Edgar Filing: MCGRATH RENTCORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Commission file number 0-13292

McGRATH RENTCORP

(Exact name of registrant as specified in its Charter)

California

94-2579843

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5700 Las Positas Road, Livermore, CA 94551-7800

(Address of principal executive offices)

Registrant’s telephone number: (925) 606-9200

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At August 2, 2007, 25,322,280 shares of Registrant’s Common Stock were outstanding.

FORWARD LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts regarding McGrath RentCorp’s (the “Company’s”) business strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans and objectives are forward looking statements. These forward-looking statements appear in a number of places and can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “hopes” or “certain” or the negative of these terms or other variations or comparable terminology.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements including, without limitation, the following: the future prospects for and growth of the Company and the industries in which it operates, the level of the Company’s future rentals and sales, customer demand and cost of raw materials, the Company’s ability to maintain its business model; the Company’s ability to retain and recruit key personnel; the Company’s ability to maintain its competitive strengths and to effectively compete against its competitors; the Company’s short-term decisions and long-term strategies for the future and its ability to implement and maintain such decisions and strategies, including its strategies: (i) to focus on rental revenue growth from an increasing base of rental assets, (ii) to actively maintain, repair, redeploy, manage and anticipate the need for various models of rental equipment cost-effectively and to maximize the level of proceeds from the sale of such products, and (iii) to create internal facilities and infrastructure capabilities that can provide prompt and efficient customer service, experienced assistance, rapid delivery and timely maintenance of the Company’s equipment; the demand by the educational market (and the K-12 market in particular) for the Company’s modular products; the effect of delays or interruptions in the passage of statewide and local facility bond measures on the Company’s operations; the effect of changes in applicable law, and policies relating to the use of temporary buildings on the Company’s modular rental and sales revenues, including with respect to class size and building standards; the effects of changes in the level of state funding to public schools and the use of classrooms that meet the Department of Housing requirements; the Company’s ability to maintain and upgrade modular equipment to comply with changes in applicable law and customer preference; the Company’s strategy to effectively implement its expansion into Florida and other new markets in the U.S.; the Company’s expectation that the first phase of its ERP upgrade project will be completed in early 2008; the Company’s engaging in and ability to consummate future acquisitions; manufacturers’ ability to produce products to the Company’s specification on a timely basis; the Company’s ability to maintain good relationships with school districts, manufacturers, and other suppliers; the effect of interest rate fluctuations; the Company’s ability to manage its credit risk and accounts receivable; the timing and amounts of future capital expenditures and the Company’s ability to meet its needs for working capital including its ability to negotiate lines of credit; the Company’s ability to track technology trends to make good buy-sell decisions with respect to electronic test equipment; the effect of changes to the Company’s accounting policies and impact of evolving interpretation and implementation of such policies; the risk of litigation and claims against the Company; the impact of a change in the Company’s overall effective tax rate as a result of the Company’s mix of business levels in various tax jurisdictions in which it does business; the adequacy of the Company’s insurance coverage; the impact of a failure by third parties to manufacture our products timely or properly; the level of future warranty costs of modular equipment that we sell; the effect of seasonality on the Company’s business; the growth of the Company’s business in international markets and the Company’s ability to succeed in those markets; and the Company’s ability to pass on increases in its costs of rental equipment, including manufacturing costs, operating expenses and interest expense through increases in rental rates and selling prices. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties including the risks set forth above and the “Risk Factors” set forth in this Form 10-Q. Moreover, neither we assume nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.

Forward-looking statements are made only as of the date of this Form 10-Q and are based on management’s reasonable assumptions, however these assumptions can be wrong or affected by known or unknown risks and uncertainties. No forward-looking statement can be guaranteed and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. Readers should not place undue reliance on these forward-looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of McGrath RentCorp and Subsidiaries:

We have reviewed the accompanying consolidated balance sheet of McGrath RentCorp and Subsidiaries as of June 30, 2007, and the related statements of income for the three-month periods ended June 30, 2007 and 2006 and the statements of income and cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the United States Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of McGrath RentCorp and Subsidiaries as of December 31, 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 9, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP

San Francisco, CA

July 31, 2007

MCGRATH RENTCORP

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended June 30,					Six Months Ended June 30,
*(in thousands, except per share amounts)*	2007		2006			2007			2006
REVENUES
Rental	$	44,995	$	41,168		$	88,303		$	80,839
Rental Related Services		8,598		7,099			16,020			14,166

Rental Operations		53,593		48,267			104,323			95,005
Sales		13,224		11,769			22,567			22,267
Other		630		637			1,310			1,257

Total Revenues		67,447		60,673			128,200			118,529

COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation of Rental Equipment		12,730		11,314			24,749			22,172
Rental Related Services		6,166		4,748			11,259			9,708
Other		8,996		9,763			16,594			17,769

Total Direct Costs of Rental Operations		27,892		25,825			52,602			49,649
Costs of Sales		9,203		8,559			15,729			15,888

Total Costs		37,095		34,384			68,331			65,537

Gross Profit		30,352		26,289			59,869			52,992
Selling and Administrative		12,607		10,802			24,255			22,356

Income from Operations		17,745		15,487			35,614			30,636
Interest		2,832		2,773			5,453			5,126

Income Before Provision for Income Taxes		14,913		12,714			30,161			25,510
Provision for Income Taxes		5,816		4,078			11,763			9,069

Income Before Minority Interest		9,097		8,636			18,398			16,441
Minority Interest in Income (Loss) of Subsidiary		12		(33	)		(15	)		(65	)

Net Income	$	9,085	$	8,669		$	18,413		$	16,506

Earnings Per Share:
Basic	$	0.36	$	0.35		$	0.73		$	0.66
Diluted	$	0.36	$	0.34		$	0.72		$	0.66
Shares Used in Per Share Calculation:
Basic		25,233		24,956			25,174			24,911
Diluted		25,491		25,209			25,431			25,211

Cash Dividends Declared Per Share	$	0.18	$	0.16		$	0.36		$	0.32

The accompanying notes are an integral part of these consolidated financial statements

MCGRATH RENTCORP

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


*(in thousands)*	June 30, 2007			December 31, 2006
ASSETS
Cash	$	321		$	349
Accounts Receivable, net of allowance for doubtful accounts of $1,200 in 2007 and $1,000 in 2006		64,159			59,834

Rental Equipment, at cost:
Relocatable Modular Buildings		468,388			451,828
Electronic Test Equipment		209,688			186,673

		678,076			638,501
Less Accumulated Depreciation		(203,669	)		(187,159	)

Rental Equipment, net		474,407			451,342

Property, Plant and Equipment, net		58,504			58,146
Prepaid Expenses and Other Assets		16,918			15,871

Total Assets	$	614,309		$	585,542

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Notes Payable	$	185,981		$	165,557
Accounts Payable and Accrued Liabilities		51,171			55,509
Deferred Income		18,461			25,852
Minority Interest in Subsidiary		3,465			3,479
Deferred Income Taxes, net		108,656			104,353

Total Liabilities		367,734			354,750

Shareholders’ Equity:
Common Stock, no par value—Authorized — 40,000 shares Issued and Outstanding — 25,322 shares in 2007 and 25,090 shares in 2006		40,425			33,963
Retained Earnings		206,150			196,829

Total Shareholders’ Equity		246,575			230,792

Total Liabilities and Shareholders’ Equity	$	614,309		$	585,542

The accompanying notes are an integral part of these consolidated financial statements

MCGRATH RENTCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,
*(in thousands)*	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	18,413		$	16,506
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation		25,902			23,223
Provision for Doubtful Accounts		430			171
Non-Cash Stock Compensation		1,704			1,548
Gain on Sale of Rental Equipment		(4,350	)		(4,134	)
Change In:
Accounts Receivable		(4,755	)		9,887
Prepaid Expenses and Other Assets		(1,047	)		(1,631	)
Accounts Payable and Accrued Liabilities		(4,434	)		4,375
Deferred Income		(7,391	)		(7,474	)
Deferred Income Taxes		4,303			(131	)

Net Cash Provided by Operating Activities		28,775			42,340

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment		(54,965	)		(71,047	)
Purchase of Property, Plant and Equipment		(1,511	)		(1,505	)
Proceeds from Sale of Rental Equipment		11,040			9,457

Net Cash Used in Investing Activities		(45,436	)		(63,095	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Bank Lines of Credit		20,424			26,268
Proceeds from the Exercise of Stock Options		3,374			1,441
Excess Tax Benefit from Exercise and Disqualifying Disposition of Stock Options		1,385			626
Payment of Dividends		(8,550	)		(7,471	)

Net Cash Provided by Financing Activities		16,633			20,864

Net Increase (Decrease) in Cash		(28	)		109
Cash Balance, beginning of period		349			276

Cash Balance, end of period	$	321		$	385

Interest Paid, during the period	$	5,632		$	5,017

Income Taxes Paid, during the period	$	6,076		$	8,573

Dividends Declared, not yet paid	$	4,558		$	3,994

Rental Equipment Acquisitions, not yet paid	$	8,970		$	7,308

The accompanying notes are an integral part of these consolidated financial statements

MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

NOTE 1. CONSOLIDATED FINANCIAL INFORMATION

The consolidated financial information for the six months ended June 30, 2007 and 2006 have not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals, consolidation and eliminating entries) necessary for the fair presentation of the consolidated results of operations, financial position, and cash flows of McGrath RentCorp (the “Company”) have been made. The consolidated results for the six months ended June 30, 2007 should not be considered as necessarily indicative of the consolidated results for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest Form 10-K.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies”. As required by FIN48, which clarifies SFAS No. 109, “Accounting for Income Taxes,” the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At January 1, 2007, the Company applied FIN48 to all tax positions for which the statute of limitations remained open and determined there were no material unrecognized tax benefits as of that date. In addition, there have been no material changes in unrecognized benefits since January 1, 2007. As a result, the adoption of FIN48 did not have a material effect on the Company’s financial condition, or results of operation.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2002.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes for all periods presented, which were not significant.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS No. 157”). SFAS No.157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not believe the adoption of SFAS No. 157 will have a significant effect on the Company’s financial condition, or results of operations.

In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No.159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not believe the adoption of SFAS No. 159 will have a significant effect on the Company’s financial condition, or results of operations.

NOTE 3. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed as net income divided by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed as net income divided by the

weighted average number of shares outstanding of common stock and common stock equivalents for the period, including the dilutive effects of stock options and other potentially dilutive securities. Common stock equivalents result from dilutive stock options computed using the treasury stock method and the average share price for the reported period. The effect of dilutive options on the weighted average number of shares for the three and six months ended June 30, 2007 and 2006 was 257,498 and 259,985 and 257,925 and 300,211, respectively. As of June 30, 2007 and 2006, stock options to purchase 500,000 and 540,500 shares, respectively, of the Company’s common stock were not included in the computation of diluted EPS because the exercise price exceeded the average market price for the quarter and the effect would have been anti-dilutive.

The Company’s Board of Directors has authorized the Company to repurchase shares of the Company’s outstanding common stock. These purchases are made in the over-the-counter market (NASDAQ) and/or through privately negotiated, large block transactions at such repurchase price as the officers of the Company deem appropriate and desirable on behalf of the Company. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. There were no repurchases of common stock in the three and six months ending June 30, 2007 and 2006. As of June 30, 2007, 1,977,267 shares remain authorized for repurchase.

NOTE 4. 2007 STOCK INCENTIVE PLAN

The Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”), effective June 6, 2007, under which 1,875,000 shares of common stock of the Company, plus the number of shares that remain available for grants of awards under the Company’s 1998 Stock Option Plan (the “1998 Plan”) and become available as a result of forfeiture, termination, or expiration of awards previously granted under the 1998 Plan, were reserved for the grant of options to its employees, directors and consultants. The awards have a maximum term of 10 years at an exercise price of not less than 100% of the fair market value of the Company’s common stock on the date the option is granted. The 2007 Plan replaces the Company’s 1998 Plan and the 2000 Long-Term Bonus Plan (the “2000 Plan”). The 2000 Plan only provided for the grant of stock bonuses to officers and key employees under which no awards have been granted.

NOTE 5. SEGMENT REPORTING

SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. In accordance with SFAS No. 131, the Company’s three reportable segments are Mobile Modular Management Corporation (Modulars), TRS-RenTelco (Electronics), and Enviroplex. The operations of each of these segments are described in Note 1—Organization and Business, and the accounting policies of the segments are described in Note 2—Significant Accounting Policies in the Company’s latest Form 10-K. Management focuses on several key measures to evaluate and assess each segment’s performance including rental revenue growth, gross profit, and income before provision for income taxes. As a separate corporate entity, Enviroplex revenues and expenses are maintained separately from Modulars and Electronics. Excluding interest expense, allocations of revenue and expense not directly associated with Modulars or Electronics are generally allocated to these segments based on their pro-rata share of direct revenues. Interest expense is allocated between Modulars and Electronics based on their pro-rata share of average rental equipment, accounts receivable, deferred income and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the six months ended June 30, 2007 and 2006 for the Company’s reportable segments is shown in the following table:


*(in thousands)*	Modulars			Electronics			Enviroplex ¹			Consolidated
Six Months Ended June 30,
2007
Rental Revenues	$	48,566		$	39,737		$	—		$	88,303
Rental Related Services Revenues		15,165			855			—			16,020
Sales and Other Revenues		10,570			10,718			2,589			23,877
Total Revenues		74,301			51,310			2,589			128,200
Depreciation of Rental Equipment		5,948			18,801			—			24,749
Gross Profit		39,231			20,014			624			59,869
Interest Expense (Income) Allocation		3,893			1,837			(277	)		5,453
Income (Loss) before Provision for Income Taxes		22,163			8,118			(120	)		30,161
Rental Equipment Acquisitions		20,397			34,106			—			54,503
Accounts Receivable, net (period end)		36,818			22,779			4,562			64,159
Rental Equipment, at cost (period end)		468,388			209,688			—			678,076
Rental Equipment, net book value (period end)		355,558			118,849			—			474,407
Utilization (period end) ²		82.8	%		67.2	%
Average Utilization ²		81.7	%		66.5	%

2006
Rental Revenues	$	43,010		$	37,829		$	—		$	80,839
Rental Related Services Revenues		13,545			621			—			14,166
Sales and Other Revenues		12,456			8,598			2,470			23,524
Total Revenues		69,011			47,048			2,470			118,529
Depreciation of Rental Equipment		5,138			17,034			—			22,172
Gross Profit		33,365			19,224			403			52,992
Interest Expense (Income) Allocation		3,789			1,580			(243	)		5,126
Income (Loss) before Provision for Income Taxes		17,364			8,680			(534	)		25,510
Rental Equipment Acquisitions		35,270			28,392			—			63,662
Accounts Receivable, net (period end)		32,237			18,493			2,914			53,644
Rental Equipment, at cost (period end)		439,615			175,633			—			615,248
Rental Equipment, net book value (period end)		335,390			107,210			—			442,600
Utilization (period end) ²		83.3	%		71.3	%
Average Utilization ²		82.8	%		70.3	%

1	Gross Enviroplex sales revenues were $3,205,000 and $3,337,000 for the six months ended June 30, 2007 and 2006, respectively, which includes inter-segment sales to MMMC of $616,000 and $867,000, which are eliminated in consolidation.

2	Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. The Average Utilization for the period is calculated using the average costs of rental equipment.

No single customer accounted for more than 10% of total revenues for the six months ended June 30, 2007 and 2006. In addition, total foreign country customers and operations accounted for less than 10% of the Company’s revenues and long-lived assets for the same periods.

NOTE 6. SUBSEQUENT EVENT

In July 2007, the Company entered into an agreement with the minority shareholders of Enviroplex to increase its ownership of Enviroplex from 81.1% to 100%. The stock purchase will be for cash and will close upon satisfaction of certain obligations by the parties.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to those set forth under this Item, as well as those discussed in Part II—Item 1A, “Risk Factors,” and elsewhere in this document and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I—Item 1 of this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2007.

General

The Company, incorporated in 1979, is a leading rental provider of modular buildings for classroom and office space, and test equipment for general purpose and communications needs. The Company’s primary emphasis is on equipment rentals. The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “TRS-RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. In the six months ended June 30, 2007, MMMC, TRS-RenTelco and Enviroplex contributed 73%, 27% and 0% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 68%, 34% and negative 2% for the same period in 2006. Although managed as a separate business unit, Enviroplex’s revenues, pretax income contribution and total assets are not significant relative to the Company’s consolidated financial position.

The Company generates the majority of its revenue from the rental of relocatable modular buildings and electronic test equipment on operating leases with sales of equipment occurring in the normal course of business. The Company requires significant capital outlay to purchase its rental inventory and recovers its investment through rental and sales revenues. Rental revenues and other services negotiated as part of the lease agreement with the customer and related costs are recognized on a straight-line basis over the term of the lease. Sales revenue and related costs are recognized upon delivery and installation of the equipment to the customer. Sales revenues are less predictable and can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Generally, rental revenues recover the equipment’s capitalized cost in a short period of time relative to the equipment’s rental life and when sold, sale proceeds recover a high percentage of its capitalized cost.

The Company’s growth in rental assets has been primarily funded through internal cash flow and conventional bank financing. The Company presents EBITDA as a financial measure as management believes it provides useful information regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the business. EBITDA is defined by the Company as net income before minority interest in income of subsidiary, interest expense, provision for income taxes, depreciation, amortization, and non-cash stock compensation. In addition, several of the loan covenants and the determination of the interest rate related to the Company’s revolving line of credit are expressed by reference to this financial measure, similarly calculated. EBITDA should not be considered in isolation or 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 the Company’s profitability or liquidity. The Company’s EBITDA may not be comparable to similarly titled measures presented by other companies. Since EBITDA is a non-GAAP financial measure as defined by the Securities and Exchange Commission, the following table reconciles EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States for the three, six and twelve months ended June 30, 2007 and 2006.

Reconciliation of Net Income to EBITDA


*(dollar amounts in thousands)*	Three Months Ended June 30,						Six Months Ended June 30,						Twelve Months Ended June 30,
*(dollar amounts in thousands)*	2007			2006			2007			2006			2007			2006
Net Income	$	9,085		$	8,669		$	18,413		$	16,506		$	42,985		$	40,682
Minority Interest in Income (Loss) of Subsidiary		12			(33	)		(15	)		(65	)		330			100
Provision for Income Taxes		5,816			4,078			11,763			9,069			26,903			23,458
Interest		2,832			2,773			5,453			5,126			11,087			9,385

Income from Operations		17,745			15,487			35,614			30,636			81,305			73,625
Depreciation and Amortization		13,314			11,840			25,902			23,223			50,140			46,180
Non-Cash Stock Compensation		854			718			1,704			1,548			3,281			1,592

EBITDA ¹	$	31,913		$	28,045		$	63,220		$	55,407		$	134,726		$	121,397

EBITDA Margin ²		47	%		46	%		49	%		47	%		49	%		44	%

Funded Debt to EBITDA ³														1.38			1.56

1	EBITDA is defined as net income before minority interest in income of subsidiary, interest expense, provision for income taxes, depreciation, amortization, and other non-cash stock compensation.

2	EBITDA Margin is calculated as EBITDA divided by total revenues for the period.

3	Funded Debt to EBITDA is the ratio of notes payable as of the period end compared to the last twelve months of EBITDA.

Significant risks of rental equipment ownership are borne by the Company, which include, but are not limited to, uncertainties in the market for its products over the equipment’s useful life, use limitations for modular equipment related to updated building codes or legislative changes, technological obsolescence of electronic test equipment, and rental equipment deterioration. The Company believes it mitigates these risks by continued advocacy and collaboration with governing agencies and legislative bodies for ongoing use of its modular product, staying abreast of technology trends in order to make good buy-sell decisions of electronic test equipment, and ongoing investment in repair and maintenance programs to insure both types of rental equipment are in good operating condition.

The Company’s modular revenues are primarily affected by demand for classrooms which in turn is affected by shifting and fluctuating school populations, the level of state and local funding to public schools, the need for temporary classroom space during reconstruction of older schools and changes in policies regarding class size. In particular, public schools in the State of California from time to time experience fluctuations in funding from the state. As a result of any reduced funding, lower expenditures by these schools may result in certain planned programs, including the demand for classrooms, such as the Company provides, to be postponed or terminated. Reduced expenditures may in fact result in schools reducing their long-term facility construction projects in favor of using the Company’s modular classroom solutions; however, there can be no assurance that such events will occur. At this time, the Company can make no assurances as to whether public schools will either reduce or increase their demand for the Company’s modular classrooms as a result of fluctuations in funding of public schools by the State of California. Looking forward, the Company believes that any interruption in the passage of facility bonds or contraction of class size reduction programs by public schools may have a material adverse effect on both rental and sales revenues of the Company. (For more information, see “Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and “Item 1A. Risk Factors – A significant reduction of funding to public schools could cause the demand for our modular classroom units to decline, which could result in a reduction in our revenues and profitability”, in the Part II – Other Information section of this Form 10-Q.)

Revenues of TRS-RenTelco are derived from the rental and sale of general purpose and communications test equipment to a broad range of companies, from Fortune 500 to middle and smaller market companies primarily in the electronics, communications, manufacturing, aerospace and defense industries. Electronics revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance.

The Company’s rental operations include rental and rental related service revenues, which comprised approximately 81% and 80% of consolidated revenues for the six months ended June 30, 2007 and 2006, respectively. Of the total rental operations revenues for the six months ended June 30, 2007 and 2006, modulars comprised 61% and 60%, respectively, and electronics comprised 39% and 40%, respectively. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment (if any), and other direct costs of rental operations which include direct labor, supplies, repairs, insurance, property taxes, license fees and amortization of certain lease costs.

The Company also sells both modular and electronic test equipment that is new, previously rented, or manufactured by its majority owned subsidiary, Enviroplex. The renting and selling of some modular equipment requires a dealer’s license, which the Company has obtained from the appropriate governmental agencies. For the six months ended June 30, 2007 and 2006, sales and other revenues of both modular and electronic test equipment comprised approximately 19% and 20%, respectively, of the Company’s consolidated revenues. Of the total sales and other revenues for the six months ended June 30, 2007 and 2006, modulars comprised 55% and 63%, respectively, and electronics comprised 45% and 37%, respectively. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the sale of equipment such as delivery, installation, modifications and related site work.

Selling and administrative expenses primarily include personnel and benefit costs, which include non-cash stock-based compensation, depreciation and amortization, bad debt expense, advertising costs, and professional service fees. The Company believes that sharing of common facilities, financing, senior management, and operating and accounting systems by all of the Company’s operations, results in an efficient use of overhead. Historically, the Company’s operating margins have been impacted favorably to the extent its costs and expenses are leveraged over a large installed customer base. However, there can be no assurance as to the Company’s ability to maintain a large installed customer base or ability to sustain its historical operating margins.

Recent Developments

On June 7, 2007, the Company announced that the board of directors declared a cash dividend of $0.18 per common share for the quarter ended June 30, 2007, an increase of 13% over the prior year’s comparable quarter.

The Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”), effective June 6, 2007, under which 1,875,000 shares, plus the number of shares that remain available for grants of award under the Company’s 1998 Stock Option Plan (the “1998 Plan”) and become available as a result of forfeiture, termination, or expiration of awards previously granted under the 1998 Plan, were reserved for the grant of options to its employees, directors and consultants to purchase common stock of the Company. The awards have a maximum term of 10 years at an exercise price of not less than 100% of the fair market value of the Company’s stock on the date the option is granted. The 2007 Plan replaces the Company’s 1998 Plan and the 2000 Long-Term Bonus Plan (the “2000 Plan”). The 2000 Plan only provided for the grant of stock bonuses to officers and key employees under which no awards have been granted.

Results of Operations

Three Months Ended June 30, 2007 Compared to

Three Months Ended June 30, 2006

Overview

Consolidated revenues for the three months ended June 30, 2007 increased 11% to $67.4 million, from $60.7 million for the same period in 2006. Consolidated net income for the quarter increased $0.4 million, or 5% to $9.1 million, or $0.36 per diluted share, from $8.7 million, or $0.34 per diluted share, for the same period in 2006.

For the three months ended June 30, 2007, on a consolidated basis:

•

Gross profit increased $4.1 million, or 15%, to $30.4 million from $26.3 million for the same period in 2006, with gross profit of MMMC increasing $3.5 million, or 21%, due to higher gross profit on rental revenues, and TRS-RenTelco increasing $0.3 million, or 3%, due to higher gross profit on sales revenues.

•

Selling and administrative expenses increased $1.8 million, or 17% to $12.6 million from $10.8 million for the same period in 2006, primarily as a result of higher personnel and employee benefit costs and increased bad debt expense.

•

Interest expense increased $0.1 million to $2.8 million in 2007, due to 3% higher average interest rates of 6.2% compared to 6.0% in 2006, partly offset by 1% lower average debt levels of the Company.

•

Pre-tax income contribution by MMMC and TRS-RenTelco was 74% and 26%, respectively, compared to 65% and 37%, respectively, for the comparable 2006 period. These results are discussed on a segment basis below.

•

Provision for income taxes was based on an effective tax rate of 39.0%, compared to 32.1% in the same period in 2006. The 2006 provision for income taxes was reduced $0.9 million during the second quarter 2006 to record the impact to the Company’s deferred tax liability from a franchise tax law change enacted by the state of Texas in May 2006. Excluding the impact of the Texas law change, the 2006 provision for income taxes was based on an effective tax rate of 39.0%. The Company’s 2007 estimated effective tax rate of 39.0% is based on the expected revenue distribution by state, however, there can be no assurance that such expected business levels will be achieved in 2007, which may cause the Company’s effective tax rate to change in future periods.

•

EBITDA increased $3.9 million, or 14%, to $31.9 million compared to $28.0 million in 2006, with MMMC increasing $3.1 million, TRS-RenTelco increasing $0.4, and Enviroplex increasing $0.4 million.

MMMC

For the three months ended June 30, 2007, MMMC’s total revenues increased $3.2 million, or 9%, to $39.1 million from the same period in 2006, due to $4.5 million higher rental and rental related services revenues, partly offset by lower sales revenues during the quarter. The rental revenue increase and higher gross margin on rental revenues resulted in an increase in pre-tax income of $2.7 million, or 32%, to $11.0 million for the three months ended June 30, 2007, from $8.3 million for the same period in 2006.

The following table summarizes quarter over quarter results for each revenue and gross profit category, pre-tax income, and other selected information.

MMMC – Q2 2007 compared to Q2 2006 (Unaudited)


*(dollar amounts in thousands)*	Three Months Ended June 30,						Increase (Decrease)
*(dollar amounts in thousands)*	2007			2006			$			%
Revenues
Rental	$	24,730		$	21,602		$	3,128		14	%
Rental Related Services		8,116			6,779			1,337		20	%

Rental Operations		32,846			28,381			4,465		16	%
Sales		6,085			7,332			(1,247	)	-17	%
Other		157			178			(21	)	-12	%

Total Revenues	$	39,088		$	35,891		$	3,197		9	%

Gross Profit
Rental	$	15,328		$	11,858		$	3,470		29	%
Rental Related Services		2,448			2,397			51		2	%

Rental Operations		17,776			14,255			3,521		25	%
Sales		1,767			1,793			(26	)	-1	%
Other		157			178			(21	)	-12	%

Total Gross Profit	$	19,700		$	16,226		$	3,474		21	%

Pre-tax Income	$	10,981		$	8,301		$	2,680		32	%

Other Information
Depreciation of Rental Equipment	$	3,019		$	2,618		$	401		15	%
Interest Expense Allocation	$	2,000		$	2,043		$	(43	)	-2	%

Average Rental Equipment ¹	$	417,320		$	372,051		$	45,269		12	%
Average Rental Equipment on Rent ¹	$	342,683		$	307,599		$	35,084		11	%
Average Monthly Total Yield ²		1.98	%		1.94	%				2	%
Average Utilization ³		82.1	%		82.7	%				-1	%
Average Monthly Rental Rate ⁴		2.41	%		2.34	%				3	%

Period End Rental Equipment ¹	$	421,170		$	375,227		$	45,943		12	%
Period End Utilization ³		82.8	%		83.3	%				-1	%
Period End Floors ¹		25,200			23,422			1,778		8	%

1	Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment. Period End Floors excludes new equipment inventory.

2	Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.

3	Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average costs of the rental equipment.

4	Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

MMMC’s gross profit for the three months ended June 30, 2007 increased $3.5 million, or 21%, to $19.7 million from $16.2 million for the same period in 2006. For the three months ended June 30, 2007 compared to the same period in 2006:

•

Gross Profit on Rental Revenues – Rental revenues increased $3.1 million, or 14%, over 2006, due to the continued education market demand for classrooms and the increased demand for commercial buildings. The rental revenues increase was due to a 12% increase in average rental equipment, with a higher average total yield as lower average utilization was offset by improved rental rates. As a percentage of rental revenues, depreciation was 12% in 2007 and 2006 and other direct costs decreased from 33% in 2006 to 26% in 2007, which resulted in gross margin percentage of 62% in 2007 compared to 55% in 2006. In 2006 other direct costs were impacted by higher field service costs and higher material costs related to the mix of building modification and preparation work performed during the quarter. The higher rental revenues combined with higher rental margins, resulted in gross profit on rental revenues increasing $3.5 million, or 29%, to $15.3 million from $11.9 million in 2006.

•

Gross Profit on Rental Related Services – Rental related services revenues increased $1.3 million, or 20%, compared to 2006, primarily due to the ongoing demand for modular classrooms and increased demand for commercial projects. Most of these service revenues are negotiated with the initial lease and are recognized on a straight-line basis with the associated costs over the initial term of the lease. The increase in rental related services revenues was primarily attributable to the mix of leases and associated service revenues within the initial lease term and higher revenues from services rendered during the lease during 2007 as compared to 2006. Higher revenues partly offset by lower gross margin, resulted in rental related services gross profit increasing $0.1 million to $2.5 million from $2.4 million in 2006.

•

Gross Profit on Sales – Sales revenues decreased $1.2 million, or 17%, compared to 2006. Sales occur routinely as a normal part of MMMC’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding. Lower sales revenues were offset by a higher gross margin percentage, 29% in 2007 compared to 25% in 2006, due to higher gross margin percentage on both new and used equipment sales, which resulted in comparable gross profit on sales of $1.8 million in 2007 and 2006.

For the three months ended June 30, 2007, selling and administrative expenses increased $0.8 million, or 14%, to $6.7 million from $5.9 million in the same period in 2006, primarily due to higher personnel and employee benefit costs, marketing costs and bad debt expense. Allocated interest expense of $2.0 million for the quarter ended June 30, 2007 was comparable to that of the same period in 2006.

TRS-RenTelco

For the three months ended June 30, 2007, TRS-RenTelco’s total revenues increased $3.3 million, or 14%, to $26.9 million compared to the same period in 2006, due to higher rental and sales revenues. Pre-tax income decreased $0.9 million, or 18%, for the three months ended June 30, 2007 to $3.8 million from $4.7 million for the same period of 2006, primarily due to higher selling and administrative expenses and lower gross profit on rental revenues.

The following table summarizes quarter over quarter results for each revenue and gross profit category, pre-tax income, and other selected information.

TRS-RenTelco – Q2 2007 compared to Q2 2006 (Unaudited)


*(dollar amounts in thousands)*	Three Months Ended June 30,						Increase (Decrease)
*(dollar amounts in thousands)*	2007			2006			$			%
Revenues
Rental	$	20,265		$	19,566		$	699		4	%
Rental Related Services		482			320			162		51	%

Rental Operations		20,747			19,886			861		4	%
Sales		5,636			3,223			2,413		75	%
Other		473			459			14		3	%

Total Revenues	$	26,856		$	23,568		$	3,288		14	%

Gross Profit
Rental	$	7,941		$	8,233		$	(292	)	-4	%
Rental Related Services		(16	)		(46	)		30		65	%

Rental Operations		7,925			8,187			(262	)	-3	%
Sales		1,689			1,127			562		50	%
Other		473			459			14		3	%

Total Gross Profit	$	10,087		$	9,773			314		3	%

Pre-tax Income	$	3,830		$	4,688		$	(858	)	-18	%

Other Information
Depreciation of Rental Equipment	$	9,711		$	8,696		$	1,015		12	%
Interest Expense Allocation	$	959		$	862		$	97		11	%

Average Rental Equipment ¹	$	203,688		$	167,478		$	36,210		22	%
Average Rental Equipment on Rent ¹	$	135,366		$	119,061		$	16,305		14	%
Average Monthly Total Yield ²		3.32	%		3.89	%				-15	%
Average Utilization ³		66.5	%		71.1	%				-6	%
Average Monthly Rental Rate ⁴		4.99	%		5.48	%				-9	%

Period End Rental Equipment ¹	$	207,937		$	173,910		$	34,027		20	%
Period End Utilization ³		67.2	%		71.3	%				-6	%

1	Average and Period End Rental Equipment represents the cost of rental equipment excluding accessory equipment.

2	Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.

3	Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment. Average Utilization for the period is calculated using the average costs of the rental equipment.

4	Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

TRS-RenTelco’s gross profit for the three months ended June 30, 2007 increased $0.3 million, or 3% to $10.1 million from $9.8 million for the same period in 2006. For the three months ended June 30, 2007 compared to the same period in 2006:

•

Gross Profit on Rental Revenues – Rental revenues increased $0.7 million, or 4%, as compared to 2006, with depreciation expense increasing $1.0 million, or 12%, resulting in decreased gross profit on rental revenues of $0.3 million, or 4%, to $7.9 million as compared to the same period in 2006. The decrease in gross profit on rental revenues is primarily due to 22% higher average rental equipment as compared to 2006, offset by lower average monthly yield as utilization of rental equipment decreased 6% and average rental rates decreased 9% in 2007 compared to 2006. The rental rate decrease was primarily due to a greater mix of general purpose test equipment that typically has lower rental rates, but longer depreciable lives, compared to communications test equipment. Other factors contributing to the lower rental rates were account penetration and other competitive pressures, and the phasing out of TRS acquired equipment at approximately 55% of list price compared to new equipment purchases at approximately 90% of list price.

•

Gross Profit on Sales – Sales revenues increased 75% to $5.6 million in 2007, as compared to $3.2 million in 2006. Gross margin percentage was 30% in 2007, compared to 35% in 2006, primarily due to lower gross margin on used equipment sales resulting in gross profit on sales increasing $0.6 million, or 50%, to $1.7 million from $1.1 million in 2006. Sales occur routinely as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements, equipment availability and funding.

For the three months ended June 30, 2007, selling and administrative expenses increased $1.1 million, or 25%, to $5.3 million from $4.2 million in the same period in 2006 due to higher personnel and employee benefit costs and bad debt expense. Allocated interest expense for the first quarter of 2007 increased $0.1 million to $1.0 million compared to that of the same period in 2006.

Six Months Ended June 30, 2007 Compared to

Six Months Ended June 30, 2006

Overview

Consolidated revenues for the six months ended June 30, 2007 increased $9.7 million, or 8%, to $128.2 million from $118.5 million for the same period in 2006. Consolidated net income for the six months ended June 30, 2007 increased $1.9 million, or 12% to $18.4 million, or $0.72 per diluted share, from $16.6 million, or $0.66 per diluted share, for the same period in 2006.

For the six months ended June 30, 2007, on a consolidated basis:

•

Gross profit increased $6.9 million, or 13%, to $59.9 million from $53.0 million for the same period in 2006, with gross profit of MMMC increasing $6.1 million, or 18% due to higher gross profit on rental revenues, and TRS-RenTelco increasing $0.8 million, or 4%, due to higher gross profit on rental and sales revenues.

•

Selling and administrative expenses increased $1.9 million, or 8% to $24.3 million from $22.4 million for the same period in 2006, primarily as a result of higher personnel and employee benefit costs and increased bad debt expense.

•

Interest expense increased $0.3 million, or 6% to $5.4 million from $5.1 million for the same period in 2006, primarily due to 6% higher average interest rates of 6.1% compared to 5.8% in 2006.

•

Pre-tax income contribution by MMMC and TRS-RenTelco was 73% and 27%, respectively, compared to 68% and 34%, respectively, for the comparable 2006 period. These results are discussed on a segment basis below.

•

Provision for income taxes was based on an effective tax rate of 39.0%, compared to 35.6% in 2006. Provision for income taxes was reduced $0.9 million during the second quarter 2006 to record the impact to the Company’s deferred tax liability from a franchise tax law change enacted by the state of Texas in May 2006. Excluding the impact of the Texas law change, the 2006 provision for income taxes was based on an effective tax rate of 39.0%. The Company’s 2007 estimated effective tax rate of 39.0% is based on the expected revenue distribution by state, however, there can be no assurance that such expected business levels will be achieved in 2007, which may cause the Company’s effective tax rate to change in future periods.

•

EBITDA increased $7.8 million, or 14%, to $63.2 million compared to $55.4 million in 2006, with MMMC increasing $5.8 million, TRS-RenTelco increasing $1.6 million and Enviroplex increasing $0.4 million.

MMMC

For the six months ended June 30, 2007, MMMC’s total revenues increased $5.3 million, or 8%, to $74.3 million over the same period in 2006, primarily due to higher rental and rental related services revenues, partly offset by lower sale revenue during the period. The rental revenue increase and higher gross margin on rental revenues resulted in an increase in pre-tax income of $4.8 million, or 28%, to $22.2 million for the six months ended June 30, 2007, from $17.4 million for the same period in 2006

The following table summarizes six months over six months results for each revenue and gross profit category, pre-tax income, and other selected data.

MMMC – Six Months Ended 6/30/07 compared to Six Months Ended 6/30/06 (Unaudited)


*(dollar amounts in thousands)*	Six Months Ended June 30,						Increase (Decrease)
*(dollar amounts in thousands)*	2007			2006			$			%
Revenues
Rental	$	48,566		$	43,010		$	5,556		13	%
Rental Related Services		15,165			13,545			1,620		12	%

Rental Operations		63,731			56,555			7,176		13	%
Sales		10,251			12,095			(1,844	)	-15	%
Other		319			361			(42	)	-12	%

Total Revenues	$	74,301		$	69,011		$	5,290		8	%

Gross Profit
Rental	$	31,070		$	25,234			5,836		23	%
Rental Related Services		4,768			4,635			133		3	%

Rental Operations		35,838			29,869			5,969		20	%
Sales		3,074			3,135			(61	)	-2	%
Other		319			361			(42	)	-12	%

Total Gross Profit	$	39,231		$	33,365		$	5,866		18	%

Pre-tax Income	$	22,163		$	17,364		$	4,799		28	%

Other Information
Depreciation of Rental Equipment	$	5,948		$	5,138		$	810		16	%
Interest Expense Allocation	$	3,893		$	3,789		$	104		3	%

Average Rental Equipment ¹	$	414,981		$	370,418		$	44,563		12	%
Average Rental Equipment on Rent ¹	$	339,166		$	306,861		$	32,305		11	%
Average Monthly Total Yield ²		1.95	%		1.94	%				1	%
Average Utilization ³		81.7	%		82.8	%				-1	%
Average Monthly Rental Rate ⁴		2.39	%		2.34	%				2	%

Period End Rental Equipment ¹	$	421,170		$	375,227		$	45,943		12	%
Period End Utilization ³		82.8	%		83.3	%				-1	%
Period End Floors ¹		25,200			23,422			1,778		8	%

1	Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment. Period End Floors excludes new equipment inventory.

2	Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.

3	Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average Utilization for the period is calculated using the average costs of the rental equipment.

4	Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

MMMC’s gross profit for the six months ended June 30, 2007 increased $5.8 million, or 18%, to $39.2 million from $33.4 million for the same period in 2006. For the six months ended June 30, 2007 compared to the same period in 2006:

•

Gross Profit on Rents - Rental revenues increased $5.6 million, or 13%, over 2006, due to the continued education market demand for classrooms and increased demand for commercial projects. The rental revenue increase was due to a 12% increase in average rental equipment, with a higher average total yield as lower average utilization was offset by improved rental rates. As a percentage of rents, depreciation was 12% in 2007 and 2006 and other direct costs of rental operations decreased from 29% in 2006 to 24% in 2007, which resulted in gross margin percentage of 64% in 2007 compared to 59% in 2006. In 2006 other direct costs were impacted by higher field service costs and higher material costs related to the mix of building modification and preparation work performed. The higher rental revenues combined with higher rental margins resulted in gross profit on rental revenues increasing $5.9 million, or 23%, to $31.1 million from $25.2 million in 2006.

•

Gross Profit on Rental Related Services – Rental related services revenues increased $1.6 million, or 12%, compared to 2006, primarily due to the ongoing demand for modular classrooms. Most of these service revenues are negotiated with the initial lease and are recognized on a straight-line basis with the associated costs over the initial term of the lease. The increase in rental related services revenues was primarily attributable to the mix of leases and associated service revenues within the initial lease term during 2007 as compared to 2006. The higher revenues partly offset by a lower gross margin percentage of 31% in 2007 compared to 34% in 2006, resulted in rental related services gross profit increasing $0.2 million, or 3%, to $4.8 million from $4.6 million in 2006.

•

Gross Profit on Sales – Sales revenues decreased $1.8 million, or 15%, compared to 2006. Sales occur routinely as a normal part of MMMC’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding. Lower sales revenues were partly offset by a higher gross margin percentage, 30% in 2007 compared to 26% in 2006, due to a lower mix of new equipment sales and higher margin on used equipment sales, which resulted in sales gross profit decreasing $0.1 million, or 2%, to $3.0 million from $3.1 million in 2006.

For the six months ended June 30, 2007, selling and administrative expenses increased $1.0 million, or 8%, to $13.2 million from $12.2 million in the same period in 2006, primarily due to higher personnel and employee benefit costs, marketing costs and bad debt expense. Allocated interest expense for the six months ended June 30, 2007 increased $0.1 million, or 3%, to $3.9 million from that of the comparable period in 2006.

TRS-RenTelco

For the six months ended June 30, 2007, TRS-RenTelco’s total revenues increased $4.3 million, or 9%, to $51.3 million compared to the same period in 2006, due to higher rental and sales revenues. Pre-tax income decreased $0.6 million to $8.1 million for the six months ended June 30, 2007 from $8.7 million for the same period in 2006, primarily due to lower gross margin on rental revenues and higher selling and administrative expense.

The following table summarizes six months over six months results for each revenue and gross profit category, pre-tax income, and other selected data.

TRS-RenTelco – Six Months Ended 6/30/07 compared to Six Months Ended 6/30/06 (Unaudited)


*(dollar amounts in thousands)*	Six Months Ended June 30,						Increase (Decrease)
*(dollar amounts in thousands)*	2007			2006			$			%
Revenues
Rental	$	39,737		$	37,829		$	1,908		5	%
Rental Related Services		855			621			234		38	%

Rental Operations		40,592			38,450			2,142		6	%
Sales		9,727			7,702			2,025		26	%
Other		991			896			95		11	%

Total Revenues	$	51,310		$	47,048		$	4,262		9	%

Gross Profit
Rental	$	15,890		$	15,664		$	226		1	%
Rental Related Services		(7	)		(177	)		170		96	%

Rental Operations		15,883			15,487			396		3	%
Sales		3,140			2,841			299		11	%
Other		991			896			95		11	%

Total Gross Profit	$	20,014		$	19,224		$	790		4	%

Pre-tax Income	$	8,118		$	8,680		$	(562	)	-6	%

Other Information
Depreciation of Rental Equipment	$	18,801		$	17,034		$	1,767		10	%
Interest Expense Allocation	$	1,837		$	1,580		$	257		16	%

Average Rental Equipment ¹	$	197,581		$	162,457		$	35,124		22	%
Average Rental Equipment on Rent ¹	$	131,333		$	114,143		$	17,190		15	%
Average Monthly Total Yield ²		3.35	%		3.88	%				-14	%
Average Utilization ³		66.5	%		70.3	%				-5	%
Average Monthly Rental Rate ⁴		5.04	%		5.52	%				-9	%

Period End Rental Equipment ¹	$	207,937		$	173,910		$	34,027		20	%
Period End Utilization ³		67.2	%		71.3	%				-6	%

1	Average and Period End Rental Equipment represents the cost of rental equipment excluding accessory equipment.

2	Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.

3	Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment. Average Utilization for the period is calculated using the average costs of the rental equipment.

4	Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

TRS-RenTelco’s gross profit for the six months ended June 30, 2007 increased $0.8 million, or 4%, to $20.0 million from $19.2 million for the same period in 2006. For the six months ended June 30, 2007 compared to the same period in 2006:

•

Gross Profit on Rents – Rental revenues increased $1.9 million, or 5%, as compared to 2006, with depreciation expense increasing $1.8 million, or 10%, resulting in increased gross profit on rents of $0.2 million, or 1%, to $15.9 million as compared to the same period in 2006. The rental revenue increase was due to 22% higher average rental equipment as compared to 2006, partly offset by lower average monthly yield as utilization of rental equipment decreased 5% and average monthly rental rate decreased 9% in 2007 compared to 2006. The rental rate decrease was due to account penetration and other competitive pressures, the phasing out of TRS acquired equipment at approximately 55% of list price compared to new equipment purchases at approximately 90% of list price and a greater mix of general purpose test equipment that typically has lower rental rates, but longer depreciable lives, compared to communications test equipment.

•

Gross Profit on Sales – Sales revenues increased 26% to $9.7 million in 2007 as compared to $7.7 million in 2006. Gross margin percentage was 32% in 2007, compared to 37% in 2006, primarily due to lower gross margin on used equipment sales resulting in gross profit on sales increasing $0.3 million, or 11%, to $3.1 million from $2.8 million in 2006. Sales occur routinely as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements, equipment availability and funding.

For the six months ended June 30, 2007, selling and administrative expenses increased $1.1 million, or 12%, to $10.1 million from $9.0 million in the same period in 2006 due to higher personnel and employee benefit costs. Allocated interest expense for the six months ended June 30, 2007 increased $0.2 million, to $1.8 million from that of the comparable period in 2006.

Liquidity and Capital Resources

This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See the statements at the beginning of this Item for cautionary information with respect to such forward-looking statements.

The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company for the six months ended June 30, 2007 compared to the same period in 2006 are summarized as follows:

Cash Flows from Operating Activities: The Company’s operations provided net cash flow of $28.8 million, a decrease of 32% during the six months ended June 30, 2007 as compared to $42.3 million during the same period in 2006. The $13.5 million decrease in net cash provided by operating activities was primarily attributable to the reduction of accounts receivable in 2006 due to the collection of large aged receivables that did not recur in 2007 and to a lesser extent decreased accounts payable and other accrued liabilities compared to 2006, partly offset by improved results of operations and other balance sheet changes.

Cash Flows from Investing Activities: Net cash used in investing activities was $45.4 million for the six months ended June 30, 2007 as compared to $63.1 million for the same period in 2006. The $17.7 million decrease in net cash used in investing activities was primarily due to a $16.0 million decrease in rental equipment purchases to $55.0 million from $71.0 million during the same period in 2006.

Cash Flows from Financing Activities: Net cash provided by financing activities was $16.6 million for the six months ended June 30, 2007, compared to $20.9 million during the same period in 2006. For the first six months of 2007, net cash provided by financing activities included net borrowings under the Company’s operating lines of credit of $20.4 million, payment of dividends to shareholders of $8.6 million, proceeds from the exercise of stock options of $3.4 million and excess tax benefit from the exercise and disqualifying disposition of stock options of $1.4 million. For the first six months of 2006, net cash provided by financing activities included net borrowings under the Company’s operating lines of credit of $26.3 million, payment of dividends to shareholders of $7.5 million, proceeds from the exercise of stock options of $1.4 million and the excess tax benefit from the exercise and disqualifying disposition of stock options of $0.6 million.

The Company had total liabilities to equity ratios of 1.49 to 1 and 1.54 to 1 as of June 30, 2007 and December 31, 2006, respectively. The debt (notes payable) to equity ratios were 0.75 to 1 and 0.72 to 1 as of June 30, 2007 and December 31, 2006, respectively. The Company’s credit facility related to its cash management services facilitates automatic borrowings and repayments with the bank on a daily basis depending on the Company’s cash position and allows the Company to maintain minimal cash balances. At June 30, 2007, the Company had unsecured lines of credit that permit it to borrow up to $195.0 million of which $138.0 million was outstanding and has capacity to borrow up to an additional $57.0 million. These unsecured lines of credit expire June 30, 2008.

The Company has in the past made purchases of shares of its common stock from time to time in the over-the-counter market (NASDAQ) and/or through privately negotiated, large block transactions under an authorization of the Company’s board of directors. Shares repurchased by the Company are cancelled and returned to the status of authorized but unissued stock. There were no repurchases of common stock in the six months ended June 30, 2007 and 2006. As of August 2, 2007, 1,977,267 shares of the Company’s common stock remain authorized for repurchase.

Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s market risk exposures from those reported in our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4.

CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2007. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that have materially affected, or would reasonably be likely to materially affect, the Company’s internal control over financial reporting.

PART II -OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in the current proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, operating results or cash flows.

ITEM 1A.

RISK FACTORS

You should carefully consider the following discussion of various risks and uncertainties. We believe these risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. The following risk factors are not the only risk factors facing our Company. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition, and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and you may lose all or part of your investment.

Our stock price is subject to fluctuations and the value of your investment may decline.

The market price of our common stock fluctuates on the NASDAQ Global Select Market and is likely to be affected by a number of factors including but not limited to:

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our operating performance and the performance of our competitors, and in particular any variations in our operating results or dividend rate from our stated guidance or from investors’ expectations;

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changes in general conditions in the economy, the industries in which we operate or the financial markets;

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investor’s reaction to our press releases, public announcements, or filings with the SEC;

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the stock price performance of competitors or other comparable companies;

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changes in research analysts’ coverage, recommendations or earnings estimates for us or for the stocks of other companies in our industry;

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sales of common stock by our directors, executive officers and our other large shareholders, particularly in light of the limited trading volume of our stock;

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any merger and acquisition activity that involves us or our competitors; and

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other announcements or developments affecting us, our industry, customers, suppliers, or competitors.

In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock and are based upon factors that have little or nothing to do with our Company or its performance, and these fluctuations could materially reduce our stock price.

Our future operating results may fluctuate, fail to match past performance or fail to meet expectations.

Our operating results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of a number of factors, some of which are beyond our control including but not limited to:

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general economic conditions in the states and countries where we rent and sell our products;

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legislative and educational policies where we rent and sell our products;

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seasonality of our rental businesses and our end-markets;

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success of our strategic growth initiatives;

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the timing and type of equipment purchases, rentals and sales;

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the nature and duration of the equipment needs of our customers;

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the timing of new product introductions by us, our suppliers and our competitors;

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the volume, timing and mix of maintenance and repair work on our rental equipment;

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our equipment mix, availability, utilization, and pricing;

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the mix, by state and country, of our revenues, personnel and assets;

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rental equipment impairment from excess, obsolete, or damaged equipment;

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movements in interest rates or tax rates;

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changes in, and application of, accounting rules;

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changes in the regulations applicable to us; and

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litigation matters.

As a result of these factors, our historical financial results are not necessarily indicative of our future results.

Our ability to retain our executive management and to recruit, retain and motivate key employees is critical to the success of our business.

If we cannot successfully recruit and retain qualified personnel, our operating results and stock price may suffer. We believe that our success is directly linked to the competent people in our organization, including our executive officers, senior managers and other key personnel, and in particular, Dennis Kakures our Chief Executive Officer. Personnel turnover can be costly and could materially and adversely impact our operating results and can potentially jeopardize the success of our current strategic initiatives. We need to attract and retain highly qualified personnel to replace personnel when turnover occurs, as well as add to our staff levels as growth occurs. Our business and stock price likely will suffer if we are unable to fill, or experience delays in filling open positions, or fail to retain key personnel when turnover occurs.

Failure by third parties to manufacture our products to our specifications or on a timely basis may harm our reputation and financial condition.

We depend on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. In the future, we may be limited as to the number of third-party suppliers for some of our products. Currently, we do not have any long-term purchase contracts with any third-party supplier. In the future, we may not be able to negotiate arrangements with these third parties on acceptable terms, if at all. If we cannot negotiate arrangements with these third parties to produce our products or if the third parties fail to produce our products to our specifications or in a timely manner, our reputation and financial condition could be harmed.

We may not be able to effectively implement our selected Enterprise Resource Planning system, or ERP.

During June 2005, we entered into an agreement with Rental Results, a rental software application provider, to support the transition of our modular business, certain aspects of our electronics business and our accounting systems to their platform. The new ERP and upgrades to our IT infrastructure will result in higher selling and administrative costs in 2007 and beyond. This is a multi year project and we expect the first phase of the project to be completed in early 2008. These information system upgrades are important to serve and support our strategic growth. The delay or failure to implement these new systems effectively could disrupt our business, distract management’s focus and attention from our business operations and growth initiatives, and increase our implementation and operating costs, any of which could negatively impact our operations and operating results.

We may engage in future acquisitions that could negatively impact our results of operations, financial condition and business.

Some of our recent growth has resulted through the acquisition of TRS, an electronic test equipment rental business in 2004. We anticipate that we will continue to consider acquisitions in the future that meet our strategic growth plans. We are unable to predict whether or when any prospective acquisition will be completed. Acquisitions involve numerous risks, including the following:

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difficulties in integrating the operations, technologies, products and personnel of the acquired companies;

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diversion of management’s attention from normal daily operations of the business;

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difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

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timely completion of necessary financing and required amendments, if any, to existing agreements;

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an inability to implement uniform standards, controls, procedures and policies;

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undiscovered and unknown problems, defects or other issues related to any acquisition that become known to us only after the acquisition;

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negative reactions from our customers to an acquisition;

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disruptions among employees which may erode employee morale;

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potential loss of key employees, including costly litigation resulting from the termination of those employees.

In connection with acquisitions we may:

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assume liabilities or acquire damaged assets, some of which may be unknown at the time of such acquisitions;

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record goodwill and non-amortizable intangible assets that will be subject to future impairment testing and potential periodic impairment charges;

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incur amortization expenses related to certain intangible assets; or

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become subject to litigation.

Acquisitions are inherently risky, and no assurance can be given that our future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions we make could harm our business and operating results in a material way. In addition, if we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing shareholders’ ownership could be diluted significantly. If we were to proceed with one or more significant future acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available credit line, or we may be required to seek additional debt or equity financing.

If we do not effectively manage our credit risk, collect on our accounts receivable, or recover our rental equipment from our customers’ sites, it could have a material adverse effect on our operating results.

We generally sell to customers on 30-day terms, individually perform credit evaluation procedures on our customers on each transaction and require security deposits or other forms of security from our customers when a significant credit risk is identified. Historically, accounts receivable write-offs and related equipment not returned by customers has not been significant and, in each of the last five years has been less than 1% of total revenues. Failure to manage our credit risk and receive timely payments on our customer accounts receivable may result in the write-off of customer receivables and loss of equipment, particularly electronic test equipment. If we are not able to manage credit risk issues, or if a large number of customers should have financial difficulties at the same time, our credit and equipment losses would increase above historical levels. If this should occur, our results of operations may be materially and adversely affected.

Effective management of our rental assets is vital to our business.

Our modular and electronics rental products have long useful lives and managing those assets is a critical element to each of our rental businesses. Modular asset management requires designing and building the product for a long life that anticipates the needs of our customers, including anticipating changes in legislation, regulations, building codes and local permitting. Electronics asset management requires understanding, selecting and investing in equipment technologies that support market demand, including anticipating technological advances and changes in manufacturers’ selling prices. For both our modular and electronic assets, we must successfully maintain and repair this equipment cost-effectively to maximize the useful life of the products and the level of proceeds from the sale of such products.

The nature of our businesses exposes us to the risk of litigation and liability under environmental, health and safety and products liability laws.

Certain aspects of our businesses involve risks of liability. In general, litigation in our industry, including class actions that seek substantial damages, arises with increasing frequency. Claims may be asserted under environmental, labor, health and safety or product liability laws. Litigation is invariably expensive, regardless of the merit of the plaintiffs’ claims. We may be named as a defendant in the future, and there can be no assurance, irrespective of the merit of such future actions, that we will not be required to make substantial settlement payments in the future.

Conducting our routine businesses exposes us to risk of litigation from employees, vendors and other third parties.

We are subject to claims arising from disputes with employees, vendors and other third parties in the normal course of business; these risks may be difficult to assess or quantify and their existence and magnitude may remain unknown for substantial periods of time. If the plaintiffs in any suits against us were to successfully prosecute their claims, or if we were to settle such suits by making significant payments to the plaintiffs, our operating results and financial condition would be harmed. Even if the outcome of a claim proves favorable to us, litigation can be time consuming and costly and may divert management resources. In addition, our organizational documents require us to indemnify our senior executives to the maximum extent permitted by California law. If our senior executives were named in any lawsuit, our indemnification obligations could magnify the costs of these suits.

The majority of our indebtedness is subject to variable interest rates, which makes us vulnerable to increases in interest rates.

Our indebtedness exposes us to interest rate increases because the majority of our indebtedness is subject to variable rates. At present, we do not have any derivative financial instruments such as interest rate swaps or hedges to mitigate interest rate variability. The interest rates under our credit facilities will be reset at varying periods. These interest rate adjustments could expose our operating results and cash flows to periodic fluctuations. Our annual debt service obligations will increase by approximately $1.4 million per year for each 1% increase in the average interest rate we pay, based on the $138.0 million balance of variable rate debt outstanding at June 30, 2007. If interest rates rise in the future, and particularly, if they rise significantly, our income will be negatively affected.

Our effective tax rate may change and become less predictable as our business expands.

We continue to consider expansion opportunities domestically and internationally for our rental businesses, such as our recent modular expansion in Florida and acquisition of TRS. Since the Company’s effective tax rate depends on business levels, personnel and assets located in various jurisdictions, further expansion into new markets or acquisitions may change the effective tax rate in the future and may make it and consequently our earnings less predictable going forward. In addition, the enactment of tax law changes by federal and state taxing authorities may impact the Company’s current period tax provision and its deferred tax liabilities.

Changes in financial accounting standards may cause lower than expected operating results and affect our reported results of operations.

Changes in accounting standards and their application may have a significant effect on our reported results on a going forward basis and may also affect the recording and disclosure of previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively impact our stock price.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404, and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements. Compliance with Section 404 and other requirements has and will continue to increase our costs and require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements. While we completed a favorable assessment as to the adequacy of our internal control over financial reporting for our fiscal year ended December 31, 2006, there is no assurance that future assessments of the adequacy of our internal control over financial reporting will be favorable. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal controls over financial reporting, which could adversely affect our stock price.

If we suffer loss to our facilities, equipment or distribution system due to catastrophe, our operations could be seriously harmed.

Our facilities, rental equipment and distribution systems may be subject to catastrophic loss due to fire, flood, hurricane, earthquake, terrorism or other natural or man-made disasters. In particular, we have our headquarters, three operating facilities, and rental equipment in California, which are located in areas with above average seismic activity and could be subject to a catastrophic loss caused by an earthquake. Our rental equipment and facilities in Florida are located in areas subject to hurricanes and other tropical storms. In addition to customers’ insurance on rented equipment, we carry property insurance on our rental equipment in inventory and operating facilities as well as business interruption insurance. We believe our insurance policies are adequate with the appropriate limits and deductibles to mitigate the potential loss exposure of our business. We do not have financial reserves for policy deductibles and we do have exclusions under our insurance policies that are customary for our industry, including earthquakes, flood and terrorism. If any of our facilities or a significant amount or our rental equipment were to experience a catastrophic loss, it could disrupt our operations, delay orders, shipments and revenue recognition and result in expenses to repair or replace the damaged rental equipment and facility not covered by insurance.

SPECIFIC RISKS RELATED TO OUR RELOCATABLE MODULAR BUILDINGS BUSINESS SEGMENT:

A significant reduction of funding to public schools could cause the demand for our modular classroom units to decline, which could result in a reduction in our revenues and profitability.

Rentals and sales of modulars to public school districts for use as portable classrooms, restroom buildings, and administrative offices for kindergarten through grade twelve represent a significant portion of MMMC’s rental and sales revenues. Funding for public school facilities is derived from a variety of sources including the passage of both statewide and local facility bond measures, developer fees and various taxes levied to support school operating budgets. Many of these funding sources are subject to financial and political considerations, which vary from district to district and are not tied to demand. Historically, we have benefited from the passage of facility bond measures and believe these are essential to our business. In California, our largest education market, state and local budgetary constraints have also affected the amount of funding received by public school districts.

To the extent public school districts’ funding is reduced for the rental and purchase of modular facilities, our business could be harmed and our results of operations negatively impacted. We believe that interruptions or delays in the passage of facility bond measures, changes in legislative or educational policies at either the state or local level including the contraction or elimination of class size reduction programs, a lack or insufficient amount of fiscal funding, a significant reduction of funding to public schools, or changes negatively impacting enrollment may reduce the rental and sale demand for our educational products and result in lower revenues and lower profitability.

Public policies that create demand for our products and services may change.

California and Florida have passed legislation to limit the number of students that may be grouped in a single classroom for certain grade levels. School districts with class sizes in excess of these limits have been and continue to be a significant source of our demand for modular classrooms. Further, in California, efforts to address aging infrastructure and deferred maintenance have resulted in a significant increase in modernization and reconstruction projects by public school districts including seismic retrofitting, asbestos abatement and various building repairs and upgrades. If educational priorities and policies shift away from class-size reduction or modernization and reconstruction projects, demand for our products and services may decline, not grow as quickly as or reach the levels that we anticipate. Significant equipment returns may result in lower utilization until equipment can be redeployed or sold, which may cause rental rates to decline and negatively affect our revenues and operating income.

Failure to comply with applicable regulations could harm our business and financial condition, resulting in lower operating results and cash flows.

Similar to conventionally constructed buildings, the modular building industry, including the manufacturers and lessors of portable classrooms, are subject to regulations by multiple governmental agencies at the federal, state and local level relating to environmental, health, safety and transportation matters, among other matters. Failure to comply with these laws or regulations could impact our business or harm our reputation and result in higher capital or operating expenditures or the imposition of penalties or restrictions on our operations.

As with conventional construction, typically new codes and regulations are not retroactively applied. Nonetheless, new governmental regulations in these or other areas may increase our acquisition cost of new rental equipment, limit the use of or make obsolete some of our existing equipment, or increase our general and administrative costs.

Building codes are generally reviewed every three years. All aspects of a given code are subject to change including but not limited to such items as structural specifications for earthquake safety, energy efficiency and environmental standards, fire and life safety, transportation, lighting and noise limits. On occasion, state agencies have undertaken studies of indoor air quality and noise levels with a focus on permanent and modular classrooms. These results could impact our existing modular equipment, and affect the future construction of our modular product.

Compliance with building codes and regulations entail a certain amount of risk as municipalities do not necessarily interpret these building codes and regulations in a consistent manner, particularly where applicable regulations may be unclear and subject to interpretation. The construction and modular industries have developed many “best practices” which are constantly evolving. Some of our peers and competitors may adopt practices that are more or less stringent than the Company’s. When, and if, regulatory standards are clarified, the effect of the clarification may be to impose rules on our business and practices retroactively, at which time, we may not be in compliance with such regulations and we may be required to incur costly remediation. If we are unable to pass these increased costs on to our customers, our profitability, operating cash flows and financial condition could be negatively impacted.

Our planned expansions of our modular building operations into new markets will affect our operating results.

We currently have modular building operations in California, Texas and Florida. We have identified several U.S. markets that we believe will be attractive long-term opportunities for our educational and commercial modular business and are actively preparing for launch in two of these markets in 2007. There are risks inherent in the undertaking of such expansion, including the risk of revenue from the business in these markets not meeting our expectations, higher than expected costs in entering these new markets, risk associated with compliance with applicable state laws and regulations, response by competitors and unanticipated consequences of expansion. In addition, expansion in new markets may by affected by local economic and market conditions. Expansion of our operations into these new markets will require a significant amount of attention from our management, a commitment of financial resources and will require us to add qualified management in these markets.

We are subject to laws and regulations governing government contracts. These laws and regulations make these government contracts more favorable to government entities than other third parties and any changes in these laws and regulations, or the failure to comply with these laws and regulations could harm our business.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts can differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts such as clauses that allow government entities not to perform on contractual obligations in the case of a lack of fiscal funding. Also, in the educational markets we serve, we are able to utilize “piggyback” contracts in marketing our products and services and ultimately to book business. The term “piggyback contract” refers to contracts for portable classrooms or other products entered into by public school districts following a formal bid process that allows for the use of the same contract terms and conditions with the successful vendor by other public school districts. As a result, “piggyback” contracts allow us to more readily book orders from our government customers, primarily public school districts, and to reduce the administrative expense associated with booking these orders. The governmental statutes and regulations that allow for use of “piggyback” contracts are subject to change or elimination in their entirety. A change in the manner of use or the elimination of piggyback contracts would likely negatively impact our ability to book new business from these government customers and could cause our administrative expenses related to processing these orders to increase significantly. In addition, any failure to comply with these laws and regulations might result in administrative penalties or even in the suspension of these contracts and as a result, the loss of the related revenues which would harm our business and results from operations.

Seasonality of our educational business may have adverse consequences for our business.

A significant portion of the modular sale and rental revenues are derived from the educational market. Typically, during each calendar year, our highest numbers of classrooms are shipped for rental and sale orders during the second and third quarters for delivery and installation prior to the start of the upcoming school year. The majority of classrooms shipped in the second and third quarters have rental start dates during the third quarter, thereby making the fourth quarter the first full quarter of rental revenues recognized for these transactions. These factors may impact the quarterly revenues and earnings of each year’s second, third and fourth quarters. The differences in quarterly revenues and earnings may also be subject to fluctuations in state funding. In the past, impaired levels of funding available to the school districts from the states in which we do business have caused school districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations, class size reduction initiatives and modernization and reconstruction project needs. Any reductions in funding available to school districts from the states in which we do business could result in a lower volume of orders for our products which could reduce our revenues and operating income and consequently harm our financial condition.

We face strong competition in our modular building markets.

The modular building leasing industry is highly competitive in our states of operation and we expect it to remain so. The competitive market in which we operate may prevent us from raising rental fees or sales prices to pass any increased costs on to our customers. We compete on the basis of a number of factors, including equipment availability, quality, price, service, reliability, appearance, functionality and delivery times. We believe we may experience pricing pressures in our areas of operation in the future as some of our competitors seek to obtain market share by reducing prices.

Some of our larger national competitors in the modular building leasing industry, notably Williams Scotsman International, Inc. and Modspace, formed by the combination of the former GE Capital Modular Space and Resun Space Solutions, have a greater range of products and services, greater financial and marketing resources, larger customer bases, and greater name recognition than we have. These larger competitors may be better able to respond to changes in the relocatable modular building market, to finance acquisitions, to fund internal growth and to compete for market share, any of which could harm our business.

We may not be able to quickly redeploy modular equipment returning from leases.

As of June 30, 2007, 63% of our modular portfolio had equipment on rent for periods exceeding the original committed term. Generally, when a customer continues to rent the modular equipment beyond the contractual term, the equipment contractually rents on a month-to-month basis. If a significant number of our rented modular units were returned during a short period of time, particularly those units that are rented on a month-to-month basis, a large supply of units would need to be remarketed. Our failure to effectively remarket a large influx of units returning from leases could negatively affect our financial performance and our ability to continue expanding our rental fleet.

Significant increases in raw material and labor costs could increase our acquisition cost of new modular rental equipment and repair and maintenance costs of our fleet, which would increase our operating costs and harm our profitability.

We incur labor costs and purchase raw materials, including lumber, siding and roofing and other products to perform periodic repairs, modifications and refurbishments to maintain physical conditions of our modular equipment. The volume, timing and mix of maintenance and repair work on our rental equipment may vary quarter-to-quarter and year-to-year. Generally, increases in labor and raw material costs will also increase the acquisition cost of new modular equipment and increase the repair and maintenance costs of our fleet. We also maintain a fleet of service trucks and use subcontractor companies for delivery, set-up, return delivery and dismantle of modulars for our customers. We rely on our subcontractor service companies to meet customer demands for timely shipment and return, and the loss or inadequate number of subcontractor service companies may cause prices to increase, while negatively impacting our reputation and operating performance. During periods of rising prices for labor, raw materials or fuel, and in particular, when the prices increase rapidly or to levels significantly higher than normal, we may incur significant increases in our acquisition costs for new modular equipment and incur higher operating costs that we may not be able to recoup from our customers, which would reduce our profitability.

Failure by third parties to manufacture our products timely or properly may harm our reputation and financial condition.

We are dependent on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. MMMC purchases new modulars from various manufacturers who build to MMMC’s design specifications. With the exception of Enviroplex, none of the principal suppliers are affiliated with the Company. During 2006, MMMC purchased 32% of its modular product from one manufacturer. The Company believes that the loss of its primary manufacturer of modulars could have an effect on its operations since MMMC could experience higher prices and longer lead times for modular product until other manufacturers increased their capacity.

Failure to properly design, manufacture, repair and maintain the modular product may result in impairment charges and reduction of our operating results and cash flows.

We estimate the useful life of the modular product to be 18 years with a residual value of 50%. However, proper design, manufacture, repairs and maintenance of the modular product during our ownership is required for the product to reach the estimated useful life of 18 years with a residual value of 50%. If we do not appropriately manage the design, manufacture, repair and maintenance of our modular product, or otherwise, delay or defer such repair or maintenance, we may be required to incur impairment charges for equipment that is beyond economic repair, incur significant capital expenditures to acquire new modular product to serve demand and accordingly experience reduction of our future operating results and cash flows.

Our warranty costs may increase.

Sales of new relocatable modular buildings not manufactured by us are typically covered by warranties provided by the manufacturer of the products sold. We provide ninety-day warranties on certain modular sales of used rental equipment and one-year warranties on equipment manufactured by our Enviroplex subsidiary. Historically, our warranty costs have not been significant, and we monitor the quality of our products closely. If a defect were to arise in the installment of our equipment at the customer’s facilities or in the equipment acquired from our suppliers or by our Enviroplex subsidiary, we may experience increased warranty claims. Such claims could disrupt our sales operations, damage our reputation and require costly repairs or other remedies, negatively impacting revenues and operating income.

SPECIFIC RISKS RELATED TO OUR ELECTRONIC TEST EQUIPMENT BUSINESS SEGMENT:

Market risk and cyclical downturns in the industries using test equipment may result in periods of low demand for our product resulting in excess inventory, impairment charges and reduction of our operating results and cash flows.

TRS-RenTelco’s revenues are derived from the rental and sale of general purpose and communications test equipment to a broad range of companies, from Fortune 500 to middle and smaller market companies, in the aerospace, defense, communications, manufacturing and semiconductor industries. Electronics rental and sales revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure and maintenance. Historically, these industries have been cyclical and have experienced periodic downturns, which have a material adverse impact on the industry’s demand for equipment, including the electronic test equipment rented by us. We experienced this in 2002, as a result of a prolonged downturn in the telecommunications industry, and recorded non-cash impairment charges of $24.1 million resulting from the depressed and low projected demand for the rental products coupled with high inventory levels, especially communications equipment.

In addition, the severity and length of any downturn in an industry may also affect overall access to capital, which could adversely affect our customers. During periods of reduced and declining demand for test equipment, we are exposed to additional receivable risk from non-payment and may need to rapidly align our cost structure with prevailing market conditions while at the same time motivating and retaining key employees. While the market demand for communications test equipment has improved from 2002 levels as the telecommunications industry has recovered, no assurance can be given regarding the length or extent of the recovery, and no assurance can be given that our rental utilization rates, operating results and cash flows will not be adversely impacted by the reversal of any current trends or any future downturns or slowdowns in the rate of capital investment in this industry.

Seasonality of our electronics business may impact quarterly results.

Generally, rental activity declines in the fourth quarter month of December and the first quarter months of January and February. These months may have lower rental activity due to holiday closures, particularly by larger companies, inclement weather and its impact on various field related communications equipment rentals, and companies’ operational recovery from holiday closures which may impact the start-up of new projects coming online in the first quarter. These seasonal factors may impact quarterly results in each year’s first and fourth quarter.

Our rental test equipment may become obsolete, which could result in an impairment charge.

Electronic test equipment is characterized by changing technology and evolving industry standards that may render our existing equipment obsolete through new product introductions, or enhancements, before the end of its anticipated useful life, causing us to incur impairment charges. Additionally, some manufacturers of our equipment may be acquired or cease to exist, resulting in a future lack of support for equipment purchased from those manufacturers. This could result in the remaining useful life to shorten, causing us to incur an impairment charge. We monitor our manufacturers’ capacity to support their products, the introduction of new technologies, and acquire equipment that will be marketable to our current and prospective customers. Failure to properly select, manage and respond to the technological needs of our customers and changes of our products through their technology life cycle may cause certain electronic test equipment to become obsolete, resulting in impairment charges and may negatively impact operating results and cash flows.

If we do not effectively compete in the rental equipment market, our operating results will be materially and adversely affected.

The electronic test equipment rental business is characterized by intense competition from several competitors, including Electro Rent Corporation, Telogy and Continental Resources, some of which may have access to greater financial and other resources than we do. Although no single competitor holds a dominant market share, we face intensifying competition from these established entities and new entrants in the market. We believe that we anticipate and keep pace with the introduction of new products and acquire equipment that will be marketable to our current and prospective customers. We compete on the basis of a number of factors, including product availability, price, service and reliability. Some of our competitors may offer similar equipment for lease, rental or sale at lower prices and may offer more extensive servicing, or financing options. Failure to adequately forecast the adoption of, and demand for, new or existing products may cause us not to meet our customers’ equipment requirements and may materially and adversely affect our operating results.

If we are not able to obtain equipment at favorable rates, there could be a material adverse effect on our operating results.

The majority of our rental equipment portfolio is comprised of general-purpose test and measurement instruments purchased from leading manufacturers such as Agilent Technologies and Tektronix. We depend on purchasing equipment from these manufacturers and suppliers for use as our rental equipment. If, in the future, we are not able to purchase necessary equipment from one or more of these suppliers on favorable terms, we may not be able to meet our customers’ demands in a timely manner or for a rental rate that generates a profit. If this should occur, we may not be able to secure necessary equipment from an alternative source on acceptable terms and our business may be materially and adversely affected.

If we are not able to anticipate and mitigate the risks associated with operating internationally, there could be a material adverse effect on our operating results.

Currently, total foreign country customers and operations account for less than 10% of the Company’s revenues and long-lived assets. In recent years some of our customers have expanded their international operations faster than domestic operations, and this trend may continue. Over time, we anticipate the amount of international business may increase if our focus on international market opportunities continues. Operating in foreign countries subjects the Company to additional risks, any of which may adversely impact our future operating results, including:

•

international political, economic and legal conditions including tariffs and trade barriers;

•

our ability to comply with customs, import/export and other trade compliance regulations of the countries in which we do business, together with any unexpected changes in such regulations;

•

greater difficulty in our ability to recover rental equipment and obtain payment of the related trade receivables;

•

difficulties in attracting and retaining staff and business partners to operate internationally;

•

language and cultural barriers;

•

seasonal reductions in business activities in the countries where our international customers are located;

•

difficulty with the integration of foreign operations;

•

longer payment cycles;

•

currency fluctuations; and

•

potential adverse tax consequences.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its 2007 Annual Meeting of Shareholders on June 6, 2007. The proposals voted on by the Company shareholders and the voting results were as follows:

Proposal 1: Election of Directors

The election of directors was approved as follows:


	For	Withheld	Abstentions
William J. Dawson	22,078,299	109,703	2,997,928
Robert C. Hood	22,078,299	109,703	2,997,928
Dennis C. Kakures	21,186,939	1,001,075	2,997,916
Joan M. McGrath	21,053,010	1,134,992	2,997,928
Robert P. McGrath	21,139,075	1,048,927	2,997,928
Dennis P. Stradford	22,056,807	131,195	2,997,928
Ronald H. Zech	21,757,847	430,155	2,997,928

Elected as directors at the meeting were William J. Dawson, Robert C. Hood, Dennis C. Kakures, Joan M. McGrath, Robert P. McGrath, Dennis P. Stradford and Ronald H. Zech.

Proposal 2: Management Proposal to Approve the 2007 Stock Incentive Plan

The 2007 Stock Incentive Plan was approved with 17,493,398 in favor, 2,286,525 against, 5,406,007 abstentions and broker non-votes.

Proposal 3: Ratification of Appointment of Independent Auditors

Grant Thornton LLP was ratified as the Company’s independent auditors for fiscal year 2007 with 22,181,306 in favor, 504 against, and 3,004,120 abstentions and broker non-votes.

ITEM 5.

OTHER INFORMATION

Dividends

On June 7, 2007 the Company declared a quarterly dividend on its Common Stock; the dividend was $0.18 per share. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.


10.12		McGrath RentCorp 2007 Stock Incentive Plan

10.12.1		Form of 2007 Stock Incentive Plan Stock Option Award and Agreement

10.12.2		Form of 2007 Stock Incentive Plan Non-Qualified Stock Option Award and Agreement

15.1		Awareness Letter From Grant Thornton LLP

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: August 2, 2007	MCGRATH RENTCORP

	By:	/s/ Keith E. Pratt
		Keith E. Pratt
		Senior Vice President and Chief Financial Officer

	By:	/s/ David M. Whitney
		David M. Whitney
		Vice President, Controller and Principal Accounting Officer