Historically, we expanded our operations through both internally generated growth and acquisitions, which we use to gain a presence in new markets. Typically, we enter a new market through the acquisition of the business of a smaller local competitor and then apply our business model, which is usually much more customer service and marketing focused than the business we are buying or its competitors in the market. If we cannot find a desirable acquisition opportunity in a market we wish to enter, we establish a new location from the ground up. As a result, a new branch location will typically have fairly low operating margins during its early years, but as our marketing efforts help us penetrate the new market and we increase the number of units on rent at the new branch, we take advantage of operating efficiencies to improve operating margins at the branch and typically reach company average levels after several years. When we enter a new market, we incur certain costs in developing an infrastructure. For example, advertising and marketing costs will be incurred and certain minimum staffing levels and certain minimum levels of delivery equipment will be put in place regardless of the new market's revenue base. Once we have achieved revenues during any period that are sufficient to cover our fixed expenses, we generate high margins on incremental lease revenues. Therefore, each additional unit rented in excess of the break-even level, contributes significantly to profitability. Conversely, additional fixed expenses that we incur require us to achieve additional revenue as compared to the prior period to cover the additional expense.
Among the external factors we examine to determine the direction of our business is the level of non-residential construction activity, especially in areas of the country where we have a significant presence. Customers in the construction industry represented approximately 43% and 40% of our units on rent at December 31, 2007 and 2006, respectively, and because of the degree of operating leverage we have, increases or declines in non-residential construction activity can have a significant effect on our operating margins and net income. In 2007, after three years of very strong growth in non-residential construction activity in the U.S., the growth rate in this sector began to moderate and the level of our construction related business began to slow down in certain geographic areas, particularly in the southeastern and southwestern United States. The level of non-residential construction market is expected to decline over the next 12 months. We were able to offset a portion of these economic effects by the cost synergies we are obtaining from the Merger. These synergies include both increased operating leverage as we combine branch locations in cities where we have overlapping operations and take advantage of the operating leverage inherent in our business model and the elimination of duplicate corporate operations. We believe that the loss of liquidity that is apparent in the financial markets in 2008 could continue to adversely affect the availability of credit to finance construction projects, which could exert downward pressure on our growth rate. To date, we have noted the most severe economic weakness in our California, Arizona and Florida markets.
In managing our business, we focus on our growth in leasing revenues, particularly in existing markets where we can take advantage of the operating leverage inherent in our business model. Our goal is to maintain a growth rate high enough so that revenue growth will exceed inflationary growth in expenses. We can typically do this except during severe economic downturns.
We are a capital-intensive business, so in addition to focusing on earnings per share, we focus on adjusted EBITDA to measure our results. We calculate this number by first calculating EBITDA, which we define as net income before interest expense, debt restructuring or extinguishment expense, provision for income taxes, depreciation and amortization. This measure eliminates the effect of financing transactions that we enter into on an irregular basis based on capital needs and market opportunities, and this measure provides us with a means to track internally generated cash from which we can fund our interest expense and our lease fleet growth. In comparing EBITDA from year to year, we typically further adjust EBITDA to eliminate the effect of what we consider non-recurring events not related to our core business operations to arrive at what we define as adjusted EBITDA. In 2008 the cost of events related to the integration of our existing operations and acquired operations and merger expenses would be excluded to arrive at adjusted EBITDA.
Because EBITDA is a non-GAAP financial measure, as defined by the SEC, we include below in this report reconciliations of EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States.
We present EBITDA because we believe it provides useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements and that it provides an overall evaluation of our financial condition. In addition, EBITDA is a component of certain financial covenants under our revolving credit facility and is used to determine our available borrowing capacity and the interest rate in effect under the Credit Agreement at any point in time. EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles in the United States or as a measure of our profitability or our liquidity. In particular, EBITDA, as defined, does not include:

• Interest expense - because we borrow money to partially finance our capital expenditures, primarily related to the expansion of our lease fleet, interest expense is a necessary element of our cost to secure this financing to continue generating additional revenues.

• Debt restructuring or extinguishment expense - as defined in our revolving credit facility, debt restructuring or debt extinguishment expenses are not deducted in our various calculations made under the Credit Agreement and are treated no differently than interest expense. As discussed above, interest expense is a necessary element of our cost to finance a portion of the capital expenditures needed for the growth of our business.

• Income taxes - EBITDA, as defined, does not reflect income taxes or the requirements for any tax payments.

• Depreciation and amortization - because we are a leasing company, our business is very capital intensive and we hold acquired assets for a period of time before they generate revenues, cash flow and earnings; therefore, depreciation and amortization expense is a necessary element of our business.

When evaluating EBITDA as a performance measure, and excluding the above-noted charges, all of which have material limitations, investors should consider, among other factors, the following:
• increasing or decreasing trends in EBITDA;

• how EBITDA compares to levels of debt and interest expense; and

• whether EBITDA historically has remained at positive levels.

Because EBITDA, as defined, excludes some but not all items that affect our cash flow from operating activities, EBITDA may not be comparable to a similarly titled performance measure presented by other companies.
The table below is a reconciliation of EBITDA to net cash provided by operating activities for the periods ended September 30:

                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                2007             2008             2007             2008
                                                                     (In thousands)
EBITDA                                        $  32,902        $  49,618        $  97,416        $  99,432
Senior Note redemption premiums                       -                -           (8,926 )              -
Interest paid                                    (3,960 )         (9,354 )        (20,389 )        (16,344 )
Income and franchise taxes paid                    (131 )            (59 )           (725 )           (488 )
Share-based compensation expense                  1,122            1,541            3,272            3,905
Gain on sale of lease fleet units                (1,435 )         (3,001 )         (4,176 )         (6,095 )
Loss on disposal of property, plant and
equipment                                             5              437               37              466
Changes in certain assets and
liabilities, net of effect of businesses
acquired:
Receivables                                      (3,178 )            (82 )         (3,715 )         (2,347 )
Inventories                                       1,592            3,085           (2,478 )           (485 )
Deposits and prepaid expenses                    (1,737 )            337           (1,190 )          1,237
Other assets and intangibles                       (448 )           (235 )           (146 )           (136 )
Accounts payable and accrued liabilities          6,632          (19,242 )          8,105          (14,559 )

Net cash provided by operating
activities                                    $  31,364        $  23,045        $  67,085        $  64,586

EBITDA is calculated as follows, without further adjustment, for the periods ended September 30:

                                        Three Months Ended          Nine Months Ended
                                           September 30,              September 30,
                                         2007          2008         2007          2008
                                              (In thousands except percentages)
      Net income                      $   12,704     $ 13,276     $  31,732     $ 28,795
      Interest expense                     6,241       18,022        18,294       30,586
      Provision for income taxes           8,376        8,615        20,581       18,930
      Depreciation and amortization        5,581        9,705        15,585       21,121
      Debt extinguishment expense              -            -        11,224            -

      EBITDA                          $   32,902     $ 49,618     $  97,416     $ 99,432

      EBITDA margin(1)                      39.4 %       37.4 %        41.5 %       34.0 %

(1) EBITDA margin is calculated as EBITDA divided by total revenues expressed as a percentage.

In managing our business, we routinely compare our EBITDA margins from year to year and based upon age of branch. We define this margin as EBITDA divided by our total revenues, expressed as a percentage. We use this comparison, for example, to study internally the effect that increased costs have on our margins. As capital is invested in our established branch locations, we achieve higher EBITDA margins on that capital than we achieve on capital invested to establish a new branch, because our fixed costs are already in place in connection with the established branches. The fixed costs are those associated with yard and delivery equipment, as well as advertising, sales, marketing and office expenses. With a new market or branch, we must first fund and absorb the startup costs for setting up the new branch facility, hiring and developing the management and sales team and developing our marketing and advertising programs. A new branch will have low EBITDA margins in its early years until the number of units on rent increases. Because of our high operating margins on incremental lease revenue, which we realize on a branch-by-branch basis when the branch achieves leasing revenues sufficient to cover the branch's fixed costs, leasing revenues in excess of the break-even amount produce large increases in profitability. Conversely, absent significant growth in leasing revenues, the EBITDA margin at a branch would be expected to remain relatively flat on a period-by-period comparative basis.
Accounting and Operating Overview
Our leasing revenues include all rent and ancillary revenues we receive for our portable storage, combination storage/office and mobile office units. Our sales revenues include sales of these units to customers. Our other revenues consist principally of charges for the delivery of the units we sell. Our principal operating expenses are (1) cost of sales; (2) leasing, selling and general expenses; and (3) depreciation and amortization, primarily depreciation of the portable storage units and portable offices in our lease fleet. Cost of sales is the cost of the units that we sold during the reported period and includes both our cost to buy, transport, refurbish and modify used ocean-going containers and our cost to manufacture portable storage units and other structures. Leasing, selling and general expenses include among other expenses, advertising and other marketing expenses, real property lease expenses, commissions, repair and maintenance costs of our lease fleet and transportation equipment and corporate expenses for both our leasing and sales activities. Annual repair and maintenance expenses on our leased units over the last three fiscal years have averaged approximately 4.3% of lease revenues and are included in leasing, selling and general expenses. We expense our normal repair and maintenance costs as incurred (including the cost of periodically repainting units).
Our principal asset is our lease fleet, which has historically maintained value close to its original cost. The steel units in our lease fleet (other than van trailers) are depreciated on the straight-line method over our units' estimated useful life of 25 years after the date the unit is placed in service, with an estimated residual value of 62.5%. The depreciation policy is supported by our historical lease fleet data which shows that we have been able to obtain comparable rental rates and sales prices irrespective of the age of our container lease fleet. Our wood mobile office units are depreciated over 20 years to 50% of original cost. Van trailers, which constitute a small part of our fleet, are depreciated over seven years to a 20% residual value. In connection with the Merger, we acquired assets that were not part of our principal lease fleet. These assets include timber units which are older wood constructed portable offices in the U.K. that are depreciated over 5 years to 10% of their assigned value. Other units include portable fiberglass chemical toilets that are depreciated over 3 years to 30% of their assigned value.

The table below summarizes those transactions that increased the net value of our lease fleet from $802.9 million at December 31, 2007, to $1,096.1 million at September 30, 2008:

                                                                      Dollars               Units
                                                                   (In thousands)
Lease fleet at December 31, 2007, net                             $        802,923          160,116
Purchases:
Container purchases and containers obtained through
acquisitions, including freight                                            206,132           92,676
Non-container or office units obtained through acquisitions                 67,732           21,562
Manufactured units:
Steel storage containers, combination storage/office combo
units and steel security Offices                                            25,228            1,542
New wood mobile offices                                                      8,885              291
Refurbishment and customization(3):
Refurbishment or customization of units purchased or
acquired in the current year                                                10,910            2,544 (1)
Refurbishment or customization of 3,299 units purchased in a
prior year                                                                   3,693            1,059 (2)
Refurbishment or customization of 503 units obtained through
acquisition in a prior year                                                    349              117 (3)
Other                                                                       (2,315 )           (685 )
Cost of sales from lease fleet                                             (10,751 )         (5,161 )
Effect of exchange rate changes                                             (4,427 )
Depreciation                                                               (12,233 )

Lease fleet at September 30, 2008, net                            $      1,096,126          274,061

(1) These units represent the net additional units that were the result of splitting steel containers into one or more shorter units, such as splitting a 40-foot container into two 20-foot units, or one 25-foot unit and one 15-foot unit.

(2) Includes units moved from finished goods to lease fleet.

(3) Does not include any routine maintenance.

The table below outlines the composition of our lease fleet (by book value and unit count) at September 30, 2008:

                                                              Number of
                                           Lease Fleet          Units
                                          (In thousands)
              Steel storage containers   $        620,087        217,192
              Offices                             531,940         42,870
              Van trailers                         16,363         13,999
              Other                                 2,663

                                                1,171,053
              Accumulated depreciation            (74,927 )

                                         $      1,096,126        274,061

Our most recent fair market value and orderly liquidation value appraisals were conducted in December 2007. At September 30, 2008, based on these appraisal values, the fair market value of our lease fleet was approximately 113.3% of our lease fleet net book value, and the orderly liquidation value appraisal, on which our borrowings under our revolving credit facility are based, was approximately $891.3 million, which equates to 81.3% of the lease fleet net book value. These are an independent third-party appraiser's estimation of value under two sets of assumptions, and there is no certainty that such values could in fact be achieved if any assumption were to prove incorrect at the time of an actual sale or liquidation.
Our expansion program and other factors can affect our overall lease fleet asset utilization rate. During the last five fiscal years, our annual utilization levels averaged 80.8%, and ranged from a low of 78.7% in 2003 to a high of 82.9% in 2005. Our utilization is somewhat seasonal, with the low realized in the first quarter and the high realized in the fourth quarter.

RESULTS OF OPERATIONS
Three Months Ended September 30, 2008, Compared to Three Months Ended September 30, 2007 Total revenues for the quarter ended September 30, 2008, increased by $49.3 million, or 59.0%, to $132.8 million from $83.5 million for the same period in 2007. Leasing revenues for the quarter increased by $45.3 million, or 61.3%, to $119.3 million from $74.0 million for the same period in 2007. This increase was negatively impacted by a 2.3% decrease in the average rental yield per unit, but positively effected by a 64.7% increase in the average number of units on lease and a 1.1% decrease due to exchange rates as compared to the 2007 third quarter. The decrease in yield resulted from the lower average rental rate of the units acquired in the Merger. Had the business acquired in the Merger been part of our business during the quarter ended September 30, 2007, our average rental yield would have increased by approximately 1.6% due to an increase in average rental rates in North America over the last year and an increase in delivery charges for units. Our sales of portable storage and office units for the three months ended September 30, 2008, increased by 44.1%, to $12.5 million from $8.7 million during the same period in 2007, with the increase primarily associated with the new branches acquired in the Merger. As a percentage of total revenues, leasing revenues for the quarters ended September 30, 2008 and 2007 represented 89.9% and 88.6%, respectively. Our leasing business continues to be our primary focus and leasing revenues have become the predominant part of our revenue mix over the past several years. Cost of sales are the costs related to our sales revenues only. Cost of sales was 68.4% and 68.7% of sales revenue for the quarters ended September 30, 2008 and 2007, respectively. For both periods, our gross margins remained relatively high at above 31.0% for both quarters, as we were able to pass the higher price of used containers on to our customers.
Leasing, selling and general expenses increased $23.8 million, or 53.2%, to $68.5 million for the quarter ended September 30, 2008, from $44.7 million for the same period in 2007. Leasing, selling and general expenses, as a percentage of total revenues, decreased to 51.6% for the quarter ended September 30, 2008, from 53.5% for the same period in 2007, primarily due to the $6.4 million in cost savings synergies related to the Merger that we realized during the quarter ended September 30, 2008. These cost savings synergies were partially offset by increases in payroll and related expenses to support our leasing activities and delivery and freight costs, including the increased cost of fuel. In addition, we benefited from lower repair and maintenance expenses related to our lease fleet as compared to the prior period. During the three months ended September 30, 2008, we incurred $1.9 million of additional fuel costs related to picking up and delivery of containers compared to the same quarter in the prior year.
Integration and merger expenses for the quarter ended September 30, 2008 were $6.1 million and primarily represent costs for repositioning and relocating assets to their intended location and other costs associated with the integration of the companies. Other continuing costs related to the Merger will be expensed as incurred, and will include compensation expense and office costs associated with closing certain branch locations, severance payments to employees and costs to convert historical MSG operations and systems to our enterprise resource planning (ERP) system.
EBITDA, excluding the integration and merger expenses, increased $22.8 million to $55.7 million for the quarter ended September 30, 2008 compared to $32.9 million for the three months September 30, 2007. Including integration and merger expenses EBITDA increased $16.7 million to $49.6 compared to $32.9 for the same period in 2007.
Depreciation and amortization expenses increased $4.1 million, or 73.9%, to $9.7 million in the quarter ended September 30, 2008, as compared to $5.6 million during the same period in 2007. The increase is primarily due to . . .