.

Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Companys basic and
diluted net loss available to common stockholders per share would have been
adjusted to the pro forma amounts as indicated below:

|                                                      |  |         |                                                                                                                             |   |                    |            |                   |   |                   |            |                   |   |   |            |            |   |   |            |  
|----------------------------------------------------- |  | ------- | --------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | ---------- | ----------------- | - | ----------------- | ---------- | ----------------- | - | - | ---------- | ---------- | - | - | ---------- | -
|                                                      |  |         |                                                                                                                             |   | Three months ended |            | Six months ended 
|                                                      |  |         |                                                                                                                             |   |                    |            |                  
|                                                      |  |         |                                                                                                                             |   | December 31, 2002  |            | December 31, 2003 |   | December 31, 2002 |            | December 31, 2003
|                                                      |  |         |                                                                                                                             |   |                    |            |                   |   |                   |            |                  
|Net loss available to common stockholders as reported |  | $       | (2,481,000                                                                                                                  | ) |                    | $          | (2,316,000        | ) |                   |            | (4,437,000        | ) |   | $          | (4,103,000 | )
|                                                      |  | Add:    |                                                                                                                             |   |                    |            |                   |   |                   |            |                   |   |   |            |            |   |   |           
|                                                      |  |         | Stock-based compensation expense included in reported net loss
available to common stockholders, net of related tax effects |   | $                  |           |                   |   | $                 |           |                   |   | $ |           |            |   | $ |           |  
|                                                      |  | Deduct: |                                                                                                                             |   |                    |            |                   |   |                   |            |                   |   |   |            |            |   |   |           
|                                                      |  |         | Total stock-based compensation expense determined under the fair
value method for all awards, net of tax effects            |   | $                  | (5,000     | )                 |   | $                 | (2,000     | )                 |   | $ | (11,000    | )          |   | $ | (6,000     | )
|                                                      |  |         | Pro forma net loss available to common stockholders                                                                         |   | $                  | (2,486,000 | )                 |   | $                 | (2,318,000 | )                 |   | $ | (4,448,000 | )          |   | $ | (4,109,000 | )
|                                                      |  |         | Basic and diluted loss per share as reported                                                                                |   | $                  | (2.52      | )                 |   | $                 | (2.35      | )                 |   | $ | (4.50      | )          |   | $ | (4.16      | )
|                                                      |  |         | Pro forma basic and diluted loss per share                                                                                  |   | $                  | (2.52      | )                 |   | $                 | (2.35      | )                 |   | $ | (4.51      | )          |   | $ | (4.17      | )

At the grant date, the weighted average fair value of options granted was
$58.51, this was determined using the Black-Scholes option pricing model with
the following assumptions used for calculation: risk-free interest rate of
4.7%, volatility of 3.1%, dividend rate of 0% and an expected life of 10 years.

Goodwill

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 adopted these
accounting standards effective July 1, 2002. As of December 31, 2002, we
completed the transitional impairment analysis under SFAS No. 142, no indicated
impairment of goodwill was identified. We performed our annual impairment
test as of June 30, 2003, no indicated impairment 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 test as of each June 30, thereafter. We will perform an
earlier impairment analysis if a triggering event occurs that warrants such
analysis. No goodwill expense was recorded during the three and six month
periods ended December 31, 2002 and 2003.

New Accounting Pronouncement

In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity.
Statement No. 150 requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments of a
nonpublic entity for which this statement is effective for fiscal periods
beginning after December 15, 2003, (the Companys fiscal 2005). At this time,
the Company is unable to determine the impact that adoption of this
pronouncement will have on our financial position, results of operations or
liquidity.

8



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

(2)  Related Party

The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc.
(BRS) of $225,000 as of December 31, 2003. The balance due as of June 30, 2003
was $75,000.

(3)  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.

(4)  Restatement

We will restate our consolidated financial statements for the year
ended June 30, 2003 and for the first interim period ended September 30, 2003
to properly classify our revolving credit facility with General Electric
Capital Corporation as a current liability in accordance with EITF Issue No.
95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that include both a Subjective Acceleration Clause and a
Lock-Box Arrangement (EITF 95-22).

The following table reflects the impact of the reclassification as of June 30,
2003 and September 30, 2003:

|                                              |  |                        |            |                    |  |                        |            |             |  |   |            |  |  |   |            | 
|--------------------------------------------- |  | ---------------------- | ---------- | ------------------ |  | ---------------------- | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                              |  | June 30, 2003          |            | September
30, 2003
|                                              |  |                        |            |                   
|                                              |  | As Previously Reported |            | As Restated        |  | As Previously Reported |            | As Restated
|                                              |  |                        |            |                    |  |                        |            |            
|Borrowings under revolving credit facility    |  | $                      |           |                    |  | $                      | 17,036,000 |             |  | $ |           |  |  | $ | 18,695,000 | 
|Current liabilities                           |  | $                      | 23,713,000 |                    |  | $                      | 38,198,000 |             |  | $ | 22,314,000 |  |  | $ | 38,522,000 | 
|Long-term debt, excluding current liabilities |  | $                      | 14,844,000 |                    |  | $                      | 359,000    |             |  | $ | 16,536,000 |  |  | $ | 328,000    | 

The Company will be amending the Form 10-K originally filed on September 29,
2003 and the Form 10-Q originally filed on November 11, 2003 to reflect this
restatement.

(5)  Sale-leaseback

On December 3, 2003, the Company consummated an agreement for the
sale-and-leaseback of our 11 owned properties (the Real Estate). The buyer,
CRICPENHALL LLC is owned by Prudential Real Estate Companies Account
Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are
two investment funds, sponsored by Prudential Real Estate Investors.
Prudential Real Estate Investors is a business unit of Prudential Investment
Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc.
Penhall sold the Real Estate for net proceeds of $11.3 million and immediately
entered into eleven 20 year leases with annual lease payments. Penhall also
has 4 5-year options to extend the lease at the then current fair market value.
The gain on sale of $2.7 million will be amortized over the initial term of
the leases of 20 years. Through December 31, 2003, the Company has amortized
$11,000 of the gain and recorded $97,000 of rent expense under the leaseback.

Future minimum lease payments under these 20 year leases as of December
31, 2003 are as follows:

| |            |   |            |            | 
| | ---------- | - | ---------- | ---------- | 
| | 2004       |   | $          | 1,224,000  | 
| | 2005       |   |            | 1,224,000  | 
| | 2006       |   |            | 1,224,000  | 
| | 2007       |   |            | 1,224,000  | 
| | 2008       |   |            | 1,224,000  | 
| | Thereafter |   |            | 22,283,000 | 
| |            |   |            |           
| |            | $ | 28,403,000 |           
| |            |   |            |           

9



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##### Table of Contents



(6)  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. 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, 2003 and December 31, 2003 and for the
three and six month periods ended December 31, 2002 and 2003 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,                                                                                                                  
|
| | (c) |  | elimination entries necessary to consolidate the parent company and its subsidiaries, and                                                    
|
| | (d) |  | the Company on a consolidated basis.                                                                                                         

10



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |            | 
|----------------------------------------------- | --------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------- | ----------- | ---------------------- | ----------- | ------- | ---------- | ------------ | ----------- | ------------ | ----------- | -------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                                |                 |                                                                             |                                                                             |                           |             | JUNE 30, 2003         
|                                                |                 |                                                                             |                                                                             |                           |             | (Restated, see Note 4)
|                                                |                 |                                                                             |                                                                             |                           |             |                       
|                                                |                 |                                                                             |                                                                             |                           |             | PENHALL                |             |         |            |              |             |              |             |          |             |   |             |           
|                                                |                 |                                                                             |                                                                             |                           |             | INTERNATIONAL          |             | PENHALL |            |              |             |              |             |          |             |  
|                                                |                 |                                                                             |                                                                             |                           |             | CORP.                  |             | COMPANY |            | ELIMINATIONS |             | CONSOLIDATED
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |             
|Assets                                          |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |  
|                                                | Current assets: |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |            
|                                                |                 |                                                                             | Receivables, net                                                            |                           | $           | 2,648,000              |             |         | $          | 31,618,000   |             |              | $           |         |             |   | $           | 34,266,000 |           
|                                                |                 |                                                                             | Inventories                                                                 |                           |             |                       |             |         |            | 2,362,000    |             |              |             |         |             |   |             | 2,362,000  |           
|                                                |                 |                                                                             | Costs and estimated earnings in excess of billings on
uncompleted contracts |                           |             |                       |             |         |            | 1,704,000    |             |              |             |         |             |   |             | 1,704,000  |           
|                                                |                 |                                                                             | Other current assets                                                        |                           |             | 271,000                |             |         |            | 7,066,000    |             |              |             | (152,000 | )           |   |             | 7,185,000  |           
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           
|                                                |                 |                                                                             |                                                                             | Total current assets      |             |                        | 2,919,000   |         |            |              | 42,750,000  |              |             |          | (152,000    | ) |             |            | 45,517,000 | 
|                                                |                 | Net property, plant and equipment                                           |                                                                             |                           | 8,798,000   |                        |             |         | 44,603,000 |              |             |              |            |          |             |   | 53,401,000  |           
|                                                |                 | Intercompany assets                                                         |                                                                             |                           |            |                        |             |         | 19,398,000 |              |             |              | (19,398,000 | )        |             |   |            |           
|                                                |                 | Other assets, net                                                           |                                                                             |                           | 2,051,000   |                        |             |         | 11,504,000 |              |             |              |            |          |             |   | 13,555,000  |           
|                                                |                 | Investment in subsidiary                                                    |                                                                             |                           | 70,399,000  |                        |             |         |           |              |             |              | (70,399,000 | )        |             |   |            |           
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           
|                                                |                 | $                                                                           | 84,167,000                                                                  |                           |             | $                      | 118,255,000 |         |            | $            | (89,949,000 | )            |             | $        | 112,473,000 |  
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           
|Liabilities and Stockholders Equity (Deficit): |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |  
|                                                |                 | Current installments of long-term debt                                      |                                                                             | $                         | 3,000       |                        |             | $       | 2,548,000  |              |             | $            |            |          |             | $ | 2,551,000   |           
|                                                |                 | Borrowings under revolving credit facility (Note 4)                         |                                                                             |                           |            |                        |             |         | 14,485,000 |              |             |              |            |          |             |   | 14,485,000  |           
|                                                |                 | Trade accounts payable                                                      |                                                                             |                           | 9,000       |                        |             |         | 8,096,000  |              |             |              | (152,000    | )        |             |   | 7,953,000   |           
|                                                |                 | Accrued liabilities and income taxes payable                                |                                                                             |                           | 4,931,000   |                        |             |         | 5,878,000  |              |             |              |            |          |             |   | 10,809,000  |           
|                                                |                 | Current portion of insurance reserves                                       |                                                                             |                           |            |                        |             |         | 1,569,000  |              |             |              |            |          |             |   | 1,569,000   |           
|                                                |                 | Billings in excess of costs and estimated earnings on
uncompleted contracts |                                                                             |                           |            |                        |             |         | 831,000    |              |             |              |            |          |             |   | 831,000     |           
|                                                |                 | Intercompany liabilities                                                    |                                                                             |                           | 19,398,000  |                        |             |         |           |              |             |              | (19,398,000 | )        |             |   |            |           
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           
|                                                |                 |                                                                             |                                                                             | Total current liabilities |             |                        | 24,341,000  |         |            |              | 33,407,000  |              |             |          | (19,550,000 | ) |             |            | 38,198,000 | 
|                                                |                 | Long-term debt, excluding current installments (Note 4)                     |                                                                             |                           | 180,000     |                        |             |         | 179,000    |              |             |              |            |          |             |   | 359,000     |           
|                                                |                 | Long-term portion of insurance reserves                                     |                                                                             |                           |            |                        |             |         | 5,158,000  |              |             |              |            |          |             |   | 5,158,000   |           
|                                                |                 | Senior notes                                                                |                                                                             |                           | 100,000,000 |                        |             |         |           |              |             |              |            |          |             |   | 100,000,000 |           
|                                                |                 | Deferred tax liabilities                                                    |                                                                             |                           | (891,000    | )                      |             |         | 9,112,000  |              |             |              |            |          |             |   | 8,221,000   |           
|                                                |                 | Senior Exchangeable Preferred Stock                                         |                                                                             |                           | 16,744,000  |                        |             |         |           |              |             |              |            |          |             |   | 16,744,000  |           
|                                                |                 | Series A Preferred Stock                                                    |                                                                             |                           | 19,737,000  |                        |             |         |           |              |             |              |            |          |             |   | 19,737,000  |           
|                                                |                 | Stockholders equity (deficit)                                              |                                                                             |                           | (75,944,000 | )                      |             |         | 70,399,000 |              |             |              | (70,399,000 | )        |             |   | (75,944,000 | )         
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           
|                                                |                 | $                                                                           | 84,167,000                                                                  |                           |             | $                      | 118,255,000 |         |            | $            | (89,949,000 | )            |             | $        | 112,473,000 |  
|                                                |                 |                                                                             |                                                                             |                           |             |                        |             |         |            |              |             |              |             |          |             |   |             |            |           

11



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |            | 
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------- | ----------- | ----------------- | ------ | ----------- | ---------- | ------------ | ---------- | ------------ | ----------- | ---------- | - | ---------- | ----------- | ---------- | ---------- | 
|                                               |                                                                             |                                                                             |                      |             | DECEMBER 31, 2003
|                                               |                                                                             |                                                                             |                      |             |                  
|                                               |                                                                             |                                                                             |                      |             | Penhall           |        |             |            |              |            |              |             |            |   |            |             |           
|                                               |                                                                             |                                                                             |                      |             | International     |        | Penhall     |            |              |            |              |             |            |   |           
|                                               |                                                                             |                                                                             |                      |             | Corp.             |        | Company     |            | Eliminations |            | Consolidated
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |             
|Assets                                         |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |            
|                                               | Current assets:                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |           
|                                               |                                                                             | Receivables, net                                                            |                      | $           |                  |        |             | $          | 32,742,000   |            |              | $           |           |   |            | $           | 32,742,000 |           
|                                               |                                                                             | Inventories                                                                 |                      |             |                  |        |             |            | 2,265,000    |            |              |             |           |   |            |             | 2,265,000  |           
|                                               |                                                                             | Costs and estimated earnings in excess
of billings on uncompleted contracts |                      |             |                  |        |             |            | 2,121,000    |            |              |             |           |   |            |             | 2,121,000  |           
|                                               |                                                                             | Other current assets                                                        |                      |             | 36,000            |        |             |            | 7,177,000    |            |              |             |           |   |            |             | 7,213,000  |           
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           
|                                               |                                                                             |                                                                             | Total current assets |             |                   | 36,000 |             |            |              | 44,305,000 |              |             |            |  |            |             |            | 44,341,000 | 
|                                               | Net property, plant and equipment                                           |                                                                             |                      | 40,000      |                   |        |             | 39,732,000 |              |            |              |            |            |   |            | 39,772,000  |           
|                                               | Intercompany assets                                                         |                                                                             |                      |            |                   |        |             | 7,081,000  |              |            |              | (7,081,000  | )          |   |            |            |           
|                                               | Other assets, net                                                           |                                                                             |                      | 1,720,000   |                   |        |             | 11,229,000 |              |            |              |            |            |   |            | 12,949,000  |           
|                                               | Investment in subsidiary                                                    |                                                                             |                      | 73,520,000  |                   |        |             |           |              |            |              | (73,520,000 | )          |   |            |            |           
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           
|                                               |                                                                             | $                                                                           | 75,316,000           |             |                   | $      | 102,347,000 |            |              | $          | (80,601,000  | )           |            | $ | 97,062,000 |            
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           
|Liabilities and Stockholders Equity (Deficit) |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |            
|                                               | Current installments of long-term debt                                      |                                                                             | $                    |            |                   |        | $           | 2,382,000  |              |            | $            |            |            |   | $          | 2,382,000   |           
|                                               | Trade accounts payable                                                      |                                                                             |                      | 15,000      |                   |        |             | 2,948,000  |              |            |              |            |            |   |            | 2,963,000   |           
|                                               | Accrued liabilities and income taxes
payable                                |                                                                             |                      | 5,378,000   |                   |        |             | 5,192,000  |              |            |              |            |            |   |            | 10,570,000  |           
|                                               | Current portion of insurance reserves                                       |                                                                             |                      |            |                   |        |             | 2,816,000  |              |            |              |            |            |   |            | 2,816,000   |           
|                                               | Current portion of deferred gain  sale-leaseback                           |                                                                             |                      | 133,000     |                   |        |             |           |              |            |              |            |            |   |            | 133,000     |           
|                                               | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                                                             |                      |            |                   |        |             | 1,073,000  |              |            |              |            |            |   |            | 1,073,000   |           
|                                               | Intercompany liabilities                                                    |                                                                             |                      | 7,081,000   |                   |        |             |           |              |            |              | (7,081,000  | )          |   |            |            |           
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           
|                                               |                                                                             | Total current liabilities                                                   |                      |             | 12,607,000        |        |             |            | 14,411,000   |            |              |             | (7,081,000 | ) |            |             | 19,937,000 |           
|                                               | Long-term debt, excluding current
installments                              |                                                                             |                      |            |                   |        |             | 146,000    |              |            |              |            |            |   |            | 146,000     |           
|                                               | Deferred gain  sale-leaseback                                              |                                                                             |                      | 2,517,000   |                   |        |             |           |              |            |              |            |            |   |            | 2,517,000   |           
|                                               | Long term portion of insurance reserves                                     |                                                                             |                      |            |                   |        |             | 5,158,000  |              |            |              |            |            |   |            | 5,158,000   |           
|                                               | Senior notes                                                                |                                                                             |                      | 100,000,000 |                   |        |             |           |              |            |              |            |            |   |            | 100,000,000 |           
|                                               | Deferred tax liabilities                                                    |                                                                             |                      | (891,000    | )                 |        |             | 9,112,000  |              |            |              |            |            |   |            | 8,221,000   |           
|                                               | Senior Exchangeable Preferred Stock                                         |                                                                             |                      | 17,654,000  |                   |        |             |           |              |            |              |            |            |   |            | 17,654,000  |           
|                                               | Series A Preferred Stock                                                    |                                                                             |                      | 21,073,000  |                   |        |             |           |              |            |              |            |            |   |            | 21,073,000  |           
|                                               | Stockholders equity (deficit)                                              |                                                                             |                      | (77,644,000 | )                 |        |             | 73,520,000 |              |            |              | (73,520,000 | )          |   |            | (77,644,000 | )         
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           
|                                               |                                                                             | $                                                                           | 75,316,000           |             |                   | $      | 102,347,000 |            |              | $          | (80,601,000  | )           |            | $ | 97,062,000 |            
|                                               |                                                                             |                                                                             |                      |             |                   |        |             |            |              |            |              |             |            |   |            |             |            |           

12



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(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 in earnings of subsidiary    |                          |                                     | 62,000    |                                            |           |         |           |              |           |              | (62,000    | )       |            |   |           |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |         |            |   |            |          
|                                    | Earnings from operations |                                     |           | 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, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |           |           | 
|----------------------------------- | ------------------------ | ----------------------------------- | --------- | ------------------------------------------ | --------- | ------- | ---------- | ------------ | --------- | ------------ | ---------- | ---------- | ---------- | - | ---------- | --------- | --------- | 
|                                    |                          |                                     |           | THREE MONTH PERIOD ENDED DECEMBER 31, 2003
|                                    |                          |                                     |           |                                           
|                                    |                          |                                     |           | Penhall                                    |           |         |            |              |           |              |            |            |            |   |            |          
|                                    |                          |                                     |           | International                              |           | Penhall |            |              |           |              |            |            |            |  
|                                    |                          |                                     |           | Corp.                                      |           | Company |            | Eliminations |           | Consolidated
|                                    |                          |                                     |           |                                            |           |         |            |              |           |             
|Revenues                            |                          | $                                   | 1,245,000 |                                            |           | $       | 37,875,000 |              |           | $            | (1,245,000 | )          |            | $ | 37,875,000 |          
|Cost of revenues                    |                          |                                     |          |                                            |           |         | 28,064,000 |              |           |              |           |            |            |   | 28,064,000 |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |          
|                                    |                          | Gross profit                        |           |                                            | 1,245,000 |         |            |              | 9,811,000 |              |            |            | (1,245,000 | ) |            |           | 9,811,000 | 
|General and administrative expenses |                          |                                     | 256,000   |                                            |           |         | 7,589,000  |              |           |              | (397,000   | )          |            |   | 7,448,000  |          
|Royalties                           |                          |                                     |          |                                            |           |         | 848,000    |              |           |              | (848,000   | )          |            |   |           |          
|Other operating income, net         |                          |                                     |          |                                            |           |         | 432,000    |              |           |              |           |            |            |   | 432,000    |          
|Equity in earnings of subsidiary    |                          |                                     | 1,374,000 |                                            |           |         |           |              |           |              | (1,374,000 | )          |            |   |           |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |          
|                                    | Earnings from operations |                                     |           | 2,363,000                                  |           |         |            | 1,806,000    |           |              |            | (1,374,000 | )          |   |            | 2,795,000 |          
|Interest expense                    |                          |                                     | 3,227,000 |                                            |           |         | 297,000    |              |           |              |           |            |            |   | 3,524,000  |          
|Other income                        |                          |                                     | 11,000    |                                            |           |         | 795,000    |              |           |              |           |            |            |   | 806,000    |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |          
|                                    |                          | Earnings (loss) before income taxes |           |                                            | (853,000  | )       |            |              | 2,304,000 |              |            |            | (1,374,000 | ) |            |           | 77,000    | 
|Income tax expense (benefit)        |                          |                                     | (901,000  | )                                          |           |         | 930,000    |              |           |              |           |            |            |   | 29,000     |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |          
|Net earnings                        |                          | $                                   | 48,000    |                                            |           | $       | 1,374,000  |              |           | $            | (1,374,000 | )          |            | $ | 48,000     |          
|                                    |                          |                                     |           |                                            |           |         |            |              |           |              |            |            |            |   |            |          

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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(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 in earnings of subsidiary    |                                     |   | 427,000                                  |           |         |   |             |            |              |   | (427,000   | )          |   |   |           |           
|                                    |                                     |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Earnings from operations            |   |                                          | 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   | )         
|                                    |                                     |   |                                          |           |         |   |              |            |              |   |            |            |   |   |            |           

15



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |            | 
|----------------------------------- | ----------------------------------- | - | ---------------------------------------- | ---------- | ------- | - | ------------ | ---------- | ------------ | - | ---------- | ---------- | - | - | ---------- | ---------- | 
|                                    |                                     |   | SIX MONTH PERIOD ENDED DECEMBER 31, 2003
|                                    |                                     |   |                                         
|                                    |                                     |   | Penhall                                  |            |         |   |              |            |              |   |            |            |   |   |           
|                                    |                                     |   | International                            |            | Penhall |   |              |            |              |   |            |            |  
|                                    |                                     |   | Corp.                                    |            | Company |   | Eliminations |            | Consolidated
|                                    |                                     |   |                                          |            |         |   |              |            |             
|Revenues                            |                                     | $ | 2,705,000                                |            |         | $ | 85,399,000   |            |              | $ | (2,705,000 | )          |   | $ | 85,399,000 |           
|Cost of revenues                    |                                     |   |                                         |            |         |   | 64,443,000   |            |              |   |           |            |   |   | 64,443,000 |           
|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Gross profit                        |   |                                          | 2,705,000  |         |   |              | 20,956,000 |              |   |            | (2,705,000 | ) |   |            | 20,956,000 | 
|General and administrative expenses |                                     |   | 448,000                                  |            |         |   | 14,743,000   |            |              |   | (792,000   | )          |   |   | 14,399,000 |           
|Royalties                           |                                     |   |                                         |            |         |   | 1,913,000    |            |              |   | (1,913,000 | )          |   |   |           |           
|Other operating income, net         |                                     |   |                                         |            |         |   | 621,000      |            |              |   |           |            |   |   | 621,000    |           
|Equity in earnings of subsidiary    |                                     |   | 3,121,000                                |            |         |   |             |            |              |   | (3,121,000 | )          |   |   |           |           
|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Earnings from operations            |   |                                          | 5,378,000  |         |   |              | 4,921,000  |              |   |            | (3,121,000 | ) |   |            | 7,178,000  | 
|Interest expense                    |                                     |   | 6,421,000                                |            |         |   | 682,000      |            |              |   |           |            |   |   | 7,103,000  |           
|Other income                        |                                     |   | 11,000                                   |            |         |   | 795,000      |            |              |   |           |            |   |   | 806,000    |           
|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |           
|                                    | Earnings (loss) before income taxes |   |                                          | (1,032,000 | )       |   |              | 5,034,000  |              |   |            | (3,121,000 | ) |   |            | 881,000    | 
|Income tax expense (benefit)        |                                     |   | (1,578,000                               | )          |         |   | 1,913,000    |            |              |   |           |            |   |   | 335,000    |           
|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |           
|Net earnings                        |                                     | $ | 546,000                                  |            |         | $ | 3,121,000    |            |              | $ | (3,121,000 | )          |   | $ | 546,000    |           
|                                    |                                     |   |                                          |            |         |   |              |            |              |   |            |            |   |   |            |           

16



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(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 | )         
|                                                 | Debt issuance costs                                     |                                                     |           | (104,000                                 | )          |         |           |           |            |              |           | (9,000       | )          |   |   |  |   |   |           | (113,000    | )         
|                                                 | Book overdraft                                          |                                                     |           |                                         |            |         |           |           |            |              |           | 1,322,000    |            |   |   |  |   |   |           | 1,322,000   |           
|                                                 | 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



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |              |             |  
|------------------------------------------------ | ------------------------------------------ | --------------------------------------------------- | --------- | ---------------------------------------- | ----------- | ------- | --------- | ------------ | ---------- | ------------ | -------- | ------- | ------- | - | --------- | ------------ | ----------- | -
|                                                 |                                            |                                                     |           | SIX MONTH PERIOD ENDED DECEMBER 31, 2003
|                                                 |                                            |                                                     |           |                                         
|                                                 |                                            |                                                     |           | Penhall                                  |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 |                                            |                                                     |           | International                            |             | Penhall |           |              |            |              |          |         |         |  
|                                                 |                                            |                                                     |           | Corp.                                    |             | Company |           | Eliminations |            | Consolidated
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |             
|Net cash provided by operating activities        |                                            | $                                                   | 1,203,000 |                                          |             | $       | 6,178,000 |              |            | $            |         |         |         | $ | 7,381,000 |             
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|Cash flows from investing activities:            |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 | Proceeds from sale of assets               |                                                     |           |                                         |             |         |           | 1,568,000    |            |              |          |        |         |   |           | 1,568,000    |            
|                                                 | Proceeds from sale-leaseback               |                                                     |           | 11,312,000                               |             |         |           |             |            |              |          |        |         |   |           | 11,312,000   |            
|                                                 | Capital expenditures                       |                                                     |           |                                         |             |         |           | (2,875,000   | )          |              |          |        |         |   |           | (2,875,000   | )          
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 |                                            | Net cash provided by (used in)
investing activities |           |                                          | 11,312,000  |         |           |              | (1,307,000 | )            |          |         |        |   |           |              | 10,005,000  |  
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|Cash flows from financing activities:            |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 | Due to (from) affiliates                   |                                                     |           | (12,317,000                              | )           |         |           | 12,317,000   |            |              |          |        |         |   |           |             |            
|                                                 | Borrowings under long-term debt            |                                                     |           |                                         |             |         |           | 27,000       |            |              |          |        |         |   |           | 27,000       |            
|                                                 | Repayments of long-term debt               |                                                     |           | (183,000                                 | )           |         |           | (226,000     | )          |              |          |        |         |   |           | (409,000     | )          
|                                                 | Borrowings under revolving credit facility |                                                     |           |                                          |             |         |           | 127,654,000  |            |              |          |         |         |   |           | 127,654,000  |            
|                                                 | Repayments of revolving credit facility    |                                                     |           |                                          |             |         |           | (142,139,000 | )          |              |          |         |         |   |           | (142,139,000 | )          
|                                                 | Debt issuance costs                        |                                                     |           |                                         |             |         |           | (161,000     | )          |              |          |        |         |   |           | (161,000     | )          
|                                                 | Book overdraft                             |                                                     |           | (152,000                                 | )           |         |           | (514,000     | )          |              |          | 152,000 |         |   |           | (514,000     | )          
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 |                                            | Net cash used in financing activities               |           |                                          | (12,652,000 | )       |           |              | (3,042,000 | )            |          |         | 152,000 |   |           |              | (15,542,000 | )
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|                                                 |                                            | Net change in cash and cash
equivalents             |           |                                          | (137,000    | )       |           |              | 1,829,000  |              |          |         | 152,000 |   |           |              | 1,844,000   |  
|Cash and cash equivalents at beginning of period |                                            |                                                     | 152,000   |                                          |             |         | 184,000   |              |            |              | (152,000 | )       |         |   | 184,000   |             
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             
|Cash and cash equivalents at end of period       |                                            | $                                                   | 15,000    |                                          |             | $       | 2,013,000 |              |            | $            |         |         |         | $ | 2,028,000 |             
|                                                 |                                            |                                                     |           |                                          |             |         |           |              |            |              |          |         |         |   |           |             

18



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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 California-based company acquired in September 2000,
|
| | 6. |  | H&P Sawing and Drilling, a Missouri-based company acquired in March 2001,                         
|
| | 7. |  | Bob Mack Company, a 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 six new markets
by opening offices Dallas, Richmond, Fresno, Buffalo, Reno and Seattle.

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                                   |        | 2003                                 |  | 2002 |       | 2003 
|                      |                |   |                                        |        |                                      |  |      |       |      
|                      |                |   |                                        |        |                                      |  | % of |       |       |   |        |        | % of  |  |      |       |       |   | % of   |        |  |  |      |       | % of
|                      |                |   | $                                      |        | Total                                |  | $    |       | Total |   | $      |        | Total |  | $    |       | Total
|                      |                |   |                                        |        |                                      |  |      |       |       |   |        |        |       |  |      |       |      
|                      |                |   | (Dollars in Thousands)                 |        | (Dollars in Thousands)              
|Operated Equipment:   |                |   |                                        |        |                                      |  |      |       |       |   |        |        |       |  |      |       |       |   |        |        |  |  |      |       |      |   |        |        |  |  |      |      
|Rental Services       |                | $ | 29,137                                 |        |                                      |  | 69.3 | %     |       | $ | 26,928 |        |       |  | 71.1 | %     |       | $ | 63,512 |        |  |  | 71.7 | %     |      | $ | 58,912 |        |  |  | 69.0 | %    
|Contract Services (1) |                |   | 12,907                                 |        |                                      |  | 30.7 | %     |       |   | 10,947 |        |       |  | 28.9 | %     |       |   | 25,108 |        |  |  | 28.3 | %     |      |   | 26,487 |        |  |  | 31.0 | %    
|                      |                |   |                                        |        |                                      |  |      |       |       |   |        |        |       |  |      |       |       |   |        |        |  |  |      |       |      |   |        |        |  |  |      |      
|                      | Total Revenues |   | $                                      | 42,044 |                                      |  |      | 100.0 | %     |   | $      | 37,875 |       |  |      | 100.0 | %     |   | $      | 88,620 |  |  |      | 100.0 | %    |   | $      | 85,399 |  |  |      | 100.0 | %
|                      |                |   |                                        |        |                                      |  |      |       |       |   |        |        |       |  |      |       |       |   |        |        |  |  |      |       |      |   |        |        |  |  |      |      



---

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

19



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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
including rent. Given the varied, and in some cases specialized, nature of its
rental equipment, As a result of the sale-leaseback, the Company expects
operating expenses to increase approximately $1.0 million per year due to the
incremental increase of rent expense compared to depreciation expense. 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, 2003 Compared to Six months Ended December
31, 2002

Revenues.Revenues for the six months ended December 31, 2003 (Interim
2004) were $85.4 million; a decrease of $3.2 million or 3.6% compared to the
six months ended December 31, 2002 (Interim 2003). The decrease in revenues
in Interim 2004 were primarily a result of an increase of $1.4 million or 5.5%
in Contract Services, offset by a $4.6 million or 7.2% decrease in Operated
Equipment Rental Services. The decrease in total revenues is attributable to a
continuing weakness in the non-residential construction market and fewer
contract opportunities due to the uncertainty in government spending.

Gross Profit.Gross profit totaled $21.0 million in Interim 2004, an
increase of $1.2 million or 6.2% from Interim 2003. Gross profit as a
percentage of revenues increased from 22.3% in Interim 2003 to 24.5% in Interim
2004. The increase in gross profit from Interim 2003 to Interim 2004 is
primarily attributable to significant profits from a major project and the
successful settlement of an unpriced change order.

General and Administrative Expenses.General and administrative expenses
were $14.4 million in Interim 2004 compared to $14.0 million in Interim 2003.
As a percent of revenues, general and administrative expenses were 16.9% in
Interim 2004 compared to 15.8% in Interim 2003. The increase in general and
administrative expenses as a percentage of revenues during Interim 2004 is
primarily attributable to an increase of $1.4 million in incentive
compensation, partially offset by decreases of $0.5 million in salary and
associated taxes, $0.2 in bad debt expense, and $0.1 in both telephone and
depreciation.

Interest Expense.Interest expense was $7.1 million in both Interim 2004
and 2003. Although interest expenses attributable to borrowings diminished in
2004, higher letter of credit expenses offset this savings.

Other Income.Other income increased by $0.8 million from Interim 2003 to
Interim 2004. This increase is primarily attributable to the sale of an FCC
license that was no longer used by the Company.

Income Tax Expense (Benefit).The Company recorded an income tax expense
of $0.3 million, or 38% of income before income taxes in Interim 2004, compared
to an income tax benefit of $0.2 million, or 36% of loss before income taxes in
Interim 2003.

Three months Ended December 31, 2003 Compared to Three months Ended
December 31, 2002

Revenues.Revenues for the three months ended December 31, 2003 (Interim
2004) were $37.9 million, a decrease of $4.2 million or 9.9% over the three
months ended December 31, 2002 (Interim 2003). Revenue from both contract
services and operated equipment rental services were lower than Interim 2003 by
$2.0 million or 15.2% and $2.2 million or 7.6% respectfully. The decrease in
revenues is attributable to a continuing weakness in the non-residential
construction market and uncertainty in the government spending.

Gross Profit.Gross profit totaled $9.8 million in Interim 2004, an
increase of $0.6 million or 6.1% from Interim 2003. Gross profit as a
percentage of revenues increased to 25.9% in Interim 2004 from 22.0% in Interim
2003. The increase in gross profit is primarily attributable to significant
profits from a major project and the successful settlement of an outstanding
claim.

General and Administrative Expenses.General and administrative expenses
were $7.4 million in Interim 2004 compared to $6.7 million in Interim 2003, an
increase of $0.7 million or 10.6%. As a percent of revenues, general and
administrative expenses were 19.7% in Interim 2004 compared to 16.0% in Interim
2003. The increase in general and administrative expenses as a percentage of
revenues is primarily due to an increase of $1.0 million in incentive
compensation, partially offset by decreases of $0.2 million in salary and
associated taxes, $0.1 decrease in bad debt expense, and $0.1 in depreciation

Interest Expense.Interest expense was $3.5 million in both Interim 2003
and 2004. Although interest expenses attributable to borrowings diminished in
2003, higher letter of credit expenses offset this savings.

Other Income.Other income increased by $0.8 million from Interim 2003 to
Interim 2004. This increase is primarily attributable to the sale of an FCC
license that was no longer used by the Company.

Income Tax Expense (Benefit).The Company had income tax expense in
Interim 2004 of $29,000 or 38% of income before taxes compared to an income tax
benefit of $0.2 million, or 36.0% of loss before income taxes in Interim 2003

20



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##### Table of Contents



Liquidity and Capital Resources

It is anticipated that the Companys principal uses of liquidity will be
to fund working capital, meet debt service requirements and finance the
Companys strategy of pursuing strategic acquisitions and expanding through
internal growth. The Companys principal sources of liquidity are expected to
be cash flow from operations and borrowings under the New Credit facility (The
New Credit). The New Credit is a $50 million, three year asset based borrowing
facility, consisting of a revolving credit facility (New Revolver) of up to
$50 million with a $25 million sub-facility for letters of credit.
Availability under the revolver portion of The New Credit would be limited to a
borrowing base consisting of (i) up to 85% of the net amount of the Companys
eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the
net book value of the Companys eligible inventory and eligible equipment or
(b) 85% of the appraised net orderly liquidation value of Companys eligible
inventory and equipment, and (iii) up to 50% of the appraised forced
liquidation value of the Companys owned real estate.

The
provisions of the New Credit facility include a lock-box agreement and
also allow the bank, in its reasonable
credit judgment, to assess additional reserves against the borrowing base
calculation. The Company reviewed the New Credit and determined that the
associated lock-box agreement satisfied the requirements for consideration of
EITF Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that include both a Subjective Acceleration
Clause and a Lock-Box Arrangement (EITF 95-22). Further, we have reviewed
the terms and conditions of the New Credit with the intention of determining
whether there are any subjective acceleration clauses as defined in
FAS 78, Classification of Obligations that are Callable by
the Creditor. In
reading the agreement and discussing the terms and conditions with
our lender, it
did not appear that there were any subjective acceleration clauses that fit
directly into the definition provided in FAS 78. However, upon further
analysis of the terms of the New Credit, there were certain provisions noted
that could potentially be interpreted as a subjective acceleration
clause. These reserve requirements may result in an
overadvance borrowing position that could require an accelerated repayment of
the overadvance portion. Since the inception of this New Credit facility, the lender has
not applied any additional reserves to the borrowing base calculation.
Managements understanding of this provision after consultation with the lender,
is that the lender, in its reasonable credit judgment, can assess additional
reserves to the borrowing base calculation to account for changes in the nature
of the Companys business that alters the underlying value of the collateral.
The Company does not anticipate any changes in its business practices that
would result in any material adjustments to the borrowing base calculation.
However, management cannot be certain that additional reserves will not be
assessed by the lender to the borrowing base calculation. As a result, the Company has reclassified borrowings under the New
Credit facility as a short-term obligation. In addition,
borrowings under The New Credit are subject to certain financial covenants that
include capital expenditure limits, utilization rate ratio, minimum interest
coverage ratio, maximum leverage ratio and a minimum borrowing availability
limit. The indebtedness of the Company under The New Credit is secured by a
first priority perfected security interest in all of the inventory, accounts,
equipment, fixtures, cash, and other assets of the Company. As of December 31,
2003, total borrowing unused and available under The New Credit was $28.4
million.

|                                                                     |  |      |        |      |  |   |         |  
|-------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------- | -
|SUMMARY CASH FLOW DATA (000s) FOR THE SIX MONTHS ENDED December 31, |  | 2002 |        | 2003
|                                                                     |  |      |        |     
|Cash and cash equivalents                                            |  | $    | 1,996  |      |  | $ | 2,028   |  
|Net cash provided by (used in):                                      |  |      |        |      |  |   |         |  
|Operating activities                                                 |  |      | 7,359  |      |  |   | 7,381   |  
|Investing activities                                                 |  |      | (2,285 | )    |  |   | 10,005  |  
|Financing activities                                                 |  |      | (9,283 | )    |  |   | (15,542 | )
|Capital expenditures                                                 |  |      | (2,681 | )    |  |   | (2,875  | )

Cash provided by operating activities netted to $7.4 million in both
Interim 2003 and 2004. Net earnings increased $0.8 million from a $0.3 million
loss in Interim 2003 to a $0.5 million gain in Interim 2004. In Interim 2004,
the Companys net earnings, depreciation and amortization plus decreases in
receivables, inventories, prepaid expenses and other assets 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 2003, the
Companys net earnings and depreciation and amortization plus a decrease in
receivables offset by a reduction in accounts payable, accrued liabilities and
income taxes resulted in $7.4 million in net cash provided from operating
activities.

Net cash used in investing activities was $2.3 million in Interim 2003,
compared to net cash provided by investing activities of $10.0 million in
Interim 2004. Although capital expenditures remained relatively consistent
rising from $2.7 million in Interim 2003 to $2.9 million in 2004, proceeds from
sale of assets rose from $0.4 million in Interim 2003 to $12.9 million in
Interim 2004. The increase of $12.5 million in Interim 2004 is primarily
attributable to the disposal of an unused FCC license for $0.8 million and the
sale and the leaseback of the Companys 11 owned properties, which netted the
Company $11.3 million.

Management estimates that the Companys annual capital expenditures will
be approximately $6.0 million for fiscal 2004.

Net cash used in financing activities in Interim 2004 was a use of $15.5
million as compared to a use of $9.3 million in Interim 2003. In Interim 2003
and Interim 2004, the Companys financing activities are primarily a result of
borrowings and repayments of 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, 2003, the Company
and its subsidiaries had approximately $102.5 million of total indebtedness
outstanding (including the Notes) plus outstanding letters of credit of $12.9
million and a stockholders deficit of approximately $77.6 million. As of
December 31, 2003, approximately $28.4 million of additional borrowing was
available under the Companys New Credit Facility (as defined).

Sale-leaseback

On December 3, 2003, the Company consummated an agreement for the
sale-and-leaseback of our 11 owned properties (the Real Estate). The buyer,
CRICPENHALL LLC is owned by Prudential Real Estate Companies Account
Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are
two investment funds, sponsored by Prudential Real Estate Investors.
Prudential Real Estate Investors is a business unit of Prudential Investment
Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc.
Penhall sold the Real Estate for $12.0 million and immediately entered into
eleven 20 year leases with annual lease payments. Penhall also has four 5-year
options to extend the lease at the then current fair market value. The gain on
sale of $2.7 million will be amortized over the initial term of the leases of
20 years. Through December 31, 2003, the Company has amortized $11,000 of the
gain. See Note 5 to the condensed consolidated financial statements.

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New Accounting Pronouncement

In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity.
Statement No. 150 requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, except for mandatory redeemable financial instruments of a
nonpublic entity for which this statement is effective for fiscal periods
beginning December 15, 2003, (the Companys fiscal 2005). At this time, the
Company is unable to determine the impact that adoption of this pronouncement
will have on our financial position, results of operations or liquidity.




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 and The New Credit 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 its
overall borrowing costs. 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, 2003.

|                      |  |                      |       |      |  |      |      |      |  |      |      |            |  |       |         |       |  |   |   |   |  |   |   |   |  |   |         |   |  |   |        |    
|--------------------- |  | -------------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---------- |  | ----- | ------- | ----- |  | - | - | - |  | - | - | - |  | - | ------- | - |  | - | ------ | ---
|                      |  | Years Ended June 30, |       |      |  |      |      |      |  |      |      |            |  |      
|                      |  |                      |       |      |  |      |      |      |  |      |      | Fair      
|                      |  | 2004                 |       | 2005 |  | 2006 |      | 2007 |  | 2008 |      | Thereafter |  | Total |         | Value
|                      |  |                      |       |      |  |      |      |      |  |      |      |            |  |       |         |      
|                      |  | (In thousands)      
|Fixed rate debt       |  | $                    | 2,355 |      |  | $    | 167  |      |  | $    | 6    |            |  | $     | 100,000 |       |  | $ | 0 |   |  | $ | 0 |   |  | $ | 102,528 |   |  | $ | 99,528 | (1)
|Average interest rate |  |                      | 2.64  | %    |  |      | 3.27 | %    |  |      | 2.21 | %          |  |       | 12.00   | %     |  |   | 0 | % |  |   | 0 | % |  |   | 11.77   | % |  |   | 12.37  | %  



---

|(1) |  | The fair value of fixed rate debt was determined based on current rates offered for the debt instrument.
|--- |  | --------------------------------------------------------------------------------------------------------




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
December 2003, 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 December 2003 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

(a)  Exhibits

|       |  |                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  |                                                                                                                                                                           
|       |  |                                                                                                                                                                           
|31.1   |  | Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
dated February 13, 2004*                                               
|       |  |                                                                                                                                                                           
|31.2   |  | Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
dated February 13, 2004*                                               
|       |  |                                                                                                                                                                           
|32.1   |  | Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
February 13, 2004*
|       |  |                                                                                                                                                                           
|32.2   |  | Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
February 13, 2004*
|       |  |                                                                                                                                                                           
|       |  | * filed herewith                                                                                                                                                          

(b)  Reports on Form 8-K

On December 5, 2003, we filed a Current Report on Form 8-K relating to a sale-leaseback transaction that occurred on December 3, 2003.

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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: |  |                   |  | Penhall International Corp.                       
|      |  | February 17, 2004 |  | /s/ John T. Sawyer                                
|      |  |                   |  |                                                   
|      |  |                   |  | John T. Sawyer                                    
|      |  |                   |  | Chairman of the Board, President and              
|      |  |                   |  | Chief Executive Officer                           
|      |  |                   |  |                                                   
|      |  |                   |  | /s/ Jeffrey E. Platt                              
|      |  |                   |  |                                                   
|      |  |                   |  | Jeffrey E. Platt                                  
|      |  |                   |  | Vice President-Finance and Chief Financial Officer

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Exhibit Index

|            |  |                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                               
|            |  |                                                                                                                                                                           
|31.1        |  | Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
dated February 13, 2004*                                               
|            |  |                                                                                                                                                                           
|31.2        |  | Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
dated February 13, 2004*                                               
|            |  |                                                                                                                                                                           
|32.1        |  | Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
February 13, 2004*
|            |  |                                                                                                                                                                           
|32.2        |  | Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 dated
February 13, 2004*
|            |  |                                                                                                                                                                           
|            |  | * filed herewith                                                                                                                                                          

24