Forward Looking Statements

Note: This quarterly 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, changes in market price or market demand for rental equipment; loss of business from customers; general declines in rental rates in the market; pricing pressure from competitors; unanticipated expenses; changes in financial markets; the Company’s substantial leverage; 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.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share information)

	March 31, 2005			December 31, 2004
	(Unaudited)
Assets
Cash and cash equivalents	$	5,676		$	39,050
Trade accounts receivable, net of allowance for doubtful accounts of $5,187 and $5,532, respectively	111,281			129,826
Inventory, net of reserves	14,005			14,863
Prepaid expenses and other assets	26,660			22,852
Rental equipment, net of depreciation	380,555			383,934
Property and equipment, net of depreciation	25,906			26,969
Unamortized debt issuance costs	12,611			13,323
Unamortized intangible assets	8,811			9,421
Total assets	$	585,505		$	640,238
Liabilities
Trade accounts payable	$	21,284		$	29,419
Accrued expenses and other liabilities	42,450			45,750
Debt	448,113			474,640
Total liabilities	511,847			549,809
Commitments and contingencies	—			—
Stockholders’ equity:
Common stock, $0.01 par, 25,000 shares authorized; 19,029 shares issued and outstanding at March 31, 2005; 19,004 shares issued and outstanding at December 31, 2004	190			190
Additional paid-in capital	151,642			151,642
Accumulated deficit	(78,970		)	(62,248		)
Accumulated other comprehensive income	796			845
Total stockholders’ equity	73,658			90,429
Total liabilities and stockholders’ equity	$	585,505		$	640,238

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share information)

	Successor						Predecessor
	For the three months ended March 31, 2005			For the two months ended March 31, 2004			For the one month ended January 31, 2004
	(Unaudited)			(Unaudited)
Revenues
Rental and service revenues	$	103,671		$	65,887		$	33,068
New equipment sales	5,462			5,029			3,318
Rental equipment sales	6,277			6,240			2,120
Other revenues	4,237			2,906			1,424
Total revenues	119,647			80,062			39,930
Cost of revenues
Cost of rental and service revenues	55,000			35,997			17,454
Rental equipment depreciation	27,894			17,842			8,138
Cost of new equipment sales	4,588			4,052			2,802
Cost of rental equipment sales	3,615			4,409			1,328
Other operating expenses	4,378			2,920			1,498
Total cost of revenues	95,475			65,220			31,220

Gross profit	24,172			14,842			8,710

Selling, general and administrative expenses	30,136			20,825			9,670
Reorganization expenses	—			—			1,973
Fresh start accounting adjustments	—			—			(50,667		)
Non-rental depreciation and amortization	1,626			3,428			858
Operating income (loss)	(7,590		)	(9,411		)	46,876

Other income, net	187			178			80
Gain on discharge of debt	—			—			241,128
Interest expense (contractual interest of $4,921 for the one month ended January 31, 2004)	9,319			5,420			2,629
Income (loss) from continuing operations before income taxes	(16,722		)	(14,653		)	285,455

Income tax expense	—			—			—
Net income (loss)	(16,722		)	(14,653		)	285,455

Other comprehensive loss	(49		)	(56		)	(279		)
Comprehensive income (loss)	$	(16,771	)	$	(14,709	)	$	285,176

Basic loss per common share	$	(0.88	)	$	(0.77	)
Diluted loss per common share	$	(0.88	)	$	(0.77	)
Weighted average shares outstanding:
Basic calculation	19,029			18,931
Diluted calculation	19,029			18,931

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Successor								Predecessor
	For the three months ended March 31, 2005				For the two months ended March 31, 2004				For the one month ended January 31, 2004
	(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	(16,722		)	$	(14,653		)	$	285,455
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	29,520				21,270				8,996
Amortization of debt issuance costs	712				154				—
Gain on sale of equipment	(2,752			)	(1,989			)	(861		)
Changes in operating assets and liabilities:
Trade accounts receivable	18,545				3,113				2,787
Inventory	858				(1,716			)	(61		)
Prepaid expenses and other assets	(3,808			)	(5,591			)	(2,745		)
Trade accounts payable	(8,135			)	5,980				(583		)
Accrued expenses and other liabilities	(3,349			)	7,748				1,857
Chapter 11 items:
Fresh start accounting adjustments	—				—				(50,667		)
Gain on discharge of debt	—				—				(241,128		)
Net cash flows provided by operating activities	14,869				14,316				3,050

Cash flows from investing activities:
Purchases of rental equipment	(26,268			)	(27,295			)	(4,362		)
Proceeds from sale of rental equipment	6,277				6,240				2,120
Purchases of property and equipment	(1,885			)	(987			)	(819		)
Proceeds from sale of property and equipment	160				4,265				111
Net cash flows used in investing activities	(21,716			)	(17,777			)	(2,950		)

Cash flows from financing activities:
Proceeds from debt	—				—				481,172
Payments on long-term debt	(26,381			)	(4,703			)	(482,363		)
Net proceeds under revolving credit facility	(146			)	(19,270			)	—
Payments of debt issuance costs	—				—				(6,278		)
Increase (decrease) in book overdraft (checks yet to clear)	—				10,974				(1,320		)
Net cash used in financing activities	(26,527			)	(12,999			)	(8,789		)
Net decrease in cash and cash equivalents	(33,374			)	(16,460			)	(8,689		)
Cash and cash equivalents at beginning of period	39,050				41,562				50,251
Cash and cash equivalents at end of period	$		5,676		$		25,102		$	41,562

Supplemental Cash Flow Information:
Cash paid for interest	$		5,860		$		3,810		$	2,663
Cash paid for income taxes	260				31				49

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except per share information)

1. Organization

NES Rentals Holdings, Inc. (the “Company” or the “Successor”) is principally a holding company organized under the laws of Delaware. The Company conducts its operations through its wholly-owned subsidiaries. The Company 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 from 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.

2. Reorganization

On June 27, 2003, National Equipment Services, Inc. (the “Predecessor Company”) and its U.S. subsidiaries (collectively, the “Debtors”) filed for voluntary reorganization under Chapter 11 (the “Reorganization”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the Northern District of Illinois (the “Bankruptcy Court”). 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. The Debtors’ fourth amended joint plan of reorganization (the “Plan of Reorganization”) was confirmed by the Bankruptcy Court on January 23, 2004, and the Debtors emerged from bankruptcy on February 11, 2004 (the “Effective Date”).

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

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 NES Rentals Holdings, Inc., which is the successor company to National Equipment Services, Inc. The Company has 25,000 authorized shares of common stock, par value $0.01 per share (the “New Common Stock”).

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

3. Basis of Presentation

As a result of the Company’s Reorganization as described in Note 2, the Company has applied fresh start reporting pursuant to the American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) as of January 31, 2004. As a result of the application of fresh start reporting on January 31, 2004, the pre-emergence financial results for the month ended January 31, 2004 are presented as the results of the “Predecessor.” Per share and share information for the Predecessor Company for the period presented herein have been omitted as such information is deemed to be not meaningful. Refer to Note 4 for further discussion regarding the application of fresh start reporting.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting only of normal recurring adjustments, except as described in Note 4 related to the application of fresh start reporting, have been included. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Results of operations for any interim period are not necessarily indicative of the results that may be expected for a full year. Due to the seasonality that impacts a significant portion of the Company’s locations, the second and third quarters are typically the most active quarters for the Company. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

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 include, but are not limited 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.

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 $856, $371 and $963 for the three months ended March 31, 2005, the two months ended March 31, 2004 and the month ended January 31, 2004, respectively.

Rental equipment — Rental equipment is recorded at cost at the date of purchase. Depreciation of rental equipment is computed using the straight-line method over one to fifteen year estimated useful lives.

Comprehensive loss — Unrealized foreign currency translation gains (losses) are included in other comprehensive loss for the periods presented herein.

Stock-Based Compensation—The Company accounts for its stock-based employee compensation plan, which is described more fully in Note 11, 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. Had compensation expense been determined based on the fair value at the grant date for awards under this plan consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net loss and net loss per share would have been as follows for the three months ended March 31, 2005:

Net loss, as reported	$		(16,722	)
Deduct: Total stock-based employee compensation expense determined under the fair value method, net of tax	(257			)
Pro forma net loss	$	(16,979		)

Basic loss per share, as reported	$	(0.88		)
Pro forma basic loss per share	$	(0.89		)
Diluted loss per share, as reported	$	(0.88		)
Pro forma diluted loss per share	$	(0.89		)

The determination of compensation expense for the pro forma information was based upon the estimated fair value of the options granted on the date of their grant using the Black-Scholes option pricing model and the following weighted average assumptions:

Risk-free interest rate	3.4	%
Expected life	5 years
Expected volatility	60	%
Expected dividend yield	-

The weighted average fair value of options, which were granted during the third quarter of 2004, was $3.97. The number of options exercisable at March 31, 2005 was 350.

Reclassifications—Certain reclassifications of prior year consolidated financial statement amounts have been made to conform to the current year presentation.

4. Fresh Start Accounting

Pursuant to SOP 90-7, the accounting for the effects of the Company’s reorganization occurred once the Plan of Reorganization was confirmed by the Bankruptcy Court. As discussed in Note 2, the Company’s Plan of Reorganization was

approved on January 23, 2004, and the Company emerged from bankruptcy on February 11, 2004. For financial reporting purposes, fresh start reporting was applied on January 31, 2004.

In accordance with SOP 90-7, the results of operations for the month ended January 31, 2004 include a pre-emergence gain of $241,128 resulting from the discharge of debt and other liabilities under the Plan of Reorganization and a pre-emergence gain of $50,667 resulting from the aggregate remaining changes to the net carrying value of the Predecessor Company’s pre-emergence assets and liabilities to reflect the fair values under fresh start reporting. The Predecessor Company’s estimated reorganization value at January 31, 2004, which approximates the amount a willing buyer would pay for the assets of the Company immediately after the Reorganization, was $716,252. The Company estimated the reorganization value for purposes of fresh start reporting utilizing the estimated value of the Company on an enterprise basis (the “Enterprise Value”), adjusted to exclude liabilities at January 31, 2004.

The Enterprise Value was determined by valuation specialists using the following three methodologies: (a) the application of public market valuation multiples to the Predecessor Company’s recent historical financial results, (b) the application of completed merger and acquisition transaction valuation multiples to the Predecessor Company’s recent historical financial results, and (c) a calculation of the present value of the debt-free cash flows on management’s projections, including an assumption for a terminal value (the “DCF Analysis”). The DCF Analysis involves deriving the debt-free cash flows that the Company would generate assuming the projections developed by management are realized. These cash flows and an estimated value of the Company at the end of the projected period (the “Terminal Value”) are discounted at the Company’s estimated post-Reorganization weighted average cost of capital. The financial projections utilized in the DCF analysis were developed by management and are based on estimates and assumptions, which include, but are not limited to, estimates and assumptions with respect to pricing by market, capital spending and working capital levels, and the development of a discount rate that is utilized to convert future projected cash flows to their estimated present value. The estimated projections and assumptions, while considered reasonable by management, may not be realized and are inherently subject to uncertainties and contingencies, which could significantly affect the measurement of the Enterprise Value and the reorganization value. Based on the above methodologies, the Enterprise Value was determined to be $633,000.

Under fresh start reporting, the estimated reorganization value has been allocated to the Company’s assets based on their respective fair values in conformity with the purchase method of accounting for business combinations in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Valuations performed by valuation specialists were required to determine the fair value of certain of the Company’s assets as presented below. The consolidated balance sheet presented below gives effect to the Plan of Reorganization and the application of fresh start reporting at January 31, 2004.

	Predecessor January 31, 2004			Discharge of Debt and Exit Financing			Cancellation of Old Equity			Fresh Start Adjustments			Successor January 31, 2004
Assets
Cash and cash equivalents	$	47,840		$	(6,278	)(a)	$	—		$	—		$	41,562
Trade accounts receivable	123,988			—			—			—			123,988
Inventory	13,989			—			—			425		(g)	14,414
Unamortized debt issuance costs	—			6,278		(b)	—			—			6,278
Prepaid expenses and other assets	40,854			—			—			386		(h)	41,240
Rental equipment	402,911			—			—			25,306		(i)	428,217
Property and equipment	35,050			—			—			9,330		(i)	44,380
Unamortized intangible assets	953			—			—			15,220		(j)	16,173
Total assets	$	665,585		$	—		$	—		$	50,667		$	716,252

Liabilities
Liabilities not subject to compromise
Book overdraft	$	16,167		$	—		$	—		$	—		$	16,167
Trade accounts payable	4,263			22,268		(c)	—			—			26,531
Accrued interest	184			—			—			—			184
Accrued expenses and other liabilities	38,866			—			—			—			38,866
Exit Credit Facility	—			481,172		(d)	—			—			481,172
Capital leases	1,501			—			—			—			1,501
Liabilities subject to compromise	896,399			(896,399		)(e)	—			—			—
Total liabilities	957,380			(392,959		)	—			—			564,421

Stockholders’ equity (deficit):
Successor common stock	—			189		(e)	—			—			189
Predecessor common stock	241			—			(241		)(f)	—			—
Successor additional paid-in capital	—			151,642		(e)	—			—			151,642
Predecessor additional paid-in capital	123,887			—			(123,887		)(f)	—			—
Accumulated deficit	(398,233		)	241,128		(e)	105,066		(f)	52,039		(k)	—
Predecessor treasury stock	(19,062		)	—			19,062		(f)	—			—
Accumulated other comprehensive income	1,372			—			—			(1,372		)(k)	—
Total stockholders’ equity (deficit)	(291,795		)	392,959			—			50,667			151,831
Total liabilities and stockholders’ equity (deficit)	$	665,585		$	—		$	—		$	50,667		$	716,252

Adjustments reflected in the consolidated balance sheet are as follows:

(a) Represents payment of debt issuance costs for the Exit Credit Facility.

(b) Represents recognition of debt issuance costs consisting of fees and expenses of the Exit Credit Facility.

(c) Represents the accrual of liabilities upon emergence under the Plan of Reorganization related to priority, administrative and vendor claims.

(d) Represents the proceeds under the Exit Credit Facility which were used to repay the existing indebtedness.

(e) Represents the elimination of pre-petition liabilities discharged under the Plan of Reorganization as follows:

Liabilities subject to compromise	$	896,399

Form of settlement:
Issuance of New Common Stock	(151,831		)
Issuance of Exit Credit Facility	(481,172		)
Amounts reclassified to accounts payable for certain estimated cure payments with respect to priority, administrative and vendor claims	(22,268		)

Gain on discharge of debt	$	241,128

(f) Represents cancellation of Predecessor Company common stock under fresh start reporting.

(g) Represents adjustment to reflect the Company’s estimated fair value of inventory held for sale to third parties under fresh start reporting.

(h) Represents adjustment to reflect the increase in the fair value of capitalized software development costs under fresh start reporting based on the results of valuation procedures performed by valuation specialists.

(i) Represents adjustment to reflect rental equipment and property and equipment at fair values under fresh start reporting based on the results of valuation procedures performed by valuation specialists.

(j) Represents adjustment to reflect the fair value of identified intangible assets under fresh start reporting based on results of valuation procedures performed by valuation specialists.

(k) Represents the elimination of pre-emergence equity accounts under fresh start reporting.

5. Inventory

Inventory, net of reserves consisted of the following:

	March 31, 2005				December 31, 2004
New equipment	$	2,414			$	3,221
Used equipment	217				781
Supplies	5,384				4,605
Parts	7,708				8,280
	$		15,723		$		16,887
Reserves for excess and obsolete inventory	(1,718			)	(2,024			)
	$	14,005			$	14,863

6. Prepaid Expenses and Other Assets

Prepaid expenses and other assets consisted of the following:

	March 31, 2005			December 31, 2004
Deposits	$	13,962		$		14,070
Prepaid expenses	10,815			6,598
Other assets	1,883			2,184
	$		26,660	$	22,852

7. Intangible Assets

Intangible assets, net of accumulated amortization consisted of the following:

	March 31, 2005			December 31, 2004
Customer relationships	$	10,927		$	10,927
Non-compete agreements	1,221			1,483
	$	12,148		$	12,410
Accumulated amortization	(3,337		)	(2,989		)
	$	8,811		$	9,421

Non-compete agreements and customer relationships are amortized on a straight-line basis over five years.

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following:

	March 31, 2005		December 31, 2004
Accrued compensation and benefits	$	9,001	$	13,286
Insurance reserves	11,109		12,020
Accrued property and sales taxes	4,069		4,190
Accrued interest	5,017		2,760
Other accrued expenses	13,254		13,494
	$	42,450	$	45,750

9. Debt and Liquidity

In connection with the Company’s emergence from bankruptcy on February 11, 2004, the Company entered into a senior secured credit facility (the “Exit Credit Facility”). The Exit Credit Facility consisted of $285,000 of term loan facilities and a $205,000 revolving credit facility. On August 17, 2004, the Company entered into a new senior secured credit facility (the “2004 Credit Facility”). The 2004 Credit Facility consists of a $300,000 first lien credit facility, comprised of a $200,000 term loan and a $100,000 revolving loan, and a $275,000 second lien term loan. Proceeds under the 2004 Credit Facility were used to repay the balance outstanding under the Exit Credit Facility. The Company has scheduled principal repayments of $500 quarterly on the first lien credit facility through the August 17, 2009 maturity date. The interest rate on the first lien debt averages base rate plus 0.5% or LIBOR plus 2.5%. The second lien term loan expires on August 17, 2010, and the interest rate is base plus 5% or LIBOR plus 6%. The Company has scheduled principal repayments of $688 quarterly on the second lien term loan through the maturity date. The Company recognized a loss on the discharge of the debt related to the write-off of $5,468 of unamortized debt issuance costs associated with the Exit Credit Facility. As of March 31, 2005, the average LIBOR-based interest rates on the first and second lien term loans were 5.5% and 8.0%, respectively.

The 2004 Credit Facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to fixed charge coverage ratios and debt leverage ratios. 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 and 3) pay dividends or make other restricted payments on its common stock and certain other securities unless certain financial conditions are satisfied. The 2004 Credit Facility is collateralized by substantially all of the Company’s assets. The Company is currently in compliance with all covenants governing the 2004 Credit Facility.

The Company is a holding company with no independent operations, and the Company’s assets (excluding the intercompany receivables and common stock of its subsidiaries) are insignificant. All of the Company’s subsidiaries are directly or indirectly wholly owned by the Company. There are no restrictions on the Company’s ability to obtain funds from its subsidiaries by dividend or loan. The separate financial statements of each of these wholly owned subsidiaries are not presented as management believes that separate financial statements and other disclosures concerning these subsidiaries are not individually meaningful for presentation or material to investors. In addition, the Company has pledged the stock of each of its subsidiaries as further security for the Company’s obligations under the 2004 Credit Facility.

10. Reorganization Expenses

Expenses incurred as a result of the Reorganization have been segregated from normal operations and are disclosed separately. These expenses consist primarily of professional fees incurred for financial advisors, legal counsel, consulting and other costs related to professional services received during the Reorganization, as well as employee retention expenses. These Reorganization expenses were cash charges.

11. Stock Option Plan

During 2004, the Company established a plan in which options to purchase shares of New Common Stock can be granted to directors, officers and key employees of the Company, and other individuals. Up to 1,400 shares of New Common Stock may be issued under this plan. During the third quarter of 2004, 1,400 options were granted under the plan at an exercise price of $7.80. These options vest over three years from the grant date and expire seven years from the grant date. At March 31, 2005, 350 stock options are exercisable. The Company’s stock options were excluded from the computation of diluted loss per share in the periods presented herein because inclusion would be anti-dilutive by reducing the loss per share.

12. Director’s Deferred Compensation Plan

During 2004, the Company established a plan in which each director received 20 deferred compensation units, with each unit equivalent to one share of New Common Stock. The deferred compensation units vest over five years. In the event of a “change of control” (as defined in the plan) of the Company, the deferred compensation units will immediately vest in full, and any payment to the new directors, in respect of their units, will be equal to the per share amount received by holders of New Common Stock. If the change in control occurs prior to April 1, 2006, the minimum payment to each director will equal $250. The Company accrues the value of the award over the vesting period.

13. Segment Information

The Company has two reporting segments: Traffic Safety and General Rental and Other. The General Rental and Other operations are primarily involved in the rental and sale of various types of lift and specialty equipment to construction, automotive and other industrial users. The Traffic Safety operations are primarily involved in the rental of traffic safety equipment and providing the related services to manage traffic flow during construction. The Traffic Safety operations have different contractual, regulatory and capital requirements than the General Rental and Other operations. The accounting policies for these segments are the same as those described in Note 3 to the consolidated financial statements, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The Company’s operations in Canada represent less than 2% of total revenues and total assets of the Company. Due to the size of the Company’s Canadian operations, these operations are considered insignificant for separate geographical segment reporting. The Company has no single customer that represents greater than 2% of the Company’s consolidated revenues. Identifiable assets are those used in the Company’s operations in each segment. Inter-segment revenues are not material. The following table presents financial information for the reporting segments for the periods presented:

	General Rental and Other				Traffic Safety				Consolidated
Three Months Ended March 31, 2005 (Successor):
Rental and service revenues	$	88,754			$	14,917			$	103,671
New equipment sales	5,252				210				5,462
Rental equipment sales	6,231				46				6,277
Other revenues	3,200				1,037				4,237
Total revenues	103,437				16,210				119,647
Operating loss	(2,835			)	(4,755			)	(7,590		)
Net loss	(12,028			)	(4,694			)	(16,722		)
Identifiable assets	509,606				75,899				585,505
Depreciation and amortization	26,197				3,323				29,520
Capital expenditures	27,362				791				28,153
Two Months Ended March 31, 2004 (Successor):
Rental and service revenues	$		56,902		$		8,985		$	65,887
New equipment sales	4,610				419				5,029
Rental equipment sales	6,238				2				6,240
Other revenues	2,350				556				2,906
Total revenues	70,100				9,962				80,062
Operating loss	(6,881			)	(2,530			)	(9,411		)
Net loss	(12,164			)	(2,489			)	(14,653		)
Identifiable assets	624,722				77,604				702,326
Depreciation and amortization	18,264				3,006				21,270
Capital expenditures	27,705				577				28,282

	General Rental and Other		Traffic Safety		Consolidated
One Month Ended January 31, 2004 (Predecessor):
Rental and service revenues	$	29,186	$	3,882	$	33,068
New equipment sales	3,276		42		3,318
Rental equipment sales	2,090		30		2,120
Other revenues	1,171		253		1,424
Total revenues	35,723		4,207		39,930
Operating income (a)	32,438		14,438		46,876
Net income (b)	256,750		28,705		285,455
Identifiable assets	634,340		81,912		716,252
Depreciation and amortization	8,086		910		8,996
Capital expenditures	4,552		629		5,181

(a) Operating income for General Rental and Other and Traffic Safety includes $34,629 and $16,038 of fresh start accounting adjustments, respectively.

(b) Net income for General Rental and Other and Traffic Safety includes $34,629 and $16,038 of fresh start accounting adjustments, respectively, and gains of $226,887 and $14,241, respectively, on the discharge of debt.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the Annual Report on Form 10-K of NES Rentals Holdings, Inc. (the “Company”) for the year-ended December 31, 2004 as filed with the Securities and Exchange Commission and other information included herein. All dollar amounts presented are in thousands.

General

The Company is a leading participant in the equipment rental industry, renting general, specialty and traffic safety equipment to industrial and construction end-users. The Company rents over 750 different types of machinery and equipment and sells 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 130 locations across 34 states and Canada and is a leading competitor in many of the geographic markets it serves.

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 revenues 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 the cost of rental and service revenues, the cost of new equipment, the net book value of rental equipment sold, rental equipment depreciation 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 one to fifteen years over which it depreciates its equipment on a straight-line basis.

Reorganization

Results of Operations

During 2004 and the first quarter of 2005, the Company has invested over $126,000 in its rental fleet. In addition, the industry is experiencing improving rental rates as non-residential construction, industrial and traffic safety activity continues to increase. These improving market conditions, combined with the realization of cost-savings initiatives implemented in conjunction with the Company’s restructuring, resulted in improved results from operations during the first quarter of 2005. The following table shows information derived from the Company’s consolidated statements of operations and comprehensive income (loss) as a percentage of total revenues:

	Successor				Predecessor
	Three Months Ended March 31, 2005		Two Months Ended March 31, 2004		One Month Ended January 31, 2004

Rental and service revenues	86.7	%	82.3	%	82.8	%
New equipment sales	4.6		6.3		8.3
Rental equipment sales	5.2		7.8		5.3
Other revenues	3.5		3.6		3.6
Total revenues	100.0		100.0		100.0
Cost of revenues	79.8		81.5		78.2
Gross margin	20.2		18.5		21.8
Selling, general and administrative expenses	25.2		26.0		24.2
Reorganization expenses	—		—		4.9
Fresh start accounting adjustments	—		—		(126.9	)
Non-rental depreciation and amortization	1.4		4.3		2.1
Operating income (loss)	(6.4	)	(11.8	)	117.5
Other income, net	0.2		0.2		0.2
Gain on discharge of debt	—		—		603.9
Interest expense, net	7.8		6.7		6.6
Income (loss) before income taxes	(14.0	)	(18.3	)	715.0
Income tax expense	—		—		—
Net income (loss)	(14.0	)%	(18.3	)%	715.0	%

As a result of the application of fresh start reporting on January 31, 2004, and in accordance with SOP 90-7, the post-emergence financial results for the two-month period ended March 31, 2004 are presented as the results of the “Successor,” and the pre-emergence financial results for the month ended January 31, 2004 are presented as the results of the “Predecessor.” Comparative financial statements do not straddle the emergence date because in effect the Successor represents a new entity. As a result of applying fresh start reporting, the Successor has higher levels of depreciation and amortization expense in comparison to the Predecessor. For purposes of discussion herein, the results of operations for the Predecessor for the month ended January 31, 2004 and the results of operations for the Successor for the two months ended March 31, 2004 are combined.

Comparison of the Three Months Ended March 31, 2005 and 2004

Revenues

Rental and service revenues increased 5% to $103,671 for the first quarter of 2005 from $98,955 for the same period in 2004. Rental and service revenues for General Rental and Other improved $2,666, or 3%, in the first quarter of 2005, as rental rates on the Company’s three largest equipment categories were up more than 10% in the first quarter of 2005 as compared to the same period in 2004, offsetting year-over-year declines in utilization and fleet size. Rental and service revenues for the Company’s Traffic Safety segment were up $2,050, or 16%, for the first quarter of 2005 as compared to the same period in the prior year as a result of increased activity in existing markets and expansion into new markets.

Liquidity, Financial Condition and Capital Resources

The Company’s primary capital requirements are for purchasing new rental equipment. The Company purchases rental equipment throughout the year to replace equipment that has been sold or retired as well as to maintain adequate levels of equipment to meet existing and new customer needs. Rental fleet purchases for the Company were $26,268 and $31,657 in the first quarters of 2005 and 2004, respectively. The Company’s principal sources of cash are cash generated from operations and borrowings available under its credit facility. At March 31, 2005, the Company had approximately $70,000 of availability under its credit facility.

For the three months ended March 31, 2005 and 2004, the Company’s net cash provided by operating activities was $14,869 and $17,366, respectively. The decrease in the first quarter of 2005 was primarily the result of changes in working capital. The Company’s net cash used in investing activities was $21,716 and $20,727 for the three months ended March 31, 2005 and 2004, respectively. Net cash used in investing activities consists primarily of purchases of rental equipment and property and equipment. For the three months ended March 31, 2005 and 2004, the Company’s net cash used in financing activities was $26,527 and $21,788, respectively. Net cash used in financing activities consists primarily of repayments under the Company’s credit facility.

On August 17, 2004, the Company entered into a new senior secured credit facility (the “2004 Credit Facility”). The 2004 Credit Facility consists of a $300,000 first lien credit facility, comprised of a $200,000 term loan and a $100,000 revolving loan, and a $275,000 second lien term loan. Proceeds under the 2004 Credit Facility were used to repay the balance outstanding under the credit facility the Company entered into upon its emergence from bankruptcy on February 11, 2004. The Company has scheduled principal repayments of $500 quarterly on the first lien credit facility through the August 17, 2009 maturity date. The interest rate on the first lien debt averages base rate plus 0.5% or LIBOR plus 2.5%. The Company has scheduled principal repayments of $688 quarterly on the second lien term loan through the August 17, 2010 maturity date. The interest rate on the second lien term loan averages base rate plus 5% or LIBOR plus 6%.

The 2004 Credit Facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to fixed charge coverage ratios and debt leverage ratios. 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 and 3) pay dividends or make other restricted payments on its common stock and certain other securities unless certain financial conditions are satisfied. The 2004 Credit Facility is collateralized by substantially all of the Company’s assets. The Company is currently in compliance with all covenants governing the 2004 Credit Facility.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, a revision to Statement No. 123, “Accounting for Stock-Based Compensation.” This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The Company is required to adopt SFAS 123R at the beginning of 2006. The standard provides for a prospective application. Under this method, the Company will begin recognizing compensation cost for equity based compensation for all new or modified grants after the date of adoption. In addition, the Company will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. At March 31, 2005, the aggregate value of unvested options, as determined using a Black-Scholes option valuation model, was $3,500. Upon adoption of SFAS 123R, a majority of this amount will be recognized over the remaining vesting period of these options.

Factors That May Influence Future Results

Economic Conditions

Our end-users consist of construction and industrial customers. Changes in these markets may lead to increased or decreased demand for our equipment and services. In addition, economic declines generally result in lower overall rental rates, which generally adversely impact our business.

Seasonality

The Company’s revenues and operating results fluctuate 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 as compared to the spring and summer.

Indebtedness

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

• Increases in interest rates could result in increased interest expense and increased cash outflows 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 accelerated repayment of outstanding indebtedness.

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. However, increases in competition from either new or existing industry participants could occur, and the potential impact on our existing market share 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. 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 reviews its environmental practices at its various locations from time to time.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The 2004 Credit Facility consists of a $300,000 first lien credit facility, comprised of a $200,000 term loan and a $100,000 revolving loan, and a $275,000 second lien term loan. Borrowings under the 2004 Credit Facility bear interest, at the Company’s option, at a specified base rate or LIBOR rate plus the applicable borrowing margin. At April 30, 2005, the Company had total borrowings under the 2004 Credit Facility of $446,000. Each 100 basis point increase in interest rates on the variable rate debt would decrease annual pretax earnings by approximately $4,460. In August 2004, the Company purchased interest rate cap contracts, which cap the interest rate on substantially all of the LIBOR-based debt through 2008 in the event of a significant increase in the underlying interest rate. Because of the interest rate cap levels, management does not believe that these contracts will significantly reduce the Company’s expected interest costs.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures — After evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), as of March 31, 2005 (the “Evaluation Date”), the Company’s chief executive officer and chief financial officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

Changes in internal controls — There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures during the quarter ended March 31, 2005, nor were there any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.

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

	For the quarterly period ended March 31, 2005
	For the quarterly period ended March 31, 2005
	OR

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

DELAWARE		20-0664255
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits

SIGNATURE

Index of Exhibits

	NES RENTALS HOLDINGS, INC.


	By:	/s/ MICHAEL D. MILLIGAN
		Michael D. Milligan
		Senior Vice President and Chief Financial Officer
Date: May 12, 2005

Exhibit Number		Description of Document

3.1		Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004)
3.2		By-laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004)
11.1		Statement re Computation of Per Share Earnings. Not required because the relevant computations can be clearly determined from the material contained in the financial statements included herein.
31.1		Certification by CEO Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by CFO Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification by CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification by CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002