Results of Operations

                                                  For the Three Months                For the Nine Months
                                                  Ended September 30,                 Ended September 30,
                                                 2008               2007             2008             2007
                                                           (in thousands, except per share data)
                                                                         (Unaudited)
Revenues                                      $    75,883         $ 74,190        $  239,455        $ 217,358
Costs and expenses:
Operating costs (exclusive of
depreciation and amortization)                     50,089           47,309           153,954          141,995
Depreciation and amortization                       1,386            1,142             4,405            3,262
Selling, general and administrative                17,848           19,925            58,803           57,316

Total costs and expenses                           69,323           68,376           217,162          202,573
Operating income                                    6,560            5,814            22,293           14,785
Other income (expense), net                           445              248               414              624
Interest expense                                     (353 )           (872 )          (1,380 )         (2,659 )

Income before income taxes                          6,652            5,190            21,327           12,750
Income tax expense                                 (1,250 )         (1,561 )          (4,556 )         (3,663 )

Net income                                    $     5,402         $  3,629        $   16,771        $   9,087

Earnings per share:
Basic                                         $      0.15         $   0.10        $     0.46        $    0.26
Diluted                                       $      0.15         $   0.10        $     0.45        $    0.25

Revenues
For the nine months ended September 30, 2008, consolidated revenues increased by $22.1 million, or 10.2%, when compared to the nine months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific accounted for $5.0 million and $2.4 million of the increase, respectively. Excluding foreign currency exchange rate differences, revenue increased $14.7 million, or 6.8%, for the nine months ended September 30, 2008 compared to the same period in 2007. This $14.7 million increase in revenues consisted of an $11.0 million increase from the United States, a $3.5 million increase from Europe and a $0.2 million increase in Asia-Pacific. The increase in revenue in the United States was primarily due to turnaround services. The increase in Europe was attributable to increases in under pressure and turnaround services while the Asia-Pacific revenues increased slightly across all service lines.
For the three months ended September 30, 2008, consolidated revenues increased by $1.7 million, or 2.3%, when compared to the three months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific accounted for $0.5 million and $0.5 million of the increase, respectively. Excluding foreign currency exchange rate differences, revenue increased $0.7 million, or 1.0%, for the three months ended September 30, 2008 compared to the same period in 2007. This $0.7 million increase in revenues consisted of a $2.0 million increase from Europe partially offset by a $0.6 million decrease from the United States and a $0.7 million decrease in Asia-Pacific. The increase in revenue in Europe was attributable to an increase in turnaround and other services. The decrease in revenue in the United States was due to other services. The decrease in Asia-Pacific revenue was attributable to turnaround services.
Operating Costs
For the nine months ended September 30, 2008, operating costs increased $12.0 million, or 8.4%, when compared to the nine months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific accounted for $3.6 million and $1.5 million of the increase, respectively. Excluding foreign currency exchange rate differences, operating costs increased $6.9 million, or 4.8%, for the nine months ended September 30, 2008 compared to the same period in 2007. This $6.9 million increase in operating costs consisted of a $5.7 million increase in the United States, a $0.7 million increase in Europe and $0.5 million increase for Asia-Pacific. The increase in the United States was due to an increase in labor, benefit costs and rent which were partially offset by a decrease in material costs. The increase in Europe was due to increases in labor, benefit costs, rent, engineering charges and overhead which were partially offset by a decrease in material costs and subcontract services. The increase in Asia Pacific was due to an increase in labor, benefit and material costs.
For the three months ended September 30, 2008, operating costs increased $2.8 million, or 5.9%, when compared to the three months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific accounted for $0.6 million and $0.3 million, of the increase, respectively. Excluding foreign currency exchange rate differences, operating costs increased $1.9 million, or 4.1%, for the three months ended September 30, 2008 compared to the same period in 2007. This $1.9 million increase in operating costs consists of a $0.4 million increase in the United States and a $1.6 million increase in Europe while Asia-Pacific

decreased $0.1 million. The increase in the United States was due to increased labor and benefit costs offset by a decrease in material costs. The increase in Europe was due to increased labor, benefit costs and engineering charges offset by a decrease in material costs.
Depreciation and Amortization
Depreciation and amortization expense increased $0.2 million and $1.1 million for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods of 2007 due to the depreciation and amortization related to $8.1 million of capital expenditures in 2007 and $5.4 million of capital expenditures placed in service during the first nine months of 2008. Selling, General and Administrative
For the nine months ended September 30, 2008, selling, general and administrative expenses increased $1.5 million, or 2.6%, when compared to the nine months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific accounted for approximately $1.1 million and $0.4 million of the increase, respectively. Excluding the foreign currency exchange rate differences, selling, general and administrative expenses for the nine months ended September 30, 2008 were consistent with the same period in 2007. Selling, general and administrative costs increased $1.2 million in the United States and were offset by a $1.1 million decrease in Europe and a $0.1 million decrease in Asia-Pacific. The United States increase in selling, general and administrative expenses primarily consisted of an increase in sales labor and benefit costs, vehicle costs and rent. The decrease in Europe represented decreases in legal fees and outside professional services partially offset by an increase in sales labor and benefit costs and rent. For the three months ended September 30, 2008, selling, general and administrative expenses decreased $2.1 million, or 10.4%, when compared to the three months ended September 30, 2007. The changes in foreign currency exchange rates from Europe and Asia-Pacific increased selling, general and administrative expenses by approximately $0.2 million and $0.1 million, respectively. Excluding the foreign currency exchange rate differences, selling, general and administrative expenses decreased $2.4 million, or 12.1%, for the three months ended September 30, 2008 compared to the same period in 2007. This $2.4 million decrease in selling, general and administrative costs consists of a $2.2 million decrease in the United States, a $0.1 million decrease in Europe and a $0.1 million decrease in Asia-Pacific. The United States decrease in selling, general and administrative expenses primarily consisted of a decrease in labor and benefit costs, legal fees and outside professional services. Interest Expense
For the three and nine months ended September 30, 2008, consolidated interest expense decreased by $0.5 million, or 59.5%, and $1.3 million, or 48.1%, when compared to the three and nine months ended September 30, 2007, respectively. The decrease in interest expense is due to the conversion and payoff of the Company's 8.75% subordinated debentures which matured January 2008 as well as a decrease in outstanding debt and in interest rates from September 30, 2007 to September 30, 2008. During 2007, $3.0 million of the debentures were converted into 562,628 shares of the Company's common stock with $1.9 million of the debentures converted into 358,344 shares of the Company's common stock during the first half of January 2008. The remaining $0.2 million of subordinated debentures were paid in full in January 2008. Income Taxes
The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. As a result, primarily all domestic federal and state income taxes recorded for the nine months ended September 30, 2008 and 2007 are fully offset by a corresponding change in valuation allowance. The income tax expense recorded for the nine months ended September 30, 2008 and 2007 consisted primarily of income taxes due in foreign and state jurisdictions of the Company.
Income tax expense differs from the expected tax at statutory rates due primarily to the change in valuation allowance for deferred tax assets and different tax rates in the various foreign jurisdictions. Additionally, the aggregate tax expenses are not consistent when comparing periods due to the changing income tax mix between domestic and foreign operations and within the foreign operations. In concluding that a full valuation allowance on domestic taxes was required, the Company primarily considered such factors as the history of operating losses and the nature of the deferred tax assets.
For the nine months ended September 30, 2008, income tax expense increased by $0.9 million when compared to the same period in 2007. The increase was primarily related to the increase in taxable income for foreign jurisdictions.

Liquidity and Capital Resources
The Company's liquidity and capital resources requirements include the funding of working capital needs, the funding of capital investments and the financing of internal growth.
Net cash provided by operating activities was $15.9 million for the nine months ended September 30, 2008 as compared to $15.8 million for the nine months ended September 30, 2007. Increases in net cash from operating activities were due primarily to an increase in net income of $7.7 million as well as an increase in non-cash items of $1.4 million. These increases were substantially offset by a $9.0 million decrease in net changes in operating assets and liabilities. The changes in operating assets and liabilities were driven by trade payables and accrued expenses that remained relatively flat for the nine months ended September 30, 2008 compared to an increase of approximately $6.8 million in the nine months ended September 30, 2007.
Net cash used in investing activities, which consists of capital expenditures, totaled $5.4 million and $5.7 million for the nine month periods ended September 30, 2008 and 2007 respectively.
Consolidated capital expenditures for the calendar year 2008 have been budgeted at $8.4 million to $10.4 million. Such expenditures, however, will depend on many factors beyond the Company's control, including, without limitation, demand for services as well as domestic and foreign government regulations. No assurance can be given that required capital expenditures will not exceed anticipated amounts during 2008 or thereafter. Capital expenditures during the year are expected to be funded from existing cash and anticipated cash flows from operations.
Net cash used in financing activities was $7.8 million for the nine months ended September 30, 2008 compared to $1.6 million for the nine months ended September 30, 2007. The Company made payments of $7.9 million in 2008 and $0.6 million in 2007 related to its capital leases and the pay down of long-term debt in 2008. The Company also paid $0.2 million for the final conversions of its 8.75% subordinated debentures in 2008. Additionally, the Company received $0.3 million and $0.5 million in 2008 and 2007, respectively, for common stock issued upon the exercise of options. These items were offset by $1.6 million in payments in 2007 for the bank overdraft which existed as of December 31, 2006. Furmanite Worldwide, Inc. and subsidiaries ("FWI") is subject to various financial and operational covenants associated with the $50.0 million facility, including percentage of tangible assets related to certain geographical areas, ratios of debt and capital expenditures to cash flow, as defined in the $50.0 million facility, and cash flow to fixed charges. At September 30, 2008 and December 31, 2007, $27.6 million was outstanding under the $50.0 million facility that provides for working capital. Borrowings under the $50.0 million facility bear interest at the option of the borrower at variable rates (based on either the LIBOR rate or prime rate) which were 3.6% and 6.2% at September 30, 2008 and December 31, 2007, respectively. There is a commitment fee of 0.25% to 0.50% based on the debt to earnings before interest, depreciation and amortization ("EBITDA") ratio, currently 0.25%, on the unused portion of the $50.0 million facility. At September 30, 2008, FWI was in compliance with all covenants under the $50.0 million facility. The $50.0 million facility matures in January 2010 and is secured by substantially all of the tangible assets of FWI (which approximated $132 million, consisting primarily of current assets and property and equipment) and is without recourse to the Parent Company. Considering the outstanding borrowings and letters of credit at September 30, 2008, the unused borrowing capacity was $13.9 million under the $50.0 million facility.
At September 30, 2008 and December 31, 2007, $7.5 million and $15.0 million, respectively, was outstanding under the $15.0 million facility. Borrowings under the $15.0 million facility bear interest at the option of the borrower at variable rates (based on either the LIBOR rate or prime rate) which were 3.1% and 5.7% at September 30, 2008 and December 31, 2007, respectively. The $15.0 million facility matures in January 2010 and is secured by a letter of credit under the $50.0 million facility. The $15.0 million facility has the same financial and operational covenants as the $50.0 million facility and is without recourse to the Parent Company. At September 30, 2008, the Company was in compliance with all covenants under the $15.0 million facility, with no unused borrowing capacity due to the Company's decision to reduce the facility to the amount outstanding.
The Company's 8.75% subordinated debentures were convertible into shares of the Company's common stock at the option of the holder at the conversion price of $5.26 per share. These subordinated debentures matured in January 2008.

On November 27, 2000, the Board of Directors of the Company authorized the distribution of its pipeline, terminaling and product marketing business (the "Distribution") to its stockholders in the form of a new limited liability company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was completed, with each shareholder of the Company receiving one common share of KSL for each three shares of the Company's common stock held on June 20, 2001, the record date for the Distribution, resulting in the distribution of 10.85 million KSL common shares. Pursuant to the Distribution, the Company entered into an agreement (the "Distribution Agreement") with KSL, whereby KSL is obligated to pay the Company amounts equal to certain expenses and tax liabilities incurred by the Company in connection with the Distribution. The Distribution Agreement also requires KSL to pay the Company an amount calculated based on any income tax liability of the Company that, in the sole judgment of the Company, (i) is attributable to increases in income tax from past years arising out of adjustments required by federal and state tax authorities, to the extent that such increases are properly allocable to the businesses that became part of KSL, or (ii) is attributable to the distribution of KSL's common shares and the operations of KSL's businesses prior to the Distribution date. In the event of an examination of the Company by federal or state tax authorities, the Company will have unfettered control over the examination, administrative appeal, settlement or litigation that may be involved, notwithstanding that KSL has agreed to pay any additional tax. KSL was purchased by Valero L.P. in July 2005 and KSL's obligations under the Distribution Agreement were assumed by Valero L.P. During 2006, accrued income taxes and the receivable from businesses distributed to common stockholders were both reduced by $4.6 million related to the expiration of statutes for previously provided tax exposures. The receivable from businesses distributed to common stockholders was further reduced in 2006 by $0.5 million by adjusting retained earnings for KSL previously provided tax exposures. At September 30, 2008 and December 31, 2007, $1.4 million was recorded as receivable from businesses distributed to common stockholders pursuant to the provisions of the Distribution Agreement.
The Company does not anticipate paying any dividends as it believes investing those dollars back into the Company will provide a better long-term return to shareholders in increased per share value. The Company believes that funds generated from operations, together with existing cash and available credit under the $50.0 million facility will be sufficient to finance current operations, planned capital expenditure requirements and internal growth for the foreseeable future.
Critical Accounting Policies and Estimates The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant policies are presented in the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 and in the Notes to the Consolidated Financial Statements presented under Item 1.
Critical accounting policies are those that are most important to the portrayal of the Company's financial position and results of operations. These policies require management's most difficult, subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies pertain to revenue recognition, allowance for doubtful accounts, the impairment of goodwill and income taxes. Critical accounting policies are discussed regularly, at least quarterly, with the Company's Audit Committee.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. The adoption of FIN 48 had no net impact on the Company's tax reserves during 2007. Uncertain tax positions in certain foreign jurisdictions would not impact the effective foreign tax rate because unrecognized non-current tax benefits are offset by the foreign net operating loss carryforwards, which are fully reserved. The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision. The Company did not recognize any interest or penalties for the nine months ended September 30, 2008 or 2007. Unrecognized tax benefits at September 30, 2008 and December 31, 2007 of $1.1 million and $1.0 million, respectively, for uncertain tax positions related to transfer pricing would impact the effective foreign tax rate if recognized.
Deferred tax assets and liabilities result from temporary differences between the US GAAP and tax treatment of certain income and expense items. The Company must assess and make estimates regarding the likelihood that the deferred tax assets will be recovered. To the extent that it is determined the deferred tax assets will not be recovered, a valuation allowance must be established for such assets. In making such a determination, the Company must take into account positive and negative evidence, including projections of future taxable income and assessments of potential tax planning strategies. At September 30, 2008 and December 31, 2007, the Company's valuation allowance was $19.9 million and $22.7 million, respectively.

New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurement, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. Effective January 1, 2008, the Company adopted SFAS No 157. In February 2008, the FASB issued FASB Staff Position ("FSP") FAS No. 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The Company elected to defer the effective date of its adoption to January 1, 2009 in accordance with FSP FAS No. 157-2. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its consolidated financial statements. See Note 11 for additional disclosures.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132 (R). As required, the Company adopted the provision of SFAS No. 158 that required an employer to recognize the funded status of each pension and other post retirement benefit plan as an asset or liability on their balance sheet with all unrecognized amounts recorded in other comprehensive income. The standard also ultimately requires an employer to measure the funded status of a plan as of the date of the employer's fiscal year-end statement of financial position. As required, the Company will adopt the provisions of SFAS No. 158 relative to measurement date for the fiscal year ending December 31, 2008. The Company is currently evaluating the impact, if any, that the full adoption of SFAS No. 158 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. SFAS No. 159 expands the use of fair value accounting but does not affect existing standards that require assets and liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to measure most financial assets and liabilities at fair value at specified election dates. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. The Company adopted SFAS No. 159 on January 1, 2008 and did not elect to adopt the fair value option and re-measure any of its assets or liabilities.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business . . .