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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

National Equipment Services, Inc.
(Debtor-in-Possession as of June 27, 2003)
(Exact Name of Registrant as Specified in its Charter)

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

        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 the 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. Yes ý    No o

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

        As of June 30, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates of National Equipment Services, Inc. was approximately $311,000.

        Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o    No ý

        As of February 10, 2004, there were 21,151,163 shares of Common Stock of National Equipment Services, Inc., par value $0.01 per share, outstanding.

National Equipment Services, Inc.
(Debtor in Possession as of June 27, 2003)

FORM 10-K REPORT INDEX

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Forward-Looking Statements

        Note: This report contains forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements contained in this document, other than historical information, are forward-looking statements. These statements represent management's current judgment on what the future holds. A variety of factors could cause business conditions and the Company's actual results to differ materially from those expected by the Company or expressed in the Company's forward-looking statements. These factors include, without limitation, the Company's ability to successfully integrate acquired businesses; changes in market price or market demand; loss of business from customers; general declines in rental rates in the market; pricing pressure from competitors; inability to fund required capital expenditures; the Company's pending bankruptcy reorganization; unanticipated expenses; changes in financial markets; the Company's substantial leverage; potential defaults in the Company's indebtedness; inability to make scheduled principal amortization payments on indebtedness; and other factors discussed in the Company's filings with the Securities and Exchange Commission.

        Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available on our internet website free of charge. These reports are available as soon as practicable after we electronically file these reports with the Securities and Exchange Commission. Our website address is www.nesrentals.com.

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PART I

ITEM 1.    BUSINESS

General

        National Equipment Services, Inc. (the "Company") is a leading participant in the highly fragmented $24 billion equipment rental industry. Through its 42 businesses acquired since January 1997, the Company rents general and specialty equipment to industrial and construction end-users. The Company rents over 750 different types of machinery and equipment and distributes new equipment for nationally recognized original equipment manufacturers. The Company also sells used equipment as well as complementary parts, supplies and merchandise and provides repair and maintenance services to its customers. The Company is geographically diversified, with 141 locations across 34 states and Canada and is a leading competitor in each of the geographic markets it serves.

        Management believes the Company offers a well-maintained fleet of general and specialty equipment in each of its markets. The average age of the Company's equipment fleet is approximately five years. The Company's general industrial and construction equipment selection ranges from large equipment such as aerial work platforms (booms and scissors), cranes, industrial and rough terrain forklifts, light earth-moving equipment and portable air compressors to small equipment such as hand tools to industrial and commercial construction customers. The Company's specialty equipment available for rent includes mobile storage, pumps and highway safety equipment.

        The Company is led by an experienced management team. The professionals who manage the Company's local operations average more than 15 years of experience in the equipment rental industry and have extensive knowledge of and relationships in their local markets.

Proceedings Under Chapter 11 of the U.S. Bankruptcy Code

        On June 27, 2003, the Company and its U.S. subsidiaries (collectively, the "Debtors") filed for voluntary reorganization under Chapter 11 (the "Filing") of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the Northern District of Illinois ("Bankruptcy Court"). The Debtor's subsidiary located in Canada, which represents less than 2.0% of total revenues and total assets in 2003, was not included in the petition. Due to the size of the Company's Canadian subsidiary, the consolidated financial statements of the Company included in Item 8 present the consolidated financial statements of the Debtor in all material respects. As of December 31, 2003, the Debtors were operating their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

        The initial joint plan of reorganization was filed on October 17, 2003. On January 23, 2004, the Debtors filed a fourth amended joint plan of reorganization (the "Plan of Reorganization"), which received the requisite support from the creditors authorized to vote thereon. The Plan of Reorganization was confirmed by the bankruptcy court on January 23, 2004, and the Company emerged from bankruptcy on February 11, 2004 (the "Effective Date").

        From June 27, 2003 through February 11, 2004, the Debtors continued to operate as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. Shortly after the Filing, the Debtors began notifying all known or potential creditors of the Filing for the purposes of identifying all pre-petition claims against the Debtors. Any creditor actions to obtain possession of property from the Debtors or to create, perfect or enforce any lien against the property of the Debtors were stayed. As a result, the creditors of the Debtors were precluded from collecting pre-petition debts without the approval of the Bankruptcy Court. Certain pre-petition liabilities have been paid after obtaining the approval of the Bankruptcy Court, including certain wages and benefits of employees and insurance costs.

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        The Company obtained Debtor-in-Possession financing which provided up to $30 million of availability to the Company to fund operations during the bankruptcy period. The Company did not borrow any funds from this financing source during the period it was in place.

        The Plan of Reorganization provides for the cancellation of all of the issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the "Old Common Stock"), all of the issued and outstanding shares of preferred stock of the Company, and all other outstanding securities of the Company, including common stock options as of the Effective Date.

        On the Effective Date, National Equipment Services, Inc. merged into NES Rentals, Inc. NES Rentals, Inc. was the surviving company in the merger and was renamed National Equipment Services, Inc. NES Rentals, Inc. is a subsidiary of both NES IT Services, Inc. and NES Real Estate Management, Inc., which are subsidiaries of the newly formed NES Rentals Holdings, Inc. ("NESR"), which is the successor to National Equipment Services, Inc. NESR is the new public company parent of National Equipment Services, Inc. NESR has 25,000,000 authorized shares of common stock, of which 21,400,000 will be issued (the "New Common Stock").

        In accordance with the Plan of Reorganization, (i) holders of general unsecured claims, including the holders of the Company's Senior Subordinated Notes due 2004, Series B and Senior Subordinated Notes due 2004, Series D, are to receive 97.5% of the New Common Stock of the Company, (ii) the holders of the Company's preferred stock are to receive 2.0% of the New Common Stock of the Company, and (iii) the holders of the Company's Old Common Stock are to receive 0.5% of the New Common Stock of the Company.

        On the Effective Date, NESR entered into a new senior secured credit facility (the "New Credit Facility"). The New Credit Facility consists of $285 million of term loan facilities and a $205 million revolving credit facility. NESR has scheduled principal repayments quarterly on the term loan facilities through the May 15, 2007 maturity date of the New Credit Facility.

        As a result of the emergence from bankruptcy, the Company plans to adopt fresh-start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires the Company to allocate the reorganization value of the reorganized company to its assets and to state liabilities existing at the Plan of Reorganization confirmation date at present values of amounts to be paid determined at appropriate current interest rates. For financial reporting purposes, the effective date of the emergence from bankruptcy is the close of business on January 31, 2004. Accordingly, the effects of the adjustments on the reported amounts of individual assets and liabilities resulting from the adoption of fresh-start reporting will be reflected in the Company's final statement of operations prior to emergence. As a result of the reorganization and the expected adoption of fresh-start reporting, the Company's results of operations after January 31, 2004 will not be comparable to results reported in prior periods.

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Acquired Businesses

        The Company was founded in June 1996 to acquire and integrate businesses that focus on the rental of general and specialty equipment to industrial and construction end-users. Since inception, the Company acquired the following 42 businesses:

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*

Indicates businesses that have been sold or exited by the Company.

Products and Services

        The Company is primarily involved in the business of renting equipment to industrial and construction end-users. In addition, to more fully serve its customers and leverage its fixed costs, the Company sells complementary parts, merchandise and rental equipment, acts as a distributor of new equipment on behalf of original equipment manufacturers and services the equipment it sells. Refer to the notes to the consolidated financial statements of the Company included later in this report for financial information about segments.

        Equipment Rental and Service.    The Company rents a broad selection of general equipment, ranging from large equipment, such as aerial work platforms, air compressors, generators, earth-moving equipment and rough terrain forklifts, to smaller equipment and hand tools. The Company's specialty equipment available for rent includes electric and pneumatic hoists, hydraulic and truck-mounted cranes, liquid storage tanks, pumps and highway safety equipment. The Company's general rental contracts range from daily rental contracts for small subcontractors to multi-year contracts for certain industrial customers, with an overall average rental period of approximately three weeks. The mix of rental equipment at each of the Company's locations is a function of the demands of the local customer base and the focus of that business. At December 31, 2003, the original equipment cost of the Company's rental fleet was in excess of $850 million, and the average age of its rental fleet was approximately five years based on the model year of manufacture. The Company also provides repair and maintenance services in connection with the equipment it sells as a complement to its core business.

        Sales of New Equipment.    The Company sells new equipment to end-users from certain original equipment manufacturers including JLG Industries, Genie Industries, John Deere, Hyster, Ingersoll-Rand, Miller Electric, SkyJack and Tadano. The Company believes the volume of equipment it buys creates significant purchasing power with suppliers, which generally leads to favorable prices and terms for equipment the Company purchases for its rental fleet and sells as new equipment. The Company's ability to sell new equipment offers flexibility to its customers, and the Company believes this enhances its customer relations.

        Sales of Rental Equipment.    The Company routinely sells rental equipment to adjust the size and composition of its rental fleet to changing market conditions and as part of its ongoing commitment to maintain a high quality fleet. The Company can receive favorable sales prices for its rental equipment due to its preventive maintenance program and its practice of selling rental equipment before it becomes irreparable or obsolete. Fleet management works with local managers to optimize the timing of sales of rental equipment by taking into account maintenance costs, rental demand patterns and resale prices. The

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Company sells rental equipment to its existing rental customers and to used equipment buyers through its branch operations as well as through third party auctioneers.

        Sales of Parts and Merchandise.    The Company also sells a wide range of parts and merchandise, including saw blades, drill bits, shovels, goggles, hard hats and other safety gear as a complement to its core equipment rental business. The Company believes these sales enable the Company to attract and retain customers by offering the convenience of "one-stop shopping." These revenues are reflected as "Other revenues" in the Company's Consolidated Statements of Operations and Comprehensive Loss.

Customers

        Management estimates the Company currently has more than 82,000 customers, ranging from "Fortune 500" companies to small contractors. During 2003, no single customer accounted for more than 2% of the Company's total revenues, while the top five customers represented less than 5% of total revenues. Customers look to the Company as a comprehensive source of rental equipment because of the convenience of renting as well as the high costs associated with equipment ownership. The Company's primary customer base can be classified into the following categories: 1) industrial, including manufacturers, petrochemical facilities, chemical companies, paper mills and public utilities and 2) commercial and non-residential construction, repair and renovation, including contractors and governmental agencies (federal, state and local funds for traffic improvement and infrastructure spending). In addition to maintaining its historically strong relationship with local customers, the Company services a variety of larger national and multi-regional accounts.

        Industrial.    The Company's industrial customers, many of whom operate 24 hours per day, use the Company to outsource their equipment requirements, which reduces the capital investment and minimizes the ongoing maintenance, repair and storage costs associated with equipment ownership. Management believes that the Company is well positioned to take advantage of the increasing trend among industrial customers to outsource equipment needs. In addition, the Company's specialty products, such as hoists, tanks and industrial forklifts, are tailored to meet the needs of industrial end-users. Given its multi-region presence, the Company is well positioned to increase its industrial revenue base. Industrial customers accounted for approximately 45% of the Company's total revenues during 2003.

        The Company provides equipment rental and fleet management services to the automotive industry and industry service providers. Today, all automotive activities, regardless of origin, are funneled through a dedicated staff of auto personnel based in the Detroit operation. The Company has obtained the status of a Tier 1 provider to the leading automotive manufacturers. The Company's historical reputation and Tier 1 status designates it as one of the preferred suppliers of choice.

        Construction.    The Company's construction customers include "Fortune 500" companies, national and regional contractors and subcontractors involved in construction projects such as 1) chemical plants and other manufacturing facilities, 2) roads, bridges and highways, 3) schools, hospitals and airports and 4) residential developments and apartment buildings. Construction customers currently comprise the largest portion of the Company's customer base, representing approximately 55% of the Company's total revenues during 2003.

Management Information Systems

        The Company has made significant investments in its information systems. These information systems integrate customer, vendor and fleet management data that allow the Company to track customer requirements, while coordinating with sales, delivery and maintenance personnel to ensure customer demands are met on a timely basis. These systems also provide timely equipment rental data, which allows management to monitor asset utilization, rental rates, repairs and maintenance and inventory levels by region, location, equipment classification and individual rental item.

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Branch Operations

        The Company's equipment rental branches typically include: (i) a customer service area and showroom displaying selected rental equipment, new equipment offered for sale and related merchandise, (ii) an equipment service and maintenance area and (iii) equipment storage facilities. Each branch is staffed by an average of 18 employees, including a manager, an assistant manager, sales people, back office clerks, truck drivers, mechanics and yard personnel. Our employees' knowledge of the equipment enables them to recommend the best equipment for a customer's particular application. On average, traffic safety locations are staffed with 27 employees.

Sales and Marketing

        Sales.    The Company offers rental equipment and related services primarily through its sales force, consisting of 15 sales managers, who oversee 200 outside sales people. The outside sales organization works closely with inside sales to ensure that the customer needs are fulfilled operationally. Inside sales teams work with outbound selling as a part of each day's activities. Inside sales teams also assist in lead-generation programs for follow-up calls, telemarketing, dormant customer calls and government, state and municipal bid prospecting, to generate qualified leads and drive incremental revenue.

        The inside sales force at each location is knowledgeable about all of the services and products provided at that location. Sales managers and representatives regularly call on contractors' job sites and industrial facilities in their sales territories, often assisting customers in planning for their equipment requirements. The Company also provides its sales force with extensive training, including frequent in-house training by supplier representatives, regarding the operating features and maintenance requirements of its equipment. Members of the Company's sales force generally earn commissions on all equipment rentals and sales that they generate.

        Marketing.    The Company focuses on the non-residential construction and industrial markets, with a special focus on customers with dynamic equipment and service needs. The Company segments its markets and customers into groups according to standard classifications used by market research companies. These market segments are analyzed for underpinning needs, equipment similarities and profitability, necessary for the Company's marketing planning and development. Once business is engaged, it will generally last for several years. Contractors tend to require fewer added-services and are more likely to need immediate responses to requests. Contractors like a single point of contact that knows their business and job site conditions.

        Using database and direct-targeted marketing programs, the Company leverages its strengths and drives incremental rental revenue with more precision and efficiency. By analyzing each segment for profitability, buying and behavioral similarities, product selection and awareness levels, the Company develops relevant marketing messages and programs for its best customer segments.

        The Company has a targeted sales approach, which expresses the Company's value proposition to each segmented market. District sales management focuses on Fortune 500 companies and contractors with national reach. The field sales representatives focus on NES core mid-sized industrial, municipal and commercial contractors. Small or niche businesses are reached with alternative, low-cost marketing methods (e.g. internet, e-marketing, and direct mail).

Purchasing and Suppliers

        Management believes that the Company's size enables it to purchase equipment directly from manufacturers at favorable prices. The Company has developed strong relationships with many leading original equipment manufacturers, including JLG Industries, Genie Industries, OmniQuip, Walpar, 3M, Manitowoc, MDM, Tenant, John Deere, Ford, Broderson, Ingersoll-Rand, Miller Electric, SkyJack, Tadano, Komatsu, Multiquip, Wacker and Mitsui. No single supplier accounted for more than 10% of the

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Company's total purchases during 2003, and management believes there are comparable alternative suppliers for the purchases made from significant suppliers. The Company believes it could readily replace any of its suppliers if necessary.

        After reviewing its vendor management strategy, the Company has consolidated hundreds of vendors by moving to central purchasing. The Company earns volume purchasing discounts and has established national accounts for the following products: filters, fasteners and electrical supplies, batteries, office supplies, printing, credit services, diamond and abrasive blades, cylinder gases, air and freight carriers, bulk paint suppliers and temporary labor service.

Competition

        The equipment rental industry is highly fragmented and competitive. Numerous competitors serve many of the markets in which the Company operates. These competitors range from national and multi-regional operators, such as United Rentals, Inc., Rental Service Corp., Sunbelt and Hertz Equipment Rental Corp. (an affiliate of Ford Motor Company), to small, independent businesses with a limited number of locations. Management believes that participants in the equipment rental industry compete on the basis of availability and quality of equipment, service, delivery time and price. Geographic territories for competition usually are limited to 50 to 75 miles, due to servicing requirements and equipment transportation costs. In general, management believes that national and multi-regional operators, such as the Company, enjoy substantial competitive advantages over small, independent rental businesses, which do not have the financial resources to maintain the comprehensive rental equipment fleet and high level of maintenance and service that the Company offers.

Employees

        At December 31, 2003, the Company had a total of approximately 2,700 employees, approximately 600 of which are represented by unions. Management believes that its relationship with its employees is good. The Company is committed to, and has realized significant benefits from, its formal employee training programs. Management believes that this investment in training and safety awareness programs for employees is a competitive advantage that positions the Company to be responsive to customer needs.

Governmental and Environmental Regulation

        The Company's facilities are subject to federal, state and local environmental requirements relating to discharges to air, water and land; the handling and disposal of solid and hazardous waste; and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for noncompliance, and others, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"), impose strict, retroactive, joint and several liability for releases of hazardous substances.

        Based on environmental assessments conducted in connection with the Company's acquisitions, the Company believes that its facilities are in substantial compliance with environmental requirements, and that the Company has no material liabilities arising under environmental requirements. However, some risk of environmental liability is inherent in the nature of the Company's business, and in the future the Company may incur material costs to meet current or more stringent compliance, cleanup or other obligations under environmental laws.

        The Company dispenses petroleum products from storage tanks located at some of its locations. Although the Company is not aware of any leaks or spills involving its tank systems, there can be no assurance that these systems have been or will at all times remain free from leaks, or that the use of these tanks has not resulted or will not result in spills or other releases. Management does not believe that the presence or operation of these tanks will have a material adverse effect on the Company's operating results or financial position.

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        The Company uses hazardous substances, such as solvents, to clean and maintain its rental equipment fleet, and generates wastes, such as used motor oil, radiator fluid and solvents, which are stored on site and disposed of at off-site locations. Although the Company is not aware of any material issues regarding its use of hazardous substances, under various environmental laws, including CERCLA, the Company could be liable for contamination at sites where hazardous substances used in its operations have been disposed of or otherwise released.

        Management does not expect that compliance with environmental laws will have a material adverse effect on the Company's operating results, financial condition or competitive position to date. The Company does not expect to incur material expenditures for environmental upgrades or controls in this or the succeeding year.

General Economic Conditions, Inflation, and Seasonality

        The Company's operating results may be adversely affected by changes in general economic conditions, including changes in construction and industrial activity or increases in interest rates, or by adverse weather conditions that may temporarily decrease construction and industrial activity in a particular geographic area.

        The Company's financial performance has been negatively affected over the last two years due to lower activity levels in the economy, a slowdown in non-residential construction, competitive pricing pressure due to over-capacity of rental equipment in the industry and lower demand. Additionally, the Company's Filing on June 27, 2003 generated concern among the Company's customers and vendors and disrupted business for a period of time.

        The Company's revenues and operating results fluctuate due to the seasonal nature of the markets in which the Company operates, with both rental activity and road construction tending to be lower in the winter.

ITEM 2.    PROPERTIES

        At December 31, 2003, the Company operated 141 locations in the following 34 states and Canada: Alabama (7), Arizona (5), Arkansas (4), California (1), Connecticut (1), Florida (4), Georgia (6), Illinois (4), Indiana (8), Iowa (2), Kansas (2), Kentucky (3), Louisiana (6), Maine (3), Massachusetts (7), Michigan (12), Mississippi (3), Missouri (2), Nevada (1), New Hampshire (1), New Jersey (1), New York (7), North Carolina (1), Ohio (5), Oklahoma (3), Pennsylvania (2), Rhode Island (2), South Carolina (1), Tennessee (6), Texas (13), Vermont (1), Virginia (1), West Virginia (3), Wisconsin (9), and Canada (4). The Company's properties typically include an outside storage yard and a small building containing a maintenance center, offices and, in certain locations, a retail showroom. The majority of these locations are leased. The net book value of owned facilities was approximately $12 million at December 31, 2003, and the average annual lease expense per leased facility was approximately $76,000 in 2003. Management believes that none of the Company's leased facilities, individually, is material to its operations, and that all of these leases can be readily replaced at similar terms. The Company's ownership interests in each of these properties collateralized borrowings under its credit facility.

ITEM 3.    LEGAL PROCEEDINGS

        From time to time, the Company has been and is involved in various legal proceedings, all of which (other than the Filing) management believes are routine in nature and incidental to the conduct of its business. Although the Company's ultimate legal and financial liability resulting from any of these proceedings cannot be estimated with certainty, the Company, after examining these matters, believes that an adverse ruling in any of these proceedings would not have a material adverse effect on the Company's financial condition or results of operations.

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Bankruptcy

        As described in "Item 1. Business," the Company and its U.S. subsidiaries filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. As of December 31, 2003, the Debtors were operating their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

Other matters

        Following the Company's announcement in April 2002 that it was restating its prior period financial statements through the filing of its 2002 Annual Report on Form 10-K, the Company received a notice of inquiry from the SEC relating to the Company's restated financial statements. Following a review of the Company's response to the notice of inquiry, the SEC commenced an informal investigation into this matter. The informal investigation included the production of relevant documents and the taking of testimony from certain current and former Company employees. The Company was informed that the SEC also commenced an investigation with respect to three individuals (two former employees no longer associated with the Company and one current employee).

        On April 10, 2003, the Company was informed by the staff of the SEC, through receipt of a "Wells Notice," that the SEC intended to recommend that the SEC institute a cease-and-desist proceeding against the Company, alleging that the Company violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rules 12b-20, 13a-1, and 13a-13 thereunder. Prior to and during the investigation, the Company had voluntarily upgraded and reinforced significant portions of its financial controls functions. The Company fully cooperated with the SEC throughout the investigation.

        In August 2003, the Company offered to settle the SEC investigation (the "Offer") by agreeing to certain reporting violations of the Exchange Act and by agreeing to consent to the entry of an administrative Cease-and-Desist Order (the "Order"). While the SEC has not indicated at this time that it intends to seek a civil monetary penalty against the Company, it has the statutory authority to seek a civil penalty of up to $500,000 for each violation of the Exchange Act committed by the Company. As of the date hereof, the SEC has not taken any formal action on the Offer or the Order. The Company is continuing its efforts to resolve this matter with the SEC.

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

        No matters were submitted to a vote of security holders during the fourth quarter of 2003.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        As of February 10, 2004, the day prior to emergence from bankruptcy, there were 35 holders of record of the Company's common stock. The Company has never paid any dividends on its common stock and does not expect to pay any dividends on its common stock in the foreseeable future. Dividend payments are restricted under the terms of the Company's credit facility.

        From the Company's initial public stock offering in July 1998 through October 2002, the Company's common stock was traded on the New York Stock Exchange under the symbol "NSV." For the period from October 2002 until emergence from bankruptcy on February 11, 2004, the Company's common stock was traded on the over-the-counter market under the symbol "NEQS." Subsequent to emergence from bankruptcy, NESR's New Common Stock has been traded on the over-the-counter market under the symbol "NLEQ."

        The Plan of Reorganization provides for the cancellation, as of the Effective Date, of all of the issued and outstanding shares of common stock and all other equity securities of the Company, including common stock options. Accordingly, the Company has not presented information about (a) the prices at which the common stock previously traded, and (b) compensation plans that involved the use of equity securities, because such information is not meaningful.

ITEM 6.    SELECTED FINANCIAL DATA

        The data presented below on the Company should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data.

        Since inception, the Company completed 42 business acquisitions that were accounted for using the purchase method of accounting and disposed of its trench shoring business during 2002. The accounts of the businesses acquired in these transactions are included in the Company's results of operations from their respective acquisition dates and all periods have been reclassified for the discontinued operation. Since the Company's historical operating results for the periods presented below were significantly affected by acquisitions, the Company believes that its results of operations for the years presented are not directly comparable.

        Additionally, the Company's Filing on June 27, 2003 generated concern among the Company's customers and vendors and disrupted business for a period of time during 2003. As a result of the subsequent reorganization and the expected adoption of fresh-start accounting following the Company's

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emergence from bankruptcy, the Company's results of operations after January 31, 2004 will not be comparable to results reported in prior periods.

(a)

See pages 14 through 23 of Management's Discussion and Analysis of Financial Condition and Results of Operations.

(b)

See Note 5 in the Notes to Consolidated Financial Statements regarding discontinued operations.

(c)

See Note 3 in the Notes to Consolidated Financial Statements regarding intangible assets.

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

        The following discussion and analysis of the Company's results of operations and its financial condition and liquidity should be read in conjunction with Item 1, Business, Item 6, Selected Financial Data and Item 8, Financial Statements and Supplementary Data. All dollar amounts presented are in thousands.

General

        The Company was founded in June 1996 to acquire and integrate businesses that focus on the rental of general and specialty equipment to industrial and construction end-users. Since inception, the Company acquired 42 businesses in separate transactions. All acquisitions were accounted for using the purchase method of accounting. The results of operations of the businesses acquired are included in the Company's financial statements only from their respective dates of acquisition.

        The Company derives its revenues from four sources: 1) equipment rental and service, 2) new equipment sales, 3) rental equipment sales and 4) sales of complementary parts and merchandise. The Company's primary source of revenue is the rental and service of equipment to industrial and construction end-users. The growth of rental revenues depends on several factors, including demand for rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Revenues generated from the sale of new equipment are affected by price and general economic conditions. Revenues generated from the sale of used rental equipment are affected by price, general economic conditions and the Company's fleet management program. Revenues from the sale of complementary parts and services are primarily affected by equipment rental and sales volume.

        Cost of revenues consists primarily of rental equipment depreciation, the cost of rental and service revenue, the cost of new equipment, the net book value of rental equipment sold and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, the Company uses a range of periods from two to fifteen years over which it depreciates its equipment on a straight-line basis.

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Critical Accounting Policies

        We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, which requires our management to make estimates and general assumptions about the effects of matters that are inherently uncertain. We have summarized our significant accounting policies in Note 3 to our consolidated financial statements. Of these accounting policies, we believe the following may involve a higher degree of judgment and complexity.

Application of SOP 90-7

        The 2003 consolidated financial statements have been prepared in accordance with SOP 90-7. Under SOP 90-7, revenues and expenses, realized gains and losses and provisions for losses resulting from the reorganization of the business are to be reported in the consolidated statements of operations separately as reorganization items. Professional fees are expensed as incurred. Interest expense is reported only to the extent that it will be paid during the bankruptcy or that it is probable that it will be an allowed claim. The application of SOP 90-7 also requires that the Company estimate the expected amount of allowed claims with respect to pre-petition liabilities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." At December 31, 2003, we have accrued for the expected amount of allowed claims based on our claims reconciliation process.

Allowance for Doubtful Accounts

        At December 31, 2003, we had an allowance for doubtful accounts totaling $5,689 which we have established in the event that we are unable to collect certain receivables. This allowance represents our estimate of the total receivables recorded as of December 31, 2003 that we will be unable to collect. Future general events, such as changes in the economy, and specific events, such as changes in the economic condition of our customers, could significantly impact our ability to collect on these receivables, and therefore, cause us to change our allowance estimate.

Useful Lives of Rental Equipment and Property and Equipment

        At December 31, 2003, we had $407,362 of net rental equipment and $35,728 of net property and equipment recorded on our balance sheet. Rental equipment is depreciated using the straight-line method over two to fifteen years. Property and equipment is depreciated over three to thirty years, depending on the type of asset. Our depreciable lives are based on our estimates of the useful lives of the respective assets over which they will generate revenues. These estimates may require adjustment based on changing circumstances in the marketplace. Changes to these estimates could result in us having to recognize an increase to or decrease in depreciation expense.

Impairment of Long-Lived Assets

        In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we test long-lived assets or asset groups for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. If this comparison indicates that an impairment exists, the amount of the impairment is measured by comparing the carrying value to the fair market value of the asset. Fair market value is typically based on the discounted expected future cash flows. The discount rate applied to these cash flows is based on our weighted-average cost of capital, which represents the blended after-tax costs of debt and equity. Additionally, in 2003 independent appraisals were completed on many of the Company's long-lived assets. We recognized impairments of $831, $6,743 and $3,183, related to rental fleet and buildings in 2003, 2002 and 2001, respectively, which are

15

appropriately included as depreciation expense in the consolidated statements of operations and comprehensive loss.

Impairment of Goodwill

        Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" issued by the Financial Accounting Standards Board (FASB). Under this standard, goodwill is no longer amortized but is subject to annual impairment tests on a reporting unit level. We completed our initial impairment analysis in the second quarter of 2002 and recorded a non-cash impairment charge of approximately $155,102 ($129,505, net of tax benefit), as a cumulative effect of a change in accounting principle retroactive to January 1, 2002, on the consolidated statement of operations and comprehensive loss. We completed a subsequent analysis at the end of 2002 and did not identify any goodwill impairment. In the most recent analysis performed as of June 30, 2003, we recorded a non-cash impairment charge of approximately $138,115, which reflects the impairment of the remaining goodwill of the Company.

        We evaluated the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill related. The rate used in determining discounted cash flows is a rate corresponding to our cost of capital, risk adjusted where necessary. Estimated cash flows were then determined by disaggregating our business segments to a reporting level for which meaningful identifiable cash flows could be determined. As the estimated future discounted cash flows were less than the carrying value of the net assets (tangible and identifiable intangibles) and related goodwill, an impairment loss was recognized. The impairment losses, limited to the carrying value of goodwill, represented the excess of the sum of the carrying value of the net assets (tangible and identifiable intangible) and goodwill over the discounted cash flows of the business being evaluated. In determining the estimated future cash flows, we considered current and projected future levels of income as well as business trends, prospects and market and economic conditions.

Valuation Allowance on Net Deferred Tax Assets

        At December 31, 2003, we provided a full valuation allowance of $91,727 on our net deferred tax assets. Realization of net deferred income tax assets is dependent upon generating sufficient future taxable income in the periods in which the underlying temporary differences reverse, or prior to the dates that net operating loss carryforwards expire. We must assess the likelihood that our net deferred tax assets will be recovered in the future. Because we believe that recovery is not likely, we have established a full valuation allowance.

Contractual Commitments

        The following table summarizes our obligations and commitments to make future payments under certain contracts, including debt obligations, capitalized leases and operating leases at December 31, 2003.

        In addition, the Company will be required to make interest payments, the amount of which will depend upon outstanding debt and applicable interest rates.

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        Under the New Credit Facility entered into following emergence from bankruptcy on February 11, 2004, the Company has scheduled principal repayments quarterly on the term loan facilities through the May 15, 2007 maturity date of the New Credit Facility. Scheduled principal payments on the facility are as follows: $55,000 in 2004, $20,000 in 2005, $20,000 in 2006 and the facility balance of $369,000 is due upon expiration in 2007.

Results of Operations

        The following table shows information from the Company's consolidated statements of operations as a percentage of total revenues.

        The Company's historical consolidated financial statements included herein cover the years ended December 31, 2003, 2002 and 2001. Comparisons of the Company's results are significantly impacted by the fact that the Company completed the acquisition of the North American equipment rental business of Brambles U.S.A. and Brambles Canada ("Brambles") on December 31, 2001. The results of operations of Brambles are included in the Company's financial statements only from the date of acquisition.

        The Company's financial performance has been negatively affected over the last two years due to lower activity levels in the economy, a slowdown in non-residential construction, competitive pricing pressure due to over-capacity of rental equipment in the industry and lower demand. Additionally, the Company's Filing on June 27, 2003 generated concern among the Company's customers and vendors and disrupted business for a period of time.

        The resulting decrease in earnings negatively impacted the Company's cash flows from operations during this period, limiting the Company's ability to invest in its rental fleet. Management initiated several actions in response to these circumstances, including actions to reduce its operating expenses through personnel reductions and consolidation of branch and support operations, as well as asset sales to reduce

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its debt. Although these actions reduced debt levels by more than $100,000 in 2002 and 2003, the Company's liquidity has remained strained.

        During the year, the Company continued to close and consolidate branch locations and centralize administrative functions in an effort to reduce costs. For several months leading to the bankruptcy filing in June 2003, the Company entered into a series of discussions with its debt and equity holders to evaluate various restructuring alternatives. It was determined that it was in the best interest of the Company's creditors and other constituents to seek protection through voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. As a result of defaults under its credit facilities, throughout 2003 the Company operated with limited capital resources due to its inability to borrow under its senior credit facility.

Year Ended December 31, 2003, Compared With the Year Ended December 31, 2002

        Revenues.    Total revenues declined from $621,334 in 2002 to $567,099 in 2003. A $30,697 decrease in rental and service revenues was primarily the result of consistently declining rental rates during the most recent year. In some markets, rates were down more than 15% from the prior year. Rental equipment sales were down $8,942 in 2003 as compared to 2002 as the result of a variety of vendor trade packages and fleet auctions in which the Company participated during 2002. New equipment sales of $34,006 in 2003 were down $7,891 from the prior year, and other revenues were down $6,705 from 2002, both indicative of the slowdown experienced in the non-residential market during the year.

        Revenues in the General Rental and Other segment were down in 2003. Segment revenues of $469,873 in 2003 were down 9% from 2002 levels, with rental and service revenues down 7% year-over-year. As noted above, this decrease was primarily the result of continued pressure on rental rates. In addition, the Company has taken steps during the past two years to improve the mix of its fleet which has resulted in a fleet size that is approximately 13% smaller than when these efforts were initiated. Other revenues, primarily consisting of sales of parts and supplies, which generally complement equipment rentals and sales, were down as well.

        Traffic Safety segment revenues declined 5% from $102,854 in 2002 to $97,226 in 2003. Rental and service revenue was down $3,148 year-over-year as state funding of highway construction projects was down from prior year levels.

        Gross Profit.    Gross profit declined from $156,091 in 2002 to $147,197 in 2003 on the lower revenues. Gross margin improved slightly, however, from 25% to 26% during these respective periods. This improvement is the result of actions management has taken to integrate the Brambles acquisition, completed at the end of 2001, including branch closures and consolidations, as well as workforce reductions. Approximately fifteen percent of the Company's branches have been closed or consolidated since early 2002. Additionally, the write-down of off-brand and impaired fleet negatively impacted the Company's operating expenses by $6,333 in 2002.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses decreased from $141,821 in 2002 to $136,407 in 2003. As with direct costs, this improvement is the result of actions management has taken to consolidate and centralize branch and administrative operations. Additionally, the Company recorded a $3,769 charge associated with severance and lease termination costs incurred as a result of restructuring initiatives undertaken during 2002. Selling, general and administrative expenses for 2003 include $5,346 of reorganization expenses incurred prior to the bankruptcy filing.

        Reorganization Expenses.    Subsequent to the bankruptcy filing, the Company incurred $8,816 of charges related to the reorganization. These expenses related to professional fees incurred, amortization of loan origination fees and employee retention-related expenses.

        Goodwill Impairment.    As a result of the Company's bankruptcy filing on June 27, 2003, the Company completed an impairment analysis of goodwill as of June 30, 2003. Based on the results of this analysis, the

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Company recorded a non-cash impairment charge of $138,115 during the second quarter of the year, which reflected the impairment of the remaining goodwill of the Company.

        Non-rental Depreciation and Amortization.    Non-rental depreciation and amortization declined slightly from $9,666 in 2002 to $7,699 in 2003, primarily as a result of the expiration of a portion of the Company's non-compete agreements.

        Operating Income (Loss).    As a result of the performance described above, operating income (loss) declined from $4,604 in 2002 to $(143,840) in 2003. Operating loss for the General Rental and Other segment declined from $(3,072) in 2002 to $(106,034) in 2003, and operating income (loss) within the Traffic Safety segment declined from $7,676 to $(37,806) during these respective periods.

        Interest Expense, net.    Interest expense, net decreased from $71,742 in 2002 to $60,600 in 2003. Upon filing for bankruptcy, the Company discontinued its monthly accrual for interest associated with the Senior Subordinated Notes, Series B and Series D. Had the Company continued to accrue for this interest, an additional $13,750 of interest expense would have been recognized during 2003.

        Loss from Discontinued Operations.    On June 30, 2002, the Company sold its underground trench shoring business. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the financial condition and results of operations of this business are reflected herein as discontinued operations.

        Gain on Disposal of Discontinued Operations.    The gain on the disposal of discontinued operations in 2002 reflects the gain recognized in conjunction with the sale of the underground trench shoring business discussed above.

        Cumulative Effect of a Change in Accounting Principle.    The cumulative effect of a change in accounting principle reflects the charge recognized in conjunction with the adoption of SFAS No. 142, effective January 1, 2002.

        Income Tax Expense (Benefit).    The Company did not provide any current or deferred income tax provision or benefit during 2002 or 2003 because it has experienced significant operating losses. Prior to June 30, 2002, the Company was in a net deferred tax liability position. At June 30, 2002 the Company, as a result of adopting SFAS No. 142, was in a net deferred tax asset position. At that time, it was determined that a full valuation allowance against the net deferred tax asset should be recorded and no future net deferred tax assets were recorded.

Year Ended December 31, 2002, Compared With the Year Ended December 31, 2001

        Revenues.    Total revenues increased from $555,298 in 2001 to $621,334 in 2002. A $48,471 increase in rental and service revenues was primarily the result of the operations acquired in conjunction with the Company's acquisition of Brambles, partially offset by a slower economy. Rental equipment sales were up $13,002 as the result of a variety of fleet management techniques utilized during the year, including fleet auctions and vendor trade packages, in an effort to improve the overall quality of the Company's fleet. A $2,621 decline in new equipment sales from 2001 to 2002 was more than offset by a $7,184 increase in other revenues, primarily related to increased parts sales as a result of the Brambles acquisition.

        Revenues in the General Rental and Other segment increased significantly from $446,261 in 2001 to $518,420 in 2002. As noted above, this increase was primarily the result of the operations acquired in conjunction with the Brambles transaction at the end of 2001, offset slightly by general pressure on pricing. Rental and service revenues increased 14% from 2001 to 2002.

        Revenues in the Traffic Safety segment declined $6,183 or 5.7% from $109,037 in 2001 to $102,854 in 2002. This decrease is primarily the result of increased rental rate pressure due to the less favorable economic conditions experienced in 2002 as compared to the prior year.

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        Gross Profit.    Gross profit declined from $162,460 in 2001 to $156,091 in 2002. Gross margin decreased from 29% to 25% during these respective periods primarily due to the continued decline in rental rates, as well as a 2% decline in margins earned on fleet sales in 2002 in connection with the fleet management initiatives discussed above. Additionally, the write-down of off-brand and over-valued fleet negatively impacted the Company's operating expenses by $6,333 in 2002.

        Gross profit for the General Rental and Other operations increased slightly from $130,290 in 2001 to $131,040 in 2002. Gross margins declined from 32.1% in 2001 to 27.8% in 2002. Again, this decline in margins is primarily the result of increased rate pressure and the asset write-downs discussed above.

        Gross profit for the Traffic Safety operations decreased slightly from $32,170 for 2001 as compared to $25,051 for 2002. Gross margins declined from 29.5% in 2001 to 24.3% in 2002 as a result of increased pressure on rental rates.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased from $114,837 in 2001 to $141,821 in 2002. This increase is primarily the result of the additional infrastructure acquired in conjunction with the Brambles transaction. Additionally, the Company recorded a $3,769 charge associated with severance and lease termination costs incurred as a result of restructuring initiatives undertaken during the fourth quarter of 2002. As a percentage of revenue, these costs increased from 21% to 23% in the respective periods.

        Non-rental Depreciation and Amortization.    Non-rental depreciation and amortization decreased significantly from $26,171 in 2001 to $9,666 in 2002. This decrease is primarily the result of the Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," in 2002, under which no amortization expense of goodwill is recorded.

        Operating Income.    As a result of the performance described above, operating income declined from $21,452 in 2001 to $4,604 in 2002 and approximated 1% of total revenues in 2002. Operating income (loss) for the General Rental and Other segment declined from $11,704 in 2001 to $(3,072) in 2002, and operating income within the Traffic Safety segment declined from $9,748 to $7,676 during these respective periods.

        Interest Expense, net.    Interest expense, net increased from $68,306 in 2001 to $71,742 in 2002. This increase is the result of higher average debt balances associated with continuing operations during the year, partially offset by lower interest rates on the Company's variable debt.

        Loss from Discontinued Operations.    On June 30, 2002, the Company sold its underground trench shoring business. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the financial condition and results of operations of this business are reflected herein as discontinued operations.

        Gain on Disposal of Discontinued Operations.    The gain on the disposal of discontinued operations reflects the gain recognized in conjunction with the sale of the underground trench shoring business discussed above.

        Cumulative Effect of a Change in Accounting Principle.    The cumulative effect of a change in accounting principle reflects the charge recognized in conjunction with the adoption of SFAS No. 142, effective January 1, 2002.

        Income Tax Expense (Benefit).    The Company did not provide any current or deferred income tax provision or benefit during 2002 because it has recently experienced significant operating losses. Prior to June 30, 2002, the Company was in a net deferred tax liability position. At June 30, 2002 the Company, as a result of adopting SFAS No. 142, was in a net deferred tax asset position. At that time, it was determined that a full valuation allowance against the net deferred tax asset should be recorded and no future net deferred tax assets were recorded.

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Liquidity, Financial Condition and Capital Resources

        The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and payment of liabilities in the ordinary course of business, and do not reflect adjustments that might result if the Company is unable to continue as a going concern. The Company's history of significant losses, the stockholders' deficit as of December 31, 2003, and the Chapter 11 bankruptcy filing discussed herein raise substantial doubt about the Company's ability to continue as a going concern. Continuing as a going concern is dependent upon, among other things, the success of future business operations and the generation of sufficient cash from operations and financing sources to meet the Company's obligations. The Company is presently considering a variety of alternatives to provide other sources of cash flow outside of ordinary operations. These alternatives include refinancing, fleet sales and other asset dispositions. The consolidated financial statements do not reflect the effect of any changes to the Company's capital structure or in the Company's business operations as the result of the Plan of Reorganization.

        The Company's primary capital requirements are for the purchase of new rental equipment. The Company of purchases rental equipment throughout the year to replace equipment that has been sold as well as to maintain adequate levels of equipment to meet existing and new customer needs. Rental fleet purchases for the Company were $33,902, $61,255 and $15,172 in 2003, 2002 and 2001, respectively. The Company's expenditures for rental fleet are expected to be approximately $90,000 in 2004. The Company's other capital expenditures include buying vehicles used for delivery and maintenance and for purchasing non-rental property and equipment. The Company's principal sources of liquidity are cash generated from operations and borrowings available under its credit facility. In the last two years, however, as a result of the Company's financial position, the Company has had limited capital available for capital expenditures due to more immediate funding requirements associated with debt service, insurance bonds and performance deposits.

        For the years ended December 31, 2003, 2002 and 2001, the Company's net cash provided by operations was $34,598, $47,123 and $100,569, respectively. The decline in cash provided by operations in 2003 as compared to 2002 is primarily the result of an increase in deposits required by vendors as a result of the Filing. The decrease in 2002 as compared to 2001 is primarily the result of an increase in net loss. For the same three years, the Company's net cash provided by (used in) investing activities was ($10,047), $81,192 and ($92,616), respectively. Net cash used in investing activities consists primarily of expenditures for new acquisitions and rental equipment purchases. The Company spent $92,359 to acquire Brambles in 2001 and received $108,890 in proceeds on the sale of its trench shoring division in 2002. These transactions, in addition to the fleet purchases noted above, caused the changes noted in cash flows from investing activities. Net cash provided by (used in) financing activities was $10,515, $(117,330) and $(6,916) in 2003, 2002 and 2001, respectively. Net cash provided by financing activities consists primarily of borrowings, net of repayments, under the Company's credit facility. The Company utilized the proceeds from the sale of the trench shoring business to repay outstanding indebtedness during 2002.

        In connection with the Company's emergence from bankruptcy on February 11, 2004, NESR entered into the New Credit Facility. The New Credit Facility consists of $285,000 of term loan facilities and a $205,000 revolving credit facility, subject to availability based on certain financial tests that include a borrowing base. The New Credit Facility matures on May 15, 2007.

        The New Credit Facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to 1) adjusted EBITDA levels, 2) fixed charge coverage ratios, 3) debt leverage ratios and 4) capital expenditure levels. The credit facility also contains various other covenants that restrict the Company's ability to, among other things, 1) incur additional indebtedness, 2) permit liens to attach to its assets, 3) pay dividends or make other restricted payments on its common stock and certain other securities and 4) make acquisitions unless certain financial conditions are satisfied.

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        As of February 11, 2004, NESR had $464,000 outstanding under the New Credit Facility, and $26,000 of additional availability on the revolving credit facility. The borrowing base is determined by NESR's eligible inventory, accounts receivable and rental equipment and is recomputed monthly. In the event that the book value of NESR's inventory or accounts receivable or the appraised value of NESR's rental equipment declines without a corresponding increase in one of the other categories, the available borrowing base will be temporarily reduced accordingly.

        Under the New Credit Facility, scheduled principal payments are as follows: $55,000 in 2004, $20,000 in 2005, $20,000 in 2006 and the facility balance of $369,000 is due upon expiration in 2007. The Company is presently considering a variety of alternatives to provide other sources of cash flow outside of ordinary operations to address these scheduled repayments. These alternatives include refinancing, fleet sales and other asset dispositions.

        During 1997, the Company issued $100,000 of Senior Subordinated Notes due 2004 (the "Series A Notes") at a discount netting proceeds of $95,000. During 1998, the Company completed its exchange of $100,000 of Senior Subordinated Notes due 2004, Series B (the "Series B Notes"), which were registered for public trading, for the Series A Notes. Also during 1998, the Company issued $125,000 of Senior Subordinated Notes due 2004, Series C (the "Series C Notes") at a discount netting proceeds of $122,000. During 1999, the Company issued $50,000 of additional Series C Notes, at a discount netting proceeds of $49,000. Later during 1999, the Company completed its exchange of $175,000 of Senior Subordinated Notes due 2004, Series D (the "Series D Notes"), which were registered for public trading, for the Series C Notes. In accordance with the Plan of Reorganization, the holders of the Company's Series B Notes and Series D Notes received 97.5% of the New Common Stock of the Company.

Recently Issued Accounting Pronouncements

        In May 2003, the Financial Accounting Standards Board issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires that certain financial instruments with characteristics of both liabilities and equity be classified as a liability and the accretion of any related fees be classified as interest expense rather than as a charge to retained earnings. The Company adopted SFAS No. 150 on July 1, 2003, and as a result the Company has reclassified $97,046 of senior redeemable preferred stock to liabilities. However, SFAS No. 150 does not permit the reclassification of the senior redeemable preferred stock to liabilities in financial statements prior to the effective date. Accordingly, the December 31, 2002 liabilities exclude the senior redeemable preferred stock.

Factors That May Influence Future Results

Filing

        The Company's Filing on June 27, 2003 generated concern among the Company's customers and suppliers and disrupted business for a period of time during 2003. Disclosure of the terms of the Company's Plan of Reorganization to employees, customers and vendors, as well as the subsequent emergence from bankruptcy protection in February 2004, have reduced the distractions caused by the Filing. However, the ultimate impact of the Filing on future results is not known.

Unfavorable Economic Conditions

        Our end-users consist of construction and industrial customers. Weaknesses in these markets may lead to a decrease in demand for our equipment and services. Recent declines in the non-residential construction industry, as well as reduced funding at the federal and state levels on infrastructure, have adversely affected our results of operations. The future impact of potential continued declines in these areas is not known.

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Seasonality

        The Company's revenues and operating results fluctuate significantly from quarter to quarter due to the seasonal nature of the markets in which the Company operates. The Company's presence both in the traffic safety and control industry and in the general rental market in the Northeast and Midwest are both highly seasonal in nature, with activity tending to be lower in the winter.

Indebtedness

        The Company's substantial indebtedness could adversely affect the Company's operations in the future in one or more of the following ways:

•

Significant cash required for debt service could limit the Company's ability to invest in its rental fleet and grow operations,



•

Increases in interest rates could result in increased interest expense and increased cash for debt service,



•

The Company's ability to obtain additional financing could be limited as essentially all of the assets of the Company secure the existing indebtedness and



•

Failure to comply with covenants associated with the existing indebtedness could result in the creditors' ability to require repayment of outstanding indebtedness thereunder.

Competition

        The equipment rental industry is highly fragmented and competitive. Numerous competitors serve many of the markets in which the Company operates. These competitors range from national and multi-regional operators to small, independent businesses with a limited number of locations. Management believes that participants in the equipment rental industry compete on the basis of availability and quality of equipment, service, delivery time and price. Recent economic pressures have reduced market demand and forced industry participants to lower rental rates, adversely impacting the Company's results of operations. The future impact of potential continued economic declines is unknown.

Legal Proceedings

        From time to time, the Company has been and is involved in various legal proceedings, all of which management believes are routine in nature and incidental to the conduct of its business. Although the Company does not believe that an adverse ruling in any of these proceedings would have a material adverse impact on the Company's results of operations, the Company's ultimate legal and financial liability resulting from any of these proceedings cannot be estimated with certainty.

Environmental

        The Company's facilities are subject to federal, state and local environmental requirements relating to discharges to air, water and land; the handling and disposal of solid and hazardous waste; and the cleanup of properties affected by hazardous substances. Based on environmental assessments conducted in connection with the Company's acquisitions, the Company believes that its facilities are in substantial compliance with environmental requirements, and that the Company has no material liabilities arising under environmental requirements. However, some risk of environmental liability is inherent in the nature of the Company's business, and in the future the Company may incur material costs to meet current or more stringent compliance, cleanup or other obligations under environmental laws.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The New Credit Facility consists of $285,000 of term loan facilities and a $205,000 revolving credit facility, subject to availability based on certain financial tests that include a borrowing base. Borrowings under the credit facility bear interest, at the Company's option, at a specified base rate or LIBOR rate plus the applicable borrowing margin. At March 19, 2004, the Company had total borrowings under the credit facility of $462,000. Each 100 basis point increase in interest rates on the variable rate debt would decrease pretax earnings by approximately $4,600.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Independent Auditors' Report

The Board of Directors
    NES Rentals Holdings, Inc.:

        We have audited the accompanying consolidated balance sheet of National Equipment Services, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for the year then ended. 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 audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to 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 audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Equipment Services, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net stockholders' deficit that raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        As discussed in Note 13 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" on July 1, 2003.

/s/ KPMG LLP

Chicago, Illinois
March 29, 2004

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
    of National Equipment Services, Inc.

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of National Equipment Services, Inc. and its subsidiaries (the "Company") at December 31, 2002 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index for the two years ending December 31, 2002 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, is in default of its senior credit facility and lacks the ability to repay obligations coming due July 2003 which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets during 2002.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois
April 15, 2003

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NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of June 27, 2003)

CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

27

NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of June 27, 2003)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2003, 2002 and 2001

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

28

NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of June 27, 2003)

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

29

NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of June 27, 2003)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2003, 2002 and 2001

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

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NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(Debtor-in-Possession as of June 27, 2003)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2003, 2002 and 2001

(Amounts in thousands)

1.    Organization and Basis of Presentation

        National Equipment Services, Inc. (the "Company") is principally a holding company organized under the laws of Delaware. The Company conducts its operations through its wholly owned subsidiaries acquired or formed since the date of inception. The Company owns and operates equipment rental, sales and service facilities primarily located throughout the United States of America. The Company rents various types of equipment to a diverse customer base, including construction, automotive and other industrial users. The Company also sells new equipment and used equipment out of its rental fleet, sells related parts and provides other services. The nature of the Company's business is such that short-term obligations are met typically by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying consolidated balance sheets are presented on an unclassified basis.

        The consolidated financial statements include accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

        The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and payment of liabilities in the ordinary course of business, and do not reflect adjustments that might result if the Company is unable to continue as a going concern. The Company's history of significant losses, the stockholders' deficit as of December 31, 2003, and the Chapter 11 bankruptcy filing discussed herein raise substantial doubt about the Company's ability to continue as a going concern. Continuing as a going concern is dependent upon, among other things, the success of future business operations and the generation of sufficient cash from operations and financing sources to meet the Company's obligations.

        The consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Under SOP 90-7, revenues and expenses, realized gains and losses and provisions for losses resulting from the reorganization of the business are to be reported in the consolidated statements of operations separately as reorganization expenses. Professional fees are expensed as incurred. Interest expense is reported only to the extent that it will be paid during the bankruptcy or that it is probable that it will be an allowed claim.

        The consolidated financial statements do not reflect the effect of any changes to the Company's capital structure or in the Company's business operations as the result of the approved fourth amended joint plan of reorganization.

2.    Bankruptcy

        On June 27, 2003, the Company and its U.S. subsidiaries (collectively, the "Debtors") filed for voluntary reorganization under Chapter 11 (the "Filing") of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the Northern District of Illinois ("Bankruptcy Court"). The Company's subsidiary located in Canada, which reflects less than 2% of total revenues and total assets in 2003, was not included in the petition. Due to the size of the Company's Canadian subsidiary, the consolidated financial statements of the Company presented herein are essentially equivalent to the consolidated financial statements of the Debtors. As of December 31, 2003, the Debtors were operating their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

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        The initial joint plan of reorganization was filed on October 17, 2003. On January 23, 2004, the Debtors filed a fourth amended joint plan of reorganization (the "Plan of Reorganization"), which received the requisite support from the creditors authorized to vote thereon. The Plan of Reorganization was confirmed by the bankruptcy court on January 23, 2004, and the Company emerged from bankruptcy on February 11, 2004 (the "Effective Date").

        From June 27, 2003 through February 11, 2004, the Debtors continued to operate as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. Shortly after the Filing, the Debtors began notifying all known or potential creditors about the Filing for the purposes of identifying all pre-petition claims against the Debtors. Any creditor actions to obtain possession of property from the Debtors or to create, perfect or enforce any lien against the property of the Debtors were stayed. As a result, the creditors of the Debtors were precluded from collecting pre-petition debts without the approval of the Bankruptcy Court. Certain pre-petition liabilities have been paid after obtaining the approval of the Bankruptcy Court, including certain wages and benefits of employees and insurance costs.

        The Company obtained Debtor-in-Possession financing which provided up to $30,000 of availability to the Company to fund operations during the bankruptcy period. The Company did not borrow any funds from this financing source during the period it was in place.

        The Plan of Reorganization provides for the cancellation of all of the issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the "Old Common Stock"), all of the issued and outstanding shares of preferred stock of the Company, and all other outstanding securities of the Company, including common stock options as of the Effective Date.

        On the Effective Date, National Equipment Services, Inc. merged into NES Rentals, Inc. NES Rentals, Inc. was the surviving company in the merger and was renamed National Equipment Services, Inc. NES Rentals, Inc. is a subsidiary of both NES IT Services, Inc. and NES Real Estate Management, Inc., which are subsidiaries of the newly formed NES Rentals Holdings, Inc. ("NESR"), which is the successor to National Equipment Services, Inc. NESR is the new public company parent of National Equipment Services, Inc. NESR has 25,000 authorized shares of common stock, of which 21,400 will be issued (the "New Common Stock").

        In accordance with the Plan of Reorganization, (i) holders of general unsecured claims, including the holders of the Company's Senior Subordinated Notes due 2004, Series B (the "Series B Notes") and Senior Subordinated Notes due 2004, Series D (the "Series D Notes"), are to receive 97.5% (20,865 shares) of the New Common Stock of the Company, (ii) the holders of the Company's preferred stock are to receive 2.0% (428 shares) of the New Common Stock of the Company, and (iii) the holders of the Company's Old Common Stock are to receive 0.5% (107 shares) of the New Common Stock of the Company.

        On the Effective Date, NESR entered into a new senior secured credit facility (the "New Credit Facility"). The New Credit Facility consists of $285 million of term loan facilities and a $205 million revolving credit facility. There are quarterly scheduled principal repayments on the term loan facilities through the May 15, 2007 maturity date of the New Credit Facility.

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        As a result of the emergence from bankruptcy, the Company is to adopt fresh-start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires the Company to allocate the reorganization value of the reorganized company to its assets and to state liabilities existing at the Plan of Reorganization confirmation date at present values of amounts to be paid determined at appropriate current interest rates. For financial reporting purposes, the effective date of the emergence from bankruptcy is the close of business on January 31, 2004. Accordingly, the effects of the adjustments on the reported amounts of individual assets and liabilities resulting from the adoption of fresh-start reporting will be recorded in the Company's consolidated financial statements prior to emergence. As a result of the reorganization and the expected adoption of fresh-start reporting, the Company's results of operations after January 31, 2004 will not be comparable to results reported in prior periods.

3.    Significant Accounting Policies

Cash and Cash Equivalents

        Cash and cash equivalents are highly liquid investments with original maturities of three months or less.

Trade Accounts Receivable

        Trade accounts receivable represents amounts due from customers on rental and service contracts and equipment sales. Allowances for doubtful accounts are estimated at each balance sheet date based on the age of the receivables from the due date. Accounts are written-off as they are determined to be uncollectible. Bad debt expense totaled $9,522, $6,004 and $10,226 for the years ended December 31, 2003, 2002 and 2001, respectively.

Inventory

        Inventory primarily consists of new and used equipment held for sale, supplies, and spare parts held for sale and internal maintenance. Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method or the weighted average cost method. Reserves for excess and obsolete inventory are estimated at each balance sheet date.

Rental Equipment

        Rental equipment is recorded at cost. Depreciation of rental equipment is computed using the straight-line method over two to fifteen year estimated useful lives. Accumulated depreciation on rental equipment was $353,126 and $303,096 at December 31, 2003 and 2002, respectively. When rental equipment is sold, the related cost and accumulated depreciation are removed from the respective accounts. Proceeds from the sale and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from rental equipment sales and cost of rental equipment sales in the consolidated statements of operations and comprehensive loss. Rental equipment depreciation expense aggregated $106,759, $119,731 and $99,779 for the years ended December 31, 2003, 2002 and 2001, respectively. Ordinary repairs and maintenance costs are charged to operations as incurred.

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Property and Equipment

        Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

        When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gains or losses are included in the consolidated statements of operations and comprehensive loss. Ordinary repairs and maintenance costs are charged to operations as incurred.

Impairment of Long-Lived Assets

        In accordance with the Company's adoption in 2002 of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," a long-lived asset or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, the Company compares the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of the long-lived asset or asset group. If this comparison indicates that there is an impairment, the amount of the impairment is measured by comparing the carrying value to the fair market value of the asset. Fair market value is typically based on the discounted expected future cash flows. The discount rate applied to these cash flows is based on the Company's weighted-average cost of capital, which represents the blended after-tax costs of debt and equity. The Company recognized impairments of $831, $6,743 and $3,183, related to rental fleet and buildings in 2003, 2002 and 2001, respectively, which are appropriately included as depreciation expense in the consolidated statements of operations and comprehensive loss.

Goodwill

        Goodwill consists of the capitalized excess cost over acquired net assets. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets," that superseded APB Opinion No. 17, Intangible Assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under this standard, goodwill is no longer amortized but subject to annual impairment testing on a reporting unit level.

        The Company completed its initial impairment analysis in the second quarter of 2002 and recorded a non-cash impairment charge of approximately $155,102 ($129,505, net of tax benefit), as a cumulative effect of a change in accounting principle retroactive to January 1, 2002, on the consolidated statement of operations and comprehensive loss. See Note 8 for further discussion regarding the adoption of the SFAS No. 142. As a result of the Company's bankruptcy filing on June 27, 2003, the Company completed an impairment analysis of goodwill as of June 30, 2003. Based on the results of this analysis, the Company

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recorded a non-cash impairment charge of approximately $138,115 in the second quarter of the year, which reflected the impairment of the remaining goodwill of the Company.

        The Company evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. The rate used in determining discounted cash flows is a rate corresponding to the Company's cost of capital, risk adjusted where necessary. Estimated cash flows are then determined by disaggregating the Company's business segments to a reporting level for which meaningful identifiable cash flows can be determined. When estimated future discounted cash flows are less than the carrying value of the net assets (tangible and identifiable intangibles) and related goodwill, impairment losses of goodwill are charged to operations. Impairment losses, limited to the carrying value of goodwill, represent the excess of the sum of the carrying value of the net assets (tangible and identifiable intangible) and goodwill over the discounted cash flows of the business being evaluated. In determining the estimated future cash flows, the Company considers current and projected future levels of income as well as business trends, prospects and market and economic conditions.

Loan Origination Costs

        At December 31, 2002, loan origination costs consisted primarily of $14,011 related to the Senior Credit Facility and $9,193 related to the Senior Subordinated Notes, all of which were stated at cost and amortized to interest expense using the effective interest rate method over the life of the related debt. Accumulated amortization related to loan origination costs aggregated $17,063 at December 31, 2002. The Company continued to amortize these costs up to June 27, 2003, the date of the Filing, and subsequently wrote-off the remaining unamortized loan origination costs as reorganization fees in accordance with SOP 90-7.

Income Taxes

        The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of net deferred income tax assets is dependent upon generating sufficient future taxable income in the periods in which the underlying temporary differences reverse, or prior to the dates that net operating loss carryforwards expire.

Fair Value of Financial Instruments

        The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable and trade accounts payable approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair value of pre-petition debt, including the Company's Senior Credit Facility, the Senior Subordinated Notes and the senior mandatorily redeemable preferred stock, is not determinable due to the uncertainties surrounding the repayment terms of this debt as a result of the Filing.

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Hedging Instruments

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as "SFAS No. 133") require that all derivative financial instruments be recorded on the consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period as charges or credits to operations or accumulated other comprehensive loss, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction.

Concentration of Credit Risk

        Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable from construction and industrial customers. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and the Company's geographic dispersion. The Company performs credit evaluations of its customers' financial condition and generally does not require collateral on trade accounts receivable. The Company maintains an allowance for doubtful accounts on its trade accounts receivable based upon expected collectibility.

Stock-Based Compensation

        The Company accounts for its stock-based employee compensation plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. In accordance with the intrinsic value method, no compensation expense is recognized for the Company's stock option plan as options are granted at an exercise price equal to or more than the fair market value as of the grant date. No stock options were granted in 2003. All options were cancelled upon the Company's emergence from bankruptcy on February 11, 2004. The disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS No. 123", for all periods presented in the consolidated financial statements have been omitted as such information is deemed to be not meaningful.

Use of Estimates

        The preparation of consolidated 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, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates relate to useful lives and recoverability of long-lived assets, residual values of rental equipment and reserves and allowances for trade accounts receivable and inventory. Actual results could differ from those estimates.

Revenue Recognition

        Rental revenues in the consolidated statements of operations include revenue earned on equipment rentals and rental equipment delivery and pick-up fees. Revenues from equipment rentals are recognized

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ratably over the contract term. Service revenue is recognized as the work is completed. For construction-related contracts, which comprise approximately 5% of total revenues, revenues are recognized based on the percentage of work completed. Revenues from equipment and part sales are recognized at the point of delivery. Other revenues, which consist primarily of the sale of parts and supplies, are recognized upon completion of the sale. Unbilled revenues at December 31, 2003 and 2002 were $32,805 and $20,987, respectively.

Foreign Currency Translation

        The Company's Canadian subsidiary maintains its books and records in Canadian dollars. Assets and liabilities of the Canadian subsidiary are translated into U.S. dollars using exchange rates at the end of the year. Revenues and expenses are translated at average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) within stockholders' equity (deficit).

Shipping and Handling Costs

        Shipping and handling costs are included in cost of revenues in the accompanying statements of operations and comprehensive loss.

Reclassifications

        Certain reclassifications of prior year consolidated financial statement amounts have been made to conform to the current year presentation. These reclassifications between operating and administrative costs reflect changes in job classifications between years.

4.    Per Share Information

        As all of the Company's Old Common Stock was cancelled per the terms of the Plan of Reorganization, earnings (loss) per share information for all annual and quarterly periods presented on the consolidated statement of operations has been omitted as such information is deemed to be not meaningful.

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5.    Acquisitions and Dispositions

        On June 30, 2002, the Company sold its underground trench shoring business. The proceeds of $108,890 from the sale were used to repay indebtedness under the Credit Facility. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the financial condition and results of operations of this business are presented herein as discontinued operations and prior periods have been restated. Components of amounts presented as discontinued operations in the statements of operations and comprehensive loss and balance sheets are as follows:

        The Company incurred $518 of losses associated with discontinued operations in 2003 related to write-offs of accounts receivable of the underground trench shoring business which was sold in 2002.

        On December 31, 2001, the Company purchased Brambles Equipment Services, Inc. ("BESI"), an equipment rental company based in Taylor, Michigan, for a total purchase price of $95,359. This transaction has been accounted for by the purchase method of accounting and is included in the Company's results of operations from the closing date of the acquisition. The purchase price was allocated based on the fair values of assets acquired and liabilities assumed.

6.    Inventory

        Inventory, net consists of the following at December 31: