##### Table of Contents



SECURITIES AND EXCHANGE COMMISSIONWashington, 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 March 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 by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   YesxNo  o

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act).   Yeso
Nox

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 May 14, 2003
|                                 |  |  |  |                                      
|Common Stock, $.01 Par Value     |  |  |  | 986,552                              





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | 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  
|SIGNATURES                   
|CERTIFICATIONS               



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##### Table of Contents



PENHALL INTERNATIONAL CORP.

INDEX

|                                                                                              |                        |      |                                                                                                                    |  |          |   | 
|--------------------------------------------------------------------------------------------- | ---------------------- | ---- | ------------------------------------------------------------------------------------------------------------------ |  | -------- | - | 
|                                                                                              |                        |      |                                                                                                                    |  | Page No.
|                                                                                              |                        |      |                                                                                                                    |  |         
|Part I  Financial Information                                                                |                        |      |                                                                                                                    | 
|Item 1. Financial Statements                                                                  |                        |      |                                                                                                                    | 
|                                                                                              |                        |      | Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2003                                       |  |          | 3 | 
|                                                                                              |                        |      | Condensed Consolidated Statements of Operations for the three and nine month periods ended March 31, 2002 and 2003 |  |          | 5 | 
|                                                                                              |                        |      | Condensed Consolidated Statements of Cash Flows for the nine month periods ended March 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 |                        |      | 20                                                                                                                 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                        |      | 23                                                                                                                 | 
|Item 4. Controls and Procedures                                                               |                        |      | 23                                                                                                                 | 
|Part II  Other Information                                                                   |                        |      |                                                                                                                    | 
|Items 1-5 are not applicable                                                                  |                        |      | 23                                                                                                                 | 
|Item 6. Exhibits and Reports on Form 8-K                                                      |                        |      | 23                                                                                                                 | 
|                                                                                              | a) Reports on Form 8-K |      |                                                                                                                    |  |         
|                                                                                              |                        | None |                                                                                                                    |  |          |  

2



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##### Table of Contents






Part I. Financial Information




Item 1. Financial Statements

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |            |  |            | 
|---------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------- | --------------------------------- | ---------- | -------- | ----------- | ----------- | ---------- |  | ---------- | 
|                                                     |                                                                             |                                                                |             |                                   |            | June 30, |             | March 31,  
|                                                     |                                                                             |                                                                |             |                                   |            | 2002     |             | 2003       
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |            
|                                                     |                                                                             |                                                                |             | ASSETS                            |            |          |             |             |            |  |            | 
|Current assets:                                      |                                                                             |                                                                |             |                                   |            |          |             |            
|                                                     | Cash and cash equivalents                                                   |                                                                | $           | 6,205,000                         |            |          | $           | 4,027,000   |           
|                                                     | Receivables:                                                                |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             | Contract and trade receivables                                 |             |                                   | 31,361,000 |          |             |             | 25,211,000 | 
|                                                     |                                                                             | Contract retentions due upon completion and acceptance of work |             |                                   | 4,756,000  |          |             |             | 4,154,000  | 
|                                                     |                                                                             | Income taxes                                                   |             |                                   | 1,990,000  |          |             |             | 2,600,000  | 
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             |                                                                | 38,107,000  |                                   |            |          | 31,965,000  |            
|                                                     |                                                                             | Less allowance for doubtful receivables                        |             |                                   | 1,421,000  |          |             |             | 1,436,000  | 
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             |                                                                |             | Net receivables                   |            |          | 36,686,000  |             |            |  | 30,529,000 | 
|                                                     | Costs and estimated earnings in excess of billings on uncompleted contracts |                                                                |             | 2,514,000                         |            |          |             | 1,641,000   |           
|                                                     | Deferred tax assets                                                         |                                                                |             | 3,133,000                         |            |          |             | 3,133,000   |           
|                                                     | Inventories                                                                 |                                                                |             | 1,895,000                         |            |          |             | 2,459,000   |           
|                                                     | Prepaid expenses and other current assets                                   |                                                                |             | 2,375,000                         |            |          |             | 2,137,000   |           
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             |                                                                |             | Total current assets              |            |          | 52,808,000  |             |            |  | 43,926,000 | 
|Property, plant and equipment, at cost:              |                                                                             |                                                                |             |                                   |            |          |             |            
|                                                     | Land                                                                        |                                                                |             | 5,004,000                         |            |          |             | 5,004,000   |           
|                                                     | Buildings and leasehold improvements                                        |                                                                |             | 8,822,000                         |            |          |             | 8,756,000   |           
|                                                     | Construction and other equipment                                            |                                                                |             | 121,890,000                       |            |          |             | 120,841,000 |           
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             |                                                                | 135,716,000 |                                   |            |          | 134,601,000 |            
|                                                     | Less accumulated depreciation and amortization                              |                                                                |             | 69,449,000                        |            |          |             | 77,767,000  |           
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             |                                                                |             | Net property, plant and equipment |            |          | 66,267,000  |             |            |  | 56,834,000 | 
|Goodwill, net of accumulated amortization            |                                                                             |                                                                | 9,053,000   |                                   |            |          | 9,053,000   |            
|Debt issuance costs, net of accumulated amortization |                                                                             |                                                                | 3,177,000   |                                   |            |          | 2,605,000   |            
|Other assets, net                                    |                                                                             |                                                                | 1,610,000   |                                   |            |          | 1,341,000   |            
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           
|                                                     |                                                                             | $                                                              | 132,915,000 |                                   |            | $        | 113,759,000 |            
|                                                     |                                                                             |                                                                |             |                                   |            |          |             |             |           

See accompanying notes to condensed consolidated financial statements

3



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            |  |             |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | - | --------------------------- | ------------------------------------- |  | ----------- | ------------ | ---------- |  | ----------- | ---------- | 
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  | June 30,    |              | March 31, 
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  | 2002        |              | 2003      
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |           
|                                                                                                                                                                                                                             |                                                                             |   |                             | LIABILITIES AND STOCKHOLDERS DEFICIT |  |             |              |            |  |             |            | 
|Current liabilities:                                                                                                                                                                                                         |                                                                             |   |                             |                                       |  |             |              |           
|                                                                                                                                                                                                                             | Current installments of long-term debt                                      |   | $                           | 9,217,000                             |  |             | $            | 8,800,000  | 
|                                                                                                                                                                                                                             | Trade accounts payable                                                      |   |                             | 9,726,000                             |  |             |              | 3,889,000  | 
|                                                                                                                                                                                                                             | Accrued liabilities                                                         |   |                             | 17,783,000                            |  |             |              | 13,643,000 | 
|                                                                                                                                                                                                                             | Billings in excess of costs and estimated earnings on uncompleted contracts |   |                             | 680,000                               |  |             |              | 1,252,000  | 
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            | 
|                                                                                                                                                                                                                             |                                                                             |   |                             | Total current liabilities             |  |             | 37,406,000   |            |  |             | 27,584,000 | 
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            | 
|Long-term debt, excluding current installments                                                                                                                                                                               |                                                                             |   | 19,753,000                  |                                       |  |             | 14,186,000   |           
|Senior notes                                                                                                                                                                                                                 |                                                                             |   | 100,000,000                 |                                       |  |             | 100,000,000  |           
|Deferred tax liabilities                                                                                                                                                                                                     |                                                                             |   | 9,339,000                   |                                       |  |             | 9,339,000    |           
|Senior Exchangeable Preferred Stock, redemption value $15,075,000 and $16,311,000 at June 30, 2002 and March 31,
2003, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2002 and March 31, 2003    |                                                                             |   | 15,075,000                  |                                       |  |             | 16,311,000   |           
|Series A Preferred Stock, redemption value $17,332,000 and $19,107,000 at June 30, 2002 and March 31, 2003,
respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2002 and March 31, 2003 |                                                                             |   | 17,332,000                  |                                       |  |             | 19,107,000   |           
|Stockholders deficit:                                                                                                                                                                                                       |                                                                             |   |                             |                                       |  |             |              |           
|Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,791 shares
at June 30, 2002 and 18,798 shares at March 31, 2003                                                      |                                                                             |   | 31,200,000                  |                                       |  |             | 34,412,000   |           
|Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,127 at June 30, 2002 and
1,021,870 shares at March 31, 2003                                                                          |                                                                             |   | 10,000                      |                                       |  |             | 10,000       |           
|Additional paid-in capital                                                                                                                                                                                                   |                                                                             |   | 2,044,000                   |                                       |  |             | 2,082,000    |           
|Treasury stock, at cost, 34,796 common shares at June 30, 2002 and 35,318 common shares at March 31, 2003                                                                                                                    |                                                                             |   | (317,000                    | )                                     |  |             | (336,000     | )         
|Accumulated deficit                                                                                                                                                                                                          |                                                                             |   | (98,927,000                 | )                                     |  |             | (108,936,000 | )         
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            | 
|                                                                                                                                                                                                                             |                                                                             |   | Total stockholders deficit |                                       |  | (65,990,000 | )            |            |  | (72,768,000 | )         
|Commitments and contingencies                                                                                                                                                                                                |                                                                             |   |                             |                                       |  |             |              |           
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            | 
|                                                                                                                                                                                                                             |                                                                             | $ | 132,915,000                 |                                       |  | $           | 113,759,000  |           
|                                                                                                                                                                                                                             |                                                                             |   |                             |                                       |  |             |              |            | 

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 |            | NINE MONTH PERIODS
|                                                                |                                                          |   | ENDED MARCH 31,     |            | ENDED MARCH 31,   
|                                                                |                                                          |   |                     |            |                   
|                                                                |                                                          |   | 2002                |            | 2003               |   | 2002       |            | 2003
|                                                                |                                                          |   |                     |            |                    |   |            |            |     
|Revenues                                                        |                                                          | $ | 30,010,000          |            |                    | $ | 29,850,000 |            |      | $ | 116,841,000 |            |   | $ | 118,470,000 |           
|Cost of revenues                                                |                                                          |   | 23,965,000          |            |                    |   | 25,416,000 |            |      |   | 86,286,000  |            |   |   | 94,306,000  |           
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|                                                                | Gross profit                                             |   |                     | 6,045,000  |                    |   |            | 4,434,000  |      |   |             | 30,555,000 |   |   |             | 24,164,000 |  
|General and administrative expenses                             |                                                          |   | 6,606,000           |            |                    |   | 6,617,000  |            |      |   | 21,555,000  |            |   |   | 20,627,000  |           
|Other operating income                                          |                                                          |   | 423,000             |            |                    |   | 199,000    |            |      |   | 979,000     |            |   |   | 1,088,000   |           
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|                                                                | Earnings (loss) before interest expense and income taxes |   |                     | (138,000   | )                  |   |            | (1,984,000 | )    |   |             | 9,979,000  |   |   |             | 4,625,000  |  
|Interest expense                                                |                                                          |   | 3,440,000           |            |                    |   | 3,429,000  |            |      |   | 10,747,000  |            |   |   | 10,574,000  |           
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|                                                                | Loss before income taxes                                 |   |                     | (3,578,000 | )                  |   |            | (5,413,000 | )    |   |             | (768,000   | ) |   |             | (5,949,000 | )
|Income tax benefit                                              |                                                          |   | (1,465,000          | )          |                    |   | (1,949,000 | )          |      |   | (315,000    | )          |   |   | (2,142,000  | )         
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|Net loss                                                        |                                                          |   | (2,113,000          | )          |                    |   | (3,464,000 | )          |      |   | (453,000    | )          |   |   | (3,807,000  | )         
|Accretion of preferred stock to redemption value                |                                                          |   | (905,000            | )          |                    |   | (1,023,000 | )          |      |   | (2,674,000  | )          |   |   | (3,011,000  | )         
|Accrual of cumulative dividends on preferred stock              |                                                          |   | (953,000            | )          |                    |   | (1,084,000 | )          |      |   | (2,803,000  | )          |   |   | (3,191,000  | )         
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|Net loss available to common stockholders                       |                                                          | $ | (3,971,000          | )          |                    | $ | (5,571,000 | )          |      | $ | (5,930,000  | )          |   | $ | (10,009,000 | )         
|                                                                |                                                          |   |                     |            |                    |   |            |            |      |   |             |            |   |   |             |           
|Loss per share basic and diluted                                |                                                          | $ | (4.02               | )          |                    | $ | (5.65      | )          |      | $ | (6.02       | )          |   | $ | (10.15      | )         
|Weighted average number of shares outstanding basic and diluted |                                                          |   | 986,657             |            |                    |   | 986,552    |            |      |   | 984,998     |            |   |   | 986,358     |           

See accompanying notes to condensed consolidated financial statements

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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |           |            |            |  
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------------- | --------- | ------------------ | ----------- | ----------- | --------- | ---------- | ---------- | -
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           | NINE MONTH PERIODS
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           | ENDED MARCH 31,   
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                   
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           | 2002               |             | 2003       
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|Cash flows provided by operating activities:                           |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|                                                                       | Net loss                                                                        |                                                                         | $                                            | (453,000                                                                    | )         |                    | $           | (3,807,000  | )        
|                                                                       | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         | Depreciation and amortization                |                                                                             |           | 12,752,000         |             |             |           | 12,633,000 |           
|                                                                       |                                                                                 |                                                                         | Amortization of debt issuance costs          |                                                                             |           | 664,000            |             |             |           | 705,000    |           
|                                                                       |                                                                                 |                                                                         | Provision for doubtful accounts              |                                                                             |           | (5,000             | )           |             |           | 440,000    |           
|                                                                       |                                                                                 |                                                                         | Gain on sale of assets                       |                                                                             |           | (129,000           | )           |             |           | (224,000   | )         
|                                                                       |                                                                                 |                                                                         | Changes in operating assets and liabilities: |                                                                             |           |                    |             |             |           |            |           
|                                                                       |                                                                                 |                                                                         |                                              | Receivables                                                                 |           |                    | 6,873,000   |             |           |            | 5,717,000  |  
|                                                                       |                                                                                 |                                                                         |                                              | Inventories, prepaid expenses and other assets                              |           |                    | (123,000    | )           |           |            | (326,000   | )
|                                                                       |                                                                                 |                                                                         |                                              | Costs and estimated earnings in excess of billings on uncompleted contracts |           |                    | (13,000     | )           |           |            | 873,000    |  
|                                                                       |                                                                                 |                                                                         |                                              | Trade accounts payable and accrued liabilities                              |           |                    | (5,477,000  | )           |           |            | (7,097,000 | )
|                                                                       |                                                                                 |                                                                         |                                              | Billings in excess of costs and estimated earnings on uncompleted contracts |           |                    | (1,106,000  | )           |           |            | 572,000    |  
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         |                                              | Net cash provided by operating activities                                   |           |                    | 12,983,000  |             |           |            | 9,486,000  |  
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|Cash flows from investing activities:                                  |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|                                                                       | Proceeds from sale of assets                                                    |                                                                         |                                              | 320,000                                                                     |           |                    |             | 507,000     |          
|                                                                       | Capital expenditures                                                            |                                                                         |                                              | (7,235,000                                                                  | )         |                    |             | (3,214,000  | )        
|                                                                       | Acquisition of assets                                                           |                                                                         |                                              | (3,507,000                                                                  | )         |                    |             |            |          
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         |                                              | Net cash used in investing activities                                       |           |                    | (10,422,000 | )           |           |            | (2,707,000 | )
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|Cash flows from financing activities:                                  |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|                                                                       | Borrowings under long-term debt                                                 |                                                                         |                                              | 62,641,000                                                                  |           |                    |             | 58,774,000  |          
|                                                                       | Repayments of long-term debt                                                    |                                                                         |                                              | (62,480,000                                                                 | )         |                    |             | (64,758,000 | )        
|                                                                       | Debt issuance costs                                                             |                                                                         |                                              |                                                                            |           |                    |             | (133,000    | )        
|                                                                       | Book overdraft                                                                  |                                                                         |                                              | (966,000                                                                    | )         |                    |             | (2,880,000  | )        
|                                                                       | Proceeds from issuance of common stock                                          |                                                                         |                                              | 213,000                                                                     |           |                    |             | 38,000      |          
|                                                                       | Repurchase of common stock and Series B preferred stock                         |                                                                         |                                              | (40,000                                                                     | )         |                    |             | (35,000     | )        
|                                                                       | Issuance of Series B preferred stock                                            |                                                                         |                                              | 158,000                                                                     |           |                    |             | 37,000      |          
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         |                                              | Net cash used in financing activities                                       |           |                    | (474,000    | )           |           |            | (8,957,000 | )
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         |                                              | Net change in cash and cash equivalents                                     |           |                    | 2,087,000   |             |           |            | (2,178,000 | )
|Cash and cash equivalents at beginning of period                       |                                                                                 |                                                                         | 1,030,000                                    |                                                                             |           |                    | 6,205,000   |            
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|Cash and cash equivalents at end of period                             |                                                                                 | $                                                                       | 3,117,000                                    |                                                                             |           | $                  | 4,027,000   |            
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|Supplemental disclosure of cash flow information:                      |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|                                                                       |                                                                                 | Cash paid during the period for:                                        |                                              |                                                                             |           |                    |             |             |           |           
|                                                                       |                                                                                 |                                                                         |                                              | Income taxes                                                                |           | $                  | 791,000     |             |           | $          |           |  
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 |                                                                         |                                              | Interest                                                                    |           | $                  | 13,084,000  |             |           | $          | 12,890,000 |  
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|Supplemental disclosure of noncash investing and financing activities: |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |            
|                                                                       |                                                                                 | Accrued liabilities related to the acquisition of assets                |                                              | $                                                                           | 3,400,000 |                    |             | $           |          |           
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 | Borrowings related to the acquisition of assets                         |                                              | $                                                                           | 3,265,000 |                    |             | $           |          |           
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 | Borrowings related to capital leases and equipment financing agreements |                                              | $                                                                           | 300,000   |                    |             | $           |          |           
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 | Accretion of preferred stock to redemption value                        |                                              | $                                                                           | 2,674,000 |                    |             | $           | 3,011,000 |           
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          
|                                                                       |                                                                                 | Accrual of cumulative dividends on preferred stock                      |                                              | $                                                                           | 2,803,000 |                    |             | $           | 3,191,000 |           
|                                                                       |                                                                                 |                                                                         |                                              |                                                                             |           |                    |             |             |          

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

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

Loss Per Share

Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is calculated by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period plus the impact of assumed potential dilutive
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
nine month periods ended March 31, 2002 diluted loss per share is the same as
basic loss per share as options to purchase 9,305 shares of common stock were
not included in the computation of diluted loss per share for the three and
nine month periods ended March 31, 2002 as the effect would have been
anti-dilutive. During the three and nine month periods ended March 31, 2003,
diluted loss per share is the same as basic loss per share as options to
purchase 9,135 shares of common stock were not included in the computation of
diluted loss per share for the three and nine month periods ended March 31,
2003 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:

7



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

Revenue Recognition on Long-Term Construction Contracts

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

Valuation of Long-Lived Assets and Goodwill

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



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

Stock Compensation

On October 7, 1999, the Companys Board of Directors approved a stock
incentive plan (the Plan) under which employees, officers, directors or
consultants (Eligible Participants) may be granted stock options and
restricted stock awards. The Board authorized the issuance of up to 50,000
shares of common stock and 2,500 shares of Series B Preferred Stock under the
Plan. The Plan is administered by the Board of Directors or an appointed
committee (Administrator). The exercise price for stock options or restricted
stock awards shall not be less than the Fair Market Value (as defined) of the
stock on the grant date subject to restrictions and conditions, including the
Companys option to repurchase, as determined by the Administrator at the time
of the grant. The term of each stock option shall be fixed, and not exceeding
10 years from the grant date of the stock option. In addition, stock options
may be subject to specific vesting and acceleration provisions as determined by
the Administrator at or after the grant date. The Company accounts for the
Plan in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25) and complies
with the disclosure provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123),
and SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and
Disclosure.

The following table illustrates the effect on net loss available to common
stockholders and basic and diluted loss per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
compensation.

|                                                                                                                              |  |                   |            |      |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---- |  | - | ----------- | -
|                                                                                                                              |  | Nine
Months Ended
|                                                                                                                              |  | March 31,        
|                                                                                                                              |  |                  
|                                                                                                                              |  | 2002              |            | 2003
|                                                                                                                              |  |                   |            |     
|Net loss available to common stockholders as reported                                                                         |  | $                 | (5,930,000 | )    |  | $ | (10,009,000 | )
|Add:                                                                                                                          |  |                   |            |      |  |   |             |  
|Stock-based compensation expense included in reported
net income 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              |  | $                 | (9,000     | )    |  | $ | (16,000     | )
|Proforma net loss available to common stockholders                                                                            |  | $                 | (5,939,000 | )    |  | $ | (10,025,000 | )
|Basic and diluted loss per share as reported                                                                                  |  | $                 | (6.02      | )    |  | $ | (10.15      | )
|Proforma basic and diluted loss per share                                                                                     |  | $                 | (6.03      | )    |  | $ | (10.16      | )

The weighted average fair values of options granted as of March 31, 2002 and
2003 were $21.02 and $19.23 per share, respectively, using the Black-Scholes
option-pricing model with the following assumptions as of the grant date:
risk-free interest rate 4.7%, volatility 0.0%, dividend rate 0.0% and an
expected life of 10 years. Outstanding options at March 31, 2002 and 2003
were 9,305 and 9,135 respectively.

8



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##### Table of Contents



New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards (SFAS) No. 141, Business Combinations and
No. 142 Goodwill and Other Intangible Assets. SFAS requires that the purchase
method of accounting be used for all business combinations completed after June
30, 2001, clarifies the recognition of intangible assets separately from
goodwill and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain. SFAS No. 142, which was effective for
fiscal years beginning after December 15, 2001, requires that ratable
amortization of goodwill be replaced with periodic tests of goodwill impairment
and that intangible assets, other than goodwill, which have determinable useful
lives, be amortized over their useful lives. The Company has adopted these
accounting standards effective July 1, 2002. As of December 31, 2002, we had
completed the transitional impairment analysis under SFAS No. 142, no indicated
impairment of goodwill was identified. There were no adjustments to
identifiable intangible assets useful lives or recorded balances as a result
of the adoption of SFAS No. 142. We will perform an annual impairment analysis
of goodwill as required by SFAS No. 142. The following is a reconciliation of
net loss and loss per share between the amounts reported for the three and nine
month periods ended March 31, 2003 and 2002 and the adjusted amounts reflecting
these new accounting rules:

|                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|----------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                      |  | Three Months Ended |            | Nine Months Ended
|                                                      |  | March 31,          |            | March 31,        
|                                                      |  |                    |            |                  
|                                                      |  | 2002               |            | 2003              |  | 2002 |            | 2003
|                                                      |  |                    |            |                   |  |      |            |     
|Net loss:                                             |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|Reported loss available to common stockholders        |  | $                  | (3,971,000 | )                 |  | $    | (5,571,000 | )    |  | $ | (5,930,000 | ) |  | $ | (10,009,000 | )
|Add back: Goodwill amortization (net of income taxes) |  |                    | 90,000     |                   |  |      |           |      |  |   | 331,000    |   |  |   |            |  
|                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|Adjusted net loss                                     |  | $                  | (3,881,000 | )                 |  | $    | (5,571,000 | )    |  | $ | (5,599,000 | ) |  | $ | (10,009,000 | )
|                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|Basic and diluted loss per share:                     |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|Reported basic loss per share                         |  | $                  | (4.02      | )                 |  | $    | (5.65      | )    |  | $ | (6.02      | ) |  | $ | (10.15      | )
|Add back: Goodwill amortization (net of income taxes) |  |                    | 0.09       |                   |  |      |           |      |  |   | 0.34       |   |  |   |            |  
|                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  
|Adjusted basic and diluted loss per share             |  | $                  | (3.93      | )                 |  | $    | (5.65      | )    |  | $ | (5.68      | ) |  | $ | (10.15      | )
|                                                      |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |             |  

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

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

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

On July 30, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities.SFAS 146 nullifies EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring).It requires that a liability be recognized for those
costs only when the liability is incurred, that is, when it meets the
definition of a liability in the FASBs conceptual framework. SFAS No. 146 also
establishes fair value as the objective for initial measurement of liabilities
related to exit or disposal activities. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. Adoption of SFAS 146 has not had a material impact on our
financial position or results from operations.

9



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##### Table of Contents



In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
Company did not have any guarantees at March 31, 2003 and will apply the
provisions of FIN No. 45 prospectively to guarantees made after December 31,
2002.

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

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

10



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

(2) Commitments and Contingencies

Litigation

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

(3) Long Term Debt

Under a Credit Agreement with its lenders, the Company is required to be
in compliance with certain covenants and ratios. As of March 31, 2003, the
Company was in violation and subsequently received a waiver for each of the
following covenants/ratios : (1) Interest Coverage Ratio, (2) Leverage Ratio,
and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the
Credit Agreement). The waiver requires the Companys aggregate debt under the
Credit Facility not to exceed $30,173,000 and expires May 30, 2003. The
Company is in the process of and anticipates refinancing the Credit Facility
prior to May 30, 2003. In the event that the Credit Facility is not refinanced
by May 30, 2003, the Company is required to pay an amount equal to 0.25% of the
sum of the outstanding principal amount of its respective Term Loans and its
Revolving Commitment.

(4) Condensed Consolidating Financial Information

The following consolidating financial information is presented for
purposes of complying with the reporting requirements of the Guarantor
Subsidiaries, (Penhall Rental Corp. and Penhall Company). Effective July 1,
2002, Penhall Rental was merged into Penhall International Corp. Accordingly,
consolidating financial information as of and for the three and nine months
ended March 31, 2003 does not include Penhall Rental Corp. Separate financial
statements and other disclosures with respect to the Guarantor Subsidiaries are
not presented because the Company believes that such financial statements and
other information would not provide additional information that is material to
investors.

The condensed consolidating financial information presents condensed
financial statements as of June 30, 2002 and March 31, 2003 and for the three
and nine month periods ended March 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 (Penhall Rental Corp. (through dissolution effective July 1, 2002) and Penhall Company and subsidiaries),         
|
| | (c) |  | elimination entries necessary to consolidate the parent company and its subsidiaries, and                                                    
|
| | (d) |  | the Company on a consolidated basis.                                                                                                         

11



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

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

12



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2003

|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |            | 
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------- | ----------- | ------------- | --------- | ---------- | ---------- | ------------ | ---------- | ------------ | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | ---------- | 
|                                               |                                                                             |                                                                             |                      |             | Penhall       |           |            |            |              |            |              |             |            |            |             |             |           
|                                               |                                                                             |                                                                             |                      |             | International |           | Penhall    |            |              |            |              |             |            |            |            
|                                               |                                                                             |                                                                             |                      |             | Corp.         |           | Company    |            | Eliminations |            | Consolidated
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |             
|Assets                                         |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |            
|                                               | Current assets:                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |           
|                                               |                                                                             | Receivables, net                                                            |                      | $           | 2,596,000     |           |            | $          | 27,933,000   |            |              | $           |           |            |             | $           | 30,529,000 |           
|                                               |                                                                             | Inventories                                                                 |                      |             |              |           |            |            | 2,459,000    |            |              |             |           |            |             |             | 2,459,000  |           
|                                               |                                                                             | Costs and estimated earnings in excess of
billings on uncompleted
contracts |                      |             |              |           |            |            | 1,641,000    |            |              |             |           |            |             |             | 1,641,000  |           
|                                               |                                                                             | Intercompany assets                                                         |                      |             |              |           |            |            | 4,303,000    |            |              |             | (4,303,000 | )          |             |             |           |           
|                                               |                                                                             | Other current assets                                                        |                      |             | 4,318,000     |           |            |            | 4,979,000    |            |              |             |           |            |             |             | 9,297,000  |           
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             |                                                                             | Total current assets |             |               | 6,914,000 |            |            |              | 41,315,000 |              |             |            | (4,303,000 | )           |             |            | 43,926,000 | 
|                                               | Net property, plant and equipment                                           |                                                                             |                      | 8,865,000   |               |           |            | 47,969,000 |              |            |              |            |            |            |             | 56,834,000  |           
|                                               | Other assets, net                                                           |                                                                             |                      | 2,578,000   |               |           |            | 10,421,000 |              |            |              |            |            |            |             | 12,999,000  |           
|                                               | Investment in subsidiary                                                    |                                                                             |                      | 68,162,000  |               |           |            |           |              |            |              | (68,162,000 | )          |            |             |            |           
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | $                                                                           | 86,519,000           |             |               | $         | 99,705,000 |            |              | $          | (72,465,000  | )           |            | $          | 113,759,000 |            
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           
|Liabilities and Stockholders Equity (Deficit) |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |            
|                                               | Current installments of long-term debt                                      |                                                                             | $                    | 6,004,000   |               |           | $          | 2,796,000  |              |            | $            |            |            |            | $           | 8,800,000   |           
|                                               | Trade accounts payable                                                      |                                                                             |                      | 4,000       |               |           |            | 3,885,000  |              |            |              |            |            |            |             | 3,889,000   |           
|                                               | Accrued liabilities                                                         |                                                                             |                      | 2,145,000   |               |           |            | 11,498,000 |              |            |              |            |            |            |             | 13,643,000  |           
|                                               | Billings in excess of costs and estimated earnings on uncompleted
contracts |                                                                             |                      |            |               |           |            | 1,252,000  |              |            |              |            |            |            |             | 1,252,000   |           
|                                               | Intercompany liabilities                                                    |                                                                             |                      | 4,303,000   |               |           |            |           |              |            |              | (4,303,000  | )          |            |             |            |           
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | Total current liabilities                                                   |                      |             | 12,456,000    |           |            |            | 19,431,000   |            |              |             | (4,303,000 | )          |             |             | 27,584,000 |           
|                                               | Long-term debt, excluding current installments                              |                                                                             |                      | 11,570,000  |               |           |            | 2,616,000  |              |            |              |            |            |            |             | 14,186,000  |           
|                                               | Senior notes                                                                |                                                                             |                      | 100,000,000 |               |           |            |           |              |            |              |            |            |            |             | 100,000,000 |           
|                                               | Deferred tax liabilities                                                    |                                                                             |                      | (157,000    | )             |           |            | 9,496,000  |              |            |              |            |            |            |             | 9,339,000   |           
|                                               | Senior Exchangeable Preferred stock                                         |                                                                             |                      | 16,311,000  |               |           |            |           |              |            |              |            |            |            |             | 16,311,000  |           
|                                               | Series A Preferred stock                                                    |                                                                             |                      | 19,107,000  |               |           |            |           |              |            |              |            |            |            |             | 19,107,000  |           
|                                               | Stockholders equity (deficit)                                              |                                                                             |                      | (72,768,000 | )             |           |            | 68,162,000 |              |            |              | (68,162,000 | )          |            |             | (72,768,000 | )         
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           
|                                               |                                                                             | $                                                                           | 86,519,000           |             |               | $         | 99,705,000 |            |              | $          | (72,465,000  | )           |            | $          | 113,759,000 |            
|                                               |                                                                             |                                                                             |                      |             |               |           |            |            |              |            |              |             |            |            |             |             |            |           

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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |            |  
|----------------------------------- | -------------------------------------------------------- | - | --------------------------------------- | ---------- | ------- | - | --------- | --------- | ------------ | - | ------------ | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                    |                                                          |   | THREE MONTH PERIOD ENDED MARCH 31, 2002
|                                    |                                                          |   |                                        
|                                    |                                                          |   | Penhall                                 |            | Penhall |   |           |           |              |   |              |            |   |   |            |            |  
|                                    |                                                          |   | International                           |            | Rental  |   | Penhall   |           |              |   |              |            |   |   |           
|                                    |                                                          |   | Corp.                                   |            | Corp.   |   | Company   |           | Eliminations |   | Consolidated
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |             
|Revenues                            |                                                          | $ |                                        |            |         | $ | 2,163,000 |           |              | $ | 31,433,000   |            |   | $ | (3,586,000 | )          |   | $ | 30,010,000 |           
|Cost of revenues                    |                                                          |   |                                        |            |         |   |          |           |              |   | 24,062,000   |            |   |   | (97,000    | )          |   |   | 23,965,000 |           
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |           
|                                    | Gross profit                                             |   |                                         |           |         |   |           | 2,163,000 |              |   |              | 7,371,000  |   |   |            | (3,489,000 | ) |   |            | 6,045,000  |  
|General and administrative expenses |                                                          |   | 97,000                                  |            |         |   | 77,000    |           |              |   | 8,042,000    |            |   |   | (1,610,000 | )          |   |   | 6,606,000  |           
|Royalties                           |                                                          |   |                                        |            |         |   |          |           |              |   | 1,880,000    |            |   |   | (1,880,000 | )          |   |   |           |           
|Other operating income, net         |                                                          |   | 1,000                                   |            |         |   |          |           |              |   | 422,000      |            |   |   |           |            |   |   | 423,000    |           
|Equity in loss of subsidiaries      |                                                          |   | (47,000                                 | )          |         |   |          |           |              |   |             |            |   |   | 47,000     |            |   |   |           |           
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |           
|                                    | Earnings (loss) before interest expense and income taxes |   |                                         | (143,000   | )       |   |           | 2,086,000 |              |   |              | (2,129,000 | ) |   |            | 48,000     |   |   |            | (138,000   | )
|                                    | Interest expense                                         |   |                                         | 3,403,000  |         |   |           | 4,000     |              |   |              | 33,000     |   |   |            |           |   |   |            | 3,440,000  |  
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |           
|                                    | Earnings (loss) before income taxes                      |   |                                         | (3,546,000 | )       |   |           | 2,082,000 |              |   |              | (2,162,000 | ) |   |            | 48,000     |   |   |            | (3,578,000 | )
|Income tax expense (benefit)        |                                                          |   | (1,433,000                              | )          |         |   | 854,000   |           |              |   | (886,000     | )          |   |   |           |            |   |   | (1,465,000 | )         
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |           
|                                    | Net earnings (loss)                                      |   | $                                       | (2,113,000 | )       |   | $         | 1,228,000 |              |   | $            | (1,276,000 | ) |   | $          | 48,000     |   |   | $          | (2,113,000 | )
|                                    |                                                          |   |                                         |            |         |   |           |           |              |   |              |            |   |   |            |            |   |   |            |           

14



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |            |            |  
|----------------------------------- | --------------------------------------------- | ------------------------ | ---------- | --------------------------------------- | ---------- | ------- | ---------- | ------------ | ---------- | ------------ | ---------- | --------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                    |                                               |                          |            | THREE MONTH PERIOD ENDED MARCH 31, 2003
|                                    |                                               |                          |            |                                        
|                                    |                                               |                          |            | Penhall                                 |            |         |            |              |            |              |            |           |            |   |            |           
|                                    |                                               |                          |            | International                           |            | Penhall |            |              |            |              |            |           |            |  
|                                    |                                               |                          |            | Corp.                                   |            | Company |            | Eliminations |            | Consolidated
|                                    |                                               |                          |            |                                         |            |         |            |              |            |             
|Revenues                            |                                               | $                        | 2,187,000  |                                         |            | $       | 29,850,000 |              |            | $            | (2,187,000 | )         |            | $ | 29,850,000 |           
|Cost of revenues                    |                                               |                          |           |                                         |            |         | 25,416,000 |              |            |              |           |           |            |   | 25,416,000 |           
|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |           
|                                    |                                               | Gross profit             |            |                                         | 2,187,000  |         |            |              | 4,434,000  |              |            |           | (2,187,000 | ) |            |            | 4,434,000  |  
|General and administrative expenses |                                               |                          | 183,000    |                                         |            |         | 6,830,000  |              |            |              | (396,000   | )         |            |   | 6,617,000  |           
|Royalties                           |                                               |                          |           |                                         |            |         | 1,791,000  |              |            |              | (1,791,000 | )         |            |   |           |           
|Other operating income, net         |                                               |                          | 12,000     |                                         |            |         | 187,000    |              |            |              |           |           |            |   | 199,000    |           
|Equity in loss of subsidiary        |                                               |                          | (2,558,000 | )                                       |            |         |           |              |            |              | 2,558,000  |           |            |   |           |           
|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |           
|                                    | Loss before interest expense and income taxes |                          |            | (542,000                                | )          |         |            | (4,000,000   | )          |              |            | 2,558,000 |            |   |            | (1,984,000 | )         
|Interest expense                    |                                               |                          | 3,377,000  |                                         |            |         | 52,000     |              |            |              |           |           |            |   | 3,429,000  |           
|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |           
|                                    |                                               | Loss before income taxes |            |                                         | (3,919,000 | )       |            |              | (4,052,000 | )            |            |           | 2,558,000  |   |            |            | (5,413,000 | )
|Income tax benefit                  |                                               |                          | (455,000   | )                                       |            |         | (1,494,000 | )            |            |              |           |           |            |   | (1,949,000 | )         
|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |           
|Net loss                            |                                               | $                        | (3,464,000 | )                                       |            | $       | (2,558,000 | )            |            | $            | 2,558,000  |           |            | $ | (3,464,000 | )         
|                                    |                                               |                          |            |                                         |            |         |            |              |            |              |            |           |            |   |            |           

15



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |            |  
|----------------------------------- | ------------------------------------------------- | - | -------------------------------------- | ---------- | ------- | - | --------- | --------- | ------------ | - | ------------ | ---------- |  | - | ----------- | ----------- | - | - | ----------- | ---------- | -
|                                    |                                                   |   | NINE MONTH PERIOD ENDED MARCH 31, 2002
|                                    |                                                   |   |                                       
|                                    |                                                   |   | Penhall                                |            | Penhall |   |           |           |              |   |              |            |  |   |             |             |  
|                                    |                                                   |   | International                          |            | Rental  |   | Penhall   |           |              |   |              |            |  |   |            
|                                    |                                                   |   | Corp.                                  |            | Corp.   |   | Company   |           | Eliminations |   | Consolidated
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |             
|Revenues                            |                                                   | $ |                                       |            |         | $ | 8,427,000 |           |              | $ | 121,578,000  |            |  | $ | (13,164,000 | )           |   | $ | 116,841,000 |           
|Cost of revenues                    |                                                   |   |                                       |            |         |   |          |           |              |   | 86,616,000   |            |  |   | (330,000    | )           |   |   | 86,286,000  |           
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |           
|                                    | Gross profit                                      |   |                                        |           |         |   |           | 8,427,000 |              |   |              | 34,962,000 |  |   |             | (12,834,000 | ) |   |             | 30,555,000 |  
|General and administrative expenses |                                                   |   | 285,000                                |            |         |   | 268,000   |           |              |   | 26,549,000   |            |  |   | (5,547,000  | )           |   |   | 21,555,000  |           
|Royalties                           |                                                   |   |                                       |            |         |   |          |           |              |   | 7,288,000    |            |  |   | (7,288,000  | )           |   |   |            |           
|Other operating income, net         |                                                   |   | 3,000                                  |            |         |   |          |           |              |   | 976,000      |            |  |   |            |             |   |   | 979,000     |           
|Equity in earnings of subsidiaries  |                                                   |   | 5,987,000                              |            |         |   |          |           |              |   |             |            |  |   | (5,987,000  | )           |   |   |            |           
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |           
|                                    | Earnings before interest expense and income taxes |   |                                        | 5,705,000  |         |   |           | 8,159,000 |              |   |              | 2,101,000  |  |   |             | (5,986,000  | ) |   |             | 9,979,000  |  
|Interest expense                    |                                                   |   | 10,634,000                             |            |         |   | 14,000    |           |              |   | 99,000       |            |  |   |            |             |   |   | 10,747,000  |           
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |           
|                                    | Earnings (loss) before income taxes               |   |                                        | (4,929,000 | )       |   |           | 8,145,000 |              |   |              | 2,002,000  |  |   |             | (5,986,000  | ) |   |             | (768,000   | )
|Income tax expense (benefit)        |                                                   |   | (4,476,000                             | )          |         |   | 3,340,000 |           |              |   | 821,000      |            |  |   |            |             |   |   | (315,000    | )         
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |           
|Net earnings (loss)                 |                                                   | $ | (453,000                               | )          |         | $ | 4,805,000 |           |              | $ | 1,181,000    |            |  | $ | (5,986,000  | )           |   | $ | (453,000    | )         
|                                    |                                                   |   |                                        |            |         |   |           |           |              |   |              |            |  |   |             |             |   |   |             |           

16



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##### Table of Contents



PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |            |  
|----------------------------------- | -------------------------------------------------------- | - | -------------------------------------- | ---------- | ------- | - | ------------ | ---------- | ------------ | - | ---------- | ---------- | - | - | ----------- | ---------- | -
|                                    |                                                          |   | NINE MONTH PERIOD ENDED MARCH 31, 2003
|                                    |                                                          |   |                                       
|                                    |                                                          |   | Penhall                                |            |         |   |              |            |              |   |            |            |   |   |            
|                                    |                                                          |   | International                          |            | Penhall |   |              |            |              |   |            |            |  
|                                    |                                                          |   | Corp.                                  |            | Company |   | Eliminations |            | Consolidated
|                                    |                                                          |   |                                        |            |         |   |              |            |             
|Revenues                            |                                                          | $ | 8,294,000                              |            |         | $ | 118,470,000  |            |              | $ | (8,294,000 | )          |   | $ | 118,470,000 |           
|Cost of revenues                    |                                                          |   |                                       |            |         |   | 94,306,000   |            |              |   |           |            |   |   | 94,306,000  |           
|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |           
|                                    | Gross profit                                             |   |                                        | 8,294,000  |         |   |              | 24,164,000 |              |   |            | (8,294,000 | ) |   |             | 24,164,000 |  
|General and administrative expenses |                                                          |   | 567,000                                |            |         |   | 21,246,000   |            |              |   | (1,186,000 | )          |   |   | 20,627,000  |           
|Royalties                           |                                                          |   |                                       |            |         |   | 7,108,000    |            |              |   | (7,108,000 | )          |   |   |            |           
|Other operating income, net         |                                                          |   | 13,000                                 |            |         |   | 1,075,000    |            |              |   |           |            |   |   | 1,088,000   |           
|Equity in loss of subsidiary        |                                                          |   | (2,131,000                             | )          |         |   |             |            |              |   | 2,131,000  |            |   |   |            |           
|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |           
|                                    | Earnings (loss) before interest expense and income taxes |   |                                        | 5,609,000  |         |   |              | (3,115,000 | )            |   |            | 2,131,000  |   |   |             | 4,625,000  |  
|Interest expense                    |                                                          |   | 10,360,000                             |            |         |   | 214,000      |            |              |   |           |            |   |   | 10,574,000  |           
|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |           
|                                    | Loss before income taxes                                 |   |                                        | (4,751,000 | )       |   |              | (3,329,000 | )            |   |            | 2,131,000  |   |   |             | (5,949,000 | )
|Income tax benefit                  |                                                          |   | (944,000                               | )          |         |   | (1,198,000   | )          |              |   |           |            |   |   | (2,142,000  | )         
|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |           
|Net loss                            |                                                          | $ | (3,807,000                             | )          |         | $ | (2,131,000   | )          |              | $ | 2,131,000  |            |   | $ | (3,807,000  | )         
|                                    |                                                          |   |                                        |            |         |   |              |            |              |   |            |            |   |   |             |           

17



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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |             |             |  
|--------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ---------- | -------------------------------------- | --------- | ------- | --------- | ---------- | ---------- | ------------ | ---------- | ------------ | ----------- | - | ---------- | --------- | --------- | - | ---------- | ----------- | ----------- | -
|                                                    |                                                         |                                                     |            | NINE MONTH PERIOD ENDED MARCH 31, 2002
|                                                    |                                                         |                                                     |            |                                       
|                                                    |                                                         |                                                     |            | Penhall                                |           | Penhall |           |            |            |              |            |              |             |   |            |           |           |  
|                                                    |                                                         |                                                     |            | International                          |           | Rental  |           | Penhall    |            |              |            |              |             |   |            |          
|                                                    |                                                         |                                                     |            | Corp.                                  |           | Corp.   |           | Company    |            | Eliminations |            | Consolidated
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |             
|Net cash provided by (used in) operating activities |                                                         | $                                                   | (3,955,000 | )                                      |           | $       | 4,953,000 |            |            | $            | 17,971,000 |              |             | $ | (5,986,000 | )         |           | $ | 12,983,000 |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|Cash flows from investing activities:               |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|                                                    | Proceeds from sale of assets                            |                                                     |            |                                       |           |         |           |           |            |              |            | 320,000      |             |   |            |          |           |   |            | 320,000     |            
|                                                    | Capital expenditures                                    |                                                     |            |                                       |           |         |           | 30,000     |            |              |            | (7,265,000   | )           |   |            |          |           |   |            | (7,235,000  | )          
|                                                    | Acquisition of assets                                   |                                                     |            |                                       |           |         |           |           |            |              |            | (3,507,000   | )           |   |            |          |           |   |            | (3,507,000  | )          
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|                                                    |                                                         | Net cash provided by (used in) investing activities |            |                                        |          |         |           |            | 30,000     |              |            |              | (10,452,000 | ) |            |           |          |   |            |             | (10,422,000 | )
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|Cash flows from financing activities:               |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|                                                    | Due to (from) affiliates                                |                                                     |            | 5,505,000                              |           |         |           | (3,140,000 | )          |              |            | (8,351,000   | )           |   |            | 5,986,000 |           |   |            |            |            
|                                                    | Borrowings under long-term debt                         |                                                     |            | 59,760,000                             |           |         |           |           |            |              |            | 2,881,000    |             |   |            |          |           |   |            | 62,641,000  |            
|                                                    | Repayments of long-term debt                            |                                                     |            | (61,641,000                            | )         |         |           | (9,000     | )          |              |            | (830,000     | )           |   |            |          |           |   |            | (62,480,000 | )          
|                                                    | Book overdraft                                          |                                                     |            |                                       |           |         |           |           |            |              |            | (966,000     | )           |   |            |          |           |   |            | (966,000    | )          
|                                                    | Proceeds from issuance of common stock                  |                                                     |            | 213,000                                |           |         |           |           |            |              |            |             |             |   |            |          |           |   |            | 213,000     |            
|                                                    | Repurchase of common stock and Series B preferred stock |                                                     |            | (40,000                                | )         |         |           |           |            |              |            |             |             |   |            |          |           |   |            | (40,000     | )          
|                                                    | Issuance of Series B preferred stock                    |                                                     |            | 158,000                                |           |         |           |           |            |              |            |             |             |   |            |          |           |   |            | 158,000     |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|                                                    |                                                         | Net cash provided by (used in) financing activities |            |                                        | 3,955,000 |         |           |            | (3,149,000 | )            |            |              | (7,266,000  | ) |            |           | 5,986,000 |   |            |             | (474,000    | )
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|                                                    |                                                         | Net change in cash and cash equivalents             |            |                                        |          |         |           |            | 1,834,000  |              |            |              | 253,000     |   |            |           |          |   |            |             | 2,087,000   |  
|Cash and cash equivalents at beginning of period    |                                                         |                                                     |           |                                        |           |         | 921,000   |            |            |              | 109,000    |              |             |   |           |           |           |   | 1,030,000  |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            
|Cash and cash equivalents at end of period          |                                                         | $                                                   |           |                                        |           | $       | 2,755,000 |            |            | $            | 362,000    |              |             | $ |           |           |           | $ | 3,117,000  |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |            |           |           |   |            |            

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PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MARCH 31, 2003
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |             |            |  
|--------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ---------- | -------------------------------------- | --------- | ------- | --------- | ---------- | ---------- | ------------ | ---------- | ------------ | ----------- | - | - | - | - | - | --------- | ----------- | ---------- | -
|                                                    |                                                         |                                                     |            | NINE MONTH PERIOD ENDED MARCH 31, 2003
|                                                    |                                                         |                                                     |            |                                       
|                                                    |                                                         |                                                     |            | Penhall                                |           | Penhall |           |            |            |              |            |              |             |   |   |   |   |  
|                                                    |                                                         |                                                     |            | International                          |           | Rental  |           | Penhall    |            |              |            |              |             |   |   |  
|                                                    |                                                         |                                                     |            | Corp.                                  |           | Corp.   |           | Company    |            | Eliminations |            | Consolidated
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |             
|Net cash provided by (used in) operating activities |                                                         | $                                                   | (4,486,000 | )                                      |           | $       |          |            |            | $            | 13,972,000 |              |             | $ |  |   |   | $ | 9,486,000 |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|Cash flows from investing activities:               |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|                                                    | Proceeds from sale of assets                            |                                                     |            |                                       |           |         |           |           |            |              |            | 507,000      |             |   |   |  |   |   |           | 507,000     |           
|                                                    | Capital expenditures                                    |                                                     |            |                                       |           |         |           |           |            |              |            | (3,214,000   | )           |   |   |  |   |   |           | (3,214,000  | )         
|                                                    | Cash from Penhall Rental Corp. merger                   |                                                     |            | 6,143,000                              |           |         |           | (6,143,000 | )          |              |            |             |             |   |   |  |   |   |           |            |           
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|                                                    |                                                         | Net cash provided by (used in) investing activities |            |                                        | 6,143,000 |         |           |            | (6,143,000 | )            |            |              | (2,707,000  | ) |   |   |  |   |           |             | (2,707,000 | )
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|Cash flows from financing activities:               |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|                                                    | Due to (from) affiliates                                |                                                     |            | 6,361,000                              |           |         |           |           |            |              |            | (6,361,000   | )           |   |   |  |   |   |           |            |           
|                                                    | Borrowings under long-term debt                         |                                                     |            | 57,710,000                             |           |         |           |           |            |              |            | 1,064,000    |             |   |   |  |   |   |           | 58,774,000  |           
|                                                    | Repayments of long-term debt                            |                                                     |            | (61,673,000                            | )         |         |           |           |            |              |            | (3,085,000   | )           |   |   |  |   |   |           | (64,758,000 | )         
|                                                    | Debt issuance costs                                     |                                                     |            | (104,000                               | )         |         |           |           |            |              |            | (29,000      | )           |   |   |  |   |   |           | (133,000    | )         
|                                                    | Book overdraft                                          |                                                     |            |                                       |           |         |           |           |            |              |            | (2,880,000   | )           |   |   |  |   |   |           | (2,880,000  | )         
|                                                    | 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 provided by (used in) financing activities |            |                                        | 2,334,000 |         |           |            |           |              |            |              | (11,291,000 | ) |   |   |  |   |           |             | (8,957,000 | )
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|                                                    |                                                         | Net change in cash and cash equivalents             |            |                                        | 3,991,000 |         |           |            | (6,143,000 | )            |            |              | (26,000     | ) |   |   |  |   |           |             | (2,178,000 | )
|Cash and cash equivalents at beginning of period    |                                                         |                                                     |           |                                        |           |         | 6,143,000 |            |            |              | 62,000     |              |             |   |  |   |   |   | 6,205,000 |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            
|Cash and cash equivalents at end of period          |                                                         | $                                                   | 3,991,000  |                                        |           | $       |          |            |            | $            | 36,000     |              |             | $ |  |   |   | $ | 4,027,000 |            
|                                                    |                                                         |                                                     |            |                                        |           |         |           |            |            |              |            |              |             |   |   |   |   |   |           |            

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##### Table of Contents






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

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

General

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

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



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

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

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

|                                   |                |   |                                     |        |                                    |  |      |       |       |   |        |        |       |  |      |       |       |   |        |         |  |  |      |       |      |   |        |         |  |  |      |       |  
|---------------------------------- | -------------- | - | ----------------------------------- | ------ | ---------------------------------- |  | ---- | ----- | ----- | - | ------ | ------ | ----- |  | ---- | ----- | ----- | - | ------ | ------- |  |  | ---- | ----- | ---- | - | ------ | ------- |  |  | ---- | ----- | -
|                                   |                |   | THREE MONTH PERIODS ENDED MARCH 31, |        | NINE MONTH PERIODS ENDED MARCH 31,
|                                   |                |   |                                     |        |                                   
|                                   |                |   | 2003                                |        | 2002                               |  | 2003 |       | 2002 
|                                   |                |   |                                     |        |                                    |  |      |       |      
|                                   |                |   |                                     |        |                                    |  | % of |       |       |   |        |        | % of  |  |      |       |       |   | % of   |         |  |  |      |       | % of
|                                   |                |   | $                                   |        | Total                              |  | $    |       | Total |   | $      |        | Total |  | $    |       | Total
|                                   |                |   |                                     |        |                                    |  |      |       |       |   |        |        |       |  |      |       |      
|                                   |                |   | (Dollars in Thousands)              |        | (Dollars in Thousands)            
|Operated Equipment Rental Services |                | $ | 23,232                              |        |                                    |  | 77.8 | %     |       | $ | 23,743 |        |       |  | 79.1 | %     |       | $ | 86,744 |         |  |  | 73.2 | %     |      | $ | 87,422 |         |  |  | 74.8 | %    
|Contract Services (1)              |                |   | 6,618                               |        |                                    |  | 22.2 | %     |       |   | 6,267  |        |       |  | 20.9 | %     |       |   | 31,726 |         |  |  | 26.8 | %     |      |   | 29,419 |         |  |  | 25.2 | %    
|                                   |                |   |                                     |        |                                    |  |      |       |       |   |        |        |       |  |      |       |       |   |        |         |  |  |      |       |      |   |        |         |  |  |      |      
|                                   | Total Revenues |   | $                                   | 29,850 |                                    |  |      | 100.0 | %     |   | $      | 30,010 |       |  |      | 100.0 | %     |   | $      | 118,470 |  |  |      | 100.0 | %    |   | $      | 116,841 |  |  |      | 100.0 | %
|                                   |                |   |                                     |        |                                    |  |      |       |       |   |        |        |       |  |      |       |       |   |        |         |  |  |      |       |      |   |        |         |  |  |      |      

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

20



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##### Table of Contents



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

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

Results of Operations

Nine Months Ended March 31, 2003 Compared to Nine months Ended March 31,
2002

Revenues.Revenues for the nine months ended March 31, 2003 (Interim
2003) were $118.5 million, an increase of $1.6 million or 1.4 % from the nine
months ended March 31, 2002 (Interim 2002). Increased revenues in Interim
2003 were primarily a result of an increase of $2.3 million or 7.8% in Contract
Services in Interim 2003, partially offset by a $0.7 or 0.8% decrease in
Operated Equipment Rental Services.

Gross Profit.Gross profit totaled $24.2 million in Interim 2003, a
decrease of $6.4 million or 20.9% from Interim 2002. Gross profit as a
percentage of revenues decreased from 26.2% in Interim 2002 to 20.4% in Interim
2003. The decrease in gross profit from Interim 2002 to Interim 2003 is
primarily attributable to increased competition, cost overruns on some
contracts, and an increase of $2.8 million in insurance costs during Interim
2003. The decrease in gross profit as a percentage of revenues was due to
increased competition, an increase in insurance costs and a decrease in
equipment utilization.

General and Administrative Expenses.General and administrative expenses
were $20.6 million in Interim 2003 compared to $21.6 million in Interim 2002.
As a percent of revenues, general and administrative expenses were 17.4% in
Interim 2003 compared to 18.4% in Interim 2002. The decrease in general and
administrative expenses as a percentage of revenues during Interim 2003 is
primarily attributable to decreases of $1.1 million in incentive compensation,
$0.4 million in payroll and related expenses and $0.5 million in goodwill
amortization partially offset by a $0.6 million increase in insurance costs and
a $0.4 million increase in bad debt expense.

Interest Expense.Interest expense was $10.6 million in Interim 2003
compared to interest expense of $10.7 million in Interim 2002. The decrease in
interest expense is attributable to lower interest rates and decreased
borrowing during Interim 2003.

Income Tax Benefit.The Company recorded an income tax benefit of $2.1
million, or 36% of loss before income taxes in Interim 2003, compared to an
income tax benefit of $0.3 million, or 41% of loss before income taxes in
Interim 2002. The increase in the income tax benefit is attributable to a
higher loss before income tax in Interim 2003.

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

Revenues.Revenues for the three months ended March 31, 2003 (Interim
2003) were $29.9 million, a decrease of $0.2 million or 0.5% over the three
months ended March 31, 2002 (Interim 2002). Contract revenues increased $0.4
million and Operated Equipment Rental Services decreased $0.5 million in
Interim 2003 compared to Interim 2002.

Gross Profit.Gross profit totaled $4.4 million in Interim 2003, a
decrease of $1.6 million or 26.7% from Interim 2002. Gross profit as a
percentage of revenues decreased to 14.9% in Interim 2003 from 20.1% in Interim
2002. The decrease in gross profit is primarily attributable to increased
insurance costs, which increased by $1.0 million during Interim 2003, a
decrease in equipment utilization and losses on some Contract Services work.
The decrease in gross profit as a percentage of revenues was due primarily to
increased insurance costs, increased competition and a decrease in equipment
utilization.

General and Administrative Expenses.General and administrative expenses
were $6.6 million in both Interim 2002 and Interim 2003. As a percent of
revenues, general and administrative expenses were 22.2% in Interim 2003
compared to 22.0% in Interim 2002. An increase in bad debt of $0.3 million and
an increase in insurance costs of $0.1 million was offset by lower wages of
$0.2 million and lower amortization costs of $0.2 million.

Interest Expense.Interest expense was $3.4 million in both Interim 2002
and Interim 2003.

Income Tax Benefit.The Company recorded an income tax benefit of $1.9
million, or 36.0% of loss before income taxes in Interim 2003 compared to an
income tax benefit of $1.5 million, or 41.0% of loss before income taxes in
Interim 2002. The increase in tax benefit is attributable to a higher loss
before income tax in Interim 2003.

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Liquidity and Capital Resources

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

|                                                                   |  |      |         |      |  |   |        |  
|------------------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------ | -
|SUMMARY CASH FLOW DATA (000's) FOR THE NINE MONTHS ENDED MARCH 31, |  | 2002 |         | 2003
|                                                                  
|Cash and cash equivalents                                          |  | $    | 3,117   |      |  | $ | 4,027  |  
|                                                                  
|Net cash provided by (used in):                                    |  |      |         |      |  |   |        |  
|                                                                  
|Operating activities                                               |  |      | 12,983  |      |  |   | 9,486  |  
|                                                                  
|Investing activities                                               |  |      | (10,422 | )    |  |   | (2,707 | )
|                                                                  
|Financing activities                                               |  |      | (474    | )    |  |   | (8,957 | )
|                                                                  
|Capital expenditures                                               |  |      | (7,235  | )    |  |   | (3,214 | )
|                                                                  

Cash provided by operating activities decreased to $9.5 million in Interim
2003 from $13.0 million in Interim 2002, a decrease of $3.5 million. Net loss
increased $3.3 million from a $0.5 million loss in Interim 2002 to a $3.8
million loss in Interim 2003. In Interim 2003, the Companys net loss and
depreciation plus a decrease in receivables offset by a decrease in trade
accounts payable and accrued liabilities resulted in $9.5 million in net cash
provided by operating activities. In Interim 2002, the Companys net earnings
and depreciation plus a decrease in receivables offset by a reduction in
accounts payable and accrued liabilities and a reduction in billings in excess
of costs and estimated earnings on uncompleted contracts resulted in $13.0
million in net cash provided from operating activities.

Net cash used in investing activities decreased $7.7 million to $2.7
million in Interim 2003 from $10.4 million in Interim 2002. The reduction in
net cash used in investing activities is attributable to a decrease in capital
expenditures of $4.0 million and a decrease in the acquisition of assets of
$3.5 million.

Management estimates that the Companys annual capital expenditures will
be approximately $5.0 million for fiscal 2003.

Net cash used in financing activities in Interim 2003 was a net use of
$9.0 million as compared to a net use of $0.5 million in Interim 2002. In
Interim 2003 and Interin 2002 the Companys financing activities are primarily
a result of borrowings and repayments of long-term debt and a book overdraft.

Historically, the Company has funded its working capital requirements,
capital expenditures and other needs principally from operating cash flows. As
a result of the recapitalization in 1998, however, the Company has substantial
indebtedness and debt service obligations. As of March 31, 2003, the Company
and its subsidiaries had approximately $123.0 million of total indebtedness
outstanding (including the Notes) plus outstanding letters of credit of $8.8
million and a stockholders deficit of approximately $72.8 million. As of March
31, 2003, approximately $11.3 million of additional borrowing was available
under the Companys New Credit Facility.

Under a Credit Agreement with its lenders, the Company is required to be
in compliance with certain covenants and ratios. As of March 31, 2003, the
Company was in violation and subsequently received a waiver for each of the
following covenants/ratios: (1) Interest Coverage Ratio, (2) Leverage Ratio,
and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the
Credit Agreement). The waiver requires the Companys aggregate debt under the
Credit Facility not to exceed $30,173,000 and expires May 30, 2003. The
Company is in the process of and anticipates refinancing the Credit Facility
prior to May 30, 2003. In the event that the Credit Facility is not refinanced
by May 30, 2003, the Company is required to pay an amount equal to 0.25% of the
sum of the outstanding principal amount of its respective Term Loans and its
Revolving Commitment.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

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

The table below presents the principal amounts of debt, weighted average
interest rates, fair values and other items required by the year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes as of March 31, 2003.

|                                           |  |                      |       |      |  |      |        |      |  |      |      |            |  |       |         |       |  |   |       |   |  |   |       |   |  |   |         |   |  |      |        |    
|------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ---- | ---------- |  | ----- | ------- | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ------- | - |  | ---- | ------ | ---
|                                           |  | Years Ended June 30,
|                                           |  |                     
|                                           |  |                      |       |      |  |      |        |      |  |      |      |            |  |       |         |       |  |   |       |   |  |   |       |   |  |   |         |   |  | Fair
|                                           |  | 2003                 |       | 2004 |  | 2005 |        | 2006 |  | 2007 |      | Thereafter |  | Total |         | Value
|                                           |  |                      |       |      |  |      |        |      |  |      |      |            |  |       |         |      
|                                           |  | (In thousands)      
|Fixed rate debt                            |  | $                    | 68    |      |  | $    | 2,027  |      |  | $    | 174  |            |  | $     | 100,012 |       |  | $ | 5     |   |  | $ | 166   |   |  | $ | 102,452 |   |  | $    | 63,952 | (2)
|Average interest rate                      |  |                      | 5.68  | %    |  |      | 3.12   | %    |  |      | 4.48 | %          |  |       | 12.00   | %     |  |   | 10.00 | % |  |   | 10.00 | % |  |   | 11.80   | % |  |      | 11.69  | %  
|Variable rate LIBOR debt (1)               |  | $                    | 1,684 |      |  | $    | 16,646 |      |  | $    | 791  |            |  | $     | 1,248   |       |  | $ | 165   |   |  | $ | 0     |   |  | $ | 20,534  |   |  | $    | 20,534 |    
|Weighted average current interest rate (1) |  |                      |       |      |  |      |        |      |  |      |      |            |  |       |         |       |  |   |       |   |  |   |       |   |  |   |         |   |  |      | 4.36   | %  



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




Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure
(1) that information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commissions (SEC) rules and forms,
and (2) that this information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
March 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 March 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.

None

23



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##### Table of Contents






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: May 14, 2003 |  | Penhall International Corp.   /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        

24



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##### Table of Contents






CERTIFICATIONS

I, John T. Sawyer, certify that:



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



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



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



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



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

May 14, 2003

/s/ JOHN T. SAWYER

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

25



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##### Table of Contents



I, Jeffrey E. Platt, certify that:



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



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



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



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



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

May 14, 2003

/s/ JEFFREY E. PLATT

Jeffrey E. Platt
Vice President-Finance and Chief Financial Officer (Principal Financial
Officer)

26