Team (TISI)

12. COMMITMENTS AND CONTINGENCIES

In August 2005, we were served in a lawsuit styled Paulette Barker, as named Executor for the Estate of Robert Barker, et. al. v. Emmett J. Lescroart, Michael Urban, Team, Inc. et. al., Case Number 355868-402 in the Probate Court #1, Harris County, Texas. The dispute arises out of the sale by Mr. Barker to Mr. Lescroart of stock in Thermal Solutions, Inc. (“TSI”). Subsequently, we acquired all of the outstanding stock of TSI in April 2004 allegedly for a much higher price than Mr. Lescroart paid Mr. Barker in July 2003. The plaintiff claims damages in excess of $1.0 million. We intend to continue our vigorous defense of this action. We believe the outcome of this matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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We have, from time to time, provided temporary leak repair services for the steam operations of Consolidated Edison of New York (“Con Ed”) located in New York City. In July 2007, a Con Ed steam main

located in midtown Manhattan ruptured causing one death and other injuries and property damage. Five separate lawsuits have been filed against Con Ed and us in the Supreme Courts of New York located in Kings, New York and Bronx County, alleging that our temporary leak repair services may have contributed to the cause of the rupture. The lawsuits seek generally unspecified compensatory damages for personal injury, property damage and business interruption. Additionally, on March 31, 2008 we received a letter from Con Ed alleging that our contract with Con Ed requires us to indemnify and defend Con Ed for additional claims filed against Con Ed as a result of the rupture. Subsequently, Con Ed filed an action to join Team and the city of New York as defendants in more than 40 separate lawsuits previously filed against Con Ed. We intend to vigorously defend the lawsuits and Con Ed’s claim for indemnification. We are unable to estimate the amount of liability to us, if any, associated with these lawsuits and the claim for indemnification. We maintain insurance coverage, subject to a deductible limit of $250,000, for these losses should they be incurred and have notified our insurers of the incident. We do not believe the final resolution of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In February 2007, one of our employees sustained serious injuries as a result of a fire at the Valero McKee Refinery in Sunray, Texas. The employee and his family have made a demand on Valero for compensation related to his injuries. We have received a letter from Valero demanding that, pursuant to the terms of our contract, we indemnify Valero for any losses they may incur as a result of the claims by our employee. We maintain insurance coverage, subject to a deductible limit of $150,000, for any losses should they be incurred and have placed our insurers on notice. We do not believe the outcome of this matter will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In our opinion, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.

We also enter into operating leases to obtain equipment for our field operations and administrative functions. Our obligations under non-cancellable operating leases, primarily consisting of facility and auto leases, were approximately $28.0 million at May 31, 2008 and are as follows (in thousands):

Total rent expense under operating leases, including rental expense under short term leases, was approximately $18.7 million, $12.9 million and $10.8 million for the years ended May 31, 2008, 2007 and 2006, respectively.

11. COMMITMENTS AND CONTINGENCIES

In August 2005, we were served in a lawsuit styled Paulette Barker, as named Executor for the Estate of Robert Barker, et. al. v. Emmett J. Lescroart, Michael Urban, Team, Inc. et. al., Case Number 355868-402 in the Probate Court #1, Harris County, Texas. The dispute arises out of the sale by Mr. Barker to Mr. Lescroart of stock in Thermal Solutions, Inc. (“TSI”). Subsequently, we acquired all of the outstanding stock of TSI in April 2004 allegedly for a much higher price than Mr. Lescroart paid Mr. Barker in July 2003. Mr. Lescroart is a member of our Board of Directors. The plaintiff claims damages in excess of $1,000,000. We intend to vigorously defend this action and do not believe that we have any legal liability under the allegations of the suit and, further, we believe that we are entitled to be indemnified from any loss we may incur under the terms of the Stock Purchase Agreement related to the acquisition. We have filed a motion for summary judgment seeking dismissal from the case. The motion is currently pending before the judge.

We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In our opinion, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.

We also enter into operating leases to obtain equipment for our field operations and administrative functions. Our obligations under non-cancellable operating leases, primarily consisting of facility and auto leases, were approximately $18.8 million at May 31, 2007 and are as follows (in thousands):

Total rent expense under operating leases, including rental expense under short term leases, was approximately $12.9 million, $10.8 million and $5.6 million in 2007, 2006 and 2005, respectively.

11. COMMITMENTS AND CONTINGENCIES

In August 2005, we were served in a lawsuit styled Paulette Barker, as named Executor for the Estate of Robert Barker, et. al. v. Emmett J. Lescroart, Michael Urban, Team, Inc. et. al., Case Number 355868-402 in the

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Probate Court #1, Harris County, Texas. The dispute arises out of the sale by Mr. Barker to Mr. Lescroart of stock in TSI. Subsequently, all of the outstanding stock of TSI was acquired by us in April 2004 allegedly for a much higher price than Mr. Lescroart paid Mr. Barker in July 2003. The plaintiff claims damages in excess of $1,000,000. We intend to vigorously defend this action and do not believe that we have any legal liability under the suit and, further, believe we are entitled to be indemnified from any loss we may incur under the terms of the Stock Purchase Agreement related to the TSI acquisition. Mr. Lescroart is a member of our Board of Directors and was dismissed from the lawsuit for lack of personal jurisdiction in December 2005.

We are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In the opinion of our management, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on our consolidated financial statements.

We also enter into operating leases to obtain equipment for our field operations and administrative functions. Our obligations under non-cancellable operating leases, primarily consisting of auto leases, were approximately $13.4 million at May 31, 2006 and are as follows (in thousands):

Total rent expense under operating leases, including rental expense under short term leases, was approximately $10.8 million, $5.6 million, and $3.4 million in 2006, 2005 and 2004, respectively.

12. COMMITMENTS AND CONTINGENCIES

Loss Contingencies

In April 2003, Team and three other parties were named as defendants in a lawsuit styled Diamond Shamrock Refining Company, L.P. v. Cecorp, Inc. et al in the 148^th Judicial District Court of Nueces County, Texas. The suit seeks recovery for approximately $40 million in property damages from an explosion and fire originating at a valve which the Company’s personnel were attempting to seal in order to prevent a leak. The venue of the case has been moved to Live Oak County, Texas. Liability is being contested and other parties appear to have primary responsibility for the fire and explosion. The Company is unable to estimate the range of possible losses with respect to this claim. However, the Company believes it is insured against any significant loss with both primary and excess liability insurance. However, coverage from the $1 million primary policy is disputed and a defense is being provided by the carrier subject to a reservation of rights. In connection with the dispute of coverage, the Company has filed an action styled Team Industrial Services, Inc. v. American Safety Indemnity Company et. al. in the 149^th Judicial District Court of Brazoria County, Texas, Cause number 28,400.

In June 2004, Ultramar Diamond Shamrock Corporation made demand on Team Industrial Services, Inc. for indemnity from claims asserted against Ultramar Diamond Shamrock Corporation in Linda Alapisco, et al v. Ultramar Diamond Shamrock Corporation, et al, Cause No. L-030085, in the 156th District Court of Live Oak County, Texas. This suit seeks unspecified damages for the 250 individuals identified in the petition for injuries resulting from alleged exposure to toxic chemicals released as a result of the explosion and fire at the Diamond Shamrock facility. This demand has been turned over to the general liability insurance carrier which is defending the claim subject to a reservation of rights letter.

The Company’s umbrella policy has limits of coverage of $25,000,000 and should be more than sufficient to provide the Company a defense and indemnity as to all claims asserted in both matters referred to above. However, the excess carrier has sent a reservation of rights letter to the Company to which the Company has responded. The Company believes that both the primary and excess carriers have coverage for the claims asserted.

In November of 2004, the Company participated in a turnaround at a refinery facility of a major customer which has resulted in a claim being made by that customer against the Company. The customer has alleged that the Company’s work resulted in damage to a vessel flange that required further repairs that delayed the re-commencement of the refinery’s production. The customer has submitted a demand for $1.8 million dollars in damages (which includes an alleged $1.5 million of damages for lost production). The parties have reached an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

agreement in principle to settle the dispute. The parties are in the process of documenting the agreement in principle which includes an adjustment on the project billing in favor of the customer in the amount of $300,000, pricing discounts to the customer on future work totaling $300,000 and a renegotiation of certain contract terms. The Company has recorded the loss in fiscal 2005 based on the terms of the agreement in principle.

In August of 2005, the Company was served in a lawsuit styled Paulette Barker, as named Executor for the Estate of Robert Barker, et. al. v. Emmett J. Lescroart, Michael Urban, Team, Inc. et. al., Case Number 355868-402 in the Probate Court #1, Harris County, Texas. Mr. Lescroart is on the Board of Directors of the Company. Apparently, the dispute arises out of the sale by Mr. Barker to Mr. Lescroart of stock in Thermal Solutions, Inc. Subsequently, all of the outstanding stock of Thermal Solutions, Inc. was acquired by the Company in April of 2004 allegedly for a much higher price than Mr. Lescroart paid Mr. Barker in July of 2003. The plaintiff claims damages in excess of $1,000,000. The Company does not believe that it has any legal liability under the allegations of the suit and, further, believes it is protected under the terms of the Stock Purchase Agreement related to the acquisition. Additionally, the Company believes that the director and officer insurance carrier of Thermal Solutions, Inc. will defend the Company’s interest in the matter.

The Company and certain subsidiaries are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In the opinion of management, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on the Company’s consolidated financial statements.

Lease Commitments

The Company’s operating leases relate to facilities and transportation and other equipment which are leased over terms ranging from one to five years with typical renewal options and escalation clauses. Total rent expense under operating leases charged against earnings were $5,606,000, $3,428,000 and $3,294,000 in 2005, 2004 and 2003, respectively.

Future minimum lease payments under non-cancelable operating leases are as follows:

10. COMMITMENTS AND CONTINGENCIES

Loss Contingencies

In December 2001, the Company and 18 other defendants were sued in a lawsuit styled Lyondell Chemical Company and Atlantic Richfield Company v. Ethyl Corporation et al in the United States District Court for the Eastern District of Texas, Beaumont Division. In April and May of 2004, the District Court granted motions for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

summary judgment filed by the Company and dismissed the Plaintiffs’ claims with prejudice with respect to claims against Team allegedly arising out of its ownership of the stock of French Limited and of Allstate Vacuum and Tanks, Inc (“Allstate”). The Company has reason to believe that the Plaintiffs will appeal the Court’s ruling in favor of the Company at the end of the case.

This lawsuit arises out of a previous lawsuit filed by the United States of America against the Plaintiffs, Lyondell and Arco Chemical, alleging that hazardous substances and/or pollutants or contaminants were deposited at the Turtle Bayou Site in Liberty County, Texas. Arco and Lyondell entered into a settlement with the United States which was embodied in a Consent Decree. Within three years after the Consent Decree was entered, Arco and Lyondell brought the referenced suit against approximately 18 parties seeking contribution for the costs of response for removal and/or remedial action at the Turtle Bayou Site. The co-defendants include, among others, Exxon-Mobil, El Paso Tennessee Pipeline Company, Du Pont, Ethyl Corporation, and Lubrizol. Later, El Paso added approximately nine additional defendants.

Plaintiffs allege that French Ltd., a vacuum truck company that the Company owned from 1978 to 1984, or its former parent, French Limited of Houston, Inc., had, during the time period of 1969 to 1976, transported hazardous substances to the Turtle Bayou Site.

In 1982, as a result of the contentions made by the Environmental Protection Agency (“EPA”), the Company informed George Whitten, the one who had sold French, Ltd. to the Company, that his failure to reveal French, Ltd.’s activities with respect to the illegal depositing of hazardous substances was a breach of the representations and warranties of the agreement by which the Company acquired French, Ltd. In November 1984, the Company sold French back to Whitten.

The Plaintiffs alleged that French, Ltd. and, therefore, the Company, should be held liable for French Limited and/or French Limited of Houston, Inc.’s allegedly wrongful deposits of some of the material that was deposited at the Site. Plaintiffs also allege that the Company should be held liable for some alleged disposal of hazardous waste by another former Company subsidiary, Allstate.

In addition to the claims originally put forward by the Plaintiffs, nine of the Defendants have filed cross-claims against the Company in which they contended they do not believe they should be held liable on Plaintiffs’ claims against them, but that if they are held liable then they seek contribution from the Company and other defendants. In addition, the four of those same nine defendants which are related to the El Paso Corporation (the “El Paso Defendants”) seek contribution against the Company and others on a related claim by the United States Government on another location within the Turtle Bayou Site at which hazardous wastes were disposed. All defendants except the El Paso Defendants have agreed orally to dismiss their cross-claims against the Company subject to revival if the Plaintiffs appeal the summary judgments granted by the District Court. Management believes that the El Paso defendants and the Company are close to an agreement with respect to a motion to dismiss similar to the one proposed with the other defendants; if the Company is not successful in reaching such an agreement, then the Company plans to file a motion for summary judgment requesting that the District Court apply its previously granted summary judgments against the El Paso Defendants.

The Company believes that the claims against it in this matter are without merit, as is supported by the rulings of the District Court.

In April 2003, Team and three other parties were named as defendants in a lawsuit styled Diamond Shamrock Refining Company, L.P. v. Cecorp, Inc. et al in the 148^th Judicial District Court of Nueces County, Texas. The suit seeks recovery for $40 million in property damages from an explosion and fire originating at a valve which the Company’s personnel were attempting to seal in order to prevent a leak. Liability is being

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

contested and other parties appear to have primary responsibility for the fire and explosion. The Company is insured against this loss with both primary and excess liability insurance, subject to any applicable deductible.

In June 2004, Ultramar Diamond Shamrock Corporation made demand on Team Industrial Services, Inc. for indemnity from claims asserted against Ultramar Diamond Shamrock Corporation in Linda Alapisco, et al v. Ultramar Diamond Shamrock Corporation, et al, Cause No. L-030085, in the 156th District Court of Live Oak County, Texas. This suit seeks unspecified damages for the 250 individuals identified in the petition for injuries resulting from alleged exposure to toxic chemicals released as a result of the explosion and fire at the Diamond Shamrock facility. This demand has been turned over to American Safety for a response. As of the date of this report, American Safety has not responded to the claim.

The Company’s umbrella policy has limits of coverage of $25,000,000 and should be more than sufficient to provide the Company a defense and indemnity as to all claims asserted. However, coverage from the $1 million primary policy is disputed and a defense is being provided by the carrier subject to a reservation of rights.

The Company and certain subsidiaries are involved in various other lawsuits and are subject to various claims and proceedings encountered in the normal conduct of business. In the opinion of management, any uninsured losses that might arise from these lawsuits and proceedings will not have a materially adverse effect on the Company’s consolidated financial statements.

See also Note 8 for a discussion of sales tax contingencies.

Lease Commitments

The Company’s operating leases relate to facilities and transportation and other equipment which are leased over terms ranging from one to five years with typical renewal options and escalation clauses. Rental payments on operating leases charged against earnings were $3,428,000, $3,294,000 and $2,848,000 in 2004, 2003 and 2002, respectively. Minimum rental commitments for future periods are as follows: