The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained in Item 8, "Financial Statements and Supplementary Data." All information in the discussion and references to the years are based on the Company's fiscal year that ends on October 31. Except where specifically referenced, this discussion does not include the operations of OneSource Services, Inc. ("OneSource"), which the Company acquired in November 2007, and includes other acquired operations from the dates of the respective purchases.

Overview

ABM Industries Incorporated ("ABM") and its subsidiaries (the "Company") provide janitorial, parking, security, engineering and lighting services for thousands of commercial, industrial, institutional and retail facilities in hundreds of cities throughout the United States and in British Columbia, Canada. The largest segment of the Company's business is Janitorial which generated over 57% of the Company's sales and other income (hereinafter called "Sales") and over 67% of its operating profit before corporate expenses for 2007. The Company also previously provided mechanical and elevator services. (See "Divestitures and Results from Discontinued Operations.")

The Company's Sales are substantially based on the performance of labor-intensive services at contractually specified prices. The level of Sales directly depends on commercial real estate occupancy levels. Decreases in occupancy levels reduce demand and also create pricing pressures on building maintenance and other services provided by the Company.

Janitorial and other maintenance service contracts are either fixed-price or "cost-plus" (i.e., the customer agrees to reimburse the agreed upon amount of wages and benefits, payroll taxes, insurance charges and other expenses plus a profit percentage), or are time and materials based. In addition to services defined within the scope of the contract, the Company also generates Sales from extra services (or "tags"), such as additional cleaning requirements or emergency repair services, with extra services frequently providing higher margins. The quarterly profitability of fixed-price contracts is impacted by the variability of the number of work days in the quarter.

The majority of the Company's contracts are for one-year periods, but are subject to termination by either party after 30 to 90 days' written notice. Upon renewal of the contract, the Company may renegotiate the price although competitive pressures and customers' price sensitivity could inhibit the Company's ability to pass on cost increases. Such cost increases include, but are not limited to, labor costs, workers' compensation and other insurance costs, any applicable payroll taxes and fuel costs. However, for some renewals the Company is able to restructure the scope and terms of the contract to maintain or increase profit margin.

Sales have historically been the major source of cash for the Company, while payroll expenses, which are substantially related to Sales, have been the largest use of cash. Hence operating cash flows primarily depend on the Sales level and timing of collections, as well as the quality of the customer accounts receivable. The timing and level of the payments to suppliers and other vendors, as well as the magnitude of self-insured claims, also affect operating cash flows. The Company's management views operating cash flows as a good indicator of financial strength. Strong operating cash flows provide opportunities for growth both internally and through acquisitions.

The Company's growth in Sales in 2007 from 2006 is attributable to internal growth and growth from acquisitions. Internal growth in Sales represents not only Sales from new customers, but also expanded services or increases in the scope of work for existing customers. In the long run, achieving the desired levels of Sales and profitability will depend on the Company's ability to gain and retain, at acceptable profit margins, more customers than it loses, pass on cost increases to customers, and keep overall costs down to remain competitive, particularly against privately owned facility services companies that typically have the lower cost advantage. Recent acquisitions contributing to the growth in sales in 2007 are described in Note 12 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data." Subsequent to October 31, 2007, ABM acquired OneSource, a company formed under the laws of Belize with US operations headquartered in Atlanta, Georgia. The consideration was $365.0 million which was paid by a combination of current cash and borrowings from the Company's line of credit. In addition, following the closing, the Company paid in full approximately $21 million outstanding under OneSource's then existing

credit facility. With annual revenues of approximately $825 million during the fiscal year ended March 31, 2007 and approximately 30,000 employees, OneSource is a provider of outsourced facilities services including janitorial, landscaping, general repair and maintenance and other specialized services, for more than 10,000 commercial, industrial, institutional and retail accounts in the United States and Puerto Rico, as well as in British Columbia, Canada. OneSource's operations will be included in the Janitorial segment. The Company expects to achieve operating margins for the OneSource business consistent with the remaining Janitorial segment and attain annual cost synergies of between $45 million to $50 million, which are expected to be fully implemented within 12 months after the acquisition. In 2008, the Company expects to realize between $28 million and $32 million of synergies before giving effect for costs to achieve these synergies, as discussed below. This will be achieved primarily through a reduction in duplicative positions and back office functions, the consolidation of facilities, and elimination of professional fees and other services. Furthermore, the Company expects to realize approximately $14 million in incremental cash flow in 2008 from acquiring net operating loss carry forwards and existing goodwill amortization related to the OneSource acquisition.

In the long term, the Company expects to focus its financial and management resources on those businesses in which it can grow to be a leading national service provider. It also plans to increase Sales by expanding its services into international markets.

In the short-term, management is focused on pursuing new business, increasing operating efficiencies, and integrating its most recent acquisitions, particularly OneSource. The Company is also relocating its Janitorial headquarters to Houston, concentrating its other business units in southern California and, in 2008, relocating its corporate headquarters to New York City. In addition, the Company is implementing a new payroll and human resources information system and upgrading its accounting systems and expects full implementation by the end of 2009. In 2008, the Company expects to incur one-time expenses of approximately $20 million associated with the upgrade of the existing accounting systems, implementation of a new payroll system and human resources information system, Shared Services Center implementation, relocation of corporate headquarters and costs to achieve synergies with OneSource.

Liquidity and Capital Resources

                                                October 31,
             (In thousands)                 2007          2006         Change


             Cash and cash equivalents   $ 136,192     $ 134,001     $  2,191
             Working capital             $ 353,146     $ 312,456     $ 40,690

                                          Years ended October 31,                        Years ended October 31,
(In thousands)                              2007             2006         Change           2006             2005         Change


Cash provided by operating activities
from continuing operations              $     54,295       $ 130,367     $ (76,072 )   $    130,367       $  44,799     $  85,568
Net cash (used in) provided by
investing activities                    $    (54,794 )     $ (21,814 )   $ (32,980 )   $    (21,814 )     $  16,473     $ (38,287 )
Net cash provided by (used in)
financing activities                    $      2,690       $ (31,345 )   $  34,035     $    (31,345 )     $ (30,925 )   $    (420 )

Funds provided by operations and bank borrowings have historically been the sources for meeting working capital requirements, financing capital expenditures and acquisitions, repurchasing shares of ABM common stock and paying cash dividends. As of October 31, 2007 and October 31, 2006, the Company's cash and cash equivalents totaled $136.2 million and $134.0 million, respectively.

At October 31, 2007, the Company had $25.0 million of auction rate securities that had long-term ratings in the highest classification by recognized rating agencies. Auction rate securities are debt instruments with long-term nominal maturities (typically 20 to 50 years), for which the interest rate is reset through Dutch auctions approximately every 30 days. These auction rate securities failed to trade at recent auctions due to insufficient bids from buyers and, therefore, were considered illiquid as of October 31, 2007. As a result, they were classified in long-term investments on the Consolidated Balance Sheet. The Company did not hold auction rate securities at October 31, 2006 and 2005.

On November 14, 2007, the Company acquired OneSource for $365.0 million in cash, which was paid by a combination of cash on hand and borrowings under the Company's line of credit. In addition, the approximately $21 million outstanding debt under OneSource's then existing credit facility was paid in full following the closing.

Working Capital. Working capital increased by $40.6 million to $353.1 million at October 31, 2007 from $312.5 million at October 31, 2006, primarily due to income generated during 2007. Trade accounts receivable is the largest component of working capital and totaled $370.5 million at October 31, 2007 compared to $384.0 million at October 31, 2006. These amounts were net of allowances for doubtful accounts and sales totaling $6.9 million and $8.0 million at October 31, 2007 and 2006, respectively. At October 31, 2007, accounts receivable that were over 90 days past due had decreased by $4.9 million to $27.9 million (7.4% of the total outstanding) from $32.8 million (8.4% of the total outstanding) at October 31, 2006. This decrease is a result of improved collection efforts in the Janitorial, Engineering and Security segments.

Cash Flows from Operating Activities. Continuing operations provided net cash of $54.3 million, $130.4 million and $44.8 million in 2007, 2006 and 2005, respectively. The $76.1 million decrease in cash provided by continuing operations between 2007 and 2006 was primarily due to the inclusion in 2006 of the $80.0 million received in the fourth quarter from the settlement of the World Trade Center ("WTC") insurance claims, a $34.9 million income tax payment in 2007 relating to the WTC insurance claims settlement and $6.6 million of pre-payments to International Business Machines Corporation ("IBM") associated with IBM transition and maintenance services in 2007, as discussed below. An increase in collection of accounts receivable in 2007 and the receipt of the $7.5 million in connection with the termination of the airport parking garage lease in 2007 also impacted the change. Cash flows from continuing operations increased by $85.6 million in 2006 from 2005 primarily due to the $80.0 million received in settlement of WTC insurance claims, although payments in 2006 of litigation settlements that were pending at October 31, 2005 reduced cash flow from continuing operations.

Cash Flows from Investing Activities. Net cash used in investing activities was $54.8 million and $21.8 million in 2007 and 2006, respectively, and net cash provided by investing activities was $16.5 million in 2005. The $33.0 million increase in 2007 compared to 2006 is primarily due to the net investment of

$25.0 million in auction rate securities as described above and a $8.0 million increase in additions to property, plant and equipment, which mainly reflects capitalized costs associated with the upgrade of the Company's accounting systems and the implementation of a new payroll and human resources information system (discussed below). The $38.3 million increase in cash used in investing activities in 2006 compared to 2005 was primarily due to the receipt of $32.3 million from the sales of the operating assets of the Mechanical segment (see "Divestitures and Results from Discontinued Operations") and net proceeds of $29.6 million from the sale of auction rate securities in 2005. The 2006 and 2005 statements of cash flows were adjusted in 2007 to conform to the 2007 presentation. See Long-term investments in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplemental Data." This was partially offset by the use of $16.9 million less cash to purchase businesses and $3.7 million less cash to acquire property, plant, and equipment in 2006 compared to 2005.

Cash Flows from Financing Activities. Net cash provided by financing activities was $2.7 million in 2007 and net cash used in financing activities was $31.3 million and $30.9 million in 2006 and 2005, respectively. The Company did not repurchase any ABM common stock in 2007, compared to 2006 when it repurchased $26.0 million of ABM common stock. The net cash provided by financing activities in 2007 is also attributable to a $12.3 million increase in funds from common stock issuances as a result of the increase in stock option exercises in 2007, partially offset by a $2.0 million decrease in 2004 Employee Stock Purchase Plan ("ESPP") purchases compared to 2006. In 2006, the Company purchased $5.4 million less ABM common stock than in 2005 while issuing $4.9 million less ABM common stock through the Company's stock option and employee stock purchase plans.

Line of Credit. At October 31, 2007, ABM had a $300.0 million syndicated line of credit scheduled to expire in May 2010. As of October 31, 2007 and 2006, the total outstanding amounts under the facility were $108.0 million and $98.7 million, respectively, in the form of standby letters of credit. The facility included usual and customary covenants for a credit facility of this type, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, the facility also required that the Company satisfy certain financial covenants. The Company was in compliance with all covenants as of October 31, 2007.

In connection with the acquisition of OneSource, the Company terminated the $300.0 million line of credit on November 14, 2007 and replaced it with a new $450.0 million five-year syndicated line of credit that is scheduled to expire on November 14, 2012 ("the new Facility"). Borrowings under the new Facility were used to acquire OneSource on November 14, 2007. The new Facility is available for working capital, the issuance of standby letters of credit, the financing of capital expenditures and other general corporate purposes.

Under the new Facility, no compensating balances are required and the interest rate is determined at the time of borrowing based on the London Interbank Offered Rate ("LIBOR") plus a spread of 0.625% to 1.375% or, at ABM's election, at the higher of the federal funds rate plus 0.5% and the Bank of America prime rate ("Alternate Base Rate") plus a spread of 0.000% to 0.375%. A portion of the new Facility is also available for swing line (same-day) borrowings at the Interbank Offered Rate ("IBOR") plus a spread of 0.625% to 1.375% or, at ABM's election, at the Alternate Base Rate plus a spread of 0.000% to 0.375%. The new Facility calls for a non-use fee payable quarterly, in arrears, of 0.125% to 0.250% of the average, daily, unused portion of the new Facility. For purposes of this calculation, irrevocable standby letters of credit issued primarily in conjunction with ABM's self-insurance program and cash borrowings are included as usage of the new Facility. The spreads for LIBOR, Alternate Base Rate and IBOR borrowings, and the commitment fee percentage are based on ABM's leverage ratio. The new Facility permits ABM to request an increase in the amount of the line of credit by up to $100.0 million (subject to receipt of commitments for the increased amount from existing and new lenders). The standby letters of credit outstanding under the prior facility have been replaced and are now outstanding under the new Facility. As of November 30, 2007, the total outstanding amounts under the new Facility in the form of cash borrowings and standby letters of credit were $295.0 million and $113.3 million, respectively.

The new Facility includes customary covenants for a credit facility of this type, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, the new Facility also requires that ABM maintain three financial covenants:
(1) a fixed charge coverage ratio greater than or equal to 1.50 to 1.0 at each fiscal quarter-end; (2) a leverage ratio of less than or equal to 3.25 to 1.0 at each fiscal quarter-end; and (3) a consolidated net worth of greater than or equal to the sum of (i) $475.0 million, (ii) an amount equal to

50% of the consolidated net income earned in each full fiscal quarter ending after November 14, 2007 (with no deduction for a net loss in any such fiscal quarter), and (iii) an amount equal to 100% of the aggregate increases in stockholders' equity of ABM and its subsidiaries after November 14, 2007 by reason of the issuance and sale of capital stock or other equity interests of ABM or any subsidiary, including upon any conversion of debt securities of ABM into such capital stock or other equity interests, but excluding by reason of the issuance and sale of capital stock pursuant to ABM's employee stock purchase plans, employee stock option plans and similar programs.

If an event of default occurs under the new Facility, including certain cross-defaults, insolvency, change in control, and violation of specific covenants, among others, the lenders can terminate or suspend ABM's access to the new Facility, declare all amounts outstanding under the new Facility, including all accrued interest and unpaid fees, to be immediately due and payable, and/or require that ABM cash collateralize the outstanding letter of credit obligations.

Commitments

As of October 31, 2007, the Company's future contractual payments, commercial
commitments and other long-term liabilities were as follows:



(in thousands)                                                                   Payments Due By Period

Contractual Obligations                                Total        1 year        2 - 3 years       4 - 5 years       After 5 years


Operating Leases                                     $ 110,542     $  34,187     $      39,042     $      19,114     $        18,199
IBM Services Agreement                                  90,334        16,434            30,410            27,692              15,798
IBM Payroll System Support                               1,963         1,277               686                 -                   -
IBM Systems Upgrade,
Implementation and Support                              21,120         9,829             5,152             4,355               1,784


                                                     $ 223,959     $  61,727     $      75,290     $      51,161     $        35,781

(in thousands) Payments Due By Period

Other Long-Term Liabilities Total 1 year 2 - 3 years 4 - 5 years After 5 years

Unfunded Employee Benefit Plans $ 30,158 $ 2,727 $ 4,098 $ 3,637 $ 19,696

(in thousands)                                                         Amounts of Commitment Expiration Per Period

Commercial Commitments                                 Total        1 year        2 - 3 years       4 - 5 years       After 5 years


Standby Letters of Credit                            $ 107,983     $ 107,983     $           -     $           -     $             -
Surety Bonds                                            62,839        55,196             2,239             5,404                   -


                                                     $ 170,822     $ 163,179     $       2,239     $       5,404     $             -


Total Commitments                                    $ 424,939     $ 227,633     $      81,627     $      60,202     $        55,477

The amounts set forth under operating leases represent the Company's contractual obligations to make future payments under non-cancelable operating lease agreements for various facilities, vehicles and other equipment.

On September 29, 2006, the Company entered into a Master Professional Services Agreement (the "Services Agreement") with IBM that became effective October 1, 2006. Under the Services Agreement, IBM is responsible for substantially all of the Company's information technology infrastructure and support services. Prior to the Services Agreement, the Company maintained its equipment and had in-house personnel providing such services. The base fee for these services is $116.6 million payable over the initial term of 7 years and 3 months. As of October 31, 2007, aggregate payments of $26.2 million had been made to IBM since the Services Agreement became effective. Services covered by the Services Agreement may be expanded at rates set forth in the Services Agreement, or later agreed to by the parties, which would increase amounts payable to IBM.

As a result of a January 23, 2007 amendment to expand its services, IBM is also providing maintenance and support services for the Company's legacy payroll systems. The base fee for these services is $2.3 million payable over a 3 year and 7 month term that commenced April 1, 2007. As of October 31, 2007, aggregate payments of $0.4 million had been made to IBM for these services.

The Company also completed an evaluation of its existing accounting, payroll and human resources information systems in the first quarter of 2007. On April 4, 2007, the Company further expanded services covered by the Services Agreement. IBM is assisting in the upgrade of the Company's existing accounting systems and the implementation of a new payroll system and human resources information system. IBM will also provide post-implementation support services beginning July 1, 2008 through December 31, 2013. The base fee for this upgrade and implementation is $13.3 million, and $12.9 million for post implementation support services for a total of $26.2 million payable over 6 years and 10 months. As of October 31, 2007, aggregate payments of $5.1 million had been made to IBM. The Company began the design phase of the project in the second quarter of 2007. The implementation of the new systems is scheduled to commence in July 2008 with completion by the end of 2009.

The total anticipated cost for the upgrade of the existing accounting systems and implementation of the new payroll system and human resources system is approximately $35 million, which includes IBM contracted system upgrade and implementation costs of $13.3 million, as well as licensing fees and other external costs.

The Company has two unfunded defined benefit plans, an unfunded post-retirement benefit plan and two unfunded deferred compensation plans that are described in Note 6 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K. At October 31, 2007, the liability reflected on the Company's consolidated balance sheet for these five plans totaled $20.6 million, with the amount expected to be paid over the next 20 years estimated at $30.2 million. With the exception of the deferred compensation plans, the liabilities for which are reflected on the Company's consolidated balance sheet at the amount of compensation deferred plus accrued interest, the plan liabilities at that date assume future annual compensation increases of 3.50% (for those plans affected by compensation changes) and have been discounted at 6.0%, a rate based on Moody's Investor Services Aa-rated long-term corporate bonds (i.e., 20 years). Because the deferred compensation plans' liabilities reflect the actual obligations of the Company and the post-retirement benefit plan and two defined benefit plans have been frozen, variations in assumptions would be unlikely to have a material effect on the Company's financial condition and operating performance. The Company expects to fund payments required under the plans from operating cash as payments are due to participants.

Not included in the unfunded employee benefit plans in the table above are union-sponsored multi-employer defined benefit plans under which certain union employees of the Company are covered. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Contributions made for these plans were $37.1 million, $34.5 million and $34.4 million in 2007, 2006 and 2005, respectively.

The Company uses surety bonds, principally performance and payment bonds, to guarantee performance under various customer contracts in the normal course of business. These bonds typically remain in force for one to five years and may include optional renewal periods. At October 31, 2007, outstanding surety bonds totaled $62.8 million. The Company does not believe these bonds will be required to be drawn upon.

The Company self-insures certain insurable risks such as general liability, automobile, property damage and workers' compensation. Commercial policies are obtained to provide for $150.0 million of coverage for certain risk exposures above the self-insured retention limits (i.e., deductibles). Net of the estimated recoverable from the insurers, the estimated liability for claims incurred at October 31, 2007 and 2006 was $205.1 million and $195.2 million, respectively. The Company periodically evaluates its estimated claim costs and liabilities and accrues self-insurance reserves to its best estimate. The self-insurance claims paid in 2007, 2006 and 2005 were $56.3 million, $57.4 million and $55.2 million, respectively. Claim payments vary based on the frequency and/or severity of claims incurred and timing of the settlements and therefore may have an uneven impact on the Company's cash balances.

The Company believes that the current cash and cash equivalents, cash generated from operations and the new Facility will be sufficient to meet the Company's cash requirements for the long-term, except for cash required for significant acquisitions.

Environmental Matters

The Company's operations are subject to various federal, state and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water and . . .