~~Table~~SECURITIES ofAND ~~Contents~~EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE COMMISSION~~ 20549

~~Washington,~~FORM ~~D.C. 20549~~ 10-K

FORM 10-K

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the year ended June 30, 2004

		OR

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

~~[X]~~For ~~ANNUAL~~the ~~REPORT~~transition ~~PURSUANT~~period ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~from to .

~~For~~Commission ~~the~~File ~~year~~Number ~~ended June 30, 2003~~ 333-64745

OR PENHALL INTERNATIONAL CORP.

~~[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15~~(d)Exact OFname ~~THE~~of ~~SECURITIES~~registrant ~~EXCHANGE~~as ~~ACT~~specified OFin ~~1934.~~its charter)

For the transition period from to .

ARIZONA		86-0634394
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~Commission~~1801 ~~File~~PENHALL ~~Number~~WAY, ~~333-64745~~ANAHEIM, CA 92803(Address of principal executive offices) (Zip Code)

~~PENHALL INTERNATIONAL CORP.~~ (714) 772-6450

(~~Exact~~Registrant’s ~~name~~telephone ofnumber, ~~registrant~~including ~~as specified in its charter)~~area code)

ARIZONA		86-0634394
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Securities registered pursuant to Section 12(b) of the Act:

~~1801 PENHALL WAY, ANAHEIM, CA 92803 (Address of principal executive offices) (Zip Code)~~ None

~~(714) 772-6450 (Registrant’s~~Securities ~~telephone~~registered ~~number,~~pursuant ~~including~~to Section 12(g) ~~area~~of ~~code)~~ the Act:

~~Securities registered pursuant to Section 12(b) of the Act:~~ None

~~None~~Indicate by the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Securities registered pursuant to Section 12(g) of the Act:

CLASS AND TITLE OF CAPITAL STOCK		SHARES OUTSTANDING AS OF OCTOBER 1, 2004
Common Stock, $.01 Par Value		986,552

~~None~~Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the ~~number~~registrant (1) has offiled ~~shares~~all ~~outstanding~~reports required to be filed by Section 13 or 15(d) of ~~each~~the Securities Exchange Act of 1934 during the ~~issuer’s~~preceding 12 months (or ~~classes~~for ofsuch ~~common~~shorter ~~stock~~period that the registrant was required to file such reports), and as(2) has ofbeen ~~the~~subject ~~latest~~to ~~practicable~~such ~~date.~~filing requirements for the past 90 days. Yes ý No o

CLASS AND TITLE OF CAPITAL STOCK		SHARES OUTSTANDING AS OF SEPTEMBER 29, 2003
Common Stock, $.01 Par Value		986,552

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

~~Indicate~~DOCUMENTS byINCORPORATED ~~check~~BY ~~mark if disclosure of delinquent filers pursuant to Item~~REFERENCE: 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] None

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

~~Indicate~~PART byI ~~check~~ITEM ~~mark~~1. ~~whether~~BUSINESS ~~the~~ITEM ~~registrant~~2. isPROPERTIES anITEM ~~accelerated~~3. ~~filer~~LEGAL ~~(as defined~~PROCEEDINGS inITEM ~~Rule 12b~~4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-2K ofSIGNATURES ~~the~~EXHIBIT ~~Exchange~~INDEX ~~Act)~~EXHIBIT 12 EXHIBIT 31.1 ~~Yes~~EXHIBIT ~~[ ] No [~~31.2 XEXHIBIT ] 32.1 EXHIBIT 32.2

~~DOCUMENTS INCORPORATED BY REFERENCE: None~~ ii

~~TABLE~~PART ~~OF CONTENTS~~I

PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PART III
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
	ITEM 9a. CONTROLS AND PROCEDURES
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION.
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBITS INDEX
EXHIBIT 12
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

ITEM 1. BUSINESS

~~Table of Contents~~GENERAL

~~TABLE~~Penhall consists OFof ~~CONTENTS~~Penhall International Corporation, an Arizona corporation, and a wholly owned subsidiary, Penhall Company, a California corporation. Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Bob Mack Company, a California corporation, and Penhall Leasing, a California single member limited liability company (collectively Penhall International Corporation and the four subsidiaries are the “Company” or “Penhall”).

PART I
	ITEM 1. BUSINESS	1
	ITEM 2. PROPERTIES	7
	ITEM 3. LEGAL PROCEEDINGS	8
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	8
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	8
	ITEM 6. SELECTED FINANCIAL DATA	9
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	10
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.	17
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.	17
PART III
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	50
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	50
	ITEM 11. EXECUTIVE COMPENSATION.	51
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	52
	ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	53
	ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES	53
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K	54
SIGNATURES		57
EXHIBIT INDEX		58
EXHIBIT 12
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

On August 4, 1998, a series of mergers (Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., became the corporate parent of Penhall International Inc. (collectively, the Parent Company). Concurrent with the Recapitalization, Phoenix Concrete Cutting, Inc. was renamed Penhall International Corp. and Penhall International Inc. was renamed Penhall Rental Corp. Effective October 1, 1998, all of the operations, and certain of the assets and liabilities of Penhall International Corp., were transferred into Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002. In connection with the Recapitalization in August of 1998, the Company became the successor obligor of $100,000,000 12% Senior Notes (Senior Notes) due August 2006. The foregoing transactions are collectively referred to herein as the “Transactions.”

iiPenhall was founded in 1957 and is one of the largest operated equipment rental providers 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 on an hourly or fixed-price quote basis (“Operated Equipment Rental Services”) to serve construction, industrial, manufacturing, governmental and residential customers. In addition, Penhall complements its Operated Equipment Rental Services by providing the same type of services on a fixed-price contract basis for long-term projects. Penhall employs over 800 skilled operators and has 696 revenue units in its diverse operated equipment rental fleet, which includes a broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units, to large equipment such as backhoes, excavators, water trucks and concrete grinders. Penhall provides its services from 37 locations in 17 states, including Arizona, Colorado, Nevada, Texas, Georgia, North and South Carolina, Oregon, New York and Utah. Penhall has a diverse base of over 14,000 customers. With the exception of the California Department of Transportation, no one customer has accounted for more than 5% of its total revenue in any of the past five fiscal years. Penhall has a reputation for high quality service, which results in a high degree of customer loyalty, and management believes that a significant percent of its revenues are derived through repeat business from existing customers. Penhall has increased its revenues from $95.3 million in fiscal 1997 to $157.0 million in fiscal 2004 through 1) increased rental fleet utilization, 2) increasing its rental equipment fleet, 3) acquisitions, and 4) opening of new offices.

~~Table~~Through its skilled operators and equipment rental fleet, Penhall performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, Penhall generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. For longer duration projects, which may last from a few days to several years, Penhall provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of ~~Contents~~fixed-price contract revenues are derived from long-term highway projects, which have an average contract length of approximately ten months. Penhall strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, Penhall is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 27% of Operated Equipment Rental Services revenues are generated from fixed-price contracts.

~~PART~~Based Ion industry sources, the Company estimates that the United States equipment rental industry has grown from approximately $6.5 billion in annual rental revenues in 1990 to approximately $23.5 billion in 2003. This represents a compound annual growth rate of approximately 10.3%, although in the past two years industry rental revenues decreased by about $1.3 billion. The operated equipment rental industry is a specialized niche segment of the highly fragmented United States equipment rental industry. Management believes that the operated equipment rental industry has grown at a similar rate during the same period.

~~ITEM~~ 1~~. BUSINESS~~

~~GENERAL~~The recent slowdown in industry revenues is a reflection of the significant slowdown in private non-residential construction activity, which declined 13.2% and 5.2% in 2002 and 2003, respectively, as well as significant lower state highway and bridge spending due to state budgets deficits. The Company is particularly sensitive to changes in state highway and non-residential construction activity because these sectors have been principal users of the Company’s services. The long-term growth of the equipment rental industry has been driven primarily by construction spending and continued outsourcing of equipment needs by construction and industrial companies. While customers traditionally have rented equipment for specific purposes such as supplementing capacity during peak periods and in connection with special projects, customers are increasingly looking to rental operators to provide an ongoing, comprehensive supply of equipment, enabling such customers to benefit from the economic advantages and convenience of rental.

~~Penhall consists of Penhall International Corporation, an Arizona~~EQUIPMENT ~~corporation,~~RENTAL and a wholly owned subsidiary, Penhall Company, a California corporation. Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Bob Mack Company, a California corporation, and Penhall Leasing, a California single member limited liability company (collectively Penhall International Corporation and the five subsidiaries are the “Company” or “Penhall”). FLEET

Penhall owns ~~was~~and ~~founded~~operates ina ~~1957~~well-maintained ~~and~~fleet ~~is one~~ of ~~the~~696 ~~largest~~units of operated equipment, ~~rental~~including ~~providers~~excavators, instompers, ~~the~~backhoes, ~~United~~and ~~States.~~compressors, Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators on an hourly or fixed-price quote basis (“~~Operated Equipment Rental Services~~bobcats,”~~) to~~ ~~serve construction~~crushing equipment, ~~industrial~~saws, ~~manufacturing,~~drills ~~governmental~~ and ~~residential customers.~~grinding, Inasphalt ~~addition~~milling, ~~Penhall~~and ~~complements~~grooving ~~its Operated Equipment Rental~~equipment. ~~Services~~Penhall byalso ~~providing~~carries ~~the same type~~ state-of ~~services on a fixed~~-~~price~~the-art ~~contract basis for long~~manually-~~term~~operated ~~projects. Penhall employs over 800 skilled operators~~ and ~~has 710~~remote-controlled ~~units in its diverse operated equipment rental fleet~~breakers, which ~~includes~~provide aaccess ~~broad selection of equipment ranging from smaller items such as diamond abrasive saws and coring units,~~ to ~~large equipment such as backhoes~~contaminated, ~~excavators,~~hazardous ~~water~~or ~~trucks and~~limited ~~concrete grinders. Penhall provides its services from 38 locations in 17~~access ~~states,~~areas ~~including Arizona, Colorado, Nevada, Texas, Georgia, North~~ and ~~South Carolina,~~which ~~Oregon,~~have ~~New~~been ~~York~~used ~~and~~for ~~Utah.~~hazardous ~~Penhall~~projects ~~has~~such aas ~~diverse~~the ~~base~~demolition of ~~over 14,000~~ ~~customers.~~decommissioned ~~With~~nuclear ~~the~~power ~~exception~~plants. ofThe ~~the~~Company ~~California~~employs ~~Department~~skilled ~~of Transportation~~operators, noincluding ~~one~~trainees, ~~customer has accounted~~ for ~~more~~each ~~than~~piece 5% of ~~its~~equipment ~~total~~it ~~revenue in any of the past five fiscal years~~operates. ~~Penhall~~The ~~has a reputation for high quality service,~~following ~~which~~table ~~results~~is in a ~~high~~summary ~~degree~~ of ~~customer loyalty, and management believes that a significant percent of its revenues are derived through repeat business from existing customers.~~ Penhall’s ~~has~~operated ~~increased~~equipment ~~its revenues from $95.3 million in fiscal 1997 to $159.6 million in fiscal 2003 through 1) increased~~ rental ~~fleet~~ ~~utilization, 2) increasing its rental equipment~~ fleet, 3)as ~~acquisitions, and 4) opening~~ of ~~new offices.~~ June 30, 2004:

Through its skilled operators and equipment rental fleet, Penhall performs new construction, rehabilitation and demolition services in connection with infrastructure projects. For short duration assignments, typically lasting from several hours to a few weeks, Penhall generally provides Operated Equipment Rental Services on an hourly or fixed-price quote basis. Services provided in this manner include specialized work such as highway and airport runway grooving and asphalt cutting, as well as demolition work such as concrete breaking, removal and recycling. For longer duration projects, which may last from a few days to several years, Penhall provides services on a fixed-price contractual basis. Services provided in this manner include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. A majority of fixed-price contract revenues are derived from long-term highway projects, which have an average contract length of approximately ten months. Penhall strives to maximize utilization of its operated equipment rental fleet and uses its fixed-price contract services to (i) market its Operated Equipment Rental Services, (ii) increase utilization of its operated equipment rental fleet and (iii) differentiate it from other equipment rental competitors. As part of a fixed-price contract project, Penhall is responsible for completion of an entire job or project, and typically employs its Operated Equipment Rental Services. On average, approximately 27% of Operated Equipment Rental Services revenues are generated from fixed-price contracts.

DESCRIPTION		QUANTITY
Diamond saws		355
Compressors		104
Excavators		22
Grinders		21
Backhoes		49
Bobcats		59
Tankers		27
Stompers		8
Loaders		2
Milling		17
Miscellaneous		32

Total Units		696

~~The operated equipment rental industry is a specialized niche segment of~~In ~~the~~addition ~~highly~~to ~~fragmented~~its ~~United~~696-unit ~~States~~operated equipment rental ~~industry. As of June 30~~fleet, ~~2001,~~ ~~there~~Penhall ~~were~~maintains an additional ~~estimated~~fleet ~~17,000~~of ~~equipment~~34 ~~rental companies in the United States~~tankers, and no19 ~~single~~grinders ~~company~~which ~~represented~~are ~~more~~used ~~than~~exclusively ~~7% of total market revenues~~on infixed-price ~~1999~~contracts. ~~Based on industry sources~~Also, itPenhall ~~is estimated that the U.S. equipment rental industry~~ has ~~grown~~an ~~from~~inventory approximately $6.5 billion in annual rental revenues in 1990 to about $24 billion in 2002. Management believes that the operated equipment rental industry has grown at a similar rate during this period. This represents a compound annual growth rate of approximately ~~11.5%, although~~399 ~~in the past two years industry rental revenues decreased by about $2~~Bare ~~billion.~~Equipment ~~The recent downturn in industry revenues is a reflection of the significant slowdown in private non-residential construction activity~~Rentals, which ~~declined~~ ~~16%~~are inrented ~~2002~~out ~~according~~on toan ~~Department~~hourly, ofdaily, ~~Commerce~~weekly ~~data~~or ~~as well as~~monthly ~~significantly~~basis ~~lower~~without ~~state~~skilled ~~highway~~operators. ~~and~~Bare ~~bridge~~Equipment ~~spending~~Rentals ~~due~~include ~~to state budget~~personnel ~~deficits.~~lifts, ~~The~~forklifts, ~~Company~~front-end isloaders ~~particularly sensitive to changes in state highway~~ and ~~non-residential~~ ~~construction~~light ~~activity because these sectors have been principal users of the Company’s services~~towers. ~~The~~Each ~~long~~Penhall ~~term~~location ~~growth of the equipment rental~~has ~~industry~~its ~~has~~own ~~been~~shop ~~driven primarily by construction spending~~ and ~~continued outsourcing~~repair ~~of equipment needs by construction~~ and ~~industrial~~maintenance ~~companies.~~staff ~~While customers~~that ~~traditionally~~routinely ~~have~~maintains ~~rented equipment for specific purposes such as supplementing capacity during peak periods~~ and ~~in connection with special~~ ~~projects,~~repairs ~~customers~~the ~~are increasingly looking to rental operators to provide an ongoing, comprehensive supply of~~ equipment, ~~enabling such customers to benefit from the economic advantages and convenience of~~ rental fleet.

1 SERVICES

~~Table~~Penhall, through its operated equipment rental fleet and skilled operators, serves its customer base in a wide variety of ~~Contents~~infrastructure projects, including new construction, rehabilitation and demolition projects, and provides specialized services such as highway and airport runway grooving, asphalt cutting, concrete coring and demolition work. These services are available singly but are more commonly provided by Penhall in conjunction with other services necessary to their application to a particular project, including breaking, excavating, removing and recycling of construction materials. Penhall also provides services in connection with earthquake retrofit projects, particularly in California, which include retrofitting of highways, buildings, bridges and tunnels in order to bring them in compliance with more stringent earthquake safety laws. Moreover, the Company is the largest provider of grinding services in the United States.

~~THE~~Specialty ~~REORGANIZATION~~ Services:

~~Penhall International, Inc~~• Cutting., ~~a California corporation (“PII”), prior to the consummation of the Transactions (as defined below) conducted all its operations through Phoenix Concrete~~ Cutting, ~~Inc., an Arizona corporation (the~~is ~~“Company”), and~~ the ~~Penhall~~use ~~Company, a California corporation (“PenCo”). As~~ of ~~June 30,~~ ~~1998,~~diamond ~~PII,~~abrasive ~~the~~saws ~~stockholders~~to ofcut ~~PII,~~concrete ~~the Company,~~ and ~~Penhall Acquisition Corp~~asphalt., anThis ~~Arizona~~service ~~Corporation (the “Issuer” or “PAC”), entered into~~is anfrequently ~~Agreement~~utilized ~~and~~in ~~Plan~~new ofconstruction ~~Merger (the “Merger Agreement”). Pursuant~~ to ~~the Merger~~provide ~~Agreement,~~rectangular ~~the~~openings ~~Company formed PCC Merger Sub, a California corporation~~in ~~and~~walls wholly-owned subsidiary (“PCC Merger Sub”), which on August 4, 1998, was merged with and into PII (the “Reorganization Merger”), with the result that (i) PII continued as the surviving corporation, (ii) each stockholder of PII had his or ~~her common equity in PII converted into common equity in the Company~~floors, ~~(iii) PII received common equity in the Company approximately equal in value to the value of its common equity in the Company immediately prior to the consummation of the Reorganization Merger~~ and ~~(iv) the~~is ~~Company~~generally ~~received~~more ~~common equity~~efficient inthan ~~PII~~framing ~~such that the Company became the corporate parent of~~ and ~~owns~~forming ~~all~~ the ~~outstanding capital stock of PII (which continues to hold all the~~ ~~outstanding~~opening ~~capital~~while ~~stock of PenCo). Pursuant to~~ the ~~Merger~~concrete ~~Agreement, immediately~~is ~~following~~being the Reorganization Merger, the Issuer merged with and into the Company (the “Recapitalization Merger” and, together with the Reorganization Merger, the “Mergers”), with the Company continuing as the surviving corporation (the “Surviving Corporation”)poured. ~~Prior~~Flat tosawing oralso ~~simultaneously with~~is ~~the~~commonly ~~consummation of the Recapitalization Merger, the Issuer entered into a~~used ~~new~~in ~~senior~~modifying ~~secured~~existing ~~credit~~structures ~~facility (the “New Credit Facility”) providing for $20.0 million of Term Loans (as defined therein)~~ and uproad ~~to $30~~rehabilitation.0 million of Revolving Loans (as defined therein), and all indebtedness of PII except $3.7 million of notes payable was repaid (the “Refinancing”). Following the consummation of the Mergers, the Company changed its corporate name to “Penhall International Corp.” and PII changed its corporate name to “Penhall Rental Corp.”

~~The aggregate consideration paid upon consummation of the Recapitalization Merger (the “Merger Consideration”) was approximately $136.~~2 million. Pursuant to the Merger Agreement, (i) certain management stockholders of PII (the “Existing Management Stockholders”) agreed to convert a portion of the common equity in the Company received by them pursuant to the Reorganization Merger into $8.7 million of common and preferred equity of the Surviving Corporation (the “Equity Rollover”), (ii) the National Christian Charitable Foundation, Inc., (Foundation), a foundation formed by the Company’s former majority shareholder received $10.0 million of preferred equity of the Surviving Corporation in lieu of $10.0 million of cash Merger Consideration otherwise payable to it in the Recapitalization Merger, and (iii) BRS and certain persons affiliated with Bruckmann, Rosser and Sherrill & Co., L.P., (BRS), (together with BRS, the “BRS Entities”) and the New Management Stockholders (consisting of certain existing management and certain new management shareholders) purchased $21.1 million and $0.2 million, respectively, of common and preferred equity of the Surviving Corporation (the “Equity Contribution” and, together with the Mergers, the Refinancing and the Equity Rollover, the “Recapitalization”). Following the consummation of the Recapitalization, the BRS Entities held approximately 62.5% of the Common stock, par value $.01 per share, of the Surviving Corporation (“Common stock”), 100.0% of the Series A Preferred stock, par value $.01 per share, of the Surviving Corporation (“Series A Preferred stock”) and 43.3% of the Series B Preferred stock, par value $.01 per share, of the Surviving Corporation (“Series B Preferred stock”), the Management Stockholders held approximately 37.5% of the Common stock and 38.6% of the Series B Preferred stock, the Foundation held 100% of the Senior Exchangeable Preferred stock and PII held approximately 18.1% of the Series B Preferred stock.

In• Coring. ~~connection~~Coring ~~with~~is the ~~Recapitalization in August of 1998, the Issuer~~ ~~issued~~use ~~$100,000,000~~ of ~~12%~~rotary ~~Senior~~drills ~~Notes~~to ~~due~~create ~~2006~~holes ~~(the~~ranging ~~“Existing~~from ~~Notes”).~~less ~~As part~~than ofone ~~the~~inch ~~Recapitalization,~~to ~~the Company became the successor obligor under~~42 ~~the~~inches ~~Existing~~in ~~Notes~~diameter. InThis ~~order~~service tois ~~satisfy~~most ~~certain~~frequently ~~obligations~~utilized ofboth ~~the Company and the Guarantors (consisting of the Company’s wholly-owned subsidiaries) contained~~ in ~~the Registration Rights Agreement, dated August 4, 1998 (the~~new ~~“Registration~~construction ~~Rights Agreement”) by~~ and ~~among~~in ~~the~~retrofit ~~Issuer,~~of ~~the~~existing ~~Company,~~facilities ~~the Guarantors,~~to BTcreate ~~Alex.~~spaces ~~Brown~~needed ~~Incorporated (“BTAB”) and Credit Suisse First Boston~~for ~~(collectively~~installation ~~with BTAB, the “Initial Purchasers”) with respect to the initial sale~~ of ~~the~~ventilation ~~Existing Notes~~ducts, ~~the Company offered to exchange an aggregate principal amount of up to $100~~conduits,~~000,000~~ ofelectrical ~~its 12% Senior Notes due 2006 (the “New Notes”) for a like principal amount of the Existing Notes outstanding in December 1998. The New Notes~~ and ~~the~~other ~~Existing~~cables, ~~Notes are hereinafter~~and ~~collectively~~mechanical ~~referred to as the “Notes~~passageways.” ~~The~~Coring ~~terms~~is ofalso ~~the~~used ~~New Notes are identical~~ in ~~all material respects to those of~~ the ~~Existing~~Company’s ~~Notes, except for~~earthquake ~~certain~~retrofit ~~transfer restrictions and registration rights relating to the Existing Notes~~projects. ~~The New Notes were issued pursuant to, and are entitled to the benefits of, the Indenture (as defined) governing the Existing Notes.~~

~~The~~• Grinding. ~~foregoing~~Grinding ~~transactions,~~ is the ~~application~~use of ~~the~~diamond ~~proceeds~~abrasive ~~therefrom~~grinders to mill away excess material as necessary to attain a uniform, level finish on flat surfaces, such as highways, airport runways and industrial floors. Grinding is also utilized as a maintenance process to extend the ~~payment~~useful life of ~~related~~highways ~~fees~~by ~~and~~evening ~~expenses,~~the ~~are~~wear ~~collectively~~patterns caused ~~referred~~by years of heavy traffic, to ~~herein as~~prevent cracking and subsequent failure of the ~~“Transactions~~surface.”

2• Grooving. Grooving is the use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with the construction or modification of highways and airport runways and provides for better tire traction on these surfaces.

~~Table~~• Sawing and Sealing. Sawing and sealing is the cutting of ~~Contents~~concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength.

~~EQUIPMENT~~• Asphalt ~~RENTAL~~Milling. Asphalt ~~FLEET~~milling is the grinding of asphalt and concrete surfaces. This service uses equipment with carbide tools to change the elevation of existing roadways as part of highway rehabilitation projects. The work is performed using a fleet of various size machines, ranging from 200 horsepower, 48” wide machines to 800 horsepower, 8 1/2’ wide machines. This service may also involve road reclamation and asphalt recycling.

~~Penhall~~Other owns and operates a well-maintained fleet of 710 units of operated equipment, including excavators, stompers, backhoes, compressors, “bobcats,” crushing equipment, saws, drills and grinding, asphalt milling, and grooving equipment. Penhall also carries state-of-the-art manually-operated and remote-controlled breakers, which provide access to contaminated, hazardous or limited access areas and which have been used for hazardous projects such as the demolition of decommissioned nuclear power plants. The Company employs skilled operators, including trainees, for each piece of equipment it operates. The following table is a summary of Penhall’s operated equipment rental fleet as of June 30, 2003Services:

DESCRIPTION	QUANTITY
Diamonds		359
Compressors		108
Excavators		24
Grinders		21
Backhoes		50
Bobcats		61
Tankers		26
Stompers		8
Loaders		2
Milling		17
Miscellaneous		34
Total Units		710

• Breaking. Breaking is the use of manually-operated or, in hostile environments, remotely-controlled high-energy hydraulic breaking equipment to remove concrete. This service was most visibly utilized by Penhall in the removal of large sections of the Nimitz Freeway in Oakland, California, following the 1989 earthquake, and in the removal of damaged freeway bridges and overpasses in southern California following the 1994 earthquake. Breaking equipment is more commonly used in less dramatic settings, such as interior renovation of industrial buildings to adapt them to a new use, and in removal of existing structures in preparation for redevelopment of the real estate. The Company has designed and used remotely-controlled breakers for modification and removal of facilities contaminated with radioactive material, such as nuclear power stations and development laboratories.

In• Clearing ~~addition~~and toRemoval. Clearing ~~its~~and ~~710-unit~~removal ~~operated~~is ~~equipment~~the ~~rental~~use ~~fleet, Penhall maintains an additional fleet~~ of 36excavators ~~tankers, 21 grinders,~~ and 17other ~~miscellaneous pieces~~heavy-duty of equipment, ~~which are used exclusively on fixed-price contracts. Also,~~to ~~Penhall~~remove ~~has~~broken anconcrete inventory of approximately 436 Bare Equipment Rentals, which are rented out on an hourly, daily, weekly or monthly basis without skilled operators. Bare Equipment Rentals include personnel lifts, forklifts, front-end loaders and ~~light~~other ~~towers.~~material ~~Each~~from ~~Penhall~~a ~~location~~site ~~has~~to ~~its~~a ~~own~~point ~~shop~~of ~~and repair and~~recycling ~~maintenance~~or ~~staff that routinely maintains and repairs the equipment rental fleet~~disposal.

~~SERVICES~~• Crushing and Recycling. Crushing and recycling is the use of specialized equipment to reduce the size of the material to a consistent specification, separating out the steel reinforcing material for sale as scrap, and providing an aggregate material suitable for use as construction fill material and roadbase material. Such recycling provides a valuable environmental benefit by conserving solid waste landfill space, and converting a waste into a usable product.

~~Penhall,~~• Compaction. ~~through~~Compaction is ~~its~~the ~~operated~~preparation ~~equipment~~of ~~rental~~subsoil ~~fleet~~base and ~~skilled operators,~~fill ~~serves~~material ~~its~~to ~~customer base in~~ a ~~wide variety of infrastructure~~specification ~~projects,~~suitable ~~including~~for new construction, ~~rehabilitation~~on ~~and~~the ~~demolition projects, and provides specialized services such as highway and airport runway grooving, asphalt cutting, concrete coring and demolition work~~site. ~~These~~Compaction services ~~are available~~typically ~~singly but~~ are ~~more commonly~~ provided bytogether ~~Penhall in conjunction~~ with ~~other~~ ~~services~~removal ~~necessary to their application to a particular project, including breaking, excavating, removing and recycling of construction materials. Penhall also provides~~ services in ~~connection~~the ~~with~~site ~~earthquake retrofit~~preparation ~~projects,~~process ~~particularly~~for ~~in California, which include retrofitting of~~new ~~highways,~~construction ~~buildings,~~or ~~bridges and tunnels in order to bring them in compliance with more stringent earthquake safety laws. Moreover, the Company is the largest provider of grinding services in the United States.~~ redevelopment

~~Specialty Services:~~ OPERATIONS

•Penhall provides ~~Cutting. Cutting is~~ the ~~use~~rental of ~~diamond~~operator ~~abrasive~~assisted ~~saws~~equipment tothrough ~~cut~~(i) ~~concrete~~Operated Equipment ~~and~~Rental ~~asphalt. This service is frequently utilized in new construction to provide rectangular openings in walls or floors~~Services, ~~and~~performed is generally more efficient than framing and forming the opening while the concrete is being poured. Flat sawing also is commonly used in modifying existing structures and road rehabilitation. • Coring. Coring is the use of rotary drills to create holes ranging from less than one inch to 42 inches in diameter. This service is most frequently utilized both in new construction and in retrofit of existing facilities to create spaces needed for installation of ventilation ducts, conduits, electrical and other cables, and mechanical passageways. Coring is also used in the Company’s earthquake retrofit projects. • Grinding. Grinding is the use of diamond abrasive grinders to mill away excess material as necessary to attain a uniform, level finish on ~~flat~~an ~~surfaces,~~hourly ~~such~~ as ~~highways,~~well ~~airport runways and industrial floors. Grinding is also utilized~~ as a ~~maintenance~~fixed-price quote ~~process to extend the useful life of highways by evening the wear patterns caused by years of heavy traffic~~basis, ~~to prevent cracking~~ and ~~subsequent~~(ii) fixed-price ~~failure~~contracts, ofin ~~the~~which ~~surface.~~Penhall ~~• Grooving. Grooving~~ is responsible ~~the~~for ~~use of diamond abrasive groove cutting machines to provide safety grooving of flat services. This service is commonly provided in connection with~~ the ~~construction~~completion ~~or modification~~ of ~~highways~~a ~~and~~particular ~~airport runways and provides for better tire traction on these surfaces~~project.

3Penhall’s Operated Equipment Rental Services involve short duration assignments lasting from several hours to a few weeks and typically generate revenues of less than $7,500 per assignment. Services provided on this basis include specialized work such as highway and airport runway grooving, asphalt cutting, and demolition work such as concrete breaking, removal, and recycling. Although all lines of equipment are rented for these types of projects, a given project will typically use only one piece of equipment. Operated Equipment Rental Services are typically provided on an hourly basis or for a project with pre-determined specifications, and Penhall quotes a bid to perform and invoice the customer for the project.

~~Table of Contents~~3

	•		Sawing and Sealing. Sawing and sealing is the cutting of concrete and the introduction of high-strength epoxy cement and sealant into cracks or spaces to avoid water intrusion into the surface and to provide additional structural strength.
	•		Asphalt Milling. Asphalt milling is the grinding of asphalt and concrete surfaces. This service uses equipment with carbide tools to change the elevation of existing roadways as part of highway rehabilitation projects. The work is performed using a fleet of various size machines, ranging from 200 horsepower, 48” wide machines to 800 horsepower, 8 1/2’ wide machines. This service may also involve road reclamation and asphalt recycling.

Penhall’s services are made available to customers through its 37 regional locations. Penhall maintains a basic equipment rental fleet and operators at each of its 37 locations. If necessary, equipment can be shipped from any of Penhall’s locations to projects at remote sites. Rental fees for Penhall’s equipment range from $80 to $430 per hour and encompass both the equipment and the operator’s time.

~~Other~~Penhall solicits ~~Services:~~and receives business over the telephone, by facsimile, by written purchase order or through Penhall salesmen. Each day Penhall’s dispatcher at each location is responsible for the allocation of resources to meet the customer’s service and timing requirements. The dispatcher matches all of the work requests for that day to available equipment and operators. Each of Penhall’s skilled operators has an expertise with a particular piece of equipment. Depending on the requirements for that day, an operator may be assigned from one to four jobs on a given day. An operator’s time is allocated by job through job tickets, which generate both payroll and customer billing data.

~~• Breaking. Breaking is the use of manually-operated or~~Historically, Penhall inrented ~~hostile~~its ~~environments, remotely-controlled high-energy hydraulic breaking~~ equipment toonly ~~remove concrete. This service was most visibly utilized by Penhall~~ in ~~the~~conjunction ~~removal~~with ~~of large sections of~~ the ~~Nimitz~~services ~~Freeway in Oakland, California, following the 1989 earthquake, and in the removal~~ of ~~damaged~~a ~~freeway~~Penhall employee ~~bridges~~as ~~and overpasses in southern California following~~ the ~~1994 earthquake~~operator. ~~Breaking~~However, ~~equipment is more commonly used~~ in ~~less dramatic settings~~1996, ~~such~~Penhall asstarted ~~interior~~operating ~~renovation~~rental yards ~~of industrial buildings to adapt them to a new use,~~ and inoffering ~~removal~~Bare ofEquipment existing structures in preparation for redevelopment of the real estate. The Company has designed and used remotely-controlled breakers for modification and removal of facilities contaminated with radioactive materialRentals, ~~such~~or asrenting ~~nuclear power stations and development laboratories. • Clearing and Removal. Clearing and removal is the use of excavators and other heavy-duty~~ equipment ~~to remove broken concrete and other material from a site to a point of recycling or disposal~~without operators. •To ~~Crushing and Recycling. Crushing and recycling is the use of specialized equipment to reduce the size of the material to a consistent specification~~date, ~~separating~~such ~~out~~Bare ~~the~~Equipment ~~steel~~Rentals ~~reinforcing~~have ~~material~~not ~~for~~yet ~~sale~~constituted ~~as scrap, and providing an aggregate material suitable for use as construction fill material and roadbase material. Such recycling provides~~ a significant ~~valuable~~part ~~environmental benefit by conserving solid waste landfill space, and converting a waste into a usable product. • Compaction. Compaction is the preparation~~ of ~~subsoil~~Penhall’s ~~base and fill material to a specification suitable for new construction on the site~~revenues. ~~Compaction services typically are provided together with removal services in the site preparation process for new construction or redevelopment~~

~~OPERATIONS~~Contract pricing utilizes the same equipment and services provided through its Operated Equipment Rental Services; however, these services involve longer duration assignments lasting from a few days to several years and may generate revenues of between $7,500 and $10,000,000 per assignment. Services provided on this basis include work for highway, airport and building general contractors, federal, state and municipal agencies and for property owners. Fixed-price contract projects typically use multiple types of equipment concurrently and require a Penhall supervisor to coordinate the safe and efficient function of Penhall’s workmen and equipment. For fixed-price contract projects, Penhall typically employs the use of its Operated Equipment Rental Services as well as outside rental equipment and sub-contractors. Although Penhall has obtained contractor’s licenses in 26 states (not including 24 states, which do not require licensing), it typically provides its services in the capacity of a subcontractor under prime or general contracts in approximately half of its fixed-price contract projects.

The majority of Penhall’s ~~provides~~fixed-price contracts are obtained through competitive bidding for general contractors. Penhall determines whether to bid on a project primarily on the ~~rental~~basis of ~~operator~~the ~~assisted~~type ~~equipment~~of ~~through~~work ~~(i)~~involved. Other factors, including ~~Operated~~the ~~Equipment~~time ~~Rental~~of ~~Services~~the project, ~~performed~~Penhall’s onongoing anproject ~~hourly~~schedule and asany particular ~~well~~risks asinvolved aalso affect Penhall’s determination whether to bid on ~~fixed-price~~a ~~quote~~project. ~~basis~~In preparing a bid, Penhall’s estimators analyze material, labor and all ~~(ii)~~ other cost components of the proposed project. Penhall also will make its own determination of the quantity of items needed for the project and assess any special risks involved. Penhall must specify in its bid a fixed-price ~~contracts~~per unit within the range of the estimated quantity to be provided under the contract. Generally, within this range, no adjustments in ~~which~~unit prices are made and Penhall is committed to provide the items at the fixed unit prices specified in ~~responsible~~its ~~for~~bid, and any unforeseen increase in the ~~completion~~cost of athe ~~particular~~items ~~project~~over the prices bid is borne by Penhall. Penhall has not borne a significant amount of cost increases in connection with its fixed-price contracting services.

Penhall~~’s Operated Equipment Rental Services involve short duration~~ ~~assignments~~sometimes ~~lasting~~contracts ~~from~~directly ~~several~~with ~~hours~~Federal, tostate aor ~~few~~local ~~weeks~~governments ~~and typically generate~~or ~~revenues of less than $7~~agencies,~~500.~~ ~~Services~~and ~~provided~~in onaddition ~~this~~some ~~basis~~of ~~include specialized~~its work ~~such~~performed asfor ~~highway~~general ~~and~~contractors may ~~airport~~relate ~~runway~~to ~~grooving,~~a ~~asphalt~~general ~~cutting, and~~or ~~demolition~~prime ~~work~~contract ~~such~~with asa ~~concrete~~governmental ~~breaking, removal, and recycling~~entity. ~~Although~~Generally ~~all~~the ~~lines~~contracting ofagency ~~equipment~~reserves ~~are~~the ~~rented~~right ~~for~~to ~~these~~terminate ~~types~~the ofcontract ~~projects,~~with ~~a given project~~the ~~will~~general ~~typically~~contractor, ~~use~~without ~~only~~cause, ~~one~~for ~~piece~~its ofown ~~equipment~~convenience. ~~Operated~~In ~~Equipment~~that ~~Rental~~event, ~~Services~~Penhall ~~are~~generally ~~typically~~is ~~provided~~entitled onto anbe ~~hourly~~paid ~~basis~~its orcosts for athe ~~project~~work ~~with~~performed to ~~pre-determined~~the ~~specifications,~~date ~~and~~of termination. Penhall ~~quotes~~has anot ~~bid~~historically toexperienced ~~perform~~any ~~and invoice~~material ~~the~~contract ~~customer for the project~~cancellations.

~~Penhall’s services are made available to customers through its 38 regional~~SALES ~~locations.~~AND Penhall maintains a basic equipment rental fleet and operators at each of its 38 locations. If necessary, equipment can be shipped from any of Penhall’s locations to projects at remote sites. Rental fees for Penhall’s equipment range from $80 to $430 per hour and encompass both the equipment and the operator’s time. MARKETING

Penhall maintains ~~solicits~~a sales and ~~receives~~estimating ~~business~~force ~~over~~of ~~the~~approximately ~~telephone,~~100 ~~by facsimile~~people, typically bywith ~~written~~at ~~purchase~~least ~~order~~two orsalespersons ~~through~~based ~~Penhall~~at ~~salesmen.~~most ~~Each~~of ~~day~~ Penhall’s ~~dispatcher~~ atoperating ~~each location is responsible for the allocation of resources to~~locations ~~meet~~calling ~~the~~on ~~customer’s~~both ~~service~~new and ~~timing~~existing ~~requirements~~customers. ~~The~~These ~~dispatcher~~salespeople ~~matches~~provide ~~all~~estimates ofand ~~the~~prepare ~~work~~bids ~~requests~~ for ~~that~~projects. ~~day~~Management tobelieves ~~available~~that ~~equipment~~its ~~and operators. Each of~~fixed-price ~~Penhall’s~~contract ~~skilled~~services ~~operators~~serve ~~has~~as ~~an expertise with~~ a ~~particular~~unique ~~piece~~marketing ~~of equipment.~~tool ~~Depending on the requirements~~ for ~~that~~its ~~day,~~Operated anEquipment Rental ~~operator~~Services ~~may~~and ~~be assigned~~help ~~from~~to ~~one~~increase tothe ~~four~~utilization ~~jobs~~of onPenhall’s aoperated equipment ~~given~~rental ~~day~~fleet. AnPenhall ~~operator’s~~also ~~time~~regularly isparticipates ~~allocated by~~in ~~job~~industry ~~through~~trade shows ~~job~~and ~~tickets~~conferences, ~~which~~and ~~generate~~advertises ~~both~~in ~~payroll~~trade ~~and customer billing data~~journals.

4PURCHASING AND SUPPLIERS

~~Table~~Penhall’s size, status in the industry and relationships enable it to purchase equipment directly from manufacturers at prices and on terms that Penhall believes to be more favorable than are available to its smaller competitors. Penhall’s procurement of ~~Contents~~equipment for its rental fleet is generally coordinated through its headquarters in Anaheim, California, while smaller inventory items are typically purchased at the divisional level. Penhall’s suppliers must meet specified standards of quality and experience, and include well-known equipment manufacturers such as Caterpillar, John Deere,

Historically, Penhall rented its equipment only in conjunction with the services of a Penhall employee as the operator. However, in 1996, Penhall started operating rental yards and offering Bare Equipment Rentals, or renting equipment without operators. To date, such Bare Equipment Rentals have not yet constituted a significant part of Penhall’s revenues. 4

~~Contract pricing utilizes the same equipment and services provided through~~Ingersoll-Rand, ~~its Operated Equipment Rental Services; however~~Kenworth, ~~these~~General ~~services~~Motors ~~involve~~Company ~~longer duration assignments lasting from a few days to several years~~ and ~~may~~Ford ~~generate revenues~~Motor ~~of between $7,500 and $10,000,000~~Company. ~~Services~~The ~~provided~~favorable ~~on this basis~~pricing, ~~include work for highway~~service, ~~airport~~training and ~~building~~information ~~general~~that ~~contractors,~~Penhall ~~federal, state~~receives ~~and~~from ~~municipal~~its ~~agencies and for property owners. Fixed-price contract~~suppliers ~~projects~~represent ~~typically~~what ~~use~~Penhall ~~multiple~~believes ~~types~~to ofbe ~~equipment~~a ~~concurrently~~significant ~~and~~competitive ~~require a~~advantage. ~~Penhall~~Management ~~supervisor~~continually toanalyzes ~~coordinate~~ the ~~safe~~effectiveness, quality and ~~efficient~~profitability ~~function~~ of Penhall’s ~~workmen~~ ~~and~~ equipment. ~~For~~and ~~fixed-price~~addresses ~~contract projects, Penhall typically employs the use of its Operated Equipment Rental Services as well as outside rental~~ equipment ~~and~~procurement ~~sub-contractors~~issues. ~~Although~~ Penhall ~~has obtained~~ ~~contractor’s~~maintains ~~licenses~~no inlong-term 26supply ~~states~~or ~~(not~~purchasing ~~including~~contracts 24and ~~states,~~believes ~~which~~that ~~do not~~it ~~require~~could ~~licensing),~~readily itreplace ~~typically~~any ~~provides~~of its ~~services~~existing insuppliers ~~the~~if ~~capacity~~it ofwere ano longer ~~subcontractor~~advantageous ~~under~~to ~~prime~~purchase orequipment ~~general~~from ~~contracts~~such ~~in approximately half of its fixed-price contract projects~~suppliers.

The majority of Penhall’s fixed-price contracts are obtained through competitive bidding for general contractors. Penhall determines whether to bid on a project primarily on the basis of the type of work involved. Other factors, including the time of the project, Penhall’s ongoing project schedule and any particular risks involved also affect Penhall’s determination whether to bid on a project. In preparing a bid, Penhall’s estimators analyze material, labor and all other cost components of the proposed project. Penhall also will make its own determination of the quantity of items needed for the project and assess any special risks involved. Penhall must specify in its bid a fixed-price per unit within the range of the estimated quantity to be provided under the contract. Generally, within this range, no adjustments in unit prices are made and Penhall is committed to provide the items at the fixed unit prices specified in its bid, and any unforeseen increase in the cost of the items over the prices bid is borne by Penhall. Penhall has not borne a significant amount of cost increases in connection with its fixed-price contracting services. CUSTOMERS

Most of Penhall’s ~~sometimes~~customers ~~contracts~~consist ~~directly~~of ~~with Federal~~highway, ~~state~~airport orand ~~local~~building general ~~governments~~contractors orand ~~agencies~~subcontractors, and inFederal, ~~addition~~state ~~some~~and ofmunicipal ~~its~~agencies ~~work performed for general~~in ~~contractors~~various ~~may~~construction, ~~relate~~industrial, tomanufacturing, agovernmental ~~general~~and orresidential markets. ~~prime~~Some ~~contract~~of ~~with~~Penhall’s amajor ~~governmental entity.~~customers ~~Generally~~include the ~~contracting~~Cleveland ~~agency~~Wrecking, North ~~reserves~~Dakota ~~the~~Dept. ~~right~~of toTransportation, ~~terminate~~California ~~the contract~~Department ~~with~~of ~~the~~Transportation, Indiana ~~general~~Department ~~contractor~~of Transportation, ~~without~~Griffith ~~cause~~Company, ~~for~~Granite ~~its~~Construction, and ~~own~~All ~~convenience~~American Asphalt. In ~~that~~During ~~event~~fiscal 2004, Management estimates that Penhall served ~~generally~~over is11,000 ~~entitled~~customers toand bethat ~~paid~~no ~~its~~one ~~costs~~customer accounted for ~~the~~more ~~work~~than ~~performed~~3% toof ~~the~~Penhall’s ~~date~~revenues. ofManagement ~~termination.~~believes ~~Penhall~~that ~~has~~a ~~not~~significant ~~historically~~percent ~~experienced~~of ~~any~~Penhall’s ~~material~~revenues ~~contract~~represented ~~cancellations~~repeat business from existing customers.

~~SALES AND MARKETING~~ COMPETITION

~~Penhall~~The operated ~~maintains~~equipment arental ~~sales~~industry ~~and~~is ~~estimating~~a ~~force~~specialized niche of ~~approximately~~the ~~120~~overall ~~people,~~equipment ~~with~~rental atindustry ~~least~~and ~~two~~is ~~salespersons~~highly ~~based~~competitive. ~~at most of~~ Penhall’s ~~operating~~competitors ~~locations~~include ~~calling~~large onnational ~~both~~rental ~~new~~companies, regional companies, smaller independent businesses and ~~existing~~equipment vendors, which sell and rent equipment to customers. ~~These~~The ~~salespeople~~industry ~~provide estimates~~is also highly fragmented, and ~~prepare~~primarily ~~bids~~consists ~~for~~of many ~~projects.~~relatively ~~Management~~small, ~~believes~~independent ~~that~~businesses ~~its~~typically serving discrete local ~~fixed-price~~markets ~~contract~~within ~~services~~30 ~~serve~~to as50 amiles ~~unique~~of ~~marketing~~the ~~tool~~equipment ~~for~~rental ~~its~~location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services ~~and~~companies ~~help~~have tofocused ~~increase~~their ~~the~~operations ~~utilization~~on ~~of Penhall’s~~providing ~~operated~~a ~~equipment~~broad ~~rental~~array ~~fleet.~~of ~~Penhall~~services ~~also~~to ~~regularly~~relatively ~~participates~~large customers, primarily in ~~industry~~ ~~trade~~medium ~~shows~~to large ~~and~~metropolitan ~~conferences~~markets, ~~and~~while ~~advertises~~generally inserving ~~trade~~smaller ~~journals.~~markets through delivery from distant major markets.

~~PURCHASING~~Competitive factors ~~AND~~in ~~SUPPLIERS~~the operated equipment rental industry include breadth of product lines, the availability of equipment and skilled operators, the condition of equipment, service, name recognition, proximity to customers and price. Penhall believes that it is able to successfully compete in the markets that it serves because of its reputation and large fleet of equipment. In addition, certain of the services provided by Penhall, such as diamond saw cutting services, are highly specialized and therefore not widely available; the market for these services therefore tends to be somewhat less competitive. Management does not believe that Penhall faces any significant competitor on a national scale, as the operated equipment rental industry is characterized primarily by local providers offering a limited array of services.

~~Penhall’s size, status in the industry and relationships enable it to~~Management ~~purchase equipment directly from manufacturers at prices and on terms that Penhall~~ believes tothe beoperated ~~more favorable than are available to its smaller competitors. Penhall’s procurement of~~ equipment ~~for its~~ rental ~~fleet~~industry ~~is generally~~benefits ~~coordinated~~from ~~through its headquarters in Anaheim, California, while smaller inventory items are typically purchased at~~ the ~~divisional level.~~continuing ~~Penhall’s~~trend ~~suppliers~~among ~~must~~businesses ~~meet~~to ~~specified~~outsource ~~standards of quality and experience, and include well~~non-~~known~~core ~~equipment~~operations ~~manufacturers~~to ~~such~~reduce ~~as Caterpillar, John Deere,~~capital ~~Ingersoll-Rand~~investment, ~~Kenworth,~~convert ~~General~~costs ~~Motors Company and Ford Motor Company. The favorable pricing, service, training and information that Penhall receives~~ from ~~its~~ ~~suppliers~~fixed ~~represent what Penhall believes~~ to bevariable aand ~~significant~~minimize ~~competitive advantage. Management continually analyzes~~ the ~~effectiveness~~downtime, maintenance, ~~quality~~repair and ~~profitability~~ ofstorage ~~Penhall’s~~associated ~~equipment~~with ~~and addresses~~ equipment ~~procurement issues~~ownership. ~~Penhall maintains no long-term supply or purchasing contracts and~~Customers ~~believes~~are ~~that~~increasingly itusing ~~could~~Operated ~~readily~~Equipment ~~replace~~Rental ~~any~~Services ofcompanies ~~its~~to ~~existing suppliers if it were~~provide noa ~~longer~~comprehensive ~~advantageous~~supply toof ~~purchase~~ equipment ~~from~~and ~~such suppliers~~operators.

~~CUSTOMERS~~Penhall’s fixed-price contract projects are obtained through competitive bidding. Penhall believes that it is able to compete effectively for fixed-price contract jobs because of its extensive resources and relationships with general contractors. In many cases, a customer requires a performance bond before a contract is awarded. Penhall believes that its bonding capacity is a competitive advantage over smaller, less financially stable competitors. The Company’s advantage in this area has been demised by the surety market reducing Penhall’s bonding capacity due to both Penhall’s poor results over the past 3 years, as well as reduced bonding capacity in the market. Further, the Company’s current surety has indicated that another year of operating losses could result in the discontinuation of their surety support. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.

~~Most of Penhall’s customers consist of highway, airport and building~~INTELLECTUAL ~~general~~PROPERTY ~~contractors~~AND ~~and~~PROPRIETARY subcontractors, and Federal, state and municipal agencies in various construction, industrial, manufacturing, governmental and residential markets. Some of Penhall’s major customers include the Mississippi Department of Transportation, Granite Construction, All American Asphalt, and Denver International Airport. During fiscal 2003, Penhall served over 14,000 customers and no one customer accounted for more than 3% of Penhall’s revenues. Management believes that a significant percent of Penhall’s revenues represented repeat business from existing customers. RIGHTS

5Penhall currently holds a United States trademark and service mark with respect to the “Penhall” name and logo, which it believes are of particular importance to Penhall’s business. Except with respect to the “Penhall” name and logo, Penhall is not dependent on any intellectual property rights.

~~Table~~MANAGEMENT INFORMATION ~~of Contents~~SYSTEM

~~COMPETITION~~Penhall utilizes a management information system, which was implemented in fiscal 1997 and subsequently upgraded. The management information system gives management the ability to analyze certain cost results by line of equipment and location. This information network is used to make decisions with respect to investments in new

The operated equipment rental industry is a specialized niche of the overall equipment rental industry and is highly competitive. Penhall’s competitors include large national rental companies, regional companies, smaller independent businesses and equipment vendors, which sell and rent equipment to customers. The industry is also highly fragmented, and primarily consists of many relatively small, independent businesses typically serving discrete local markets within 30 to 50 miles of the equipment rental location, with few multi-location regional or national operators. Traditionally, large Operated Equipment Rental Services companies have focused their operations on providing a broad array of services to relatively large customers, primarily in medium to large metropolitan markets, while generally serving smaller markets through delivery from distant major markets. 5

~~Competitive factors in the operated~~ equipment ~~rental industry include~~ ~~breadth~~as ofwell ~~product~~as ~~lines,~~certain ~~the~~other ~~availability~~competitive ofdecisions. ~~equipment~~In ~~and skilled operators~~addition, the ~~condition of equipment, service, name recognition, proximity to customers~~system ~~and~~provides ~~price.~~information ~~Penhall~~with ~~believes~~respect ~~that it is able~~ to ~~successfully~~contract ~~compete~~ work-in ~~the markets that it serves because of its reputation and large fleet of equipment. In addition~~-progress, ~~certain~~which ofis ~~the services provided~~ used by ~~Penhall,~~project ~~such~~managers ~~as diamond saw cutting services, are highly specialized~~ and ~~therefore~~contract ~~not~~division ~~widely~~management ~~available; the market for these services therefore tends~~ to bemonitor ~~somewhat less competitive. Management does not believe that Penhall faces any significant competitor on a national scale, as~~ the ~~operated~~status ~~equipment rental industry is characterized~~of ~~primarily~~jobs byin ~~local providers offering a limited array of services~~progress.

~~Management believes the operated equipment rental industry benefits from~~RADIO the continuing trend among businesses to outsource non-core operations to reduce capital investment, convert costs from fixed to variable and minimize the downtime, maintenance, repair and storage associated with equipment ownership. Customers are increasingly using Operated Equipment Rental Services companies to provide a comprehensive supply of equipment and operators. COMMUNICATIONS

Penhall~~’s fixed-price contract projects are obtained through competitive~~ ~~bidding.~~licenses Infrom ~~many~~Motorola ~~cases~~and, ain ~~performance~~one ~~bond~~case, isfrom ~~required~~an byindividual, athe ~~customer~~right ~~before a~~to ~~contract~~operate isand ~~awarded.~~install ~~Penhall~~certain ~~believes~~radio ~~that~~repeater ~~its~~equipment ~~bonding~~at ~~capacity is~~ a ~~competitive~~ ~~advantage~~number ~~over~~of ~~smaller,~~sites ~~less~~in the ~~financially~~State ~~stable~~of ~~competitors~~California. ~~Moreover,~~ ~~Penhall~~This ~~believes~~equipment ~~that~~allows itPenhall isand ~~able~~its tooperators ~~compete~~in ~~effectively for~~the ~~fixed-price~~field ~~contract~~to ~~jobs~~communicate ~~because~~with ofeach ~~its~~other ~~extensive~~by ~~resources and relationships with general contractors~~radio.

~~INTELLECTUAL~~In connection ~~PROPERTY~~with ~~AND~~the ~~PROPRIETARY~~radio ~~RIGHTS~~communications referred to above, Penhall holds several licenses from the Federal Communications Commission (“FCC”) that allows it to broadcast over certain designated radio frequencies. These licenses may not be assigned without the FCC’s consent. During fiscal 2004, Penhall sold one of its three FCC licenses for the amount of $800,000. The gain on sale of $795,000 is reported in other income in the consolidated statement of operations.

~~Penhall currently holds a United States trademark and service mark with~~LABOR respect to the “Penhall” name and logo, which it believes are of particular importance to Penhall’s business. Except with respect to the “Penhall” name and logo, Penhall is not dependent on any intellectual property rights. RELATIONS

~~MANAGEMENT~~As of ~~INFORMATION~~June 30, ~~SYSTEM~~2004 Penhall Company had approximately 1,200 full-time employees. The Company also hires, on an as-needed basis, equipment operators when work-in-progress necessitates additional personnel.

~~Penhall utilizes a management information system~~Approximately, ~~which was implemented in~~ ~~fiscal~~460 ~~1997~~of ~~and~~Penhall’s ~~subsequently~~employees ~~upgraded.~~are ~~The~~represented ~~management information system gives management the ability to analyze certain cost results~~ by ~~line~~various oflabor ~~equipment and location~~unions. ~~This information network is used to make decisions with respect to~~The ~~investments~~Company’s inunionized ~~new equipment as well as certain other competitive decisions. In addition, the system provides information with respect to contract~~ work ~~in progress,~~force ~~which~~ is ~~used~~divided byinto ~~project~~approximately ~~managers~~35 ~~and~~certified ~~contract division management to~~or ~~monitor~~lawfully ~~the~~recognized ~~status~~bargaining ~~of jobs in progress~~units.

~~RADIO~~With the ~~COMMUNICATIONS~~exception of three agreements, all agreements expiring during fiscal 2004 have been renewed or extended. The three pending agreements represent approximately 100 employees. It is anticipated that all agreements will be renewed without any disruption to operations. There are nine agreements expiring during fiscal 2005, all at the very end of the fiscal year. No discussions have begun on those agreements. There is no reason to believe that any expiration will have a material effect on fiscal 2005 operations. There is currently one unfair labor practice charge pending against Penhall either before the National Labor Relations’ Board or the courts. The National Labor Relations Board has directed that the issue be remanded to the union grievance procedure. The potential liability is estimated to be less than $10,000.

~~Penhall~~ITEM ~~licenses from Motorola and, in one case, from an individual, the right to operate and install certain radio repeater equipment at a number of sites in the State of California~~2. ~~This equipment allows Penhall and its operators in the field to communicate with each other by radio.~~ PROPERTIES

InPenhall is ~~connection~~headquartered ~~with~~in ~~the~~Anaheim, ~~radio~~California. ~~communications~~As ~~referred~~of ~~to above~~June 30, 2004 Penhall ~~holds~~leased ~~several~~37 ~~licenses~~facilities ~~from~~which ~~the~~are ~~Federal~~used ~~Communications~~for ~~Commission~~equipment ~~(“FCC”)~~yards ~~that allow~~and itaccompanying tooffice space. ~~broadcast~~The ~~over~~following ~~certain~~table ~~designated~~sets ~~radio~~forth ~~frequencies.~~the ~~These~~location ~~licenses may~~and ~~not~~square befootage ~~assigned~~of ~~without~~each of ~~the~~such ~~FCC’s consent~~facilities.

LABOR RELATIONS

LOCATION		APPROX. SQUARE FEET
Anaheim, California (1)		18,300
Gardena, California (1)		3,850
Camarillo, California (1)		3,600
San Leandro, California		6,000
Sacramento, California (1)		8,000
San Diego, California (1)		5,600
Riverside, California		9,000
Santa Clara, California (1)		9,950
Irvine, California		9,500
Bakersfield, California		4,000
Burbank, California (1)		6,200
Phoenix, Arizona (1)		12,900
Austin, Texas (1)		6,100
Grapevine, Texas		7,500
Denver, Colorado (1)		15,100
Austell, Georgia		8,000
Las Vegas, Nevada (1)		11,000
Portland, Oregon		24,000
Salt Lake City, Utah		10,500
Rogers, Minnesota		11,000

As of June 30, 2003 Penhall Company had approximately 1,300 full-time employees. The Company also hires, on an as-needed basis, equipment operators when work in progress necessitates additional personnel. 6

Approximately, 750 of Penhall’s employees are represented by various labor unions. The Company’s unionized work force is divided into approximately 30 certified or lawfully recognized bargaining units.

LOCATION		APPROX. SQUARE FEET
Birmingham, Alabama		9,600
Golden Valley, Minnesota		11,000
Morrisville, North Carolina		15,000
Charlotte, North Carolina		6,000
Greensboro, North Carolina		5,184
Wilmington, North Carolina		1,000
Greenville, South Carolina		3,500
Columbia, South Carolina		3,500
Charleston, South Carolina		5,000
Buffalo, New York		3,000
Kansas City, Missouri		6,000
Tukwila, Washington		10,017
Fresno, California		4,500
Richmond, Virginia		1,000
Reno, Nevada		800
Tucson, Arizona		1,500
Visalia, California		13,600

6(1) On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has 4 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.2 million will be amortized over the initial term of the leases of 20 years.

~~Table~~Penhall presently leases 37 sites in 16 states (collectively, the “Leased Sites”). The average remaining term of ~~Contents~~the leases under which the Leased Sites are held (collectively, the “Real Property Leases”) is approximately 12.9 years (assuming the exercise of all option periods). The Real Property Leases for the following fourteen Leased sites have remaining terms of less than three years: (i) Santa Clara, California - October 31, 2005, (ii) Buffalo, New York - July 1, 2005, (iii) Richmond, Virginia - month to month, (iv) Riverside, California - June 30, 2005 (v) Columbia, South Carolina - month to month, (vi) Tucson, Arizona - July 31, 2006, (vii) Greenville, South Carolina - month to month, (viii) Wilmington, North Carolina - month to month, (ix) Charleston, South Carolina - December 31, 2005, (x) Greensboro, North Carolina- September 30, 2004, (xi) Reno, Nevada - February 28, 2006, (xii) Grapevine, Texas - December 30, 2006, (xiii) Birmingham, Alabama - month to month, and (xiv) Kansas City, Missouri - June 30, 2006.

~~With~~ITEM ~~the exception of two agreements, all agreements expiring during Fiscal 2003 have been renewed or extended~~3. ~~The~~LEGAL two pending agreements represent approximately 11 employees. It is anticipated that both agreements will be renewed without any disruption to operations. There are six agreements expiring during fiscal 2004, all at the very end of the fiscal year. No discussions have begun on those agreements. There is no reason to believe that any expiration will have a material effect on Fiscal 2004 operations. There are currently no unfair labor practice charges pending against Penhall either before the National Labor Relations’ Board or the courts. PROCEEDINGS

~~ITEM~~The 2.Company ~~PROPERTIES~~has an employment related legal matter which was settled and approved by the court subsequent to year end. The Company estimates that reserves as of June 30, 2004 are sufficient based on the settlement. As of June 30, 2004, the Company has accrued $250,000 related to this matter.

~~Penhall~~There are isvarious ~~headquartered~~additional inlawsuits ~~Anaheim,~~and ~~California.~~claims Aspending ofagainst ~~June 30,~~and ~~2003~~claims being ~~Penhall~~pursued ~~owned~~by orthe ~~leased~~Company 38and ~~facilities~~its ~~which~~subsidiaries ~~are~~arising ~~used~~out ~~for~~of ~~equipment~~the ~~yards~~normal ~~and~~course of ~~accompanying~~business. It ~~office~~is ~~space.~~management’s ~~The~~present opinion, ~~following~~based ~~table~~in ~~sets~~part ~~forth~~upon the ~~location~~advice ~~and square~~of ~~footage~~legal counsel, that the outcome of these ~~each~~proceedings will not have a material effect on the Company’s financial position, results of ~~such~~operations, ~~facilities~~or liquidity.

	APPROX.
	SQUARE
LOCATION	FEET
Anaheim, California		18,300
Gardena, California		3,850
Camarillo, California		3,600
San Leandro, California		6,000
Sacramento, California		8,000
San Diego, California		5,600
Riverside, California (1)		9,000
Santa Clara, California (1)		9,950
Irvine, California (1)		9,500
Bakersfield, California (1)		4,000
Burbank, California		6,200
Phoenix, Arizona		12,900
Austin, Texas		6,100
Grapevine, Texas (1)		11,000
Denver, Colorado		15,100
Austell, Georgia (1)		8,000
Las Vegas, Nevada		11,000
Portland, Oregon (1)		24,000
Salt Lake City, Utah (1)		10,500
Rogers, Minnesota (1)		11,000
Birmingham, Alabama (1)		2,000
Golden Valley, Minnesota (1)		11,000
Superior, Wisconsin (1)		4,000
Morrisville, North Carolina (1)		15,000
Charlotte, North Carolina (1)		6,000
Greensboro, North Carolina (1)		5,184
Wilmington, North Carolina (1)		1,000
Greenville, South Carolina (1)		3,500
Columbia, South Carolina (1)		3,500
Charleston, South Carolina (1)		5,000
Buffalo, New York (1)		3,000
Kansas City, Missouri (1)		6,000
Seattle, Washington (1)		2,000
Fresno, California (1)		4,500
Richmond, Virginia (1)		1,000
Reno, Nevada (1)		800
Tucson, Arizona (1)		1,500
Visalia, California (1)		13,600

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

~~(1) Leased~~No matters ~~property.~~were submitted to a vote of security holders during the fourth quarter ended June 30, 2004.

~~Penhall~~PART presently leases 27 sites in 16 states (collectively, the “Leased Sites”). The average remaining term of the leases under which the Leased Sites are held (collectively, the “Real Property Leases”) is approximately 5 years (assuming the exercise of all option periods). The Real Property Leases for the following four Leased sites have remaining terms of less than three years: (i) Santa Clara, California — October 31, 2005, (ii) Buffalo, New York — November 30, 2003, (iii) Seattle, Washington — July 31, 2004, (iv) Riverside, California — June 30, 2005, II

7ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

~~Table~~The Company’s ofcommon ~~Contents~~equity is not publicly traded and, accordingly, an established market does not exist for such common equity. The Company did not pay any dividends in fiscal 2003 or 2004. The indenture agreement

~~(v) Columbia, South Carolina — month to month, (vi) Fresno, California – June 30, 2004, (vii) Tucson, Arizona – July 31, 2004, and (viii) Greenville, South Carolina — month to month.~~ 7

~~ITEM~~related to 3.the ~~LEGAL~~Senior ~~PROCEEDINGS~~Notes contains covenants that restrict, among other things, the ability of the Company to incur additional indebtedness, pay dividends or make certain other Restricted Payments (as defined therein), enter into transactions with affiliates, allow its subsidiaries to make certain payments, create liens, make certain asset dispositions and merge or consolidate with, or transfer substantially all of its assets to another person, or engage in certain change of control transactions.

~~Penhall~~ITEM ~~is from time to time involved in legal proceedings arising in the ordinary course of business~~6. ~~Penhall~~SELECTED ~~believes there is no outstanding~~FINANCIAL ~~litigation, which could have a material impact on its financial position or results of operations.~~ DATA

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	FISCAL YEAR ENDED JUNE 30,
	2000			2001			2002			2003			2004
	(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues	$	173,060		$	175,769		$	161,242		$	159,617		$	157,030
Cost of revenues	119,169			123,725			121,897			127,626			121,811
Gross profit	53,891			52,044			39,345			31,991			35,219
General and administrative expenses	28,474			28,347			28,364			27,935			28,328
Reorganization expenses	43			—			—			—			—
Goodwill impairment	—			—			—			—			2,682
Other operating income	543			725			839			938			827
Earnings from operations	25,917			24,422			11,820			4,994			5,036
Other income	—			—			—			—			859
Interest expense	15,591			15,263			14,293			14,355			13,880
Earnings (loss) before income taxes	10,326			9,159			(2,473		)	(9,361		)	(7,985		)
Income tax expense (benefit)	4,376			3,900			(856		)	(3,441		)	(2,342		)
Net earnings (loss)	5,950			5,259			(1,617		)	(5,920		)	(5,643		)
Accretion of preferred stock to redemption value	(2,854		)	(3,207		)	(3,615		)	(4,074		)	(4,605		)
Accrual of cumulative dividends on preferred stock	(2,946		)	(3,263		)	(3,794		)	(4,325		)	(4,944		)
Net earnings (loss) available to common stockholders	$	150		$	(1,211	)	$	(9,026	)	$	(14,319	)	$	(15,192	)
EARNINGS (LOSS) PER SHARE:
Basic and diluted	.15			(1.22		)	(9.16		)	(14.52		)	(15.40		)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted	1,000,953			995,747			985,345			986,406			986,552
OTHER DATA:
Adjusted EBITDA (1)	40,481			40,676			29,005			21,727			22,073
Adjusted EBITDA margin (2)	23.4		%	23.1		%	18.0		%	13.6		%	14.1		%
Net cash provided by operating activities	20,282			15,732			17,609			12,649			11,118
Net cash provided by (used in) investing activities	(17,228		)	(17,697		)	(12,482		)	(2,958		)	6,848
Net cash provided by (used in) financing activities	(4,030		)	886			48			(15,712		)	(17,074		)
Depreciation and amortization	14,521			16,254			17,185			16,733			14,355
Capital expenditures	18,093			18,469			9,495			4,222			6,442
Units of operated equipment rentals at end of period	664			747			761			710			696
Number of locations at end of period	31			37			38			38			37
Ratio of earnings to fixed charges (3)	1.6		x	1.6		x	—			—			—
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END:
Total assets	122,162			126,962			132,915			112,601			89,407
Long-term obligations, including current maturities	125,235			125,208			128,970			117,395			100,995
Stockholders’ deficit	(62,787		)	(61,075		)	(65,990		)	(75,944		)	(86,192		)

~~No matters were submitted to a vote of security holders during the fourth quarter ended June 30, 2003.~~ 8

~~PART~~The following IIchart depicts the reconciliation of net cash provided by (used) in operating activities to Adjusted EBITDA:

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

	FISCAL YEAR ENDED JUNE 30,
	2000			2001			2002			2003			2004
Net cash provided by (used in) operating activities	$	20,282		$	15,732		$	17,609		$	12,649		$	11,118
Interest expense less debt amortization of debt issuance costs	14,706			14,379			13,408			13,042			12,717
Current tax (expense) benefit	1,979			2,644			(120		)	(2,093		)	779
Provision for doubtful receivables	(340		)	(146		)	(340		)	(767		)	(427		)
Gain on sale of assets	305			422			300			485			1,285
Amoritzation of deferred gain sale-leaseback	—			—			—			—			64
Change in operating assets and liabilities net of acquisitions	3,506			7,645			(1,852		)	(1,589		)	(2,604		)
Reorganization costs	43			—			—			—			—
Other income	—			—			—			—			(859		)
Adjusted EBITDA	$	40,481		$	40,676		$	29,005		21,727			$	22,073

~~The~~(1) Adjusted ~~Company’s~~EBITDA ~~common~~represents ~~equity~~earnings isbefore ~~not~~interest ~~publicly traded and~~expense, ~~accordingly~~income taxes, ~~an established~~depreciation ~~market~~and ~~does~~amortization, ~~not~~adjusted ~~exist~~to ~~for~~exclude ~~such~~stock-related compensation ~~common~~expense, ~~equity.~~reorganization ~~The~~costs, ~~Company~~other ~~did~~compensation, ~~not~~goodwill ~~pay~~impairment ~~any~~and ~~dividends~~other ~~in fiscal 2002 or 2003~~income. The ~~Indenture~~Company ~~contains~~ignores ~~covenants that restrict, among other things,~~ the ~~ability~~effect of ~~the~~non-recurring ~~Company~~events tonot ~~incur~~related to ~~additional~~the ~~indebtedness,~~core ~~pay~~business ~~dividends~~operations orto ~~make~~arrive ~~certain~~at ~~other~~EBITDA. Adjusted ~~Restricted~~EBITDA is ~~Payments~~presented ~~(as~~because ~~defined~~Management ~~therein),~~believes ~~enter~~it ~~into~~provides ~~transactions~~useful ~~with~~information ~~affiliates, allow~~regarding ~~its~~a ~~subsidiaries~~company’s ability to ~~make~~incur ~~certain~~and/or ~~payments,~~service ~~create~~debt. ~~liens,~~Adjusted ~~make~~EBITDA ~~certain~~should ~~asset~~not be ~~dispositions~~considered ~~and~~in ~~merge~~isolation or ~~consolidate~~as ~~with,~~a orsubstitute ~~transfer~~for ~~substantially~~net ~~all~~income, ~~of its~~cash ~~assets to another person~~flows, or ~~engage in certain change of control~~other ~~transactions.~~consolidated Asincome ~~part~~or ofcash ~~the~~flow ~~Recapitalization,~~data ~~the~~prepared ~~Issuer issued the Existing Notes~~ in accordance with ~~Rule 144A of the Securities Act of 1933, as amended.~~accounting Inprinciples ~~December~~generally ~~1998,~~accepted ~~the~~in ~~Company filed a registration statement and~~ the ~~Existing Notes~~United ~~were~~States ~~exchanged~~of ~~for~~America ~~registered~~or ~~notes.~~as Asa ~~part~~ measure of ~~the~~a ~~Recapitalization, the~~company’s ~~Company~~profitability ~~became~~or ~~the successor obligor under the Existing Notes~~liquidity. ~~See “Business — the Reorganization”.~~

8(2) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues.

~~Table~~(3) For the purpose of computing ~~Contents~~the ratio of earnings to fixed charges, “earnings” consists of earnings before income taxes and fixed charges. “Fixed Charges” consist of interest expense, which includes amortization of debt issuance costs and the interest portion of the Company’s rent expense. Earnings were insufficient to cover fixed charges by $2,473,000, $9,361,000 and $7,985,000 for 2002, 2003, and 2004 respectively.

~~ITEM 6. SELECTED FINANCIAL DATA~~ 9

		FISCAL YEAR ENDED JUNE 30,
		1999			2000			2001			2002			2003
		(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues		$	143,446		$	173,060		$	175,769		$	161,242		$	159,617
Cost of revenues			101,389			119,854			124,408			122,418			128,048
Gross profit			42,057			53,206			51,361			38,824			31,569
General and administrative expenses			32,570			28,474			28,347			28,364			27,935
Reorganization expenses			3,501			43			—			—			—
Other operating income			1,121			1,228			1,408			1,360			1,360
Earnings before interest expense and income taxes			7,107			25,917			24,422			11,820			4,994
Interest expense			14,334			15,591			15,263			14,293			14,355
Earnings (loss) before income taxes			(7,227	)		10,326			9,159			(2,473	)		(9,361	)
Income tax expense (benefit)			(1,388	)		4,376			3,900			(856	)		(3,441	)
Net earnings (loss)			(5,839	)		5,950			5,259			(1,617	)		(5,920	)
Accretion of preferred stock to redemption value			(2,304	)		(2,854	)		(3,207	)		(3,615	)		(4,074	)
Accrual of cumulative dividends on preferred stock			(2,323	)		(2,946	)		(3,263	)		(3,794	)		(4,325	)
	Net earnings (loss) available to common stockholders	$	(10,466	)	$	150		$	(1,211	)	$	(9,026	)	$	(14,319	)
EARNINGS (LOSS) PER SHARE:
	Basic and diluted		(8.16	)		.15			(1.22	)		(9.16	)		(14.52	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
	Basic and diluted		1,282,996			1,000,953			995,747			985,345			986,406
OTHER DATA:
Adjusted EBITDA (1)			31,129			40,481			40,676			29,005			21,727
Adjusted EBITDA margin (2)			21.7	%		23.4	%		23.1	%		18.0	%		13.6	%
Net cash provided by (used in) operating activities			(487	)		20,282			15,732			17,609			12,649
Net cash used in investing activities			(21,188	)		(17,228	)		(17,697	)		(12,482	)		(2,958	)
Net cash provided by (used in) financing activities			24,526			(4,030	)		886			48			(15,712	)
Depreciation and amortization			11,652			14,521			16,254			17,185			16,733
Capital expenditures			14,456			18,093			18,469			9,495			4,222
Units of operated equipment rentals at end of period			623			664			747			761			710
Number of locations at end of period			32			31			37			38			38
Ratio of earnings to fixed charges (3)			—			1.6	x		1.6	x		—			—
CONSOLIDATED BALANCE SHEET DATA AT PERIOD END:
Total assets			114,163			122,162			126,962			132,915			112,473
Long-term obligations, including current maturities			131,324			125,235			125,208			128,970			117,395
Stockholders’ deficit			(66,965	)		(62,787	)		(61,075	)		(65,990	)		(75,944	)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

~~(1)~~The Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, adjusted to exclude stock-related compensation expense, reorganization costs and other compensation (for following discussion of the ~~Company’s~~results ~~stock-related~~of ~~compensation~~operations ~~expense~~ and ~~reorganization~~financial ~~costs~~condition ~~and~~of ~~other~~Penhall should ~~compensation,~~be ~~see~~read ~~notes~~in 8conjunction ~~and~~with ~~1, respectively, to~~ the ~~Company’s~~ consolidated financial statements). ~~Adjusted~~of ~~EBITDA~~the Company, isincluding ~~presented~~the ~~because~~notes ~~Management believes it provides useful information regarding a company’s ability to incur and/or service debt. Adjusted EBITDA should not be considered in isolation or as a substitute for net income~~thereto, ~~cash~~included ~~flows, or other consolidated income or cash flow data prepared~~ in ~~accordance~~Part ~~with~~II ~~accounting principles generally accepted in the United States~~ of ~~America~~this ~~or as a measure of a company’s profitability or liquidity~~report.

9 GENERAL

~~Table~~Penhall was founded in 1957 in Anaheim, California with one piece of ~~Contents~~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 37 locations in 17 states, with a presence in some of the fastest growing states in terms of construction spending and population growth.

The ~~following~~operated equipment ~~chart~~rental ~~depicts~~industry is a specialized niche of the ~~reconciliation~~highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of ~~Net~~consolidation ~~cash~~opportunities ~~provided~~by acquiring small companies in targeted markets as well as by establishing new ~~(used)~~ offices in ~~operating~~those ~~activities~~markets. toSince ~~Adjusted~~1998, ~~EBITDA:~~Penhall has effected eight strategic acquisitions, including:

		FISCAL YEAR ENDED JUNE 30,
		1999			2000			2001			2002			2003
Net cash provided by (used in) operating activities		$	(487	)	$	20,282		$	15,732		$	17,609		$	12,649
Interest expense less amortization of debt issuance costs			13,523			14,706			14,379			13,408			13,042
Current tax (expense) benefit			—			1,979			2,644			(120	)		(2,093	)
Provision for doubtful receivables			(282	)		(340	)		(146	)		(340	)		(767	)
Gain on sale of assets			420			305			422			300			485
Net change in operating assets and liabilities, net of acquisitions			5,585			3,506			7,645			(1,852	)		(1,589	)
Stock related compensation expense			8,869			—			—			—			—
Reorganization costs			3,501			43			—			—			—
	Adjusted EBITDA	$	31,129		$	40,481		$	40,676		$	29,005		$	21,727

1. HSI, a Minnesota-based firm acquired in April 1998,

	(2)		Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenues.
	(3)		For the purpose of computing the ratio of earnings to fixed charges, “earnings” consists of earnings before income taxes and fixed charges. “Fixed Charges” consist of interest expense, which includes amortization of debt issuance costs and the interest portion of the Company’s rent expense. Earnings were insufficient to cover fixed charges by $7,337,000, $2,473,000, and $9,361,000 for 1999, 2002, and 2003 respectively.

2. Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,

~~ITEM 7~~3. Lipscomb ~~MANAGEMENT’S~~Concrete ~~DISCUSSION AND~~Cutting, ~~ANALYSIS~~a OFNorth Carolina-based ~~FINANCIAL~~company ~~CONDITION~~acquired ~~AND~~in ~~RESULTS OF OPERATIONS.~~ November 1998,

~~The~~4. Prospect ~~following~~Drilling ~~discussion of the results of operations~~ and ~~financial condition~~Sawing, ~~of Penhall should be read in conjunction with the consolidated~~a ~~financial~~Minnesota-based ~~statements~~company ofacquired ~~the Company, including the notes thereto, included~~ in ~~Part~~ ~~II of this report.~~ June 1999,

~~GENERAL~~5. Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000,

~~Penhall~~6. H&P ~~was~~Sawing ~~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 constructionDrilling, ~~industrial,~~a ~~manufacturing, governmental~~Kansas ~~and residential markets. In addition~~City, ~~Penhall complements its Operated Equipment Rental Services with fixed~~Missouri-~~price~~based ~~contracts,~~Company ~~which~~acquired ~~serve to market its Operated Equipment Rental Services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from 38 locations~~ in ~~17 states~~March 2002, ~~with a presence in some of the fastest growing states in terms of construction spending and population growth.~~

~~The~~7. Bob ~~operated~~Mack ~~equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry~~Company, inCalifornia ~~which there are~~based ~~approximately~~company ~~17,000~~acquired ~~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~~March 2002, ~~Penhall has effected eight strategic acquisitions, including:~~ and

18. Arizona ~~HSI,~~Curb aCut ~~Minnesota-based firm acquired in April 1998~~Company, 2.an ~~Daley Concrete Cutting, a South Carolina-~~Arizona based ~~division of U.S. Rentals acquired in October 1998, 3. Lipscomb Concrete Cutting, a North Carolina-based~~ company acquired in ~~November 1998, 4~~April 2002. ~~Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,~~

10During the same period, Penhall established operations in six new markets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno, and Seattle. Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are provided primarily under hourly rentals, which are complemented by long-term fixed-price contracts.

~~Table~~Revenue growth is influenced by infrastructure change, including new construction, modification, and regulatory changes. Penhall’s revenues are also impacted positively after the occurrence of ~~Contents~~natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence Penhall’s operations are demand for

5. Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000, 6. H&P Sawing and Drilling, a Kansas City, Missouri-based Company acquired in March 2002, 7. Bob Mack Company, California based company acquired in March 2002, and 8. Arizona Curb Cut Company, an Arizona based company acquired in April 2002.10

~~During~~operated rental equipment, the ~~same~~amount ~~period,~~and ~~Penhall~~quality ~~established~~of ~~operations~~equipment inavailable ~~six~~for ~~new~~rent, ~~markets~~rental rates byand ~~opening~~general ~~offices~~economic inconditions. ~~Dallas~~Historically, ~~Richmond,~~revenues ~~Fresno,~~have ~~Buffalo,~~been ~~Reno~~seasonal, as weather conditions in the spring and ~~Seattle.~~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 ~~derives~~operating ~~its~~costs ~~revenues~~include ~~primarily~~the ~~from~~cost ~~services~~of ~~provided~~labor, ~~for~~equipment ~~infrastructure~~rental ~~related~~fleet ~~jobs.~~maintenance ~~Penhall’s~~costs ~~Operated~~including ~~Equipment~~parts ~~Rental~~and ~~Services~~service, ~~are~~equipment rental fleet ~~provided~~depreciation, ~~primarily~~insurance ~~under~~and ~~hourly~~other ~~rentals~~direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, Penhall utilizes a range of periods over which ~~are~~it ~~complemented~~depreciates byits ~~long~~equipment on a straight-~~term~~line ~~fixed-price contracts~~basis. ~~The~~On ~~following~~average, ~~table~~Penhall ~~shows~~depreciates ~~the~~its ~~breakdown~~equipment ofover ~~the~~an estimated useful ~~components~~life of ~~revenue~~three ~~for~~to ~~the~~eight ~~periods~~years ~~indicated:~~ with a 10% residual value.

	FISCAL YEAR ENDED JUNE 30,
	2001					2002					2003
			% OF					% OF					% OF
	$		TOTAL			$		TOTAL			$		TOTAL
	(DOLLARS IN THOUSANDS)
Hourly Service Rentals	$	126,068		71.7	%	$	118,058		73.2	%	$	115,844		72.6	%
Long Term Service Contracts (1)		49,701		28.3	%		43,184		26.8	%		43,773		27.4	%
Total Revenue	$	175,769		100.0	%	$	161,242		100.0	%	$	159,617		100.0	%

Penhall invests in and maintains a large and versatile fleet of rental equipment ranging from relatively small items such as diamond abrasive saws and coring units to larger equipment, including backhoes, excavators, water trucks and concrete grinders. Used equipment is sometimes sold in the ordinary course of business, and gains or loss on sales of assets, net are recognized in “Other Operating Income” in Penhall’s consolidated statements of operations. In fiscal 2002, 2003 and 2004, net gains on sales of assets from such equipment sales were $300,000, $485,000 and $493,000, respectively.

Decisions to dispose of assets in its operated equipment rental fleet (1“revenue units”) ~~Excludes~~and add ~~services~~revenue ~~performed~~units, byare primarily decided at each location. Revenue units are typically kept for their full economic life. In an effort to try to maximize fleet utilization, transfers of revenue units between locations are common. Overall, the Company tends to increase its fleet as total company utilization exceeds 72%. The following table shows the number of units in Penhall’s operated equipment rental ~~divisions~~fleet onfor ~~long-term~~the ~~contracts.~~following periods:

Revenue growth is influenced by infrastructure change, including new construction, modification, and regulatory changes. Penhall’s revenues are also impacted positively after the occurrence of 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.

	FISCAL YEAR ENDED JUNE 30,
	2002		2003		2004
Beginning of Period	747		761		710
# Units Purchased	60		12		19
# Units Disposed	(46	)	(63	)	(33	)
End of Period	761		710		696

~~The principal components of Penhall’s operating costs include the cost of~~CRITICAL ~~labor,~~ACCOUNTING ~~equipment~~POLICIES ~~rental~~AND 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. ESTIMATES

~~Penhall~~The ~~invests~~preparation of inconsolidated ~~and~~financial ~~maintains~~statements arequires ~~large~~the ~~and~~Company ~~versatile~~to ~~fleet~~make ofestimates ~~rental~~and ~~equipment~~judgments ~~ranging~~that ~~from~~affect ~~relatively~~the ~~small~~reported ~~items~~amounts ~~such~~of asassets, ~~diamond~~liabilities, ~~abrasive~~revenues ~~saws~~and expenses, and related disclosure of contingent assets and liabilities. On an ~~coring~~on-going ~~units~~basis, tothe ~~larger~~Company ~~equipment~~evaluates its estimates, including ~~backhoes~~those related to long-term construction contracts, ~~excavators~~accounts receivable, ~~water~~goodwill, ~~trucks~~long-lived ~~and~~assets, ~~concrete~~self-insurance, ~~grinders.~~contingencies ~~Used~~and ~~equipment~~litigation. isThe ~~sometimes~~Company ~~sold~~bases inits estimates ~~the~~on ~~ordinary~~current ~~course of business~~information, ~~and~~historical ~~gains~~experience and on ~~sales~~various ofother assumptions ~~assets,~~that ~~net~~ are ~~recognized~~believed into ~~“Other Operating~~be ~~Income”~~reasonable inunder ~~Penhall’s~~the ~~consolidated~~circumstances, ~~statements~~the results of ~~operations.~~which Inform ~~fiscal~~the basis for making judgments about the carrying values ~~2001,~~of ~~2002~~assets and ~~2003,~~liabilities ~~gains~~and onthe ~~sales~~recognition of ~~assets~~revenue that are not readily apparent from ~~such~~other ~~equipment~~sources. ~~sales~~Actual ~~were~~results may differ from these estimates ~~$422,000,~~under ~~$300,000~~different ~~and~~assumptions ~~$485,000,~~or ~~respectively~~conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

~~The following table shows the number of units in Penhall’s operated~~Revenue ~~equipment~~Recognition ~~rental~~on ~~fleet~~Long-Term ~~for~~Construction ~~the following periods:~~ Contracts

	FISCAL YEAR ENDED JUNE 30,
	2001			2002			2003
Beginning of Period		664			747			761
# Units Purchased		135			60			12
# Units Disposed		(52	)		(46	)		(63	)
End of Period		747			761			710

Income from construction operations is recorded using the percentage-of-completion method of accounting. The majority of our long-term fixed price contracts with our customers are either “fixed unit price” or “fixed price”. Under fixed unit price contracts, the Company is committed to provide materials or services required by a project at fixed unit prices. The fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by the Company unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount. All state and federal government contracts and many of our other contracts provide for termination of the contract for the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.

11We use the percentage-of-completion accounting method for construction contracts in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue and earnings on construction contracts are recognized on the percentage-of-completion method in the ratio of costs incurred to estimated final costs. Provisions are

~~Table of Contents~~11

~~CRITICAL~~recognized ~~ACCOUNTING~~in ~~POLICIES~~the statement ~~AND~~of ~~ESTIMATES~~operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue.

~~The~~Contract ~~preparation~~cost consists of ~~consolidated~~direct ~~financial~~costs ~~statements~~on ~~requires~~contracts, ~~the~~including ~~Company to~~labor ~~make estimates~~ and ~~judgments~~materials, ~~that affect the reported~~ amounts ~~of assets,~~ ~~liabilities,~~payable ~~revenues~~to ~~and expenses~~subcontractors, ~~and~~direct ~~related~~overhead ~~disclosure~~costs ~~of contingent assets~~ and ~~liabilities.~~equipment ~~On an on-going basis, the Company evaluates its estimates,~~expense ~~including~~(primarily ~~those related to long-term construction contracts~~depreciation, ~~accounts receivable~~blades, ~~goodwill~~fuel, ~~long-lived~~maintenance ~~assets, self-insurance, contingencies~~ and ~~litigation~~ repairs). ~~The~~Contract ~~Company bases its estimates on current information, historical~~cost ~~experience~~is ~~and~~recorded onas ~~various~~incurred ~~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~~revisions ~~and~~in ~~the recognition~~contract of revenue ~~that~~and ~~are~~cost ~~not readily apparent from other sources. Actual results may differ from these~~ estimates ~~under different assumptions or~~ ~~conditions.~~are ~~The~~reflected ~~Company~~in ~~believes~~ the ~~following critical~~ accounting ~~policies affect~~period ~~its~~when ~~more significant judgments and estimates used in the preparation of its consolidated financial statements:~~ known.

~~Revenue~~The ~~Recognition~~accuracy of our revenue and profit recognition in a given period is dependent on ~~Long-Term~~the accuracy ~~Construction~~of ~~Contracts~~our estimates of the cost to complete each project which are completed by our project managers. However, projects can be complex and in most cases the profit margin estimates for a project will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have many projects of varying levels of complexity and size in process at any given time (during 2004 we worked on over 1,000 projects) these changes in estimates typically offset each other without materially impacting our overall profitability. However, large changes in cost estimates in the larger projects, can have a more significant effect on profitability.

~~Income~~Valuation ~~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 incurred 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 longLong-~~term contracts, which extend beyond~~Lived 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. Assets

~~Valuation~~Through June 30, 2002, the Company accounted for long-lived assets under SFAS No. 121, “Accounting for the Impairment of Ling-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and ~~Goodwill~~reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Deteriorating market conditions could potentially impact valuation of long-lived assets. In markets where adverse market conditions exist, the Company will consider reallocation of long-lived assets to markets where those assets will produce cash flow. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

Goodwill represents the excess of purchase price over fair value of net assets acquired. Prior to 2003, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assessed recoverability by determining whether the amortization of the goodwill balance over its remaining life would be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. The assessment of the recoverability of goodwill would be impacted if estimated future operating cash flows were not achieved. Amortization expense related to goodwill amounted to approximately $687,000 and $609,000 for the years ended June 30, 2001 and 2002, respectively.

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 No. 141 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, and accordingly, no amortization~~ ~~of goodwill was recorded in 2003~~2002. We Asperform aour ~~result of the transitional and~~ annual ~~goodwill~~ impairment ~~tests that were completed during fiscal 2003, it was~~ ~~determined~~analysis ~~there~~at ~~was~~June 30 ~~no impairment~~ of ~~goodwill. The Company’s annual test will be performed in May of~~ each year. ~~There were no adjustments to~~ ~~identifiable~~We ~~intangible~~will ~~assets’~~perform ~~useful~~an ~~lives~~earlier orimpairment ~~recorded~~analysis ~~balances~~if as a ~~result~~triggering event ofoccurs ~~the~~that ~~adoption~~warrants ofsuch ~~SFAS No~~analysis. ~~142.~~

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill annually as well as 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

12• Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

~~Table~~• Significant ofnegative ~~Contents~~industry or economic trends;

~~RESULTS~~• Unanticipated OFcompetition; ~~OPERATIONS~~ and

~~Results~~• EBITDA ofrelative ~~Operations~~ to net book value

~~Year~~As ~~Ended~~a ~~June 30~~result of industry conditions, ~~2003~~we ~~Compared~~determined that there were indicators of impairment to ~~Year~~the ~~Ended~~carrying value of goodwill. Accordingly, we performed a review of the value of our goodwill in accordance with SFAS No. 142. Based on our review, we recorded a charge of $2,682,000 to write-off the value of goodwill for two reporting units. Substantially all of the remaining $6,371,000 of goodwill relates to one reporting unit. Continued deterioration in the markets where Penhall operates could result in further impairment. As of June 30, ~~2002~~2004, the Company notes that there is no indication of additional goodwill impairment for the reporting units where the goodwill resides.

Revenues. Revenues for Fiscal 2003 were $159.6 million compared to $161.2 million for the prior year, a decrease of $1.6 million or 1.0%. A $0.6 million increase in contract revenue (1.4% increase) was offset by a $2.2 million decrease in service revenues (a 1.9% decrease). The lower revenues is a reflection of the significant slowdown in private non-residential construction activity, which declined 16% in 2002 according to Department of Commerce data as well as significantly lower state highway and bridge spending due to deficits in many state budgets. 12

~~Penhall~~RESULTS ~~operated through 38 locations in 17 states at June 30, 2002 and~~OF 2003. At June 30, 2003, Penhall’s operated rental fleet consisted of 710 units compared to 761 units at June 30, 2002, a decrease of 6.7%. A majority of the unit disposals in fiscal 2003 occurred during the later part of the fiscal year. OPERATIONS

~~Gross Profit. Gross profit totaled $31.6 million in Fiscal 2003, a~~Year ~~decrease~~Ended ~~of $7.3~~June million or 18.7% from Fiscal 2002. Gross profit as a percentage of revenues decreased from 24.1% in Fiscal 2002 to 19.8% in Fiscal 2003. The decrease in gross profit from Fiscal 2002 to Fiscal 2003 is primarily attributable to increased competition30, ~~cost~~2004 ~~overruns~~Compared ~~on some contracts, and an increase of $1.7 million in insurance costs during Fiscal 2003. The decrease in gross profit as a percentage of revenues was due~~ to ~~increased~~Year ~~competition,~~Ended an increase in insurance costs, decrease in equipment utilization, and a change in the mix of work. Although the amount of Contract Revenue only increased $0.6 million during Fiscal 2003, the amount of subcontracted work and materials associated with the Contract Revenue increased by $5.9June ~~million. Typically~~30, ~~the markup on subcontracted work and materials is significantly less than the markup on self performed work.~~ 2003

~~General and Administrative Expenses~~Revenues. Revenues ~~General~~for ~~and~~Fiscal ~~administrative~~2004 ~~expenses~~ were $27157.~~9 million~~0 ~~in Fiscal 2003~~ million compared to $28159.4 6 million infor ~~Fiscal~~the ~~2002.~~prior As year, a ~~percent~~decrease of ~~revenues,~~$2.6 ~~general~~million ~~and~~or 1.6%. A ~~administrative~~$2.8 ~~expenses~~million ~~were~~increase 17in contract revenue (a 6.54% inincrease) ~~Fiscal 2003~~was ~~compared~~offset toby 17a $5.6%4 million decrease in service ~~Fiscal~~revenues ~~2002~~(a 4.7% decrease). The ~~small~~lower ~~decrease~~service inrevenues ~~general~~is ~~and~~a reflection ~~administrative~~of ~~expenses~~the asslowdown ain ~~percentage~~private, ofnon-residential ~~revenues~~construction ~~during~~activity, ~~Fiscal~~which declined ~~2003~~16% ~~is primarily~~in ~~attributable~~2003 according to ~~decreases~~Department of ~~$0.4 million~~Commerce indata, ~~incentive~~and ~~compensation,~~continued $0into 2004.~~5 million~~ Additionally inthere ~~payroll~~was significantly ~~and~~lower ~~related~~state ~~expenses,~~highway and ~~$0.6 million~~bridge spending due to deficits in ~~goodwill~~many ~~amortization~~state ~~partially~~budgets ~~offset by~~and lack of a ~~$0.7 million~~replacement ~~increase~~program inat ~~insurance~~the ~~costs~~federal ~~and~~level afor ~~$0.4 million~~the Transportation ~~increase~~Equity inAct for the 21st Century, “TEA-21” which ~~bad~~expired ~~debt~~in ~~expense~~2003.

13Penhall operated through 37 locations in 17 states at June 30, 2003 and 2004. At June 30, 2004, Penhall’s operated rental fleet consisted of 696 units compared to 710 units at June 30, 2003, a decrease of 2.0%. The smaller fleet of revenue units is attributable to the Company not replacing all of the disposed units since revenue unit utilization rates remain below 72%.

~~Table~~Gross Profit. Gross profit totaled $35.2 million in Fiscal 2004, an increase of $3.2 ~~Contents~~million or 10.1% from Fiscal 2003. Gross profit as a percentage of revenues increased from 20.0% in Fiscal 2003 to 22.4% in Fiscal 2004. The increase in gross profit from Fiscal 2003 to Fiscal 2004 is primarily attributable to significant profits from a major project, the successful settlement of an outstanding claim and a $1.9 million decrease in depreciation expense. The decrease in depreciation expense is the result of low capital expenditures during 2002, 2003, and 2004

~~Interest~~General ~~Expense~~and Administrative Expenses. General ~~Interest~~and administrative ~~expense~~expenses ~~was~~were $1428.43 million in Fiscal ~~2003~~ 2004 compared to $27.9 ~~interest~~million ~~expense~~in Fiscal 2003. As a percent of ~~$14~~revenues, general and administrative expenses were 18.~~3 million~~0% in Fiscal ~~2002~~2004 compared to 17.5% in Fiscal 2003. The small increase in general and administrative expenses as a percentage ~~interest~~of ~~expense~~revenues during Fiscal 2004 is primarily attributable to aincreases ~~write-off~~in rent expense of $0.3 8 million ~~of debt issuance costs~~ associated with the ~~Credit~~sale/leaseback ~~Facility~~of ~~replaced~~Company properties, byincentive ~~the~~compensation ~~The~~of ~~New Credit~~$1.3 ~~(as~~million, ~~defined~~and ~~below)~~legal expense of $0.3 million offset by ~~lower~~decreases ~~interest~~$0.6 ~~rates~~million in payroll and ~~decreased~~related expenses, $0.5 ~~borrowings~~million ~~during~~in ~~Fiscal~~depreciation ~~2003~~expense and $0. 3 million in bad debt expense.

~~Income Tax Benefit~~Goodwill Impairment. ~~The~~Total goodwill ~~Company~~impairment ~~recorded an income tax benefit~~ of $~~3.4 million~~2,682,000 orhas ~~36.8%~~been ofrecorded ~~loss~~for ~~before~~the ~~income~~year ~~taxes in Fiscal 2003~~ended June 30, ~~compared~~2004. This toexpense anis the ~~income~~result ~~tax benefit~~ of ~~$0.9 million,~~impairment ortesting ~~34.6%~~on ofall ~~loss~~reporting ~~before~~units ~~income~~which ~~taxes~~had inassociated ~~Fiscal 2002~~goodwill. A ~~The~~continuing ~~increase~~decline in the California ~~income~~market ~~tax~~resulted ~~benefit~~in istwo ~~attributable~~California toreporting aunits ~~higher loss~~writing ~~before~~off ~~income~~all associated ~~tax in Fiscal 2003~~goodwill.

~~Year~~Other ~~Ended~~income. During ~~June 30~~fiscal 2004, ~~2002~~the ~~Compared~~Company tosold ~~Year~~one ~~Ended~~of ~~June 30~~its FCC licenses and also completed a sale - leaseback of its 11 owned properties, ~~2001~~which result in a total gain of $0.9 million.

~~Revenues~~Interest Expense. ~~Revenues~~Interest ~~for~~expense ~~fiscal~~was ~~2002 were~~ $~~161~~13.29 million, in Fiscal 2004 compared to ~~revenues~~ interest expense of $~~175~~14.84 million ~~for~~in ~~the~~Fiscal 2003. ~~prior~~The ~~year,~~decrease ain ~~decrease~~interest ofexpense ~~$14.5 million~~is ~~or 8.3%.~~attributable ~~Lower~~to ~~revenues~~lower borrowings in Fiscal ~~2002~~2004 ~~were~~ primarily aresulting ~~result~~from the proceeds on the sale-leaseback of athe Company ~~weaker~~owned ~~economy~~properties, ~~a significant~~which ~~downturn~~was inused ~~commercial~~to ~~building~~reduce ~~construction~~the borrowings under the revolving credit facility, ~~and~~partially ~~increased~~offset by higher costs for letters of ~~competition~~credit.

~~Penhall~~Income ~~operated~~Tax Benefit. ~~through~~The 38Company ~~locations~~recorded inan income 17tax ~~states~~benefit atof ~~June~~$2.3 30million, ~~2002, compared~~or to29.3% 37of ~~locations~~loss inbefore 17income ~~states~~taxes in atFiscal ~~June 30~~2004, ~~2001.~~compared Atto ~~June 30,~~an ~~2002, Penhall’s~~income ~~operated~~tax ~~rental~~benefit ~~fleet consisted~~ of ~~761 units compared to 747 units at June~~$3.4 30million, ~~2001, an increase of 1~~or 36.98%. ~~A majority~~ of ~~the~~loss ~~additional~~before ~~units~~income taxes in ~~fiscal~~ ~~2002~~Fiscal ~~were~~2003. The ~~acquired~~decrease ~~during~~in the ~~later~~effective ~~part~~tax ofrate ~~the~~in fiscal ~~year~~2004 ~~as part of~~is ~~the~~primarily ~~Bob~~due ~~Mack~~to ~~Company~~non-deductible ~~and~~expenses ~~Arizona~~related ~~Curb~~to ~~Cut~~goodwill ~~acquisitions~~impairment.

~~Gross Profit. For fiscal year 2002, gross profit was $38.8 million~~Year ~~compared~~Ended ~~to gross profit of $51.4~~June ~~million for fiscal year 2001~~30, a2003 ~~decrease~~Compared ~~of $12.5 million, or 24.4%. As a percent of revenue, gross profit was 24.1% in fiscal year 2002 compared~~ to ~~29.2%~~Year inEnded ~~fiscal year 2001. The decrease in gross profit in 2002 was due primarily to the decrease in utilization of the equipment rental fleet in fiscal 2002 and an increase of $3.6~~June ~~million~~30, in the cost of insurance. Utilization rates were lower due to the softening of the commercial construction market and increased competition in most of the Company’s markets. The increased cost of insurance in 2002 is a result of Penhall renewing its insurance near the end of fiscal 2001 in an adverse insurance market after emerging from a three year policy which was purchased during a favorable insurance market.

~~General and Administrative Expenses~~Revenues. Revenues ~~General~~for ~~and~~Fiscal ~~administrative~~2003 ~~expenses~~ were $28159.~~4 million~~6 ~~in fiscal year 2002~~ million compared to $28161.3 2 million infor ~~fiscal~~the prior year ~~2001~~, ana ~~increase~~decrease of $0.1 .6 million or 1.0%,. A ~~which is primarily attributable to a~~ $10.1 6 million ~~decrease~~increase in contract ~~wages,~~revenue ~~primarily~~(1.4% ~~incentive~~increase) ~~compensation,~~was offset by ~~operating~~ ~~increases mainly attributable to~~ a ~~full~~$2.2 ~~year~~million ofdecrease ~~costs~~in service ~~associated~~revenues ~~with new~~(a ~~offices~~1.9% ~~and~~decrease). ~~additional~~The ~~partial~~lower ~~year~~revenues ~~operating~~is ~~costs~~a ~~associated~~reflection ~~with~~of the ~~Bob~~ ~~Mack~~significant ~~Company~~slowdown ~~and~~in ~~Arizona~~private ~~Curb~~non-residential ~~Cut~~construction ~~acquisitions. As a percentage of revenues~~activity, which ~~general~~declined ~~and administrative expenses were 17.6~~16% in ~~fiscal~~ 2002 ~~compared~~according to ~~16.1% in~~Department ~~fiscal~~of ~~2001.~~Commerce ~~The~~data ~~increase~~as inwell ~~general and administrative expenses~~ as a ~~percent~~significantly oflower ~~revenues~~state ~~occurred~~highway ~~because many of these types of expenses remain somewhat constant,~~ and dobridge ~~not~~spending ~~increase~~due orto ~~decrease~~deficits in ~~proportion to the~~many ~~increases~~state ~~or decreases in revenues~~budgets.

~~Other~~Penhall ~~Operating~~operated through ~~Income.~~38 ~~Other~~locations ~~operating~~in ~~income,~~17 ~~consists~~states ~~primarily~~at ~~of gains~~June 30, 2002 and ~~losses~~2003. At onJune 30, ~~the~~2003, ~~sale~~Penhall’s operated rental fleet consisted of ~~fixed~~710 ~~assets,~~units ~~interest~~compared ~~income,~~to ~~and~~761 ~~discounts~~units at June 30, ~~earned~~2002, a decrease of 6.7%. ~~Other~~A ~~operating~~majority ~~income~~of inthe ~~both~~unit disposals in fiscal ~~2002~~2003 occurred ~~and~~during ~~2001~~the ~~was~~later $1part of the fiscal year.~~4 million.~~

~~Interest~~Gross ~~Expense~~Profit. ~~Interest expense was $14.3 million in fiscal 2002~~ Gross ~~compared~~profit tototaled $1531.39 million in ~~fiscal~~Fiscal ~~2001~~2003, a decrease of 6$7.4 million or 18.7% from Fiscal 2002. ~~The~~Gross ~~decrease~~profit isas a percentage of ~~attributable~~revenues todecreased ~~the~~from ~~lower~~24.4% ~~borrowings~~in ~~and~~Fiscal ~~lower~~2002 ~~interest~~to ~~rates~~20.0% ~~during~~in ~~fiscal 2002~~Fiscal 2003. The

Income Tax Expense (Benefit). The Company recorded an income tax benefit of $0.9 million, or 34.6% of losses before taxes in fiscal 2002 as compared to an income tax expense of $3.9 million, or 42.6% of earnings before income taxes in fiscal 2001. The lower effective tax rate on the loss in fiscal 2002 is due to unconsolidated state tax liabilities of Penhall Company and a 45% reduction of the California net operating loss. 13

~~LIQUIDITY~~decrease ~~AND~~in ~~CAPITAL~~gross profit ~~RESOURCES~~from Fiscal 2002 to Fiscal 2003 is primarily attributable to increased competition, cost overruns on certain contracts, and an increase of $1.7 million in insurance costs during Fiscal 2003. The decrease in gross profit as a percentage of revenues was due to increased competition, an increase in insurance costs, decrease in equipment utilization, and a change in the mix of work. Although the amount of Contract Revenue only increased $0.6 million during Fiscal 2003, the amount of subcontracted work and materials associated with the Contract Revenue increased by $5.9 million. Typically, the markup on subcontracted work and materials is significantly less than the markup on self performed work.

ItGeneral isand Administrative ~~anticipated~~Expenses. General ~~that~~and administrative ~~the~~expenses ~~Company’s~~were ~~principal~~$27.9 million ~~uses~~in ofFiscal ~~liquidity~~2003 ~~will~~compared be to $28.4 million ~~fund~~in ~~working~~Fiscal ~~capital,~~2002. ~~meet~~As ~~debt~~a ~~service~~percent ~~requirements and finance the Company’s strategy~~ of ~~pursuing~~revenues, ~~strategic~~general ~~acquisitions~~ and administrative ~~expanding~~expenses ~~through internal~~were ~~growth~~17.5% ~~The~~in ~~Company’s~~Fiscal ~~principal~~2003 ~~sources~~compared ~~of liquidity are expected~~ to be ~~cash~~17.6% ~~flow~~in ~~from operations and borrowings under the New Credit Facility (“The~~Fiscal ~~New Credit”)~~2002. The ~~New~~small ~~Credit~~decrease isin ageneral ~~$50 million,~~and ~~three~~administrative ~~year~~expenses ~~asset~~as ~~based borrowing~~a ~~facility, consisting~~ percentage of arevenues ~~revolving~~during ~~credit~~Fiscal ~~facility~~2003 ~~(“New~~is ~~Revolver”) of~~primarily upattributable to ~~$50 million~~decreases ~~with a~~ of $250.4 million ~~sub-facility~~in ~~for~~incentive ~~letters~~compensation, ~~of credit~~$0. ~~Availability~~5 ~~under~~million ~~the~~in ~~revolver~~payroll ~~portion of The New Credit would be limited to a~~and ~~borrowing~~related ~~base~~expenses, and ~~consisting of (i)~~$0.6 ~~up to 85% of the net amount of the Company’s~~million ~~eligible~~in ~~trade~~goodwill ~~accounts~~amortization ~~receivable,~~partially ~~(ii) up~~offset toby ~~the lesser of (~~a) $0.7 ~~100%~~million ofincrease ~~the~~in ~~net book~~insurance ~~value~~costs ~~of the Company’s eligible inventory~~ and ~~eligible~~a ~~equipment~~$0.4 ormillion ~~(b) 85%~~increase ofin ~~the~~bad ~~appraised~~debt ~~net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the~~ expense.

Interest Expense. Interest expense was $14.4 million in Fiscal 2003 compared to interest expense of $14.3 million in Fiscal 2002. The increase in interest expense is attributable to a write-off of $0.3 million of debt issuance costs associated with the Credit Facility replaced by the New Credit (as defined below) offset by lower interest rates and decreased borrowings during Fiscal 2003.

~~Table~~Income Tax Benefit. The Company recorded an income tax benefit of ~~Contents~~$3.4 million, or 36.8% of loss before income taxes in Fiscal 2003, compared to an income tax benefit of $0.9 million, or 34.6% of loss before income taxes in Fiscal 2002. The increase in the income tax benefit is attributable to a higher loss before income tax in Fiscal 2003.

~~appraised forced liquidation value of the Company’s owned real estate. In~~Contractual addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2003, total borrowing unused and available under The New Credit was $20.1 million. Obligations

Summary Cash Flow Data (000’s) for the periods ending June 30,
		2001			2002			2003
Cash and cash equivalents		$	1,030		$	6,205		$	184
Net cash provided by (used in):
	Operating activities	$	15,732		$	17,609		$	12,649
	Investing activities	$	(17,697	)	$	(12,482	)	$	(2,958	)
	Financing activities	$	886		$	48		$	(15,712	)
Capital expenditures		$	18,469		$	9,495		$	4,222

The following is a summary of the Company’s contractual obligations as of June 30, 2004:

In fiscal 2003, the Company’s net loss plus add backs of depreciation and amortization, amortization of debt issuance costs, provision for doubtful receivables and the gains on sales of assets, plus decreases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts, accounts payable, and accrued liabilities and the increase in insurance reserves were partially offset by increases in inventories and deferred taxes which resulted in net cash provided by operating activities of $12.6 million.

	Fiscal Year Ending June 30,
	2005		2006		2007		2008		2009		Thereafter		Total

Operating lease obligations	$	2,752,000	$	2,559,000	$	2,215,000	$	1,985,000	$	1,883,000	$	21,321,000	$	32,715,000
Long-term debt			882,000		113,000								995,000
Senior notes	—		—		100,000,000		—		—		—		100,000,000
Senior exchangeable preferred stock	—		—		24,420,000		—		—		—		24,420,000
Series A Preferred stock	—		—		—		33,587,000		—		—		33,587,000

InLIQUIDITY ~~fiscal 2002, the Company’s net loss plus depreciation and amortization,~~AND aCAPITAL decrease in receivables and an increase in accounts payable and accrued liabilities was partially offset by a decrease in billings in excess of costs and estimated earnings on uncompleted contracts and an increase in deferred taxes which resulted in net cash provided by operating activities of $17.6 million. RESOURCES

InIt is ~~fiscal~~anticipated ~~2001,~~that the Company’s ~~net~~principal ~~earnings~~uses ~~plus~~of ~~depreciation,~~liquidity ~~amortization~~will be to fund ~~and~~working ~~provision~~capital, ~~for~~meet ~~deferred~~debt ~~income~~service ~~tax~~requirements and ~~decreases~~finance inthe ~~cost~~Company’s strategy of pursuing strategic acquisitions and ~~estimated~~expanding through internal ~~earnings~~growth. inThe ~~excess~~Company’s principal sources of ~~billings~~liquidity onare ~~uncompleted~~expected ~~contracts~~to ~~were~~be ~~partially~~cash flow ~~offset~~from operations and borrowings under the New Credit Facility (“The New byCredit”) ~~increases~~secured in ~~receivables~~May ~~and~~2003. ~~inventories~~The New Credit is a $50 million, ~~prepaid~~three ~~expenses~~year asset ~~and~~based ~~other~~borrowing ~~assets~~facility, consisting of a revolving credit facility (“New ~~and~~Revolver”) ~~decreases~~of inup ~~accounts~~to ~~payable~~$50 million ~~and~~with ~~billings~~a in$25 million ~~excess~~sub-facility for letters of ~~costs~~credit. ~~and~~Availability ~~estimated~~under the revolver portion of The New Credit ~~earnings~~would onbe ~~uncompleted~~limited ~~contracts~~to ~~which~~a ~~resulted~~borrowing inbase consisting of (i) up to 85% of the net ~~cash~~amount ~~provided~~of bythe Company’s eligible trade accounts receivable, (ii) up to ~~operating~~the ~~activities~~lesser of ~~$15.7~~(a) ~~million.~~100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.

~~Management~~The ~~estimates~~provisions of the New Credit facility include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The New Credit and the associated lock-box agreement satisfy the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that ~~Penhall~~include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). We reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in SFAS No. 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear there were any subjective acceleration clauses that fit directly into the definition provided in SFAS No. 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. More specifically, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s ~~annual~~business that ~~capital~~alters ~~expenditures~~the underlying value of the collateral. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base ~~approximately~~calculation. $8As a result, the Company classifies borrowings under the New Credit facility as a short-term obligation.~~0 million~~ ~~for~~In ~~fiscal~~addition, ~~2004~~borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, ~~including~~utilization ~~replacement~~rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The ~~maintenance~~indebtedness of ~~equipment,~~The ~~purchases~~Company under The New Credit is secured by a first priority perfected security interest in all of ~~new~~the inventory, accounts, equipment, fixtures, cash, and ~~purchases~~other assets of ~~real~~the Company. As of June 30, 2004, the Company had no outstanding ~~property~~borrowings, ~~improvements~~$15.6 million of outstanding letters of credit, borrowing base limitations of $8.0 million and borrowings unused and available under The New Credit of $26.4 million.

Net cash used in investing activities during fiscal 2001, 2002 and 2003 was $17.7 million, $12.5 million and $3.0 million, respectively. Such cash was primarily used for capital expenditures of $18.5 million in fiscal 2001, $9.5 million in fiscal 2002, and $4.2 million in fiscal 2003. In fiscal 2001, $0.5 million was used for the acquisition of Advance Concrete Sawing & Drilling, Inc. and H&P Sawing & Drilling. In fiscal 2002, $3.8 million was used for the acquisition of Bob Mack Company and Arizona Curb Cut. The Company had no acquisitions in fiscal 2003. 14

Net cash provided by (used in) financing activities during fiscal 2001, 2002 and 2003 was $0.9 million, $0.0 million and ($15.7) million respectively.

Summary Cash Flow Data (000’s) for the periods ending June 30,
	2002			2003			2004
Cash and cash equivalents	$	6,205		$	184		$	1,076

Net cash provided by (used in):
Operating activities	$	17,609		$	12,649		$	11,118
Investing activities	$	(12,482	)	$	(2,958	)	$	6,848
Financing activities	$	48		$	(15,712	)	$	(17,074	)
Capital expenditures	$	9,495		$	4,222		$	6,442

~~Historically,~~The ~~Penhall~~Company’s ~~has~~cash ~~funded its working capital requirements, capital expenditures~~ and ~~other~~cash ~~needs~~equivalents ~~principally~~totaled ~~from operating cash flows~~$1.1 Asmillion aat ~~result of~~ the ~~Transactions~~ June 30, ~~however,~~2004. We ~~the~~believe ~~Company~~that ~~has~~our current ~~substantial~~cash ~~indebtedness~~ and ~~debt service~~cash ~~obligations.~~equivalents, Ascash ofgenerated ~~June 30,~~from ~~2003~~operations, ~~the Company~~ and ~~its~~the amount ~~subsidiaries~~available ~~had $117.4 million~~under ofour ~~total~~existing ~~indebtedness~~credit ~~outstanding~~facility ~~(including~~will ~~the~~be ~~Notes)~~sufficient ~~and~~to ameet ~~stockholders’~~our ~~deficit~~expected ofworking ~~$75.9 million.~~capital Asneeds, ofcapital ~~June 30~~expenditures, ~~2003~~financial ~~approximately~~commitments ~~$20.1 million~~and ofother ~~additional~~liquidity ~~borrowing~~requirements ~~was~~associated ~~available~~with ~~under~~our ~~The~~existing ~~New~~operations through ~~Credit~~the next 12 months.

15Cash provided by operating activities decreased from $12.6 million in fiscal 2003 to $11.1 million in fiscal 2004. This decrease is primarily attributable to higher receivables and costs and estimated earnings in excess of billings on uncompleted contracts offset by lower prepaid expenses. The lower prepaid expenses in fiscal 2004 is primarily associated with the timing of insurance payments compared to fiscal 2003.

~~Table~~Cash provided by investing activities in fiscal 2004 of ~~Contents~~$6.8 million represents a $9.8 million increase from the amount used in investing activities in 2003. The increase was due to the $11.3 million cash received from the sale and leaseback of 11 sites and $0.8 million received from the sale of an FCC license partially offset by a $2.2 million increase in capital expenditures. The Company had no acquisitions in fiscal 2004.

~~From~~Cash ~~August 1,~~used ~~2002~~by ~~through October 25,~~financing ~~2002,~~activities ~~the~~in ~~Company~~fiscal ~~repurchased~~2004 ~~capital~~increased ~~stock~~to ~~of the Company from four former employees for aggregate consideration of~~ $~~35,000~~17. ~~The Company’s Indenture dated as of August~~ 1~~, 1998 (the~~ ~~“Indenture”)~~million ~~with~~compared ~~United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up~~ to $~~1,000,000~~15.7 ~~and~~million ~~up to $5,000,000~~ in ~~aggregate~~fiscal ~~over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio~~2003. In Atfiscal ~~the~~2003 ~~time~~and ~~of the repurchases described above~~2004, ~~the Company~~net ~~was~~long-term ~~not~~and ~~able~~short-term todebt ~~incur additional indebtedness under the~~was ~~Indenture’s~~reduced ~~fixed charge coverage ratio, and accordingly such repurchases were not permitted~~ by ~~the Indenture~~$11.6 ~~The~~million ~~Company~~and ~~has informed the Trustee of such repurchases~~$16.4 ~~In the event that the Company receives~~million, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenturerespectively. ~~Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.~~

~~NEW~~The ~~ACCOUNTING~~Company ~~PRONOUNCEMENTS~~had standby letters of credit totaling $15.6 million at June 30, 2004, all of which are automatically renewable unless participating parties notify the other party thirty days prior to cancellation. The letters of credit are provided as collateral for our surety and for our insurance programs. In addition, we are generally required to provide surety bonds that provide an additional measure of security under certain public and private sector contracts. Most of the Company’s surety bonds are performance bonds which do not have a stated expiration date; instead the bonds are generally released when each contract is accepted by our customer.

OnIn ~~August 16,~~fiscal ~~2001~~2003, the ~~FASB~~Company’s ~~issued~~net ~~SFAS~~loss ~~No. 143,~~plus ~~“Accounting~~add ~~for~~backs ~~Asset Retirement~~of ~~Obligations”.~~depreciation ~~The~~and ~~statement requires entities to record the fair~~amortization, ~~value~~amortization of adebt ~~liability~~issuance ~~for~~costs, ~~legal~~provision ~~obligations~~for ~~associated~~doubtful ~~with~~receivables ~~the~~and ~~retirement~~the ~~obligations~~gains ofon ~~tangible~~sales ~~long-lived~~of assets, plus decreases in ~~the~~accounts ~~period~~receivable inand ~~which~~costs itand ~~is incurred.~~estimated ~~When~~earnings ~~the~~in ~~liability~~excess isof billings ~~initially~~on ~~recorded,~~uncompleted ~~the~~contracts ~~entity~~and ~~increases~~ the ~~carrying~~ ~~amount~~increase ofin ~~the~~accounts ~~related long-lived asset. Over time~~payable, ~~accretion of the~~accrued ~~liability~~liabilities isand ~~recognized~~insurance ~~each~~reserves ~~period,~~were ~~and~~partially ~~the~~offset ~~capitalized~~by ~~cost~~increases ~~is depreciated~~in ~~over~~inventories ~~the~~and ~~useful~~deferred ~~life~~taxes ofwhich ~~the~~resulted ~~related~~in ~~asset.~~net ~~Upon~~cash ~~settlement~~provided ofby ~~the~~operating activities ~~liability~~of ~~an entity~~$12.6 ~~either~~million. ~~settles~~Net ~~the~~cash ~~obligation~~used for ~~its~~investing ~~recorded~~activities ~~amount~~in ~~or incurs a gain~~Fiscal or2003 ~~loss~~was ~~upon settlement~~$3.0 ~~The standard is effective for fiscal years beginning after June 15~~million, ~~2002,~~which ~~with~~included ~~earlier application encouraged~~$4.2 ~~The~~million ~~Company~~in ~~adopted~~capital ~~this statement July 1, 2002~~expenditures. The ~~adoption~~Company ~~of SFAS No. 143 has not~~ had ano ~~material~~acquisitions ~~impact~~in onFiscal ~~the Company’s financial position or results from operations~~2003.

In ~~August~~fiscal ~~2001~~2002, the ~~FASB~~Company’s ~~issued~~net ~~SFAS~~loss ~~No. 144,~~plus ~~“Accounting~~depreciation ~~for~~and ~~the Impairment or Disposal of Long Lived Assets~~amortization,” ~~which~~a ~~supercedes~~decrease ~~SFAS~~in receivables ~~No. 121~~ and ~~certain~~ ~~sections~~an ofincrease ~~APB~~in ~~Opinion~~accounts ~~No. 30.~~payable ~~SFAS~~and ~~No. 144~~accrued ~~classifies~~liabilities ~~long-lived~~was ~~assets~~partially asoffset ~~either~~by ~~(1) to~~it’s benet ~~held and used~~loss, ~~(2) to~~a bedecrease ~~disposed~~in ofbillings byin ~~other~~excess ~~than sale, or (3) to be disposed~~ of ~~by sale. This standard introduces a~~costs ~~probability-weighted~~and ~~cash~~estimated ~~flow~~earnings ~~estimation~~on ~~approach~~uncompleted tocontracts ~~deal~~and ~~with~~an ~~situations~~increase in deferred taxes which ~~alternative~~resulted ~~courses~~in ofnet ~~action~~cash toprovided ~~recover~~by ~~the~~operating ~~carrying~~activities ~~amount~~ of a$17.6 ~~long-lived~~million. Net ~~asset~~cash ~~are~~used ~~under consideration or a range is estimated~~ for ~~the amount~~investing ofactivities ~~possible~~in ~~future~~fiscal ~~cash~~2002 ~~flows~~totaled $12.5 ~~The~~million; ~~Company~~$3.8 million ~~adopted~~was ~~this~~used ~~statement July 1, 2002.~~for ~~This~~the ~~standard~~acquisition ~~has~~of ~~not~~Bob ~~had~~Mack aCompany ~~material~~and ~~impact~~Arizona onCurb ~~the~~Cut ~~Company’s~~and ~~financial~~$9.5 ~~position~~million for orcapital ~~results of operations~~expenditures.

InManagement estimates ~~April~~that ~~2002,~~Penhall’s ~~the~~annual ~~Financial~~capital ~~Accounting~~expenditures ~~Standards~~will ~~Board,~~be ~~(“FASB”), issued~~approximately ~~Statement of Financial Accounting Standards No~~$12. ~~145,~~0 ~~“Recission~~million offor ~~FASB Statements~~fiscal ~~No. 4~~2005, ~~44,~~including replacement and ~~64,~~maintenance ~~Amendment~~ of ~~FASB Statement No. 13, and Technical~~ ~~Corrections~~equipment,” ~~which~~purchases ~~among~~of ~~other~~new ~~things~~equipment, ~~provides guidance in reporting gains~~ and ~~losses~~ ~~from~~purchases ~~extinguishments~~ of ~~debt~~real ~~and accounting for leases. The Company~~property ~~adopted this statement July 1, 2002~~ improvements. ~~This standard has not had a material impact on its financial position or its results of operations.~~

~~On July 30~~Historically, ~~2002, the Financial Accounting Standards Board (“FASB”) issued~~ ~~Statement~~Penhall ofhas ~~Financial~~funded ~~Accounting~~its ~~Standards~~working ~~(“SFAS”)~~capital ~~No. 146~~requirements, ~~“Accounting~~capital ~~for~~expenditures and ~~Costs~~other ~~Associated~~needs ~~with~~principally ~~Exit~~from oroperating ~~Disposal~~cash ~~Activities~~flows.” ~~SFAS~~As ~~146~~a ~~nullifies~~result ~~EITF~~of the ~~Issue~~Transactions, ~~No. 94-3~~however, ~~“Liability~~the ~~Recognition~~Company ~~for~~has ~~Certain~~substantial ~~Employee~~indebtedness ~~Termination Benefits~~ and ~~Other Costs to Exit an Activity (including Certain Costs Incurred~~debt inservice ~~a Restructuring)~~obligations.” ItAs ~~requires~~of ~~that~~June 30, a2004, ~~liability~~the beCompany ~~recognized~~and ~~for~~its ~~those~~subsidiaries ~~costs~~had ~~only~~$101.0 ~~when~~million ~~the~~of ~~liability~~total isindebtedness ~~incurred,~~outstanding ~~that~~(including ~~is, when it meets~~ the Senior ~~definition~~Notes) ofand a ~~liability in the FASB~~stockholders’s ~~conceptual~~deficit ~~framework.~~of ~~SFAS No~~$86. ~~146~~2 ~~also~~million. As ~~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~~June 3130, ~~2002,~~2004 ~~with~~approximately ~~earlier adoption encouraged~~$26.4 ~~Adoption~~million of ~~SFAS~~additional ~~146~~borrowing ~~has not had a material impact on the~~was ~~Company’s~~available ~~financial~~under ~~position~~The orNew ~~results from operations~~Credit.

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 subject to FIN 45 at June 30, 2003, and has applied the provisions of FIN No. 45 prospectively to guarantees subject to FIN 45 made after December 31, 2002. 15

~~In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based~~As ~~Compensation — Transition and Disclosure, an amendment~~ of ~~FASB Statement No. 123. This Statement amends FASB Statement No.~~June ~~123~~30, ~~Accounting for Stock-Based Compensation~~2004, ~~to provide alternative methods of transition for a voluntary change to~~ the ~~fair~~Company ~~value~~has ~~method of accounting for stock-based employee compensation. In addition, this Statement amends~~ the ~~disclosure~~following ~~requirements~~obligations ~~of Statement~~subject ~~No. 123~~ to redemption ~~require~~or ~~prominent~~maturity ~~disclosures~~ in ~~both~~fiscal ~~annual~~2006 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. 2007:

	Due date	Balance at June 30, 2004
Senior Notes	08/01/06	$	100,000,000
Senior Exchangeable Preferred Stock	02/01/07	$	18,602,000
Preferred Series A	08/01/07	$	22,484,000

~~Table~~The accretion of ~~Contents~~preferred stock will increase the total obligation through the dates of redemption. The Company anticipates extending or refinancing these obligations. No assurance can be given that such financing will be available to the Company or, if available that it may be obtained on terms and conditions that are satisfactory to the Company. As long as the uncertainty associated with the resolution of these obligations remain, the Company could be subject to adverse consequences including:

In• Making 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~~more ~~before~~difficult ~~February 1, 2003. The Company did not have any investments in any variable interest entities at June 30, 2003 and has applied the provisions of FIN No. 46 prospectively~~ to ~~investments~~obtain ~~in variable interest~~surety ~~entities made after February 1, 2003.~~ support;

In• Increasing ~~May~~our ~~2003,~~vulnerability ~~the~~to ~~FASB issued Statement 150, “Accounting for Certain~~general ~~Financial~~adverse ~~Instruments~~economic ~~with Characteristics of both Liabilities~~ and ~~Equity.” Statement~~industry 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning December 15, 2003, the Company’s fiscal 2005. We do not expect the adoption of this pronouncement to have a material impact on our financial position, results of its operations or liquidity. conditions;

~~ITEM~~• Limiting ~~7A.~~our ~~QUANTITATIVE~~ability ~~AND~~to ~~QUALITATIVE~~extend ~~DISCLOSURES~~or ~~ABOUT~~replace ~~MARKET RISKS~~the Company’s existing credit facility;

~~The~~• Limiting ~~Company~~our isability ~~exposed~~ to ~~interest~~extend ~~rate~~or ~~changes~~replace ~~primarily as a result of its notes payable, including~~ the ~~Term Loan and Revolving Loan (which have been~~ ~~replaced by The New Revolver), and Senior Notes which are used to maintain liquidity and fund capital expenditures and expansion of the~~ Company’s ~~operations.~~ ~~The~~existing ~~Company’s~~Senior interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the New Revolver. The Company does not enter into derivative or interest rate transactions for speculative purposes. Notes:

~~There~~• Limiting ~~are~~our noflexibility ~~derivative~~in ~~transactions~~planning ~~during~~for, ~~the~~or reacting ~~years~~to, ~~ended~~changes ~~June 30,~~in ~~2002~~ our business and ~~2003~~the industry in which we operate.

AtFrom ~~June~~August 301, ~~2003~~2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual ~~maturities~~amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of ~~long-term~~the ~~debt~~Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and ~~senior~~accordingly ~~notes~~such ~~are~~repurchases were asnot ~~follows:~~permitted by the Indenture. The Company has informed the Trustee of such repurchases. The Trustee has indicated that it considers the infraction minor and will not pursue written notice of default to the Company. In the event that the Company receives written notice specifying the default and demanding that such default be remedied from either the Trustee or from Holders of at least 25% of the outstanding principal amount of the Notes, then the Company will arrange for a third party to repurchase Company stock in the aggregate consideration of $35,000 to remedy the default.

	YEARS ENDING JUNE 30,
											THERE
	2004		2005		2006		2007		2008		AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)
Fixed rate debt	$	2,551	$	176	$	12	$	100,005	$	5	$	161	$	102,910		$	80,910
Average interest rate														11.75	%
Variable rate LIBOR debt (1)		0		0		14,485		0		0		0		14,485			14,485
Weighted average current interest rate (1)														4.84	%

The Company’s bonding capacity has been reduced due to both Penhall’s poor results over the past 3 years, as well as reduced bonding capacity in the market. Further, the Company’s current surety has indicated that another year of operating losses could result in the discontinuation of their surety support. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.

~~At June 30, 2002, the annual maturities of long-term debt and senior notes~~NEW ~~are~~ACCOUNTING ~~as follows:~~ PRONOUNCEMENTS

	YEARS ENDING JUNE 30,
											THERE
	2003		2004		2005		2006		2007		AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)
Fixed rate debt	$	3,217	$	2,518	$	739	$	1,035	$	100,005	$	166	$	107,680		$	102,680
Average interest rate														11.30	%
Variable rate LIBOR debt (1)		6,000		15,290		0		0		0		0		21,290			21,290
Weighted average current interest rate (1)														4.11	%

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“Revised Interpretations”) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. VIEs created after January 1, 2004, must be accounted for under the Revised Interpretations. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under the original or revised interpretation’s provisions. Non-SPEs created prior to February 1, 2003, should be accounted for under the Revised Interpretation’s provisions. The Revised Interpretations are effective for periods after June 15, 2003 for VIEs in which the Company holds a variable interest it acquired before February 1, 2003. For entities acquired or created before February 1, 2003, the Revised Interpretations are effective no later than the end of the first reporting period that ends after March 15, 2004, except for those VIEs that are considered to be SPEs, for which the effective date is no later than the end of the first reporting period that ends after December 31, 2003. The adoption of FIN 46 and the Revised Interpretations has not and is not expected to have a material impact on our financial position or results from operations.

~~(1)~~In ~~The~~May ~~Company~~2004, ~~has~~the ~~different~~FASB ~~interest~~issued ~~rate~~Statement ~~options~~150, “Accounting for ~~its~~Certain ~~variable~~Financial ~~rate~~Instruments ~~debt~~with Characteristics of both Liabilities and Equity.” ~~See~~Statement ~~note~~150 5establishes instandards ~~the~~for ~~consolidated~~classifying and measuring certain financial ~~statements~~instruments ~~for~~with ~~additional~~characteristics ~~information~~of both liabilities and equity. Statement No. 150 requires that an issuer classify a

~~ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.~~ 16

~~The~~financial ~~Consolidated~~instrument ~~Financial~~that ~~Statements~~is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the ~~Company~~issuer. ~~filed~~Statement asNo. ~~part~~150 ofis ~~this~~effective for ~~report~~financial oninstruments ~~Form~~entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June ~~10-K~~15, ~~are~~2003, ~~listed~~except infor ~~Item~~mandatory redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning after December 1415, 2003 (athe Company’s fiscal 2005). The Company has determined that upon adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock will be treated as interest expense in the Company’s consolidated statements of operations.

17In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition.” SAB 104 supersedes SAB 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company’s financial statements.

~~Table~~On March 31, 2004, the FASB issued its exposure draft, “Share-Based Payment,” which is a proposed amendment to SFAS No. 123. The exposure draft would require all share-based payments to employees, including grants of ~~Contents~~employee stock options and purchases under employee stock purchase plans, to be recognized as expenses in the statement of operations based on their fair values and vesting periods. The FASB expects to issue a final standard late in 2004 that would be effective for public companies for fiscal years beginning after December 15, 2004. We have not yet assessed the impact of adopting this new standard.

~~INDEPENDENT~~ITEM ~~AUDITORS’~~7A. ~~REPORT~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company ~~Board~~is exposed to interest rate changes primarily as a result of ~~Directors~~its notes ~~Penhall~~payable, ~~International~~including ~~Corp~~New Revolver and Senior Notes which are 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 ~~Subsidiaries:~~cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the New Revolver. The Company does not enter into derivative or interest rate transactions for speculative purposes.

~~We have audited the accompanying consolidated balance sheets of Penhall~~There ~~International~~are ~~Corp.~~no ~~and~~derivative ~~subsidiaries~~transactions ~~(“the~~during ~~Company”) as of June 30, 2002 and 2003, and~~ the ~~related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the~~ years ~~in the three-year period~~ ended June 30, 2003. ~~These consolidated financial statements are the responsibility~~and ~~of the Company’s management~~2004. ~~Our responsibility is to express an opinion on these consolidated financial statements based on our audits.~~

~~We conducted our audits in accordance with auditing standards generally~~At ~~accepted~~June 30, in2004, the ~~United~~annual ~~States~~maturities of ~~America.~~long-term ~~Those~~debt ~~standards require that we plan~~ and ~~perform~~senior ~~the audit to obtain reasonable assurance about whether the~~notes ~~financial statements~~ are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as ~~well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.~~ follows:

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penhall International Corp. and subsidiaries as of June 30, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

	YEARS ENDING JUNE 30,
	2005		2006		2007		2008		2009		THERE- AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)

Fixed rate debt	$	882	$	113	$	100,000	$	0	$	0	$	0	$	100,995		$	95,495	(3)
Average interest rate													11.89		%
Variable rate LIBOR debt (1) (2)	0		0		0		0		0		0		0			0
Weighted average current interest rate (1)

~~/s/~~At ~~KPMG~~June 30, ~~LLP~~2003, ~~KPMG~~the ~~LLP~~annual maturities of long-term debt and senior notes are as follows:

September 12, 2003 Orange County, California

	YEARS ENDING JUNE 30,
	2004		2005		2006		2007		2008		THERE- AFTER		TOTAL			FAIR VALUE
	(IN THOUSANDS)

Fixed rate debt	$	2,551	$	176	$	12	$	100,005	$	5	$	161	$	102,910		$	80,910	(3)
Average interest rate													11.75		%
Variable rate LIBOR debt (1) (2)	0		0		14,485		0		0		0		14,485			14,485
Weighted average current interest rate (1)													4.84		%

18(1) The revolving credit facility is classified as a short-term obligation in the consolidated balance sheet; however, the credit facility matures in 2006. This is a $50 million revolving credit facility with the interest based upon LIBOR plus 350 basis points. The total borrowing unused and available under the facility was $26.4 million at June 30, 2004. See Note 6 to the consolidated financial statements.

~~Table of Contents~~17

~~PENHALL~~(2) The ~~INTERNATIONAL~~Company ~~CORP.~~has ~~AND~~different ~~SUBSIDIARIES~~interest rate options for its variable rate debt. See note 6 in the consolidated financial statements for additional information.

~~CONSOLIDATED~~(3) The ~~BALANCE~~fair ~~SHEETS~~value of ASfixed OFrate ~~JUNE~~debt ~~30,~~was determined based on quoted market price for the debt instrument.

				2002		2003
ASSETS (note 5)
Current assets:
	Cash and cash equivalents			$	6,205,000	$	184,000
	Receivables:
		Contract and trade receivables			31,361,000		29,105,000
		Contract retentions, due upon completion and acceptance of work (note 2)			4,756,000		4,105,000
		Income taxes			1,990,000		2,648,000
					38,107,000		35,858,000
		Less allowance for doubtful receivables (note 2)			1,421,000		1,592,000
			Net receivables		36,686,000		34,266,000
	Costs and estimated earnings in excess of billings on uncompleted contracts (note 11)				2,514,000		1,704,000
	Deferred tax assets (note 6)				3,133,000		3,363,000
	Inventories				1,895,000		2,362,000
	Prepaid expenses and other current assets				2,375,000		3,638,000
			Total current assets		52,808,000		45,517,000
Property, plant and equipment, at cost:
	Land				5,004,000		5,004,000
	Buildings and leasehold improvements				8,822,000		8,793,000
	Construction and other equipment				121,890,000		117,860,000
					135,716,000		131,657,000
	Less accumulated depreciation and amortization				69,449,000		78,256,000
			Net property, plant and equipment		66,267,000		53,401,000
Goodwill					9,053,000		9,053,000
Debt issuance costs net of accumulated amortization of $3,465,000 and $4,778,000, respectively (note 5)					3,177,000		3,316,000
Other assets, net (note 3)					1,610,000		1,186,000
				$	132,915,000	$	112,473,000

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

~~See~~The Consolidated ~~accompanying~~Financial ~~notes~~Statements toof ~~consolidated~~the ~~financial~~Company ~~statements.~~filed as part of this report on Form 10-K are listed in Item 15(a).

19 18

~~Table~~Report of Independent ~~Contents~~Registered Public Accounting Firm

~~PENHALL~~The ~~INTERNATIONAL~~Board ~~CORP. AND~~of ~~SUBSIDIARIES~~ Directors

~~CONSOLIDATED~~Penhall ~~BALANCE~~International ~~SHEETS (CONTINUED) AS OF JUNE 30,~~ Corp.:

			2002			2003
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Current installments of long-term debt (note 5)		$	9,217,000		$	2,551,000
	Trade accounts payable			9,726,000			7,953,000
	Accrued liabilities (note 4)			13,986,000			12,378,000
	Billings in excess of costs and estimated earnings on uncompleted contracts (note 11)			680,000			831,000
		Total current liabilities		33,609,000			23,713,000
Long-term debt, excluding current installments (note 5)				19,753,000			14,844,000
Long-term portion of insurance reserve				3,797,000			5,158,000
Senior Notes (note 5)				100,000,000			100,000,000
Deferred tax liabilities (note 6)				9,339,000			8,221,000
Senior Exchangeable Preferred stock, redemption value $15,075,000 and $16,744,000 at June 30, 2002 and 2003, respectively. Authorized, issued and outstanding 10,000 shares (note 9)				15,075,000			16,744,000
Series A Preferred stock, redemption value $17,332,000 and $19,737,000 at June 30, 2002 and 2003, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares (note 9)				17,332,000			19,737,000
Stockholders’ deficit:
Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,791 and 18,798 shares at June 30, 2002 and June 30, 2003, respectively (note 9)				31,200,000			35,546,000
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,127 and 1,021,870 at June 30, 2002 and June 30, 2003, respectively				10,000			10,000
Additional paid-in capital				2,044,000			2,082,000
Treasury stock, at cost, 34,796 and 35,318 common shares at June 30, 2002 and June 30, 2003, respectively				(317,000	)		(336,000	)
Accumulated deficit				(98,927,000	)		(113,246,000	)
		Total stockholders’ deficit		(65,990,000	)		(75,944,000	)
Commitments and contingencies (notes 7, 8 and 10)
			$	132,915,000		$	112,473,000

We have audited the accompanying consolidated balance sheets of Penhall International Corp. and subsidiaries (the Company) as of June 30, 2003 and 2004, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the three-year period ended June 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

~~See~~We ~~accompanying~~conducted ~~notes~~our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to ~~consolidated~~obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

20In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penhall International Corp. and subsidiaries as of June 30, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004 in conformity with U.S. generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”, and accordingly, changed its method of accounting for goodwill effective July 1, 2002.

~~Table~~/s/ ofKPMG ~~Contents~~LLP Costa Mesa, California September 27, 2004

~~PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES~~ 19

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~PENHALL ~~FOR~~INTERNATIONAL ~~THE YEARS ENDED JUNE 30,~~CORP. AND SUBSIDIARIES

		2001			2002			2003
Revenues		$	175,769,000		$	161,242,000		$	159,617,000
Cost of revenues			124,408,000			122,418,000			128,048,000
	Gross profit		51,361,000			38,824,000			31,569,000
General and administrative expenses (note 8)			28,347,000			28,364,000			27,935,000
Other operating income			1,408,000			1,360,000			1,360,000
	Earnings before interest expense and income taxes		24,422,000			11,820,000			4,994,000
Interest expense			15,263,000			14,293,000			14,355,000
	Earnings (loss) before income taxes		9,159,000			(2,473.000	)		(9,361,000	)
Income tax expense (benefit) (note 6)			3,900,000			(856,000	)		(3,441,000	)
Net earnings (loss)			5,259,000			(1,617,000	)		(5,920,000	)
Accretion of preferred stock to redemption value			(3,207,000	)		(3,615,000	)		(4,074,000	)
Accrual of cumulative dividends on preferred stock			(3,263,000	)		(3,794,000	)		(4,325,000	)
Net loss available to common stockholders		$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
Loss per share basic and diluted		$	(1.22	)	$	(9.16	)	$	(14.52	)
Weighted average number of shares outstanding basic and diluted			995,747			985,345			986,406

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,

See accompanying notes to consolidated financial statements.

	2003		2004
ASSETS
Current assets:
Cash and cash equivalents	$	184,000	$	1,076,000
Receivables:
Contract and trade receivables	29,105,000		30,386,000
Contract retentions, due upon completion and acceptance of work	4,105,000		4,361,000
	33,210,000		34,747,000
Less allowance for doubtful receivables	1,592,000		1,317,000
Net receivables	31,618,000		33,430,000

Costs and estimated earnings in excess of billings on uncompleted contracts	1,704,000		2,957,000
Deferred tax assets	3,363,000		2,034,000
Income taxes receivable	2,648,000		—
Inventories	2,362,000		2,171,000
Prepaid expenses and other current assets	3,766,000		2,198,000
Total current assets	45,645,000		43,866,000

Property, plant and equipment, at cost:
Land	5,004,000		—
Buildings and leasehold improvements	8,793,000		1,302,000
Construction and other equipment	117,860,000		115,998,000
	131,657,000		117,300,000
Less accumulated depreciation and amortization	78,256,000		81,260,000

Net property, plant and equipment	53,401,000		36,040,000
Goodwill	9,053,000		6,371,000
Debt issuance costs, net of accumulated amortization	3,316,000		2,313,000
Other assets, net	1,186,000		817,000
	$	112,601,000	$	89,407,000

21See accompanying notes to consolidated financial statements.

~~Table of Contents~~20

PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE ~~STATEMENTS~~SHEETS AS OF ~~STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED~~ JUNE 30, ~~2001, 2002 AND 2003~~

	SERIES B PREFERRED STOCK							COMMON STOCK
	2003			2004
												ADDITIONAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
	SHARES							SHARES				PAID-IN
Current liabilities:
	OUTSTANDING				AMOUNT			OUTSTANDING		AMOUNT		CAPITAL
Current installments of long-term debt	$	2,551,000		$	882,000
Balance at June 30, 2000		19,052			$	24,385,000			1,012,513	$	10,000	$	1,522,000
Borrowings under revolving credit facility	14,485,000			—
Shares issued		146				186,000			4,967		—		309,000
Trade accounts payable	7,953,000			5,664,000
Accretion of redeemable preferred stock		—				—			—		—		—
Accrued liabilities and taxes payable	10,937,000			12,857,000
Accrual of cumulative dividends		—				3,263,000			—		—		—
Current portion of insurance reserves	1,569,000			2,698,000
Repurchase of shares		(497	)			(561,000	)		—		—		—
Current portion of deferred gain – sale-leaseback	—			109,000
Net earnings		—							—		—		—
Billings in excess of costs and estimated earnings on uncompleted contracts	831,000			1,526,000
Balance at June 30, 2001		18,701			$	27,273,000			1,017,480	$	10,000	$	1,831,000
Total current liabilities	38,326,000			23,736,000
Shares issued		108				158,000			3,647		—		213,000
Long-term debt, excluding current installments	359,000			113,000
Accretion of redeemable preferred stock		—				—			—		—		—
Long-term portion of deferred gain – sale-leaseback	—			2,015,000
Accrual of cumulative dividends		—				3,794,000			—		—		—
Long-term portion of insurance reserves	5,158,000			4,878,000
Repurchase of shares		(18	)			(25,000	)		—		—		—
Senior Notes	100,000,000			100,000,000
Net loss		—				—			—		—		—
Deferred tax liabilities	8,221,000			3,771,000
Balance at June 30, 2002		18,791			$	31,200,000			1,021,127	$	10,000	$	2,044,000
Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $16,744,000 and $18,602,000 at June 30, 2003 and 2004, respectively. Authorized, issued and outstanding 10,000 shares	16,744,000			18,602,000
Shares issued		22				37,000			743		—		38,000
Series A Preferred stock, par value $.01 per share, redemption value $19,737,000 and $22,484,000 at June 30, 2003 and 2004, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares	19,737,000			22,484,000
Accretion of redeemable preferred stock		—				—			—		—		—
Stockholders’ deficit:
Accrual of cumulative dividends		—				4,325,000			—		—		—
Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,798 shares at June 30, 2003 and June 30, 2004	35,546,000			40,490,000
Repurchase of shares		(15	)			(16,000	)		—		—		—
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,870 at June 30, 2003 and June 30, 2004	10,000			10,000
Net loss		—				—			—		—		—
Additional paid-in capital	2,082,000			2,082,000
Balance at June 30, 2003		18,798			$	35,546,000			1,021,870	$	10,000	$	2,082,000
Treasury stock, at cost, 35,318 common shares at June 30, 2003 and June 30, 2004	(336,000		)	(336,000		)
Accumulated deficit	(113,246,000		)	(128,438,000		)
Total stockholders’ deficit	(75,944,000		)	(86,192,000		)
Commitments and contingencies
	$	112,601,000		$	89,407,000

~~[Additional~~See ~~columns~~accompanying ~~below]~~notes to consolidated financial statements.

~~[Continued from above table, first column(s) repeated]~~ 21

	TREASURY STOCK
										TOTAL
	SHARES						ACCUMULATED			STOCKHOLDERS'
	OUTSTANDING			AMOUNT			DEFICIT			DEFICIT
Balance at June 30, 2000		(6,014	)		(14,000	)	$	(88,690,000	)		(62,787,000	)
Shares issued		—			—			—			495,000
Accretion of redeemable preferred stock		—			—			(3,207,000	)		(3,207,000	)
Accrual of cumulative dividends		—			—			(3,263,000	)		—
Repurchase of shares		(28,159	)		(274,000	)		—			(835,000	)
Net earnings		—			—			5,259,000			5,259,000
Balance at June 30, 2001		(34,173	)		(288,000	)	$	(89,901,000	)		(61,075,000	)
Shares issued		—			—			—			371,000
Accretion of redeemable preferred stock		—			—			(3,615,000	)		(3,615,000	)
Accrual of cumulative dividends		—			—			(3,794,000	)		—
Repurchase of shares		(623	)		(29,000	)		—			(54,000	)
Net loss		—			—			(1,617,000	)		(1,617,000	)
Balance at June 30, 2002		(34,796	)		(317,000	)	$	(98,927,000	)		(65,990,000	)
Shares issued		—			—			—			75,000
Accretion of redeemable preferred stock		—			—			(4,074,000	)		(4,074,000	)
Accrual of cumulative dividends		—			—			(4,325,000	)		—
Repurchase of shares		(522	)		(19,000	)		—			(35,000	)
Net loss		—			—			(5,920,000	)		(5,920,000	)
Balance at June 30, 2003		(35,318	)	$	(336,000	)	$	(113,246,000	)	$	(75,944,000	)

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

~~See~~CONSOLIDATED STATEMENTS ~~accompanying~~OF ~~notes~~OPERATIONS AS toOF ~~consolidated~~JUNE ~~financial statements.~~ 30,

	2002			2003			2004

Revenues	$	161,242,000		$	159,617,000		$	157,030,000
Cost of revenues	121,897,000			127,626,000			121,811,000
Gross profit	39,345,000			31,991,000			35,219,000

General and administrative expenses	28,364,000			27,935,000			28,328,000
Goodwill impairment	—			—			2,682,000
Other operating income, net	839,000			938,000			827,000
Earnings from operations, net	11,820,000			4,994,000			5,036,000

Interest expense	14,293,000			14,355,000			13,880,000
Other income	—			—			859,000

Loss before income taxes	(2,473,000		)	(9,361,000		)	(7,985,000		)
Income tax benefit	(856,000		)	(3,441,000		)	(2,342,000		)

Net loss	(1,617,000		)	(5,920,000		)	(5,643,000		)
Accretion of preferred stock to redemption value	(3,615,000		)	(4,074,000		)	(4,605,000		)
Accrual of cumulative dividends on preferred stock	(3,794,000		)	(4,325,000		)	(4,944,000		)

Net loss available to common stockholders	$	(9,026,000	)	$	(14,319,000	)	$	(15,192,000	)

Loss per share basic and diluted	$	(9.16	)	$	(14.52	)	$	(15.40	)
Weighted average number of shares outstanding: Basic and diluted	985,345			986,406			986,552

~~Table~~See accompanying ofnotes ~~Contents~~to consolidated financial statements.

~~PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES~~ 22

~~CONSOLIDATED~~PENHALL INTERNATIONAL ~~STATEMENTS~~CORP. OFAND ~~CASH FLOWS~~ SUBSIDIARIES

~~FOR~~CONSOLIDATED STATEMENTS ~~THE~~OF ~~YEARS~~STOCKHOLDERS’ ~~ENDED JUNE 30,~~ DEFICIT

				2001			2002			2003
Cash flows from operating activities:
Net earnings (loss)				$	5,259,000		$	(1,617,000	)	$	(5,920,000	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
	Depreciation and amortization				16,254,000			17,185,000			16,733,000
	Amortization of debt issuance costs				884,000			885,000			1,313,000
	Provision for doubtful receivables				146,000			340,000			767,000
	Provision for (benefit from) deferred income taxes				1,256,000			(736,000	)		(1,348,000	)
	Gains on sale of assets, net				(422,000	)		(300,000	)		(485,000	)
	Changes in operating assets and liabilities, net of effects of acquisitions:
		Receivables			(4,111,000	)		2,880,000			1,653,000
		Inventories, prepaid expenses and current assets			(1,074,000	)		(372,000	)		(1,730,000	)
		Costs and estimated earnings in excess of billings on uncompleted contracts			2,270,000			(658,000	)		810,000
		Trade accounts payable, accrued liabilities and insurance reserves			(3,783,000	)		1,010,000			705,000
		Billings in excess of costs and estimated earnings on uncompleted contracts			(947,000	)		(1,008,000	)		151,000
			Net cash provided by operating activities		15,732,000			17,609,000			12,649,000
Cash flows from investing activities:
	Proceeds from sale of assets				1,292,000			832,000			1,264,000
	Capital expenditures				(18,469,000	)		(9,495,000	)		(4,222,000	)
	Acquisition of companies, net of cash acquired				(520,000	)		(3,819,000	)		—
			Net cash used in investing activities		(17,697,000	)		(12,482,000	)		(2,958,000	)
Cash flows from financing activities:
	Borrowings under long-term debt				71,824,000			85,823,000			105,320,000
	Repayments of long-term debt				(73,803,000	)		(86,288,000	)		(116,895,000	)
	Book overdraft				2,891,000			196,000			(2,725,000	)
	Debt issuance costs				—			—			(1,452,000	)
	Proceeds from issuance of common stock				309,000			213,000			38,000
	Repurchase of common stock and Series B preferred stock				(521,000	)		(54,000	)		(35,000	)
	Issuance of Series B preferred stock				186,000			158,000			37,000
			Net cash provided by (used in) financing activities		886,000			48,000			(15,712,000	)
			Net change in cash and cash equivalents		(1,079,000	)		5,175,000			(6,021,000	)
Cash and cash equivalents at beginning of year					2,109,000			1,030,000			6,205,000
Cash and cash equivalents at end of year				$	1,030,000		$	6,205,000		$	184,000

FOR THE YEARS ENDED JUNE 30, 2002, 2003 AND 2004

See note 15 for supplementary cash flow information.

	SERIES B PREFERRED STOCK					COMMON STOCK					TREASURY STOCK
	SHARES OUTSTANDING		AMOUNT			SHARES OUTSTANDING	AMOUNT		ADDITIONAL PAID-IN CAPITAL		SHARES OUTSTANDING		AMOUNT			ACCUMULATED DEFICIT			TOTAL STOCKHOLDERS’ DEFICIT
Balance at June 30, 2001	18,701		$	27,273,000		1,017,480	$	10,000	$	1,831,000	(34,173	)	(288,000		)	$	(89,901,000	)	(61,075,000		)
Shares issued	108		158,000			3,647	—		213,000		—		—			—			371,000
Accretion of redeemable preferred stock	—		—			—	—		—		—		—			(3,615,000		)	(3,615,000		)
Accrual of cumulative dividends	—		3,794,000			—	—		—		—		—			(3,794,000		)	—
Repurchase of shares	(18	)	(25,000		)	—	—		—		(623	)	(29,000		)	—			(54,000		)
Net earnings	—		—			—	—		—		—		—			(1,617,000		)	(1,617,000		)
Balance at June 30, 2002	18,791		$	31,200,000		1,021,127	$	10,000	$	2,044,000	(34,796	)	(317,000		)	$	(98,927,000	)	(65,990,000		)
Shares issued	22		37,000			743	—		38,000		—		—			—			75,000
Accretion of redeemable preferred stock	—		—			—	—		—		—		—			(4,074,000		)	(4,074,000		)
Accrual of cumulative dividends	—		4,325,000			—	—		—		—		—			(4,325,000		)	—
Repurchase of shares	(15	)	(16,000		)	—	—		—		(522	)	(19,000		)	—			(35,000		)
Net loss	—		—			—	—		—		—		—			(5,920,000		)	(5,920,000		)
Balance at June 30, 2003	18,798		$	35,546,000		1,021,870	$	10,000	$	2,082,000	(35,318	)	$	(336,000	)	$	(113,246,000	)	$	(75,944,000	)
Accretion of redeemable preferred stock	—		—			—	—		—		—		—			(4,605,000		)	(4,605,000		)
Accrual of cumulative dividends	—		4,944,000			—	—		—		—		—			(4,944,000		)	—
Net loss	—		—			—	—		—		—		—			(5,643,000		)	(5,643,000		)
Balance at June 30, 2004	18,798		$	40,490,000		1,021,870	$	10,000	$	2,082,000	(35,318	)	$	(336,000	)	$	(128,438,000	)	$	(86,192,000	)

See accompanying notes to consolidated financial statements.

~~Table~~PENHALL INTERNATIONAL ofCORP. AND ~~Contents~~SUBSIDIARIES

~~PENHALL~~CONSOLIDATED STATEMENTS ~~INTERNATIONAL~~OF ~~CORP. AND~~CASH ~~SUBSIDIARIES~~ FLOWS

~~NOTES~~FOR THE TOYEARS ~~CONSOLIDATED~~ENDED ~~FINANCIAL STATEMENTS~~ JUNE 30, ~~2002 AND 2003~~

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

	2002			2003			2004
Cash flows from operating activities:
Net loss	$	(1,617,000	)	$	(5,920,000	)	$	(5,643,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	17,185,000			16,733,000			14,355,000
Amortization of debt issuance costs	885,000			1,313,000			1,163,000
Provision for doubtful receivables	340,000			767,000			427,000
Benefit from deferred income taxes	(736,000		)	(1,348,000		)	(3,121,000		)
Gains on sale of assets, net	(300,000		)	(485,000		)	(1,285,000		)
Amortization of deferred gain on sale-leaseback	—			—			(64,000		)
Goodwill impairment	—			—			2,682,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables	2,880,000			1,653,000			(2,239,000		)
Inventories, prepaid expenses, other assets and income taxes receivable	(372,000		)	(1,858,000		)	4,407,000
Costs and estimated earnings in excess of billings on uncompleted contracts	(658,000		)	810,000			(1,253,000		)
Trade accounts payable, accrued liabilities, insurance reserves and income taxes payable	1,010,000			833,000			994,000
Billings in excess of costs and estimated earnings on uncompleted contracts	(1,008,000		)	151,000			695,000
Net cash provided by operating activities	17,609,000			12,649,000			11,118,000

Cash flows from investing activities:
Proceeds from sale of assets	832,000			1,264,000			13,290,000
Capital expenditures	(9,495,000		)	(4,222,000		)	(6,442,000		)
Acquisition of companies, net of cash acquired	(3,819,000		)	—			—
Net cash provided by (used in) investing activities	(12,482,000		)	(2,958,000		)	6,848,000

Cash flows from financing activities:
Borrowings under long-term debt	85,823,000			63,161,000			592,000
Repayments of long-term debt	(86,288,000		)	(89,221,000		)	(2,507,000		)
Borrowings under revolving credit facility	—			42,159,000			201,781,000
Repayments of revolving credit facility	—			(27,674,000		)	(216,266,000		)
Book overdraft	196,000			(2,725,000		)	(514,000		)
Debt issuance costs	—			(1,452,000		)	(160,000		)
Proceeds from issuance of common stock	213,000			38,000			—
Repurchase of common stock and Series B Preferred stock	(54,000		)	(35,000		)	—
Issuance of Series B Preferred stock	158,000			37,000			—
Net cash provided by (used in) financing activities	48,000			(15,712,000		)	(17,074,000		)
Net change in cash and cash equivalents	5,175,000			(6,021,000		)	892,000
Cash and cash equivalents at beginning of year	1,030,000			6,205,000			184,000
Cash and cash equivalents at end of year	$	6,205,000		$	184,000		$	1,076,000

~~COMPANY’S~~See ~~ACTIVITIES~~notes ~~AND~~14 ~~OPERATING~~and ~~CYCLE~~16 for supplementary cash flow information.

~~Penhall International, Inc. (“PII”) was founded in 1957 and was~~See ~~incorporated~~accompanying innotes 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~~consolidated 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. 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 a new investor did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.

Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental Corp. and Penhall Company (collectively, “the Company” or “Penhall”) serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company’s revenues are generated through equipment rentals, both short-term and longer term under fixed price agreements. The length of the fixed price agreements (contracts) varies, but typically range from one to twelve months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company’s base of operations includes among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc., the Company’s operations were expanded to include the mid-western states of the United States and some provinces of Canada. The Company’s operations are primarily conducted through Penhall International Corp. and its wholly owned subsidiary, Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002. 24

~~BASIS~~PENHALL INTERNATIONAL ~~OF CONSOLIDATION~~CORP. AND SUBSIDIARIES

~~The consolidated financial statements include the accounts of Penhall~~NOTES ~~International~~TO ~~Corp.~~CONSOLIDATED ~~and~~FINANCIAL ~~its wholly owned subsidiaries: Penhall Rental Corp. and~~STATEMENTS ~~Penhall~~JUNE ~~Company. Penhall Company has three wholly owned subsidiaries~~30, ~~Penhall Investments,~~2003 aAND California Corporation, Penhall Leasing, a California single member limited liability company and Bob Mack Company, Inc. a California Corporation. All significant intercompany transactions have been eliminated in consolidation. 2004

~~REVENUE~~(1) SUMMARY ~~RECOGNITION~~OF ONSIGNIFICANT ~~LONG-TERM~~ACCOUNTING ~~CONSTRUCTION CONTRACTS~~ POLICIES

~~Income~~COMPANY’S ~~from~~ACTIVITIES ~~construction~~AND ~~operations~~OPERATING 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 the 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. CYCLE

~~Contract~~Penhall ~~costs~~International, ~~include~~Inc. ~~all~~(“PII”) ~~direct~~was founded ~~material~~in 1957 and was incorporated in the state of California on April 19, ~~equipment~~1988. ~~rentals~~On August 4, ~~labor~~1998, ~~and~~$100,000,000 of 12% Senior Notes ~~subcontract~~(the ~~costs~~Senior ~~and~~Notes) ~~those~~were ~~indirect~~sold ~~costs~~by ~~related~~Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to ~~contract~~effect ~~performance~~the recapitalization of PII. As part of the recapitalization, a series of mergers ~~such~~(the asRecapitalization ~~indirect~~Mergers) ~~labor~~were consummated pursuant to which Phoenix Concrete Cutting, ~~tools~~Inc., ~~supplies~~a wholly-owned subsidiary of PII, ~~repairs~~became ~~and~~the ~~depreciation~~corporate parent of PII, the Third Party acquired a 62.5% ~~General~~interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor ~~administrative~~of ~~costs~~the ~~are~~Senior ~~charged~~Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to ~~expense~~Penhall International Corp., and PII changed its name to Penhall Rental Corp. Under accounting principles generally accepted in the United States of America, the recapitalization mergers were accounted for as ~~incurred~~a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to a new investor did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.

24Penhall International Corp. and its wholly-owned subsidiaries, Penhall Rental Corp. and Penhall Company (collectively, “the Company” or “Penhall”) serves customers in the industrial, construction, governmental, and residential markets, primarily through the performance of new construction, rehabilitation, and demolition services in connection with infrastructure projects. The Company’s revenues are generated through equipment rentals, both short-term and longer term under fixed price agreements. The length of the fixed price agreements (contracts) varies, but typically range from one to twelve months. In accordance with the operating cycle concept, the Company classifies all contract-related assets and liabilities as current items. The Company’s base of operations includes among others, the states of California, Arizona, Colorado, Nevada, Texas, Georgia, North Carolina, South Carolina and Utah. Additionally, through its purchase in April of 1998 of Highway Services, Inc., the Company’s operations were expanded to include the mid-western states of the United States and some provinces of Canada. The Company’s operations are primarily conducted through Penhall International Corp. and its wholly owned subsidiary, Penhall Company. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.

~~Table~~BASIS ofOF ~~Contents~~CONSOLIDATION

~~PENHALL~~The ~~INTERNATIONAL~~consolidated ~~CORP~~financial statements include the accounts of Penhall International Corp. and its wholly ~~AND~~owned ~~SUBSIDIARIES~~subsidiary Penhall Company (collectively, “the Company” or “Penhall”). Penhall Company has three wholly owned subsidiaries, Penhall Investments, a California Corporation, Penhall Leasing, a California single member limited liability company and Bob Mack Company, Inc. a California Corporation. All significant intercompany transactions have been eliminated in consolidation.

~~NOTES~~REVENUE TORECOGNITION ~~CONSOLIDATED~~ON ~~FINANCIAL~~LONG-TERM ~~STATEMENTS JUNE~~CONSTRUCTION ~~30, 2002 AND 2003~~ CONTRACTS

Income from ~~claims~~construction operations ~~for~~is ~~additional~~recorded ~~contract~~using ~~compensation~~the ispercentage-of-completion ~~recorded~~method ~~upon~~of accounting. ~~settlement~~The ofCompany ~~the~~has ~~disputed~~two ~~amount~~types of contracts. The ~~asset~~first ~~“costs~~type ~~and~~of ~~estimated~~contract ~~earnings~~is infixed ~~excess~~unit ofin ~~billings~~which onthe ~~uncompleted~~percentage-of-completion ~~contracts”~~is ~~represents~~determined ~~revenues~~based ~~recognized~~on inthe units ~~excess~~completed as a percentage of ~~amounts~~estimated ~~billed~~total units. The ~~liability~~second ~~“billings~~type of contract is lump sum in ~~excess~~which the percentage-of-completion ~~costs~~is ~~and~~determined based on costs to date as compared to total estimated ~~earnings~~costs at completion. If estimated total costs on ~~uncompleted~~any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts”, ~~represents~~which ~~billings~~extend beyond fiscal year ends, revisions in ~~excess~~cost and profit estimates during the course of ~~revenues~~the ~~recognized~~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.

~~CASH~~Contract ~~AND~~costs ~~CASH~~include ~~EQUIVALENTS~~all direct material, equipment rentals, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools, supplies, repairs and depreciation. General and administrative costs are charged to expense as incurred.

~~The~~Income ~~Company~~from ~~considers~~claims ~~all~~for additional ~~highly~~contract ~~liquid~~compensation ~~investments~~is ~~with~~recorded ~~original maturities~~upon settlement of ~~three~~the ~~months~~disputed amount. The orasset ~~less~~“costs toand beestimated earnings ~~cash~~in ~~equivalents.~~excess As of ~~June 30,~~billings ~~2002 and~~on ~~2003,~~uncompleted ~~cash~~contracts” ~~equivalents~~represents ~~were~~revenues recognized ~~$4.7 million~~in ~~and~~excess ~~$0,~~of ~~respectively~~amounts billed. ~~Included~~The liability “billings in excess of ~~the~~costs ~~cash~~and ~~balance~~estimated atearnings ~~June 30,~~on ~~2003~~uncompleted iscontracts” ~~$0.2 million~~represents ~~that~~billings isin excess ~~restricted~~of revenues recognized.

~~INVENTORIES~~ CASH AND CASH EQUIVALENTS

~~Inventories,~~The ~~which~~Company ~~consist~~considers ~~primarily~~all highly liquid investments with original maturities of ~~diamond~~three ~~cutting~~months ~~blades~~or ~~and~~less ~~fuel,~~to ~~are~~be ~~stated~~cash ~~at cost~~equivalents. ~~Cost~~Included isin ~~determined~~the ~~using~~cash ~~the~~balance ~~purchase~~at ~~price~~June of30, ~~the~~2003 ~~assets~~ and 2004 is $0.2 ~~expensed~~million ~~based~~and on$0 ~~usage~~million that is restricted, respectively.

~~PROPERTY, PLANT AND EQUIPMENT~~ 25

~~The Company and its subsidiaries provide for depreciation of property,~~PENHALL ~~plant~~INTERNATIONAL ~~and equipment based on the following estimated useful lives of the~~CORP. ~~assets,~~AND ~~using the straight-line method and a residual value of approximately 10%:~~ SUBSIDIARIES

~~Buildings~~NOTES TO ~~and~~CONSOLIDATED ~~leasehold~~FINANCIAL ~~improvements~~STATEMENTS JUNE 1530, to2003 39AND ~~years Construction and other equipment 3 to 8 years~~2004

~~Leasehold improvements are amortized over the lesser of the life of the lease or useful life of the asset.~~ INVENTORIES

~~The~~Inventories, ~~cost~~which ~~and~~consist primarily ~~accumulated~~of ~~depreciation~~diamond ~~applicable~~cutting toblades ~~assets~~and ~~sold~~fuel, ~~or otherwise disposed of~~ are ~~eliminated~~stated ~~from~~at ~~the~~cost. ~~asset~~Cost ~~and accumulated~~is ~~depreciation~~determined ~~accounts.~~using ~~Gain~~the orpurchase ~~loss~~price onof ~~disposition~~the assets and is ~~reflected~~expensed inbased ~~other~~on ~~operating income~~usage.

~~GOODWILL~~ PROPERTY, PLANT AND EQUIPMENT

~~Goodwill~~The ~~represents~~Company ~~the~~provides ~~excess~~for depreciation of ~~purchase price over fair value of net assets acquired. Prior to 2003~~property, ~~goodwill~~plant ~~was~~and ~~amortized~~equipment based on ~~a straight-line basis over~~ the ~~expected~~following ~~periods to be benefited, generally 15 years. The~~estimated ~~Company~~useful ~~assessed~~lives ~~recoverability by determining whether the amortization~~ of the ~~goodwill~~ ~~balance over its remaining life would be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment~~assets, ~~if any, was measured based on projected discounted future operating cash flows~~ using ~~a discount rate reflecting~~ the ~~Company’s average~~straight-line ~~cost~~method ofand ~~funds.~~a ~~The~~residual ~~assessment of the recoverability of goodwill would~~value beranging ~~impacted~~from ~~if estimated future operating cash flows were not achieved~~7. ~~Amortization~~5% ~~expense related~~ to ~~goodwill amounted to approximately $687,000 and $609,000 for the years ended June 30, 2001 and 2002, respectively.~~ 10%:

InBuildings ~~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 No. 141 requires~~leasehold ~~that~~improvements 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, and accordingly, no amortization of goodwill was recorded in 2003. As a result of the transitional and annual goodwill impairment tests that were completed during fiscal 2003, it was determined there was no impairment of goodwill. The Company’s annual test will be performed in May of each year. There were no adjustments to ~~identifiable~~39 ~~intangible assets’ useful lives or recorded balances as a result of the adoption of SFAS No. 142.~~ years

25Construction and other equipment 3 to 8 years

~~Table~~Leasehold improvements are amortized over the lesser of ~~Contents~~the life of the lease or useful life of the asset.

~~PENHALL~~The ~~INTERNATIONAL~~cost ~~CORP.~~and accumulated ~~AND~~depreciation ~~SUBSIDIARIES~~applicable to assets sold or otherwise disposed of are eliminated from the asset and accumulated depreciation accounts. Gain or loss on disposition is reflected in other operating income.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2003~~ GOODWILL

~~The~~In ~~following~~July is2001, athe Financial ~~reconciliation~~Accounting Standards Board (FASB) issued Statement of ~~net~~Accounting Standards ~~loss~~(SFAS) No. 141, “Business Combinations” and ~~loss~~No. 142 “Goodwill ~~per~~and ~~share~~Other ~~between~~ Intangible Assets.” SFAS No. 141 requires that the ~~amounts~~purchase method ~~reported~~of accounting be used for ~~the~~all ~~years~~business ~~ended~~combinations completed after June 30, 2001, ~~2002~~clarifies the recognition of intangible assets separately from goodwill and ~~2003~~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 ~~the~~that ~~adjusted~~intangible ~~amounts~~assets, ~~reflecting~~other ~~these~~than ~~new~~goodwill, which have determinable useful lives, be amortized over their useful lives. The Company adopted these accounting standards ~~rules:~~effective July 1, 2002. We perform our annual impairment analysis at June 30 of each year. We will perform an earlier impairment analysis if a triggering event occurs that warrants such analysis.

	2001			2002			2003
Net loss:
Reported loss available to common stockholders	$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
Add back: Goodwill amortization (net of income taxes)		394,000			399,000			—
Adjusted net loss available to common stockholders		(817,000	)		(8,627,000	)		(14,319,000	)
Basic and diluted loss per share:
Reported basic and diluted loss per share		(1.22	)		(9.16	)		(14.52	)
Add back: Goodwill amortization (net of income taxes)		.40			.40			—
Adjusted basic and diluted loss per share		(0.82	)		(8.76	)		(14.52	)

Factors we consider important which could trigger an impairment review include:

~~IMPAIRMENT~~• Significant underperformance OFrelative ~~LONG-LIVED~~to ~~ASSETS~~expected ~~AND~~historical ~~LONG-LIVED~~or ~~ASSETS~~projected TOfuture ~~BE DISPOSED OF~~operating results;

~~Long-lived assets and certain identifiable intangibles are reviewed for~~• Significant ~~impairment whenever events or~~ changes in ~~circumstances indicate that~~ the ~~carrying~~ ~~amount~~manner of anour ~~asset~~use ~~may not be recoverable. Recoverability~~ of ~~assets to be held and used is measured by a comparison of~~ the ~~carrying~~acquired ~~amount of the asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such~~ assets ~~are~~or ~~considered to be impaired,~~ the ~~impairment~~ tostrategy befor ~~recognized is measured by the amount by which the carrying~~our ~~amount~~overall ~~of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.~~ business;

~~INCOME TAXES~~• Significant negative industry or economic trends;

~~Income taxes are accounted for under the asset and liability method.~~• Unanticipated ~~Deferred~~competition; ~~tax assets~~ and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

~~ENVIRONMENTAL~~• EBITDA relative ~~REMEDIATION~~to ~~COSTS~~ net book value

~~Losses~~The ~~associated~~following ~~with~~is ~~environmental remediation obligations are accrued~~a ~~for~~reconciliation ~~when~~of ~~such~~net ~~losses~~loss ~~are probable~~ and ~~reasonably~~loss ~~estimable.~~per ~~Such~~share ~~accruals~~between ~~are adjusted~~the asamounts ~~further~~reported ~~information~~for the ~~develops~~years orended ~~circumstances~~June ~~change.~~30, ~~Costs~~2002, ~~of future~~2003 ~~expenditures~~and ~~for~~2004 ~~environmental~~and ~~remediation~~the ~~obligations~~adjusted ~~are not~~amounts ~~discounted~~reflecting tothese ~~their~~new ~~present~~accounting ~~value.~~ rules:

SELF-INSURANCE

	2002			2003			2004
Net loss:
Reported loss available to common stockholders	$	(9,026,000	)	$	(14,319,000	)	$	(15,192,000	)
Add back: Goodwill amortization (net of income taxes)	399,000			—			—
Adjusted net loss available to common stockholders	$	(8,627,000	)	$	(14,319,000	)	$	(15,192,000	)
Basic and diluted loss per share:
Reported basic and diluted loss per share	$	(9.16	)	$	(14.52	)	$	(15.40	)
Add back: Goodwill amortization (net of income taxes)	.40			—			—
Adjusted basic and diluted loss per share	$	(8.76	)	$	(14.52	)	$	(15.40	)

Effective May 2001, the Company increased its third-party insurance deductible to $250,000 per occurrence. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general and vehicle liability. Losses are accrued based upon the accumulation of estimates for reported losses and includes a provision, based on past experience and using actuarial assumptions, for losses incurred but not reported. The method of determining such estimates and establishing the resulting reserves is continually reviewed and updated. Any adjustments resulting therefrom are reflected in current operations. As of June 30, 2002 and June 30, 2003, the Company had recorded a discounted accrued liability for self-insurance of $5,071,000 and $6,726,000, of which $1,274,000 and $1,569,000 are current and included in accrued expenses at June 30, 2002 and 2003, respectively. The discount rate utilized was 5% and 4% for the years ended June 30, 2002 and 2003, respectively. The accrued liability on an undiscounted basis was $5,675,000 and $7,339,000 at June 30, 2002 and 2003, respectively. Management believes that the accrual is adequate to cover the losses incurred to date; however, this accrual is based on estimates and the ultimate liability may be more or less than the amount provided. 26

26PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES

~~Table~~NOTES TO ofCONSOLIDATED ~~Contents~~FINANCIAL STATEMENTS JUNE 30, 2003 AND 2004

~~PENHALL~~IMPAIRMENT ~~INTERNATIONAL~~OF ~~CORP.~~ LONG-LIVED ASSETS AND ~~SUBSIDIARIES~~LONG-LIVED ASSETS TO BE DISPOSED OF

~~NOTES~~Through TOJune ~~CONSOLIDATED~~30, ~~FINANCIAL~~2002, ~~STATEMENTS~~the ~~JUNE~~Company 30accounted for long-lived assets under SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective July 1, 2002, ~~AND~~the ~~2003~~Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

~~STOCK-BASED~~INCOME ~~COMPENSATION~~ TAXES

~~The~~Income taxes ~~Company~~are ~~observes~~accounted for under the ~~provisions~~asset ofand ~~SFAS~~liability Nomethod. ~~123,~~ ~~“Accounting~~Deferred ~~for~~tax ~~Stock-Based~~assets ~~Compensation,”~~and ~~(“SFAS~~liabilities ~~No. 123”)~~are byrecognized ~~continuing~~for ~~to apply~~ the ~~provisions~~ offuture ~~Accounting~~tax ~~Principles Board (“APB”) Opinion No. 25, “Accounting~~consequences ~~for~~attributable ~~Stock Issued~~ to ~~Employees”~~differences ~~(“APB~~between ~~No. 25”). The Company applies~~ the ~~intrinsic~~ ~~value~~financial ~~method~~statement ascarrying ~~outlined~~amounts inof existing ~~APB~~assets ~~No. 25~~ and ~~related~~liabilities ~~interpretations~~and ~~in accounting~~their ~~for~~respective ~~stock~~tax ~~options~~bases and ~~share~~operating loss ~~units~~and ~~granted~~tax ~~under~~credit ~~these~~carry ~~programs~~forwards. ~~Under~~ ~~the~~Deferred ~~intrinsic~~tax ~~value~~assets ~~method,~~and noliabilities ~~compensation~~are measured ~~expense~~using isenacted ~~recognized~~tax ifrates ~~the exercise~~expected ~~price~~to ofapply ~~the~~to ~~Company’s~~taxable ~~employee~~income ~~stock~~in ~~options equals~~ the ~~market price~~ ofyears ~~the~~in ~~underlying~~which ~~stock~~those ontemporary ~~the~~differences ~~date~~are ofexpected ~~the~~to ~~grant.~~be ~~Accordingly,~~recovered ~~no compensation~~or ~~cost~~settled. ~~has~~The ~~been~~effect ~~recognized~~ on ~~options~~deferred ~~granted~~tax toassets ~~employees. SFAS No. 123 requires that the Company provide pro forma information regarding net loss~~ and ~~net~~liabilities ~~loss per~~of ~~common~~a ~~share~~change asin ~~if compensation cost for the Company’s stock option~~tax ~~programs~~rates ~~had~~is ~~been~~recognized ~~determined~~ in ~~accordance~~income ~~with~~in the ~~fair~~period ~~value~~that ~~method prescribed~~includes ~~therein. The Company adopted~~ the ~~disclosure~~enactment ~~provisions of SFAS No~~date. ~~148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring annual and quarterly SFAS No. 123 pro forma disclosure.~~

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

				Years ended June 30,
	2001			2002			2003
Net loss available to common stockholders as reported	$	(1,211,000	)	$	(9,026,000	)	$	(14,319,000	)
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	$	—		$	(16,000	)	$	(20,000	)
Proforma net loss available to common stockholders	$	(1,211,000	)	$	(9,042,000	)	$	(14,339,000	)
Basic and diluted loss per share as reported	$	(1.22	)	$	(9.16	)	$	(14.52	)
Proforma basic and diluted loss per share	$	(1.22	)	$	(9.18	)	$	(14.54	)

Losses associated with environmental remediation obligations are accrued for when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. The Company has not historically experienced significant exposure related to environmental remediation costs.

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

~~LOSS~~Effective May ~~PER~~2001, ~~SHARE~~the Company increased its third-party insurance deductible to $250,000 per occurrence effectively creating self-insurance for the retained risk to the Company. Such self-insurance relates to losses and liabilities primarily associated with workers’ compensation claims and general and vehicle liability. Losses are accrued based upon the accumulation of estimates for reported losses and includes a provision, based on past experience and using actuarial assumptions, for losses incurred but not reported. The method of determining such estimates and establishing the resulting reserves is continually reviewed and updated. Any adjustments resulting therefrom are reflected in current operations. As of June 30, 2003 and June 30, 2004, the Company had recorded a discounted accrued liability for self-insurance of $6,727,000 and $7,576,000, of which $1,569,000 and $2,698,000 are current at June 30, 2003 and 2004, respectively. The discount rate utilized was 4% for the years ended June 30, 2003 and 2004. The accrued liability on an undiscounted basis was $7,339,000 and $8,253,000 at June 30, 2003 and 2004, respectively. Management believes that the accrual is adequate to cover the losses incurred to date; however, this accrual is based on estimates and the ultimate liability may be more or less than the amount provided.

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential diluted securities. The dilutive effect of outstanding options is reflected in diluted per share by application of the treasury stock method. For the year ended June 30, 2001 diluted loss per share is the same as basic loss per share as there are no assumed potential dilutive securities. During the years ended June 30, 2002 and 2003, diluted loss per share is the same as basic loss per share as options to purchase 9,260 and 9,125 shares of common stock were not included in the computation of diluted loss per share for the years ended June 2002 and 2003, respectively, as the effect would have been antiSTOCK-~~dilutive.~~ BASED COMPENSATION

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 27

27PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES

~~Table~~NOTES TO ofCONSOLIDATED ~~Contents~~FINANCIAL STATEMENTS JUNE 30, 2003 AND 2004

~~PENHALL~~disclosure ~~INTERNATIONAL~~portion ~~CORP~~of SFAS No. 148, “Accounting for ~~AND~~Stock-Based ~~SUBSIDIARIES~~Compensation – Transition and Disclosure” requiring quarterly SFAS No. 123 pro forma disclosure.

~~NOTES~~Had TOthe ~~CONSOLIDATED~~Company ~~FINANCIAL~~determined ~~STATEMENTS~~compensation cost ~~JUNE~~based 30on the fair value at the grant date for its stock options under SFAS No. 123, ~~2002~~the ~~AND~~Company’s ~~2003~~basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:

COMPREHENSIVE INCOME (LOSS)

	Year ended June 30,
	2002			2003			2004
Net loss available to common stockholders as reported	$	(9,026,000	)	$	(14,319,000	)	$	(15,192,000	)
Add: Stock-based compensation expense included in reported net loss available to common stockholders, net of related tax effects	—			—			—
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects	(16,000		)	(20,000		)	(10,000		)
Pro forma net loss available to common stockholders	$	(9,042,000	)	$	(14,339,000	)	$	(15,202,000	)

Basic and diluted loss per share as reported	$	(9.16	)	$	(14.52	)	$	(15.40	)

Pro forma basic and diluted loss per share	$	(9.18	)	$	(14.54	)	$	(15.41	)

InAs ~~1999~~of November 2001 (grant date), the ~~Company~~weighted average ~~adopted~~fair ~~SFAS~~value ~~No. 130,~~of ~~“Reporting~~options ~~Comprehensive Income”,~~granted ~~which~~was ~~established~~$58.51. This ~~new~~was ~~rules~~determined ~~for~~using the ~~reporting~~Black-Scholes ~~and~~option ~~display~~pricing ofmodel ~~comprehensive~~with ~~income~~the ~~and~~following ~~its~~assumptions ~~components.~~used ~~Comprehensive~~for ~~income~~calculation: ~~(loss) equals~~risk-free ~~net income~~interest ~~(loss) for~~rate ~~each~~of 4.7%, volatility of ~~the~~3.01%, ~~years~~dividend inrate ~~the~~of ~~three-year~~0% ~~period~~and ~~ended~~an ~~June 30,~~expected life of ~~2003~~10 years.

~~SEGMENT~~LOSS PER ~~INFORMATION~~ SHARE

~~The~~Basic ~~Company’s~~loss per ~~only~~share ~~line~~is computed ofby ~~business~~dividing isnet ~~the~~loss available ~~rental~~to ofcommon ~~operator~~stockholders ~~assisted~~by the ~~equipment~~weighted ~~for~~average ~~use~~number inof ~~infrastructure~~common ~~projects~~shares outstanding during the period. ~~This~~Diluted loss per ~~equipment~~share is ~~rented~~calculated onby andividing net loss available to common ~~hourly~~stockholders ~~basis~~by ~~(Services)~~the ~~and~~weighted onaverage anumber ~~longer-term,~~of ~~fixed~~common ~~price~~shares ~~basis~~outstanding ~~(Contracts)~~during the period plus the impact of assumed potentially dilutive securities. InThe ~~fiscal~~dilutive ~~2001,~~effect ~~2002,~~of ~~and~~outstanding ~~2003,~~options ~~approximately~~is ~~72%~~reflected toin ~~73%~~diluted per share by application of ~~revenues~~the ~~were~~treasury ~~generated~~stock ~~from~~method. ~~Services~~During the years ended June 30, ~~and~~2002, ~~approximately~~2003 ~~28%~~and to2004, ~~27%~~diluted ofloss per ~~revenues~~share ~~were~~is ~~generated~~the ~~from~~same ~~Contracts.~~as ~~The~~basic ~~Company does~~loss per ~~not~~share ~~account~~as ~~for~~options to purchase 9,260, or9,125, ~~manage~~and 8,060 ~~the~~shares ~~hourly~~of orcommon ~~fixed-price~~stock were ~~rentals~~not included in athe ~~separate manner.~~computation ~~Over~~of ~~the~~diluted ~~past~~loss per 3share ~~fiscal~~for the years, ~~approximately~~ended ~~28%~~June to2002, ~~27%~~2003 ofand ~~Services revenues~~2004, ~~have~~respectively, ~~been~~as ~~generated~~the ~~from~~effect would have ~~Contracts~~been anti-dilutive.

~~The~~MANAGEMENT’S ~~Company has a non-operated assisted rental business (Bare Rentals). Bare Rentals were insignificant to the consolidated operations for each of the fiscal years ended June 30, 2001, 2002 and 2003.~~ ESTIMATES

~~RECLASSIFICATIONS~~The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Certain~~SEGMENT ~~2002 balances have been reclassified to conform to the presentation used in 2003.~~ INFORMATION

~~(2) RECEIVABLES~~The Company’s only line of business is the rental of operator assisted equipment for use in infrastructure projects. This equipment is rented on an hourly basis and on a longer-term, fixed price basis. The Company does not account for, or manage, the hourly or fixed-price rentals in a separate manner.

Contract receivables represent those amounts, which actually have been billed. Contract retentions are collectible upon completion or other milestones of contract performance. Based upon anticipated contract completion dates, these retainages are expected to be collected as follows: 28

		YEARS ENDED JUNE 30,
		2002		2003
Years ending June 30:
	2003	$	3,805,000	$	—
	2004		594,000		3,284,000
	2005		357,000		513,000
	2006		—		308,000
		$	4,756,000	$	4,105,000

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

~~Transactions~~NOTES TO inCONSOLIDATED ~~the~~FINANCIAL ~~allowance~~STATEMENTS JUNE ~~for~~30, ~~doubtful~~2003 ~~receivables~~AND ~~are summarized as follows:~~ 2004

	YEARS ENDED JUNE 30,
	2001		2002			2003
Balance, beginning of year	$	1,617,000	$	1,763,000		$	1,421,000
Provision for doubtful accounts		84,000		340,000			767,000
Accounts (charged off) collected		62,000		(682,000	)		(596,000	)
Balance, end of year	$	1,763,000	$	1,421,000		$	1,592,000

COMPREHENSIVE INCOME (LOSS)

28In 1999, the Company adopted SFAS No. 130, “Reporting Comprehensive Income”, which established new rules for the reporting and display of comprehensive income and its components. Comprehensive income (loss) equals net income (loss) for each of the years in the three-year period ended June 30, 2004.

~~Table of Contents~~RECLASSIFICATIONS

~~PENHALL~~Certain ~~INTERNATIONAL~~2002 ~~CORP. AND~~and ~~SUBSIDIARIES~~2003 balances have been reclassified to conform to the presentation used in 2004.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2003~~ (2) RECEIVABLES

~~(3) OTHER~~Contract ~~ASSETS:~~receivables represent those amounts, which actually have been billed. Contract retentions are collectible upon completion or other milestones of contract performance. Based upon anticipated contract completion dates, these retainages are expected to be collected as follows:

Other assets consist of the following:

	YEAR ENDED JUNE 30,
	2003		2004
Years ending June 30:
2004	$	3,284,000	$	—
2005	513,000		3,489,000
2006	308,000		545,000
2007	—		327,000
	$	4,105,000	$	4,361,000

	JUNE 30,			JUNE 30,
	2002			2003
Covenants not to compete	$	2,947,000		$	1,887,000
Accumulated amortization		(1,382,000	)		(701,000	)
Other		45,000			—
	$	1,610,000		$	1,186,000

Transactions in the allowance for doubtful receivables are summarized as follows:

The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $418,000, $286,000, and $376,000 for the years ended June 30, 2001, 2002 and 2003, respectively.

	YEAR ENDED JUNE 30,
	2002			2003			2004

Balance, beginning of year	$	1,763,000		$	1,421,000		$	1,592,000
Provision for doubtful accounts	340,000			767,000			427,000
Accounts (charged off) collected	(682,000		)	(596,000		)	(702,000		)

Balance, end of year	$	1,421,000		$	1,592,000		$	1,317,000

4(3) OTHER ~~ACCRUED LIABILITIES~~ASSETS:

~~Accrued~~Other ~~liabilities~~assets consist of the following:

	JUNE 30,				JUNE 30,
	JUNE 30, 2003			JUNE 30, 2004
	2002				2003
Covenants not to compete	$	1,887,000		$	1,887,000
Union benefits	$	675,000			$	657,000
Accumulated amortization	(701,000		)	(1,070,000		)
Accrued bonuses		1,577,000				423,000
	$	1,186,000		$	817,000
Accrued interest		5,179,000				4,972,000
Accrued self insurance (current portion)		1,274,000				1,569,000
Accrued insurance		708,000				776,000
Accrued vacation		531,000				531,000
Accrued payroll		2,134,000				2,026,000
Non-compete agreements		1,284,000				909,000
Other		624,000				515,000
	$	13,986,000			$	12,378,000

29The covenants not to compete are amortized over the life of the agreements. Amortization expense related to the covenants not to compete amounted to $286,000, $376,000, and $369,000 for the years ended June 30, 2002, 2003 and 2004, respectively. The Company expects amortization expense for these assets of $315,000 and $305,000 and $197,000, in 2005, 2006, and 2007, respectively.

~~Table of Contents~~29

PENHALL INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, ~~2002~~2003 AND ~~2003~~ 2004

(54) ~~LONG-TERM DEBT AND SENIOR NOTES~~ GOODWILL IMPAIRMENT

~~Long-term~~As ~~Debt~~part of its quarterly review of financial results in the third quarter of fiscal 2004, the Company determined that the continued decline in market conditions within the Company’s industry was a triggering event possibly indicating goodwill impairment. Accordingly, the Company evaluated the recoverability of its goodwill in accordance with SFAS No. 142.

~~Long-term~~Under ~~debt~~the ~~consists~~first step of the ~~following:~~SFAS No. 142 test, we determined the fair value of the reporting unit based on cash flow utilizing a multiple of earnings before interest, depreciation, taxes and amortization (EBIDTA). The multiple was determined based on prior tansactions conducted by the company and by others in comparible market sectors to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. As such, the Company was required to perform the second step analysis on the reporting unit that failed the first step in order to determine the amount of the impairment loss. The Company then performed a preliminary second step analysis in connection with the impairment and determined that an impairment charge of $353,000 was necessary for the reporting unit. The charge of $353,000 represents all of the goodwill for this reporting unit.

	JUNE 30,		JUNE 30,
	2002		2003
Note payable to former officer and shareholder, bearing interest at 8.0% per annum; principal and interest paid monthly until October 2002;	$	61,000	$	—
Note payable secured by certain equipment, stated interest of 0%, imputed interest at 10.0% per annum which resulted in a discount of $61,000; $300,000 due and paid September 30, 2002;		295,000		—
Note payable secured by certain equipment, stated interest of 0%, imputed interest at 9.0% per annum which resulted in a discount of $51,000; payable $193,000 due and paid March 31, 2003;		181,000		—
Note payable secured by certain equipment, interest of 0%, imputed interest at 3.9% per annum which resulted in a discount of $24,000; payable $123,000 due December 31, 2003 and 2004;		346,000		237,000
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest payable $200,000 due March 1, 2004;		388,000		196,000
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest payable $1,500,000 due March 1, 2004;		2,908,000		1,473,000
Revolving Loan in the maximum credit amount of $30,000,000 secured by certain assets of the Company. The Company was able to elect to maintain the Revolving Loan as a Base Rate Loan, which accrued interest quarterly at 1.25% to 2.00% (as defined) plus the higher of the Federal Funds Effective Rate (as defined) or the then current prime rate and was payable quarterly, and/or convert into a Eurodollar Loan, which accrued interest at 2.25% to 3.00% (as defined) plus the Eurodollar Rate (as defined) and was payable on the last day of each elected interest period, which ranged from one to six months, as elected by the Company. The effective interest rate at June 30, 2002 was 4.59%. All unpaid principal and interest was paid in May 2003.		9,290,000		—
$20,000,000 Term Loan secured by certain assets of the Company; principal payments of $750,000 per quarter commencing September 15, 2000 through June 15, 2001, $1,250,000 per quarter through June 15, 2002, and $1,500,000 per quarter through June 15, 2004. The Company was able to elect to maintain the Term Loan as a Base Rate Loan, which accrued interest quarterly at 1.25% to 2.00% (as defined) plus the higher of the Federal Funds Effective Rate (as defined) or the current prime rate and is payable quarterly, and/or convert into a Eurodollar Loan, which accrued interest at 2.25% to 3.00% (as defined) plus the Eurodollar Rate (as defined) and was payable on the last day of each elected interest period, which ranged from one to six months, as elected by the Company. The effective interest rate at June 30, 2002 was 3.67%. All unpaid principal and interest was paid in May 2003.		12,000,000		—
Revolving loan (“New Revolver”) in the maximum credit amount of $50,000,000 secured by certain assets of the company. The Company may elect to maintain the New Revolver as a Index Rate Loan, which accrues interest at 2.00% plus the higher of the Federal Funds Effective Rate (as defined) plus 50 basis points or the then current prime rate and is payable monthly, and/or convert into a Eurodollar Loan, which accrues interest at 3.50% plus the Eurodollar Rate (as defined) and is payable on the last day of each elected interest period, which shall range from one to six months, as elected by the Company. Unpaid principal and interest are due May 2006. The effective interest rate at June 30, 2003 was 4.84%.		—		14,485,000
Various capital leases and equipment financing agreements due through October 2005 with interest ranging from 0% to 9.6% per annum;		3,315,000		821,000
Other		186,000		183,000
		28,970,000		17,395,000
Less current installments of long-term debt		9,217,000		2,551,000
Long-term debt, excluding current installments	$	19,753,000	$	14,844,000

The Company performed the annual impairment test as of June 30, 2004 utilizing a multiple of EBITDA to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of a reporting unit was in excess of the fair value. The Company performed the second step analysis on the reporting unit to determine the impairment loss. The Company utilized a third party valuation specialist to assist in the calculation of the impairment on the reporting unit. In the second step analysis, we assigned fair market values to intangible assets that include assembled workforce, non-compete agreements, tradename, and backlog to determine the remaining fair value of the goodwill. As a result of the second step analysis we determined that an impairment charge of $2,329,000 was necessary for the reporting unit. This represents all of the goodwill for this reporting unit.

Total goodwill impairment of $2,682,000 has been included in loss from operations for the year ended June 30, 2004. Substantially all of the remaining goodwill resides in one reporting unit. Goodwill as of June 30, 2003 and 2004 was $9,053,000 and $6,371,000, respectively.

~~Table of Contents~~5) ACCRUED LIABILITIES:

~~PENHALL~~Accrued ~~INTERNATIONAL~~liabilities ~~CORP. AND~~consist ~~SUBSIDIARIES~~of the following:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 AND 2003

	JUNE 30, 2003		JUNE 30, 2004

Union benefits	$	657,000	$	936,000
Accrued bonuses	423,000		990,000
Accrued interest	4,972,000		5,020,000
Accrued insurance	776,000		1,157,000
Accrued vacation	531,000		446,000
Accrued payroll	2,026,000		2,167,000
Non-compete agreements	909,000		585,000
Due to BRS	75,000		375,000
Other	568,000		1,181,000
	$	10,937,000	$	12,857,000

The Term Loan, Revolving Loan, and Swingline Loan (the “Credit Facility”) contained certain financial and non-financial covenants, including working capital, net worth, and debt to equity ratios. The Company was also required to make defined prepayments in the event cash flows from operations exceed specified amounts, as defined. The Company was required to be in compliance with certain covenants and ratios or to request a waiver if not in compliance. The Company received a waiver for each of the following covenants and/or ratios as of June 30, 2002 and March 31, 2003: (1) Interest Coverage Ratio, (2) Leverage Ratio and (3) Minimum Consolidated EBITDA (all covenants/ratios as defined in the Credit Facility Agreement). No prepayments were required during the year 2002 or 2003. Additionally, under the terms of the Credit Facility, the Company had pledged all of the assets of its wholly owned subsidiaries as collateral. As part of the Revolving Loan, the Company had a Swingline Loan in the maximum credit amount of $2,500,000 secured by certain assets of the Company; interest accrued quarterly at 1.25% and 2.00% plus the higher of the Federal Funds Effective Rate (as defined) or then current prime rate and was payable in quarterly installments.

~~As of May 22, 2003, the Company replaced the Credit Facility with a new~~PENHALL ~~credit~~INTERNATIONAL ~~facility (“The New Credit”)~~CORP. ~~The New Credit is a $50 million, three~~ ~~year~~AND asset based borrowing facility, consisting of a $50 million revolving credit facility, the (“New Revolver”), with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate. In addition, borrowings under The New Credit are subject to certain covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The Company was in compliance with these covenants as of June 30, 2003. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts receivable, equipment, fixtures, cash, and other assets of the Company. SUBSIDIARIES

AsNOTES TO ofCONSOLIDATED ~~June~~ FINANCIAL STATEMENTS JUNE 30, 2003, ~~the~~AND ~~Company had unused and available amounts under The New Credit in the amount of $20.1 million.~~ 2004

~~Annual maturities of long~~(6) LONG-~~term~~TERM ~~debt~~DEBT, ~~for~~REVOLVING ~~the~~CREDIT ~~next~~FACILITY ~~five~~AND ~~years are as~~SENIOR ~~follows:~~ NOTES

	JUNE 30
2004	$	2,551,000
2005		176,000
2006		14,497,000
2007		5,000
2008		5,000
Thereafter		161,000
	$	17,395,000

Long-term Debt

~~Senior~~Long-term ~~Notes~~debt consists of the following:

On August 4, 1998, in connection with the Recapitalization Mergers, the Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company’s option, in whole at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes contain certain financial and non-financial covenants. From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000.

	JUNE 30, 2003		JUNE 30, 2004

Note payable secured by certain equipment, interest of 0%, imputed interest at 3.9% per annum which resulted in a discount of $24,000; annual payments of $123,000 due December 31, 2003 and 2004	$	237,000	$	121,000
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest of $200,000 paid in March 2004	196,000		—
Note payable secured by certain equipment, interest of 2.7% per annum; principal and interest of $1,500,000 paid in March 2004	1,473,000		—
Various capital leases and equipment financing agreements due through October 2005 with interest ranging from 0% to 9.6% per annum	821,000		874,000

Other	183,000		—
	2,910,000		995,000
Less current installments of long-term debt	2,551,000		882,000

Long-term debt, excluding current installments	$	359,000	$	113,000

~~From~~Annual ~~August 1,~~maturities ~~2002 through October 25, 2002, the Company repurchased capital stock~~ of ~~the~~long-term ~~Company~~debt ~~from four former employees~~ for ~~aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (~~the ~~“Indenture”)~~ ~~with~~next ~~United~~five ~~States~~years ~~Trust~~are ~~Company,~~ as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to or incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming. follows:

	JUNE 30
2005	$	882,000
2006	113,000
2007	—
2008	—
2009	—
Thereafter	—

	$	995,000

~~Table~~Revolving ofCredit ~~Contents~~Facility

~~PENHALL~~As ~~INTERNATIONAL~~of ~~CORP~~May 22, 2003, the Company entered into a new credit facility (“The New Credit”). The interest ~~AND~~rate ~~SUBSIDIARIES~~on The New Credit is calculated based upon LIBOR plus 350 basis points. In addition the Company is also required to pay the lender a commitment fee equal to 0.5% per annum in respect of undrawn commitments under The New Credit. The New Credit is a $50 million, three year asset based borrowing facility, consisting of a $50 million revolving credit facility, the (“New Revolver”), with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit is limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.

~~NOTES~~The TOprovisions ~~CONSOLIDATED~~of ~~FINANCIAL~~the ~~STATEMENTS~~New ~~JUNE~~Credit 30facility include a lock-box agreement and also allow the lender, ~~2002~~in ~~AND~~its reasonable ~~2003~~credit judgment, to assess additional reserves against the borrowing base calculation. The New Credit and the associated lock-box agreement satisfy the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). We have reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective acceleration clauses as defined in SFAS No. 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear there were any subjective acceleration clauses that fit directly into the definition provided in SFAS No. 78. However, upon further analysis of the terms of the New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. More specifically, the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The reserve requirements may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance portion. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the bank to the borrowing base calculation. As a result, the Company classifies borrowings under the New Credit facility as a short-term obligation. In addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of June 30, 2004, the Company had no outstanding borrowings, $15.6 million of outstanding letters of credit, borrowing base limitations of $8.0 million and borrowings unused and available under The New Credit of $26.4 million.

~~(6) INCOME TAXES~~ 31

~~Income tax expense (benefit) is comprised of the following components for~~PENHALL ~~each~~INTERNATIONAL ~~fiscal year ended June 30:~~CORP. AND SUBSIDIARIES

		YEAR ENDED JUNE 30,
		2001		2002			2003
Current tax expense (benefit):
	Federal	$	2,345,000	$	(180,000	)	$	(2,131,000	)
	State		299,000		60,000			38,000
			2,644,000		(120,000	)		(2,093,000	)
Deferred tax expense (benefit):
	Federal		490,000		(589,000	)		(910,000	)
	State		766,000		(147,000	)		(438,000	)
			1,256,000		(736,000	)		(1,348,000	)
		$	3,900,000	$	(856,000	)	$	(3,441,000	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2004

~~As of June~~ ~~30,~~Senior ~~2002 and 2003, the Company has a current net deferred tax asset of $3,133,000 and $3,363,000, respectively, and a net non-current deferred tax liability of $9,339,000 and $8,221,000, respectively.~~ Notes

~~Significant~~On August 4, ~~components~~1998, in connection with the Recapitalization Mergers, the Company issued $100,000,000 of Senior Notes guaranteed by the wholly-owned subsidiaries of Penhall International Corp. Interest at 12% is payable semiannually in arrears beginning February 1, 1999; all unpaid principal and interest is due August 1, 2006. In addition, the Senior Notes are redeemable at the Company’s ~~deferred~~option, ~~income~~in ~~tax~~whole ~~assets~~at any time or in part from time to time, on or after August 1, 2003, at certain redemption rates ranging from 106% to 102%. The Senior Notes contain certain financial and non-financial ~~liabilities~~covenants. The ~~are~~Company asanticipates extending ~~follows:~~or refinancing this obligation. No assurance can be given that such financing will be available to the Company or, if available, that it may be obtained on terms and conditions that are satisfactory to the Company.

			JUNE 30,			JUNE 30,
			2002			2003
Deferred tax assets:
	Allowance for doubtful receivables		$	571,000		$	640,000
	Accruals not currently deductible			2,536,000			2,723,000
	Net operating loss carryforwards			26,000			726,000
		Total deferred tax assets		3,133,000			4,089,000
Deferred tax liabilities — Depreciation and amortization				(9,339,000	)		(8,947,000	)
		Net deferred tax liability	$	(6,206,000	)	$	(4,858,000	)

From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000. The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio. At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture. The Company has informed the Trustee of such repurchases. In the event that the Company receives, in accordance with the Indenture, written notice of such default from either the Trustee or Holders of at least 25% of the outstanding principal amount of the Notes, the Company has thirty days to remedy the matter and will seek either to cure such default or to obtain a waiver of such default in accordance with the Indenture. Neither the Trustee nor any of the Note Holders have indicated their intent to notify the Company of default and the Company does not believe that written notice of such default will be forthcoming.

In(7) INCOME assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, therefore no valuation allowance has been recorded by the Company. TAXES

AsThe ofCompany’s ~~June 30,~~pre-tax ~~2003, we had net operating~~ loss ~~carryforwards (after carrybacks)~~ for the ~~federal~~years ~~and~~ended ~~state~~June ~~income tax purposes of approximately $869~~30,~~000~~ ~~and $4~~2002,~~700,000,~~ ~~respectively.~~2003 ~~The~~and ~~federal~~2004 ~~carryfowards~~was ~~expire~~generated infrom ~~20 years~~domestic ~~beginning~~operations. Income ~~2023,~~tax ~~while the state carryforwards have varying expiration dates~~expense ~~beginning~~(benefit) is incomprised ~~2013. As~~ of ~~June 30, 2003~~ the ~~Company~~following ~~had~~components ~~federal~~for ~~AMT~~each ~~credits totaling~~fiscal ~~$176,000~~year ~~that have no expiration date.~~ended June 30:

	YEAR ENDED JUNE 30,
	2002			2003			2004
Current tax expense (benefit):
Federal	$	(180,000	)	$	(2,131,000	)	$	594,000
State	60,000			38,000			185,000
	(120,000		)	(2,093,000		)

Filing Compare · PENHALL INTERNATIONAL CORP