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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2003

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                          Commission file number 1-5083
                               XANSER CORPORATION
             (Exact name of Registrant as specified in its Charter)

     Delaware                                                    74-1191271
(State or other jurisdiction                                   (IRS Employer
of incorporation or organization)                            Identification No.)

2435 North Central Expressway
Richardson, Texas                                                   75080
-----------------------------------------                    -------------------
(Address of principal executive offices)                          (zip code)

       Registrant's telephone number, including area code: (972) 699-4000

           Securities registered pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------------------       ------------------------------------------
Common Stock, Without Par Value                 New York Stock Exchange
8 3/4% Convertible Subordinated                 New York Stock Exchange
Debentures due 2008

        Securities registered pursuant to Section 12(g) of the Act: None
                                                                    ----

     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 if disclosure of delinquent  filers pursuant to Item
405 of  Regulation  S-K  (Subsection  229.405 of this  chapter) is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. Yes X No

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes No X

     Aggregate  market value of the voting stock held by  non-affiliates  of the
registrant:  $63,483,662. This figure is estimated as of June 30, 2003, at which
date the closing  price of the  registrant's  Common Stock on the New York Stock
Exchange was $2.10 per share,  and assumes that only the  Registrant's  officers
and directors were affiliates of the registrant.

     Number of shares of Common  Stock,  without  par value,  of the  Registrant
outstanding at March 22, 2004: 31,609,141.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The information  required by Part III (Items 10, 11, 12, 13 and 14) of Form
10-K is incorporated by reference from portions of the  Registrant's  definitive
proxy  statement to be filed with the  Securities  and Exchange  Commission  not
later than 120 days after the close of the fiscal year covered by this Report.

--------------------------------------------------------------------------------
<PAGE>
                                     PART I

Item 1.    Business

GENERAL

     Xanser  Corporation  ("Xanser" or the  "Company")  conducts  its  principal
businesses  in  two  industry  segments,   technical  services  and  information
technology services.  The technical services and information technology services
segments  operate through  subsidiaries of Furmanite  Worldwide,  Inc. and Xtria
LLC, respectively. Furmanite Worldwide, Inc., and its domestic and international
subsidiaries and affiliates  (collectively,  "Furmanite"),  provide  specialized
technical  services,  including leak sealing under pressure,  on-site machining,
valve testing and repair and other engineering products and services,  primarily
to electric  power  generating  plants,  petroleum  refineries and other process
industries in the United  Kingdom,  Continental  Europe,  North  America,  Latin
America and Asia-Pacific.  For additional  information see "Technical Services."
Xtria LLC ("Xtria") is engaged in the information  technology  services industry
and  offers   products  and   services   that   include   hardware   design  and
implementation,  web hosted data  processing,  networking,  consulting and other
support  services to the healthcare,  finance and insurance  industries,  and to
agencies  of the state and  federal  governments.  Xtria  also  provides  claims
administration  support and  automated  documentation  control.  For  additional
information see "Information Technology Services."

     On November 27, 2000, the Board of Directors of the Company  authorized the
distribution of its pipeline,  terminaling and product marketing businesses (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. As a result, the accompanying  consolidated financial
statements reflect the results of operations of KSL prior to the Distribution as
"Discontinued operations - businesses distributed to common shareholders".

     Xanser was  incorporated  in Delaware on January 23,  1953.  The  Company's
principal  operating office is located at 2435 North Central  Expressway,  Suite
700, Richardson, Texas 75080 and its telephone number is (972) 699-4000.


OPERATING SEGMENTS

     Financial  information  regarding  the  Company's  operating  segments  and
foreign  operations is presented  under the caption  "Business  Segment Data" in
Note 9 to the Company's consolidated  financial statements.  Such information is
hereby incorporated by reference into this Item 1.


TECHNICAL SERVICES

     The Furmanite group of companies offers  specialized  technical services to
an  international  base of clients.  Founded in Virginia Beach,  Virginia in the
1920s as a  manufacturer  of leak sealing kits,  Furmanite  Worldwide,  Inc. has
evolved into an  international  service  company  that  provides  technical  and
technology  solutions.  In the  1960s,  Furmanite  expanded  within  the  United
Kingdom,  primarily through its leak sealing products and services,  and, during
the 1970s and 1980s, grew through  geographic  expansion and the addition of new
techniques, processes and services to become one of the largest leak sealing and
on-site machining companies in the world. The Company acquired Furmanite in 1991
to  diversify  the  Company's   operations  and  pursue   international   growth
opportunities.  For the year ended December 31, 2003,  Furmanite's  revenues and
operating   income  were   approximately   $101.0   million  and  $6.3  million,
respectively.  See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations."



<PAGE>


Products and Services

     Furmanite  provides  on-line  repairs of leaks ("leak  sealing") in valves,
pipes and other  components of piping  systems and related  equipment  typically
used in  flow-process  industries.  See "Customers and Markets."  Other services
provided by Furmanite include on-site  machining,  bolting and valve testing and
repair  on such  systems  and  equipment.  These  services  tend  to  complement
Furmanite's leak sealing service,  since these "turnaround services" are usually
performed  while a plant or piping  system is off-line.  In addition,  Furmanite
provides hot tapping,  fugitive emissions  monitoring,  passive fire protection,
concrete repair and heat exchanger  repair.  Furmanite also performs  diagnostic
services on valves and motors by, among other  methods,  utilizing  its patented
Trevitest(R)  system.  In  performing  these  services,   Furmanite  technicians
generally work at the customer's location, frequently responding on an emergency
basis.  Over its history,  Furmanite has established a reputation for delivering
quality  service  and  helping  its  customers  avoid or delay  costly  plant or
equipment  shutdowns.  For each of the years ended  December 31, 2003,  2002 and
2001,  under  pressure  services  represented  approximately  42%,  46% and 42%,
respectively,  of Furmanite's revenues,  while turnaround services accounted for
approximately  48%,  46% and 50%,  respectively,  and  product  sales  and other
industrial services represented  approximately 10%, 8% and 8%, respectively,  of
Furmanite's revenues for each of such years.

     Furmanite's on-line,  leak sealing under pressure services are performed on
a variety of flow-process  industry  machinery,  often in difficult  situations.
Many of  Furmanite's  techniques  and  materials  are  proprietary  and some are
patented and, the Company  believes,  they provide  Furmanite with a competitive
advantage over other  organizations  that provide  similar  services.  Furmanite
holds approximately 200 patents and trademarks for its techniques,  products and
materials.  These  patents,  which are  registered in  jurisdictions  around the
world,  expire on dates  ranging from April 2004 to December  2012.  Furmanite's
skilled  technicians  work with equipment in a manner designed to enhance safety
and  efficiency  in  temperature  environments  ranging from  cryogenic to 1,400
degrees Fahrenheit and pressure environments ranging from vacuum to 5,000 pounds
per square inch. In many  circumstances,  Furmanite personnel are called upon to
custom-design  tools,  equipment  or other  materials  to effect  the  necessary
repairs.  These efforts are supported by an internal  quality control group that
works with the on-site technicians in crafting these materials.

Customers and Markets

     Furmanite's customer base includes petroleum  refineries,  chemical plants,
offshore  energy  production  platforms,  steel mills,  nuclear power  stations,
conventional power stations,  pulp and paper mills, food and beverage processing
plants and other flow-process facilities in more than 25 countries.  Over 80% of
Furmanite's  revenues are derived from fossil and nuclear fuel power  generation
companies,  petroleum refiners and chemical  producers,  while other significant
markets include offshore oil producers and steel manufacturers. As the worldwide
industrial  infrastructure  continues to age,  additional repair and maintenance
expenditures are expected to be required for the specialized  services  provided
by Furmanite.  Other factors that may influence the markets  served by Furmanite
include regulations governing  construction of industrial plants, and safety and
environmental  compliance  requirements.  No single customer  accounted for more
than 10% of this  segment's  consolidated  revenue  during any of the past three
fiscal years.

     Furmanite  believes that it is the most  recognized  brand in its industry.
With its 75-year history,  Furmanite's customer  relationships are long-term and
worldwide.  Furmanite serves its customers from its Richardson,  Texas worldwide
headquarters  and  maintains  a  substantial  presence  in the  United  Kingdom,
Continental Europe and Asia-Pacific. Furmanite currently operates North American
offices  in the  United  States  in Baton  Rouge,  Louisiana;  Beaumont,  Texas;
Charlotte,   North   Carolina;   Houston,   Texas;   Los  Angeles,   California;
Merrillville, Indiana and Salt Lake City, Utah. Furmanite's worldwide operations
are  further  supported  by offices  currently  located in  Australia,  Belgium,
France,  Germany,  Hong Kong, Malaysia,  the Netherlands,  New Zealand,  Norway,
Singapore  and the  United  Kingdom  and by  licensee,  agency  and/or  minority
ownership interest arrangements in Argentina,  Brazil,  Chile, Croatia,  Cyprus,
Czech Republic, Egypt, Finland, Hungary, India, Indonesia, Italy, Japan, Kuwait,
Macedonia,  Poland, Portugal,  Puerto Rico, Saudi Arabia, Slovak Republic, South
Korea,  Sweden,  Thailand,  Trinidad,  Ukraine,  the United  Arab  Emirates  and
Venezuela.  Sales by major  geographic  region  for 2003 were 23% for the United
States,  62% for Europe and 15% for Asia-Pacific.  See "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" and Note 9 to the
Company's consolidated financial statements.

     Furmanite's  leak sealing under pressure and other specialty field services
are marketed  primarily  through direct sales calls on customers by salesmen and
technicians based at Furmanite's various operating locations, which are situated
to  facilitate  timely  customer  response,  24 hours a day,  seven days a week.
Customers  are  usually  billed  on a time  and  materials  basis  for  services
typically  performed  pursuant to either job quotation sheets or purchase orders
issued under written  customer  agreements.  Customer  agreements  are generally
short-term in duration and specify the range of and rates for the services to be
performed.  Furmanite typically provides various limited  warranties,  depending
upon the services furnished,  and has had no material warranty claims during the
three years ended December 31, 2003. Furmanite competes on the basis of service,
product  performance  and price,  generally  on a localized  basis with  smaller
companies and the in-house maintenance departments of its customers or potential
customers.  In addition to staff  reductions  and the trend toward  outsourcing,
Furmanite  believes it currently  has an  advantage  over  in-house  maintenance
departments because of the ability of its  multi-disciplined  technicians to use
Furmanite's  proprietary and patented techniques to perform quality repairs on a
timely basis while customer equipment remains in service.

Safety, Environmental and Other Regulatory Matters

     Many  aspects  of  Furmanite's   operations  are  subject  to  governmental
regulation. Federal, state and local authorities of the U.S. and various foreign
countries have each adopted safety, environmental and other regulations relating
to the use of certain  methods,  practices and materials in connection  with the
performance of Furmanite's  services and which otherwise  affect its operations.
Further,  because of its  international  operations,  Furmanite  is subject to a
number of political  and economic  risks,  including  taxation  policies,  labor
practices,  currency exchange rate fluctuations,  foreign exchange restrictions,
local political  conditions,  import and export limitations and expropriation of
equipment.  Except in certain developing countries, where payment in a specified
currency  is  required  by  contract,  Furmanite's  services  are paid,  and its
operations are typically  funded,  in the currency of the particular  country in
which its business  activities are conducted.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

     Leak  sealing  under  pressure  and  other  Furmanite  services  are  often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures,  potential  contact with caustic or toxic materials,
fire and explosion  hazards and  environmental  contamination,  any of which can
cause  serious  personal  injury  or  property  damage.  Furmanite  manages  its
operating risks by providing its technicians with extensive  on-going  classroom
and field  training and  supervision,  maintaining  a technical  support  system
through its staff of specialists,  establishing  and enforcing strict safety and
competency  requirements,  standardizing procedures and evaluating new materials
and techniques for use in connection  with its lines of service.  Furmanite also
maintains  insurance coverage for certain risks,  although there is no assurance
that  insurance  coverage  will  continue to be  available  at rates  considered
reasonable or that the insurance will be adequate to protect the Company against
liability and loss of revenues  resulting from the consequences of a significant
accident.


INFORMATION TECHNOLOGY SERVICES

     Xtria, the Company's  information  technology  services business,  provides
information  technology services to the healthcare  industry,  the financial and
insurance industries and to various governmental agencies. The segment's primary
business   includes  hardware  design  and   implementation,   web  hosted  data
processing,  networking,  consulting  and other support  services.  For the year
ended  December  31,  2003,  the  information  services  segment's  revenues and
operating  losses  were  $34.7  million  and  $6.5  million,  respectively.  See
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operations".  Xtria is headquartered in Richardson, Texas, and maintains offices
in Bryan, Texas; McLean, Virginia; and Frederick, Maryland.

Healthcare Services

     Xtria facilitates healthcare  organizations conversion from diagnostic film
images to digital  radiology  imaging  systems,  known as Picture  Archival  and
Communication  Systems  ("PACS").  PACS are used in  connection  with  digitally
recorded  diagnostic  images,  such  as  magnetic  resonance  imaging,  computer
tomography scans,  ultrasounds and digital x-rays,  among others. The integrated
PACS  communication  network  enables  physicians  to share  studies and results
electronically  while the digital imaging  technologies are expected to increase
the  throughput of imaging  studies.  The system also allows  information  to be
shared between facilities,  including  international  locations,  through secure
web-based and dedicated wide area  connections.  Beyond the benefits to patients
and medical staff,  the system reduces the costs  associated  with  traditional,
film-based   radiology   imaging,   which  requires   processing,   storing  and
distributing images in film libraries.

     Xtria's PACS  implementation  service provides evaluation of the healthcare
organization's  PACS  readiness,  including a  technology  assessment,  workflow
analysis, cost analysis and information systems integration plan, development of
a Request For  Proposal  tailored  to the  specific  needs of the  organization,
evaluation of vendor submissions and recommendations on technical compliance and
pricing,   analysis  of  the  top  vendors,   participation  in  on-site  vendor
presentations, and negotiation of final vendor contracts. Upon completion of the
installation, Xtria's PACS implementation system continues to provide assistance
by development of a  comprehensive  transition  plan  incorporating  the digital
imaging goals,  project timelines and specific milestones  necessary to ensure a
smooth  transition to a digital  environment  for the  healthcare  organization.
Xtria  also  provides  support  and  testing  of the  system  after  it has been
installed,  by  engineers,  physicists,  and RTs  ensure the system is ready for
clinical  use and meets the design  specifications;  and,  on-going  operational
management to ensure peak performance of the PACS.

Financial and Insurance Services

     Xtria's financial and insurance group provides risk management  information
solutions and services for financial  services and  insurance  companies.  Xtria
helps clients mitigate risk and increase profitability through improved decision
support and active risk  management.  The Company's  risk  management  solutions
include lien tracking and notification services, automated document control, and
federal  and  state  delinquent  payer  compliance  reporting.  As  part  of its
services,  Xtria monitors,  on behalf of its customers,  the status of insurance
coverage on  automobiles  and homes pledged as loan  collateral.  Xtria believes
that the market for these  applications  is  fragmented  among a number of small
competitors  and that  competition  in this market is  primarily  based upon the
quality of the services provided.

     Xtria  also  provides  claims  administration  services,   utilizing  their
industry   expertise,   technical   infrastructure,   and   process   management
capabilities  to meet the  client's  claims  administration  needs  by  tracking
damaged  collateral,  issuing  settlement checks directly to the insured lender,
obtaining  salvage bids,  processing title transfers and providing loss reports.
Xtria utilizes the Tickler(TM)  Tracking System to automate document control and
manage risk  exposure  from  missing,  expired or improper  loan  documentation.
Sensitive  documents,  such as UCC-1s,  hazard insurance,  title insurance,  tax
receipts,  financial  statements,  cash flow reports,  letters of credit,  stock
values and CDs can be regularly reviewed and tracked by the Tickler(TM) Tracking
System.

Government Services

     Xtria provides  comprehensive  information  technology services,  including
web-enabled software applications, consulting and web development services under
various  state  and  federal  government  contracts.  The  web-enabled  software
applications  developed by Xtria include early childhood research studies, field
research and program analysis tools,  shared  statistical  analysis tools, grant
review services,  conference  management and logistics  coordination  tools. The
Company believes that the capabilities Xtria offers in web-related services with
large database components offer opportunities for further expanding its market.

ENVIRONMENTAL MATTERS

     Many of the Company's  operations  are subject to federal,  state and local
laws and  regulations  relating to protection of the  environment.  Although the
Company believes that its operations generally are in compliance with applicable
environmental regulation, risks of additional costs and liabilities are inherent
in its  operations,  and there can be no assurance  that  significant  costs and
liabilities will not be incurred by the Company.  Moreover,  it is possible that
other  developments,   such  as  increasingly   stringent   environmental  laws,
regulations, enforcement policies thereunder, and claims for damages to property
or  persons  resulting  from the  operations  of the  Company  could  result  in
substantial   costs  and   liabilities.   See  "Technical   Services  -  Safety,
Environmental and Other Regulatory Matters."


EMPLOYEES

     At December  31,  2003,  the Company and its  subsidiaries  employed  1,034
persons.  The Furmanite  group of companies  employed a total of 873 persons and
142 persons were  employed by the Xtria group of  companies.  As of December 31,
2003,  approximately  410 of the persons  employed by Furmanite  were subject to
representation by unions or other similar associations for collective bargaining
or other similar purposes,  including 106 of Furmanite's employees in the United
Kingdom  who are  subject  to a  collective  bargaining  contract.  The  Company
considers relations with its employees to be good.


AVAILABLE INFORMATION

     The  Company  files  annual,   quarterly,   and  other  reports  and  other
information  with the  Securities  and  Exchange  Commission  ("SEC")  under the
Securities  Exchange Act of 1934 (the "Exchange  Act").  These reports and other
information  that the  Company  files with the SEC may be read and copied at the
SEC's Public  Reference  Room at 450 Fifth  Street,  NW,  Washington,  DC 20549.
Additional  information  about the  Public  Reference  Room may be  obtained  by
calling the SEC at  1-800-SEC-0330.  In addition,  the SEC maintains an Internet
site  (http://www.sec.gov)  that contains reports,  proxy information statements
and other information regarding issuers that file electronically with the SEC.

     The Company also makes  available free of charge on or through its Internet
site  (www.xanser.com) the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q,  Current  Reports on Form 8-K, and other  information  statements  and, if
applicable,  amendments to those reports filed or furnished  pursuant to Section
13(a) of the Exchange Act as soon as  reasonably  practicable  after the reports
are electronically filed with, or furnished to, the SEC.


Item 2. Properties

     The properties  owned or utilized by the Company and its  subsidiaries  are
generally described in Item 1 of this Report.  Additional information concerning
the  obligations  of the  Company  and its  subsidiaries  for lease  and  rental
commitments is presented under the caption  "Commitments and  Contingencies"  in
Note 8 to the Company's consolidated financial statements. Such descriptions and
information are hereby incorporated by reference into this Item 2.

     The Company's  corporate  headquarters  is located in an office building in
Richardson,  Texas,  pursuant to a lease  agreement  that  expires in 2007.  The
facilities  used in the operations of the Company's  subsidiaries  are generally
held under lease agreements having various  expiration  dates,  rental rates and
other terms, except for two Furmanite  properties located in the United Kingdom,
which are owned by the Company.


Item 3. Legal Proceedings

     The Company has contingent  liabilities  resulting from litigation,  claims
and  commitments  incident  to  the  ordinary  course  of  business.  Management
believes,  based on the advice of counsel,  that the ultimate resolution of such
contingencies,  either  individually  or in  the  aggregate,  will  not  have  a
materially  adverse effect on the financial  position,  results of operations or
liquidity of the Company.


Item 4. Submission of Matters to a Vote of Security Holders

     The Company did not hold a meeting of stockholders or otherwise  submit any
matter to a vote of stockholders in the fourth quarter of 2003.


                                     PART II

Item 5. Market  for  the  Registrant's  Common  Equity and  Related  Stockholder
        Matters

     Shares of the Company's  Common Stock are listed and traded on the New York
Stock Exchange  ("NYSE") under the symbol XNR. Prior to the  Distribution of KSL
on June 29, 2001,  the  Company's  Common Stock was traded on the NYSE under the
symbol KAB. At March 22, 2004, there were approximately  4,000 holders of Common
Stock of  record.  The  following  table  sets  forth,  for the  fiscal  periods
indicated,  the quoted  high and low sales  prices of the shares on the New York
Stock Exchange.

                                                         Quoted Stock Prices
                                                               for XNR
                                                     -------------------------
              Calendar Year                           High               Low
              ------------------------               ------            -------
              2002:
                First Quarter                        $ 2.76            $ 1.87
                Second Quarter                         3.45              1.80
                Third Quarter                          2.01              1.25
                Fourth Quarter                         1.98              1.25

              2003:
                First Quarter                          1.90              1.33
                Second Quarter                         2.50              1.65
                Third Quarter                          2.78              2.05
                Fourth Quarter                         2.75              2.18

              2004:
                First Quarter                          2.65              2.25
                  (through March 22, 2004)

     The Company currently intends to retain future earnings for the development
of its  business  and does not  anticipate  paying cash  dividends on its Common
Stock in the  foreseeable  future.  The  Company's  dividend  policy is reviewed
periodically  and  determined  by its Board of Directors on the basis of various
factors,  including,  but not limited to, its results of  operations,  financial
condition, capital requirements and investment opportunities.  Additionally, the
credit facilities for the working capital of Furmanite  contain  restrictions on
the respective  subsidiary's  ability to pay dividends or  distributions  to the
Company, if an event of default exists.

<PAGE>
Item 6. Summary Historical Financial Data

     The  following  selected  financial  data (in  thousands,  except per share
amounts) is derived from the Company's  Consolidated  Financial  Statements  and
should be read in conjunction  with the  Consolidated  Financial  Statements and
related notes thereto included elsewhere in this report. As a result of the June
2001 Distribution of KSL (See Note 1 to the Consolidated  Financial Statements),
the Company's pipeline,  terminaling and product marketing  businesses have been
reclassified  as  "Discontinued  operations - businesses  distributed  to common
shareholders" for all periods presented. The Company has not declared a dividend
on its Common Stock for any of the periods presented.
<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                           -----------------------------------------------------------------------
                                              2003          2002           2001            2000           1999
                                           ----------     ---------      ----------     ----------      ----------

<S>                                        <C>            <C>            <C>            <C>             <C>
Income Statement Data:
Revenues............................       $  135,720     $ 131,436      $  144,704     $  127,641      $  135,433
                                           ==========     =========      ==========     ==========      ==========
Operating income (loss).............       $   (3,367)    $  (4,207)     $    5,429     $    4,102      $   (4,566)
                                           ==========     =========      ==========     ==========      ==========
Income (loss) from continuing
   operations before income taxes
   and cumulative effect of change
   in accounting principle..........       $   (4,380)    $  (5,511)     $    9,349     $      889      $   (8,057)

Income tax benefit (expense)........           (8,725)(a)     3,269          13,039(b)       5,894(c)       38,507(d)
                                           ----------     ---------      ----------     ----------      ----------
Income (loss) from continuing
   operations before cumulative
   effect of change in accounting
   principle........................          (13,105)       (2,242)         22,388          6,783          30,450

Cumulative effect of change in
   accounting principle-adoption
   of new accounting standard for
   goodwill, net of income taxes....              -         (45,269)            -              -              -
                                           ----------     ---------      ----------     ----------      ----------
Income (loss) from continuing
   operations.......................          (13,105)      (47,511)         22,388          6,783          30,450

Income from discontinued operations
   - businesses distributed to common
   shareholders                                   -             -             3,337         10,386          28,459
                                           ----------     ---------      ----------     ----------      ----------
Net income (loss)...................       $  (13,105)    $ (47,511)     $   25,725     $   17,169      $   58,909
                                           ==========     =========      ==========     ==========      ==========
</TABLE>

(a)  Includes a $12.1 million  non-cash  deferred  income tax expense  resulting
     from a change in the valuation  allowance  for deferred tax assets  arising
     from prior year tax losses  that are  available  to offset  future  taxable
     income (see Note 2 to Consolidated Financial Statements).

(b)  Includes $18.1 million in tax benefits resulting from recapitalization of a
     foreign subsidiary (see Note 2 to Consolidated Financial Statements).

(c)  Includes the  recognition of $6.3 million in expected  benefits from prior'
     years tax losses available to offset future taxable income.

(d)  Includes the recognition of $37.1 million in expected  benefits from prior'
     years tax losses available to offset future taxable income.

<TABLE>
<CAPTION>
<PAGE>

                                                                  Year Ended December 31,
                                           -----------------------------------------------------------------------
                                              2003          2002           2001            2000           1999
                                           ----------     ---------      ----------     ----------      ----------
<S>                                        <C>            <C>            <C>            <C>             <C>
Per Share Data:
Earnings (loss) per common share:
   Basic:
     Continuing operations:
       Before cumulative effect of
         change in accounting
         principle..................       $   (0.41)     $  (0.07)      $     0.68     $     0.20      $    0.95
       Cumulative effect of change
         in accounting principle....              -          (1.38)             -              -              -
                                           ---------      --------       ----------     ----------      ---------
                                               (0.41)        (1.45)            0.68           0.20           0.95
     Discontinued operations........              -              -             0.10           0.33           0.91
                                           ---------      --------       ----------     ----------      ---------
                                           $   (0.41)     $  (1.45)      $     0.78     $     0.53      $    1.86
                                           =========      ========       ==========     ==========      =========
   Diluted:
     Continuing operations:
       Before cumulative effect of
         change in accounting
         principle..................       $   (0.41)     $  (0.07)      $     0.64     $     0.19      $    0.92
       Cumulative effect of change
         in accounting principle....              -          (1.38)             -              -              -
                                           ---------      --------       ----------     ----------      ---------
                                               (0.41)        (1.45)            0.64           0.19           0.92
     Discontinued operations........              -              -             0.10           0.31           0.87
                                           ---------      --------       ----------     ----------      ---------
                                           $   (0.41)     $  (1.45)      $     0.74     $     0.50      $    1.79
                                           =========      ========       ==========     ==========      =========

</TABLE>
<TABLE>
<CAPTION>

                                                                       December 31,
                                           -----------------------------------------------------------------------
                                              2003          2002           2001            2000           1999
                                           ----------     ---------      ----------     ----------      ----------
<S>                                        <C>            <C>            <C>            <C>             <C>
Balance Sheet Data:
Cash and cash equivalents...........       $   21,240     $  25,624      $   29,545     $   20,517      $   14,516
Working capital.....................           44,103        47,055          71,789         81,185          42,191
Total assets........................          104,790       127,647         186,219        226,643         219,540
Long-term debt......................           20,457        28,409          37,801         39,593          44,223
Stockholders' equity................           52,452        61,549         115,506        166,039         144,803

</TABLE>
<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

     This  discussion  should  be  read in  conjunction  with  the  Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
report.


GENERAL

     The Company,  formed in 1953,  conducts  its  principal  businesses  in two
industry segments, technical services and information technology services.

     The Company's  technical services business,  which is conducted through its
Furmanite group of subsidiaries,  offers  specialized  technical  services to an
international  base of clients  located in the  United  States,  Europe and Asia
Pacific regions.  The technical  services  business  provides on-line repairs of
leaks in  valves,  pipes and other  components  of piping  systems  and  related
equipment,  typically in the flow-process  industries.  Other services  provided
include on-site machining,  bolting and valve testing and repair on such systems
and  equipment.  In  addition,  the  division  provides  hot  tapping,  fugitive
emissions  monitoring,  passive  fire  protection,   concrete  repair  and  heat
exchanger repair.

     The Company's  information  technology services business,  Xtria,  provides
services and related  products to the  healthcare  industry,  the  financial and
insurance industries,  and various governmental  agencies. The segment's primary
business is information  technology services,  including  application  software,
hardware,  web  hosted  data  processing,  networking,  consulting  and  support
services.

     On November 27, 2000, the Board of Directors of the Company  authorized the
distribution of its pipeline,  terminaling and product marketing businesses (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.  As a result of the  Distribution,  the  Company's
pipeline, terminaling and product marketing businesses have been reclassified as
"Discontinued  operations - businesses  distributed to common  shareholders" for
all periods presented.


OVERVIEW

     In 2003,  the Company  directed  its efforts to position  Xanser for future
growth and profitability.

     The Company's technical service business, Furmanite,  delivered outstanding
performance  in 2003 as it  continued to focus its  operations  on its true core
competency - maximizing  the uptime of its  customers'  critical  assets so that
they are on line and  performing  profitably.  Furmanite has fine-tuned its core
services in order to achieve effective and efficient delivery,  at the same time
adding new services and  technologies  that open new markets,  add new customers
and extend value to its existing customers.

     Xanser's information technology services business, Xtria, was formed from a
collection of IT businesses that were added over time. Some of these  businesses
were  performing  very well  while  others  were  struggling.  Those  struggling
businesses were taking a great deal of time and resources and were substantially
reducing  Xtria's  profitability.  Those  operations  did not have the potential
growth and margins that are necessary to build Xtria over the long term and were
closed  in the  fourth  quarter  of 2003.  Xtria is now  focused  on its  strong
operations in healthcare,  financial and insurance,  and government that deliver
solid margins and have large market potential.  In each of these areas Xtria has
an established reputation, long-term customers, and proven solutions.

     Xanser has a strong  balance  sheet with  substantial  working  capital and
equity  and  a  small  amount  of  debt  and  will   continue  to  maximize  its
opportunities for growth in the future.


CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                               ----------------------------------------------------
                                                                    2003              2002               2001
                                                               -------------      -------------     ---------------
                                                                    (in thousands, except per share amounts)

<S>                                                            <C>                <C>               <C>
Revenues from continuing operations.......................     $     135,720      $     131,436     $       144,704
                                                               =============      =============     ===============
Operating income (loss) from continuing operations........     $      (3,367)     $      (4,207)    $         5,429
                                                               =============      =============     ===============
Income (loss) from continuing operations before income
   taxes and cumulative effect of change in accounting
   principle..............................................     $      (4,380)     $      (5,511)    $        9,349
                                                               =============      =============     ==============
Net income (loss):
   Continuing operations..................................     $     (13,105)     $     (47,511)    $       22,388
   Discontinued operations - businesses
     distributed to common shareholders...................               -                  -                3,337
                                                               -------------      -------------     --------------
      Net income (loss)...................................     $     (13,105)     $     (47,511)    $       25,725
                                                               =============      =============     ==============
Earnings (loss) per common share:
    Basic:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.41)     $       (0.07)     $        0.68
        Cumulative effect of change in
          accounting principle.............................              -                (1.38)              -
                                                               --------------     -------------     --------------
                                                                       (0.41)             (1.45)              0.68
      Discontinued operations..............................              -                  -                 0.10
                                                               --------------     --------------    --------------
                                                               $       (0.41)     $       (1.45)    $         0.78
                                                               =============      =============     ==============
    Diluted:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.41)     $       (0.07)    $         0.64
        Cumulative effect of change in
          accounting principle.............................              -                (1.38)             -
                                                               --------------     -------------     --------------
                                                                       (0.41)             (1.45)              0.64
      Discontinued operations..............................              -                  -                 0.10
                                                               --------------     --------------    --------------
                                                               $       (0.41)     $       (1.45)    $         0.74
                                                               =============      =============     ==============
Capital expenditures from continuing operations,
   excluding acquisitions.................................     $       3,311      $       5,504     $        4,625
                                                               =============      =============     ==============
</TABLE>


     For the year ended December 31, 2003, consolidated revenues from continuing
operations  increased by $4.3 million,  or 3%, when  compared to 2002,  due to a
$10.3 million  increase in revenues from the  technical  services  business (see
"Technical  Services"  below),  partially  offset by a $6.0 million  decrease in
revenues from the  information  technology  services  business.  The information
technology  services business closed its non-performing  operations in late 2003
(see "Information  Technology Services" below). The consolidated  operating loss
decreased by $0.8 million in 2003,  when compared to 2002, due to a $2.8 million
increase in operating  income from the  technical  services  business and a $0.8
million decrease in general and administrative  expenses,  partially offset by a
$2.7 million increase in operating loss from the information technology services
business.  Loss from  continuing  operations  before income taxes and cumulative
effect of change in accounting principle decreased by $1.1 million,  compared to
2002,  due to the overall  decrease in operating loss and a decrease in interest
expense (see "Interest Expense" below). Income (loss) from continuing operations
was ($13.1) million for the year ended December 31, 2003 and includes a non-cash
accounting adjustment in the fourth quarter of 2003 related to deferred taxes of
$12.1 million (see "Income Taxes" below).

     For the year ended December 31, 2002,  revenues decreased by $13.3 million,
or 9%, when  compared to 2001,  due to a $7.7 million  decrease in revenues from
the  information  technology  services  business and a $5.6 million  decrease in
revenues from the technical  services  business.  Operating  income decreased by
$9.6 million in 2002,  when  compared to 2001,  due  primarily to a $7.4 million
decrease in operating income from the information  technology  services business
and a $2.0 million  decrease in  operating  income from the  technical  services
business.  Income  (loss) from  continuing  operations  before  income taxes and
cumulative effect of change in accounting  principle decreased by $14.9 million,
compared  to  2001,  due to the  decrease  in  operating  income  and  the  2001
recognition  of $6.0  million of other  income,  net of  expenses,  from a legal
proceeding,  partially offset by a decrease in interest  expense.  Income (loss)
from  continuing  operations was ($47.5) million for the year ended December 31,
2002,  and  includes a charge  (net of income  taxes) of $45.3  million  for the
cumulative effect of a change in accounting principle-adoption of new accounting
standard for goodwill (see "Critical Accounting Policies and Estimates" below).

<PAGE>
TECHNICAL SERVICES

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                              ---------------------------------------
                                                                2003            2002            2001
                                                              ---------      ---------        -------
                                                                           (in thousands)

<S>                                                           <C>            <C>             <C>
  Revenues:
     United States........................................    $  23,285      $  26,199       $ 35,788
     Europe...............................................       62,995         53,186         48,554
     Asia-Pacific.........................................       14,738         11,362         11,979
                                                              ---------      ---------       --------
                                                              $ 101,018      $  90,747       $ 96,321
                                                              =========      =========       ========
  Operating income (loss):
     United States........................................    $  (1,688)     $  (1,562)      $  1,306
     Europe...............................................        7,756          5,990          7,011
     Asia-Pacific.........................................        2,147          1,007            879
     Headquarters.........................................       (1,878)        (1,855)        (3,615)
                                                              ---------      ---------       --------
                                                              $   6,337      $   3,580       $  5,581
                                                              =========      =========       ========
  Capital expenditures....................................    $   1,897      $   2,912       $  3,331
                                                              =========      =========       ========

</TABLE>

     For the year ended December 31, 2003, technical services revenues increased
by $10.3  million,  or 11%, when compared to 2002,  due to increased  demand for
services  in Europe and Asia and  favorable  foreign  currency  exchange  rates,
partially  offset by lower revenues in the United States.  In the United States,
revenues  decreased  by $2.9  million,  or 11%,  when  compared to 2002,  due to
decreases in turnaround and  underpressure  services  resulting from unfavorable
market conditions and decisions to exit  non-performing  contracts which did not
meet current requirements for generating favorable returns. In Europe,  revenues
increased  $9.8  million,  or 18%,  when  compared to 2002,  due to increases in
turnaround  and  underpressure  services,  product sales and  favorable  foreign
currency exchange rates.  Asia-Pacific  revenues increased $3.4 million, or 30%,
when  compared to 2002,  due to increases in  turnaround  services and favorable
foreign  exchange  rates.  Overall,  2003 technical  services  operating  income
increased by $2.8 million,  or 77%, when compared to 2002. In the United States,
operating  income  decreased  by $0.1  million,  compared to 2002,  due to lower
levels of  business.  In Europe and Asia,  operating  income  increased  by $1.8
million, or 29%, and $1.1 million, or 113%, respectively,  due to overall higher
revenue levels.

     For the year ended December 31, 2002, technical services revenues decreased
by $5.6 million,  or 6%, when  compared to 2001,  primarily due to the impact of
the economic  downturn on its customers'  business,  particularly  in the United
States.  In the United  States,  revenues  decreased  by $9.6  million,  or 27%,
compared to 2001, due to decreases in turnaround and underpressure  services. In
Europe,  revenues  increased  $4.6  million,  or 10%,  compared to 2001,  due to
increases in  underpressure  services and favorable  foreign  currency  exchange
rates,  partially offset by decreases in turnaround and other process  services.
Asia-Pacific  revenues  decreased $0.6 million,  or 5%, compared to 2001, due to
decreases  in  turnaround  services  and  product  sales,  partially  offset  by
favorable foreign exchange rates.  Overall,  2002 technical  services  operating
income  decreased  by $2.0  million,  or 36%,  compared  to 2001.  In the United
States, operating income decreased by $2.9 million, compared to 2001, due to the
lower levels of business. In Europe, operating income decreased by $1.0 million,
compared to 2001, as favorable  pension cost  adjustments  recorded in 2001 were
not totally offset by the margins resulting from increased  revenues in 2002. In
Asia-Pacific,  operating income increased $0.1 million, compared to 2001, due to
increases in operating margins, which more than offset the lower revenues.

     Headquarters  costs for 2001 includes $1.9 million of amortization  related
to excess of cost over fair value of net assets of acquired  businesses.  In the
first quarter of 2002,  the Company  adopted  Statement of Financial  Accounting
Standards  "(SFAS")  No.  142  "Goodwill  and Other  Intangible  Assets",  which
eliminates  the  amortization  of  goodwill  and other  intangible  assets  with
indefinite lives (see "Critical Accounting Policies and Estimates" below).


INFORMATION TECHNOLOGY SERVICES
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                              ---------------------------------------
                                                                2003            2002           2001
                                                              ---------      ---------       --------
                                                                           (in thousands)

<S>                                                           <C>            <C>             <C>
  Revenues................................................    $  34,702      $  40,689       $ 48,383
                                                              =========      =========       ========
  Operating income (loss).................................    $  (6,518)     $  (3,796)      $  3,651
                                                              =========      =========       ========
  Capital expenditures....................................    $   1,309      $   2,592       $  1,294
                                                              =========      =========       ========
</TABLE>

     For the year ended  December  31,  2003,  information  technology  services
revenues  decreased  by $6.0  million,  or 15%,  when  compared to 2002,  due to
decreases in both  communications-related  installation  revenues and government
services  equipment sales revenues,  partially offset by increases in healthcare
sector revenues. The communications-related installation services operations and
low-margin  government  services equipment sales operations,  as well as certain
other  non-profitable  operations,  were  closed in the fourth  quarter of 2003.
Included in operating  income in 2003 is a fourth quarter charge of $3.5 million
pertaining to the write-down of inventory and software  costs,  and employee and
other termination expenses resulting from the closing of such operations. Unpaid
termination  costs at December  31, 2003 were not  material.  Overall,  the 2003
operating loss for the information  technology services operations  increased by
$2.7  million  in 2003,  compared  to 2002,  primarily  due to  losses  from the
non-profitable operations which were exited in late 2003.

     For the year ended December 31, 2002,  revenues  decreased by $7.7 million,
or 16%,  when  compared to 2001,  due to decreases in both service  revenues and
equipment  sales.  The  decrease in service  revenues is due  primarily to lower
communication-related installation revenues from a large customer as a result of
the economic downturn in the technology industry. Revenues from equipment sales,
furnished at the request of selected customers, decreased slightly due to normal
fluctuations in customer needs. Overall, 2002 operating income decreased by $7.4
million,  when  compared  to  2001,  due  to  the  lower  revenues  and  planned
investments in management, marketing and product development costs.

     Information  technology  services  operating  income for 2001 includes $0.4
million of amortization  related to excess of cost over fair value of net assets
of acquired  businesses.  In the first quarter of 2002, the Company adopted SFAS
No. 142, which  eliminates  the  amortization  of goodwill and other  intangible
assets with indefinite lives (see "Critical  Accounting  Policies and Estimates"
below).


GENERAL AND ADMINISTRATIVE EXPENSE

     For the year ended December 31, 2003,  general and  administrative  expense
was approximately  $3.2 million, a decrease of $0.8 million from the prior year.
For the year ended  December 31, 2002,  general and  administrative  expense was
approximately  $4.0  million,  an increase of $0.2  million  over the year ended
December 31, 2001. The decrease in 2003 general and  administrative  expense was
the  result of overall  decreases  in  personnel-related  and  consulting  costs
related  primarily to corporate  governance  consulting  costs, when compared to
2002  levels.  The  increase  in 2002,  when  compared  to 2001,  was due to the
corporate governance consulting costs incurred in 2002.


OTHER INCOME

     The Company was the plaintiff in a legal proceeding  involving  malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which,  net of
expenses,  totaled  $6.0  million and is  included in other  income for the year
ended December 31, 2001.


INTEREST EXPENSE

     For the years ended December 31, 2003 and 2002,  interest expense decreased
by $0.5 million and $1.7 million, respectively,  when compared to the respective
prior year period,  due  primarily to  reductions  in debt (see  "Liquidity  and
Capital Resources") and lower interest rates on variable rate borrowings.


INCOME TAXES

     During the fourth quarter of 2003,  the Company,  pursuant to an evaluation
performed in  accordance  with the  provisions of SFAS No. 109  "Accounting  for
Income Taxes",  recorded a $12.1 million  non-cash  deferred  income tax expense
resulting  from a change in the  valuation  allowance  for  deferred  tax assets
arising from prior years' tax losses (net operating loss carryforwards) that are
available to offset future taxable income.  The net operating loss carryforwards
expire as follows:  $1.2 million in 2006;  $3.0 million in 2007;  $13.4 in 2022;
and $9.6 million in 2023.

     For the year ended  December 31, 2001,  income from  continuing  operations
includes   $18.1   million   in  income   tax   benefits   resulting   from  the
recapitalization  of a foreign  subsidiary.  Additionally,  income taxes for the
year ended  December  31,  2001  includes  benefits of $0.6  million  related to
favorable  developments  pertaining  to  certain  state and  foreign  income tax
issues.

     Income tax benefit  differs from the  expected  tax at statutory  rates due
primarily to the 2003 change in valuation  allowance for deferred tax assets and
different tax rates in the various state and foreign jurisdictions.


LIQUIDITY AND CAPITAL RESOURCES

     Cash provided by operating  activities of  continuing  operations  was $4.9
million,  $3.5  million and $3.1 million  during the years 2003,  2002 and 2001,
respectively.  The  increase  in  2003,  compared  to 2002,  was due to  overall
increases in technical services revenues and operating income,  partially offset
by normal changes in working capital  requirements  resulting from the timing of
cash receipts and disbursements. The increase in 2002, compared to 2001, was due
primarily to normal changes in working capital  requirements  resulting from the
timing of cash receipts and disbursements, partially offset by overall decreases
in revenues and operating income.

     Capital  expenditures  for continuing  operations  were $3.3 million,  $5.5
million and $4.6 million for the years ended  December 31, 2003,  2002 and 2001,
respectively.  Consolidated  capital expenditures for 2004 have been budgeted at
$3 million to $4 million, depending on the economic environment and the needs of
the businesses.  Such expenditures,  however, will depend on many factors beyond
the Company's control, including, without limitation, demand for services in the
technical services and information services businesses, local, state and federal
government  regulations.  No  assurance  can  be  given  that  required  capital
expenditures  will not exceed  anticipated  amounts  during 2004 or  thereafter.
Capital expenditures (excluding  acquisitions) in 2004 are expected to be funded
from existing cash and anticipated cash flows from operations.

     In  connection  with a stock  repurchase  plan  authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's  common stock,  at a cost of $3.3 million.  The stock purchases
were funded with cash on hand.

     At December 31, 2003,  $14.3  million was  outstanding  under a $25 million
Amended and  Restated  Bank Loan  Agreement  ("Loan  Agreement")  that  provides
working capital for the technical  services group and is without recourse to the
Company.  Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable  rates  (2.88% at December 31,  2003),  based on either the
LIBOR rate or prime rate,  have a  commitment  fee on the unused  portion of the
facility and contain certain financial and operational covenants with respect to
the  technical  services  group,  including  percentage  of tangible  assets and
revenues related to certain  geographical areas, ratios of debt to cash flow, as
defined  in the Loan  Agreement,  and cash  flow to fixed  charges  and  capital
expenditures.  At December  31,  2003,  the Company was in  compliance  with all
covenants.  The  Loan  Agreement  matures  in  January  2009 and is  secured  by
substantially all of the tangible assets of the technical services group.

     The Company's 8.75%  subordinated  debentures ($5.0 million  outstanding at
December 31, 2003) are convertible  into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share.  On March 1, 2002, the Company  purchased  $10.0 million of  subordinated
debentures at par value,  which satisfies its sinking fund requirements on these
subordinated  debentures  until their final  maturity in 2008.  On September 30,
2003,  the  Company   purchased  an  additional  $4.9  million  of  subordinated
debentures at par value, plus accrued interest.

     On March 30, 2001, the Company's  Series A Preferred Stock was redeemed for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends,  for a total cost of approximately $6.1 million.  The redemption cost
included a $0.4 million  redemption  premium,  which was recognized as dividends
and redemption premium applicable to preferred stock in 2001.  Additionally,  on
June 12, 2001, the Company exchanged, in non-cash transactions, 1,356,777 shares
of the Company's  common stock for all Series C Preferred and Series F Preferred
shares outstanding.

     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. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the  Distribution  Agreement.
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
judgement 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.


     The  following  is a schedule  by period of the  Company's  debt  repayment
obligations and material contractual commitments at December 31, 2003:
<TABLE>
<CAPTION>

                                                          Less than                                        After
                                              Total        1 year        1-3 years       4-5 years        5 years
                                           ----------     ---------      ----------     ----------      ----------
                                                                      (in thousands)
<S>                                        <C>            <C>            <C>            <C>             <C>
Debt:
     Technical services credit facility    $   14,296     $      12      $      -       $      -        $   14,284
     Parent company convertible
        subordinated debentures........         5,000           -               -            5,000            -
     Other.............................           301           100             201            -              -
                                           ----------     ---------      ----------     ----------      ----------
                                               19,597           112             201          5,000          14,284

     Capital leases....................         1,598           626             722            250            -
                                           ----------     ---------      ----------     ----------      ----------
        Debt subtotal..................        21,195           738             923          5,250          14,284
                                           ----------     ---------      ----------     ----------      ----------
Other contractual commitments:
     Operating leases..................        10,477         3,326           4,311          1,367           1,473
                                           ----------     ---------      ----------     ----------      ----------
        Total..........................    $   31,672     $   4,064      $    5,234     $    6,617      $   15,757
                                           ==========     =========      ==========     ==========      ==========
</TABLE>

     A foreign subsidiary of the Company has certain future funding requirements
regarding  a  defined  benefits  pension  plan  (see  Note  3 to  the  Company's
Consolidated Financial Statements).


OFF-BALANCE SHEET TRANSACTIONS

     The Company was not a party to any off-balance  sheet  transactions  during
any of the three years ended December 31, 2003.


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.

     Critical  accounting  policies  are those  that are most  important  to the
portrayal of our 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. Our most critical accounting policies pertain to revenue recognition,
the  impairment  of excess of cost over  fair  value of net  assets of  acquired
businesses and income taxes.

     The Company's  information  technology  services  segment  includes revenue
recognized  under  multiple  element  arrangements  with  its  customers,  which
requires the use of  significant  judgments  and  estimates by  management.  The
accounting  policies  for  revenue  recognition  in the  information  technology
services  segment  comply with AICPA  Statement of Position  No. 97-2  "Software
Revenue Recognition".  SOP No. 97-2 requires revenue to be recognized only after
software is delivered, all significant obligations of the Company are fulfilled,
and all significant  uncertainties  regarding customer  acceptance have expired.
SOP  No.  97-2  also  requires  the  unbundling  of  multiple  elements  and the
allocation  of pricing to each  element  based upon  vendor  specific  objective
evidence  of fair  value.  In  addition,  the  information  technology  services
segment's  revenues under long-term  service contracts are accounted for using a
proportional  performance method or on a straight-line  basis in accordance with
the Securities and Exchange  Commission's Staff Accounting  Bulletin ("SAB") No.
101 "Revenue Recognition in Financial Statements", as amended by SAB No. 104.

     Effective  January  1,  2002,  the  Company  adopted  SFAS No.  142,  which
eliminates the  amortization for goodwill (excess of cost over fair value of net
assets of acquired  businesses)  and other  intangible  assets  with  indefinite
lives.  Under  SFAS  No.  142,   intangible  assets  with  lives  restricted  by
contractual,  legal,  or other means will  continue to be  amortized  over their
useful  lives.  As of December 31, 2003,  the Company had no  intangible  assets
subject to amortization under SFAS No. 142. Goodwill and other intangible assets
not  subject  to  amortization  are  tested  for  impairment  annually  or  more
frequently if events or changes in circumstances  indicate that the assets might
be impaired.  SFAS No. 142 requires a two-step  process for testing  impairment.
First,  the fair value of each  reporting unit is compared to its carrying value
to determine  whether an indication of  impairment  exists.  If an impairment is
indicated,  then second, the implied fair value of the reporting unit's goodwill
is determined by allocating the unit's fair value to its assets and  liabilities
(including any unrecognized intangible assets) as if the reporting unit had been
acquired in a business  combination.  The amount of impairment  for goodwill and
other intangible assets is measured as the excess of its carrying value over its
implied fair value.  Based on valuations  and analysis  performed by independent
valuation  consultants and the Company in the first quarter of 2002, the Company
determined that the carrying value of its goodwill  exceeded implied fair value,
and therefore,  the Company recorded a non-cash  charge,  after income taxes, of
$45.3 million as the cumulative effect of a change in accounting  principle.  No
impairment  charge  was  appropriate  under  the  previous  goodwill  impairment
standard (SFAS No. 121),  which was based on undiscounted  cash flows.  Based on
valuations  and  analysis  performed  by the Company at December  31,  2003,  no
additional impairment charge was required.  Future evaluations of the fair value
of goodwill and other intangible  assets are dependent on many factors,  several
of which are out of the  Company's  control,  including  the demand for services
provided.  To the extent that such factors or conditions  change, it is possible
that future  impairments could occur,  which could have a material effect on the
results of operations of the Company.

     At December 31, 2003, the Company had a significant  amount of net deferred
tax assets,  which  consisted  principally of net operating loss  carryforwards,
alternative minimum tax credit carryforwards and temporary differences resulting
from  differences in the tax and book basis of certain  assets and  liabilities.
The net operating loss carryforwards expire, if unused, as follows: $1.2 million
in 2006; $3.0 million in 2007;  $13.4 million in 2022; and $9.6 million in 2023.
The alternative minimum tax credit  carryforwards have no expiration date. Based
on evaluations  performed by the Company  pursuant to SFAS No. 109 in the fourth
quarter of 2003, a non-cash  valuation  allowance of $12.1  million was provided
with  respect to the  Company's  federal and state net  deferred tax assets (see
Note 2 to the Company's Consolidated  Financial Statements).  The utilization of
net operating loss carryforwards  could be subject to limitation in the event of
a change in ownership, as defined in the tax laws.


RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2003, the Financial  Accounting Standards Board ("FASB") issued
Interpretation  No. 46  (Revised  December  2003),  "Consolidation  of  Variable
Interest Entities ("FIN 46R"),  primarily to clarify the required accounting for
interests in variable  interest entities  ("VIEs").  This standard replaces FASB
Interpretation  No. 46,  Consolidation of Variable Interest  Entities,  that was
issued in January 2003 to address  certain  situations in which a company should
include in its financial  statements the assets,  liabilities  and activities of
another  entity.  For  the  Company,  application  of FIN  46R is  required  for
interests  in certain  VIEs that are  commonly  referred  to as  special-purpose
entities,  or SPEs, as of December 31, 2003 and for interests in all other types
of VIEs as of March  31,  2004.  The  application  of FIN 46R has not and is not
expected to have a material impact on the consolidated  financial  statements of
the Company.

     In December of 2003, SFAS No. 132 (revised),  "Employers' Disclosures about
Pensions and Other Postretirement  Benefits", was issued. SFAS No. 132 (revised)
prescribes  employers'  disclosures about pension plans and other postretirement
benefit  plans,  but does not change the  measurement  or  recognition  of those
plans.  SFAS No. 132 (revised)  retains and revises the disclosure  requirements
contained in the original SFAS No. 132 and requires additional disclosures about
the assets,  obligations,  cash flows,  and net periodic benefit cost of defined
benefit  pension  plans  and other  postretirement  benefit  plans.  SFAS No 132
(revised),  which  applies  to a  defined  benefits  pension  plan of a  foreign
subsidiary  of the  Company,  must be adopted by the  Company in the fiscal year
ending December 31, 2004.


Item 7A. Quantitative and Qualitative Disclosure About Market Risk

     The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the  Company's  debt and  investment  portfolios  and  fluctuations  in
foreign currency.

         The Company centrally manages its debt and investment portfolios
considering investment opportunities and risks, tax consequences and overall
financing strategies. The Company's investment portfolio consists of cash
equivalents; accordingly, the carrying amounts approximate fair value. The
Company's investments are not material to the financial position or performance
of the Company. Assuming variable rate debt of $14.6 million at December 31,
2003, a one percent increase in interest rates would increase annual interest
expense by approximately $0.1 million.

     A  significant  portion of the  technical  services  business is exposed to
fluctuations  in  foreign  currency  exchange  rates.  (See  Item  7  "Technical
Services".)


Item 8.  Financial Statements and Supplementary Data

     The consolidated financial statements and supplementary data of the Company
begin on page F-1 of this report.  Such  information is hereby  incorporated  by
reference into this Item 8.

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

     None.

Item 9A.  Controls and  Procedures.

     Xanser  Corporation's  principal  executive officer and principal financial
officer,  after  evaluating as of December 31, 2003,  the  effectiveness  of the
Company's  disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities  Exchange Act of 1934),  have concluded  that, as of
such date,  the Company's  disclosure  controls and  procedures are adequate and
effective to ensure that  material  information  relating to the Company and its
consolidated  subsidiaries  would be made known to them by others  within  those
entities.

     During  the  fourth  quarter  of 2003,  there  have been no  changes in the
Company's  internal  controls  over  financial  reporting  that have  materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the  evaluation.  As a result,  no corrective  actions
were required or undertaken.


                                    PART III

     The  information  required  by Items 10, 11, 12, 13 and 14 of Form 10-K are
hereby incorporated by reference to the Company's  Definitive Proxy Statement to
be filed pursuant to Regulation  14A under the  Securities  Exchange Act of 1934
within 120 days after December 31, 2003.
<PAGE>
                                    PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>


<S>                                                                                                      <C>
                                                                                                         Beginning
(a) (1)  Financial Statements                                                                               Page

         Set forth below are financial statements appearing in this report.

         Xanser Corporation and Subsidiaries Financial Statements:
             Independent Auditors' Report........................................................           F - 1
             Consolidated Statements of Income - Three Years Ended
               December 31, 2003, 2002 and 2001..................................................           F - 2
             Consolidated Balance Sheets - December 31, 2003 and 2002............................           F - 4
             Consolidated Statements of Cash Flows - Three Years Ended
               December 31, 2003, 2002 and 2001..................................................           F - 5
             Consolidated Statements of Changes in Stockholders'
               Equity - Three Years Ended December 31, 2003, 2002 and 2001.......................           F - 6
             Notes to Consolidated Financial Statements..........................................           F - 7

(a) (2)  Financial Statement Schedules

     Set forth are the financial statement schedules appearing in this report.

         Schedule I - Xanser Corporation (Parent Company) Condensed Financial Statements:
             Statements of Income - Three Years Ended December 31, 2003, 2002 and 2001...........           F - 26
             Balance Sheets - December 31, 2003 and 2002.........................................           F - 27
             Statements of Cash Flows - Three Years Ended
               December 31, 2003, 2002 and 2001..................................................           F - 28

         Schedule II - Xanser Corporation Valuation and Qualifying Accounts -
             Three Years Ended December 31, 2003, 2002 and 2001..................................           F - 29
</TABLE>

     Schedules,  other than those listed above, have been omitted because of the
absence of the conditions  under which they are required or because the required
information  is included in the  consolidated  financial  statements  or related
notes thereto.

(a) (3)  List of Exhibits

     3.1  Restated  Certificate  of  Incorporation  of  the  Registrant,   dated
          September  26,  1979,  filed as  Exhibit  3.1 of the  exhibits  to the
          Registrant's  Registration  Statement on Form S-16,  which  exhibit is
          hereby incorporated by reference.

     3.2  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the Registrant,  dated April 30, 1981,  filed as Exhibit 3.2 of the
          exhibits to the Registrant's  Annual Report on Form 10-K ("Form 10-K")
          for the  year  ended  December  31,  1981,  which  exhibit  is  hereby
          incorporated by reference.

     3.3  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the  Registrant,  dated May 28,  1985,  filed as Exhibit 4.1 of the
          exhibits  to the  Registrant's  Quarterly  Report on Form 10-Q  ("Form
          10-Q") for the quarter  ended June 30, 1985,  which  exhibit is hereby
          incorporated by reference.

     3.4  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the Registrant,  dated September 17, 1985,  filed as Exhibit 4.1 of
          the  exhibits  to the  Registrant's  Form 10-Q for the  quarter  ended
          September 30, 1985, which exhibit is hereby incorporated by reference.

     3.5  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the  Registrant,  dated July 10, 1990,  filed as Exhibit 3.5 of the
          exhibits to the Registrant's Form 10-K for the year ended December 31,
          1990, which exhibit is hereby incorporated by reference.

     3.6  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the Registrant,  dated September 21, 1990,  filed as Exhibit 3.5 of
          the  exhibits  to the  Registrant's  Form 10-Q for the  quarter  ended
          September 30, 1990, which exhibit is hereby incorporated by reference.

     3.7  Certificate of Amendment to the Restated  Certificate of Incorporation
          of the Registrant,  dated August 8, 2001,  filed as Exhibit 3.1 to the
          Registrant's  Current  Report on Form 8-K filed on  August  22,  2001,
          which exhibit is hereby incorporated by reference.

     3.8  By-laws of the Registrant,  filed as exhibit 3.7 to Registrant's  Form
          10-K for the year ended  December  31, 1998,  which  exhibit is hereby
          incorporated by reference.

     4.1  Certificate  of  Designation,  Preferences  and Rights  related to the
          Registrant's Series B Junior  Participating  Preferred Stock, filed as
          Exhibit 4.2 to the  Registrant's  10-K for the year ended December 31,
          1998, which exhibit is incorporated herein by reference.

     4.2  Indenture between Moran Energy Inc.  ("Moran") and First City National
          Bank of Houston  ("First City"),  dated January 15, 1984,  under which
          Moran issued the 8 3/4% Convertible  Subordinated Debentures due 2008,
          filed as Exhibit  4.1 to Moran's  Registration  Statement  on Form S-3
          (SEC  File No.  2-81227),  which  exhibit  is hereby  incorporated  by
          reference.

     4.3  First  Supplemental  Indenture  between the Registrant and First City,
          dated as of  March  20,  1984,  under  which  the  Registrant  assumed
          obligations under the Indenture listed as Exhibit 4.5 above,  filed as
          Exhibit 4.7 of the Registrant's  Form 10-K for the year ended December
          31, 1983, which exhibit is hereby incorporated by reference.

    10.1* Xanser Corporation (formerly Kaneb Services,  Inc.) Savings Investment
          Plan,  as  amended,  filed  as  Exhibit  4.10 of the  exhibits  to the
          Registrant's  Registration  Statement on Form S-8 ("Form S-8") (S.E.C.
          File No.  33-41295) as Exhibit 4.1 to the exhibits of the Registrant's
          Form  S-8  (S.E.C.  File No.  333-14067),  and as  Exhibit  4.9 to the
          exhibits of the  Registrant's  Form S-8 (S.E.C.  File No.  333-83968),
          which exhibits are hereby incorporated by reference.

    10.2* Xanser  Corporation   (formerly  Kaneb  Services,   Inc.)  1994  Stock
          Incentive  Plan,  filed  as  Exhibit  4.12  to  the  exhibits  of  the
          Registrant's Form S-8 (S.E.C.  File No. 33-54027),  as Exhibit 10.1 to
          the Registrant's  Current Report on Form 8-K filed on August 22, 2001,
          and as Exhibit 10.1 to the exhibits of the Registrant's  Form 10-Q for
          the period ended June 30, 2003, which exhibits are hereby incorporated
          by reference.

    10.3* Xanser  Corporation  (formerly  Kaneb  Services,  Inc.) Deferred Stock
          Unit Plan,  as amended,  filed as Exhibit  4.1 to the  exhibits of the
          Registrant's  Form S-8 (S.E.C.  File No. 333-08725) as Exhibit 10.1 to
          the  exhibits of the  Registrant's  Current  Report on Form 8-K ("Form
          8-K"),   and  as  Exhibits  4.9  and  4.10  to  the  exhibits  of  the
          Registrant's Form S-8 (S.E.C. File No. 333-83970),  which exhibits are
          hereby incorporated by reference.

    10.4* Kaneb Services,  Inc. 1996 Supplemental  Deferred  Compensation  Plan,
          filed as Exhibit  4.1 to the  exhibits  of the  Registrant's  Form S-8
          (S.E.C.  File No.  333-08727),  and as Exhibit 10.2 to the Exhibits of
          the Registrant's  Form 8-K, which exhibits are hereby  incorporated by
          reference.

    10.5* Kaneb  Services,  Inc. $1.63 Director Stock Options,  filed as Exhibit
          4.1 to the  exhibits of the  Registrant's  Form S-8  (S.E.C.  File No.
          33-58981), which exhibit is hereby incorporated by reference.

    10.6* Kaneb Services,  Inc.  Directors Stock Options I, filed as Exhibit 4.1
          to  the  exhibits  of the  Registrant's  Form  S-8  (S.E.C.  File  No.
          333-14069), which exhibit is hereby incorporated by reference.

    10.7* Kaneb Services,  Inc. 1996 Directors Stock Incentive Plan, as amended,
          filed as Exhibit  4.1 to the  exhibits  of the  Registrant's  Form S-8
          (S.E.C.  File No. 333-14071) and as Exhibit 4.1 to the exhibits of the
          Registrant's   Form  S-8   (S.E.C.   File  No.   333-22109),   and  as
          supplemented, filed as Exhibit 4.2 to the Exhibits of the Registrant's
          Form S-8  (S.E.C.  File No.  333-60195),  and as  Exhibit  10.1 to the
          Exhibits  of the  Registrant's  Form 8-K,  which  exhibits  are hereby
          incorporated by reference.

    10.8* Kaneb Services,  Inc. Non-Employee Directors Deferred Stock Unit Plan,
          filed as Exhibit  4.1 to the  exhibits  of the  Registrant's  Form S-8
          (S.E.C.  File No.  333-08723),  and as Exhibit 10.3 to the Exhibits of
          the Registrant's  Form 8-K, which exhibits are hereby  incorporated by
          reference.

    10.9* Kaneb Services,  Inc. 1994 Stock Option Agreements,  filed as Exhibits
          10.1, 10.2, 10.3 and 10.4 to the exhibits of the Registrant's Form S-8
          (S.E.C. File No. 333-34489), which exhibits are hereby incorporated by
          reference.

   10.10* Form  of  Termination  Agreement,  filed   as  Exhibit  10.10  to  the
          exhibits of the Registrant's Form 10-K for the year ended December 31,
          1996, which exhibit is hereby incorporated by reference.

   10.11* Form of  Indemnification  Agreement,  filed  as  Exhibit  10.11 to the
          Registrant's  Form 10-K for the year ended  December 31,  1999,  which
          exhibit is hereby incorporated by reference.

   10.12  Amended and Restated Loan  Agreement  between  Furmanite  PLC, Bank of
          Scotland and certain  other  Lenders,  dated May 1, 1991,  as amended,
          (the  "Furmanite  Loan  Agreement"),  filed  as  Exhibit  10.8  of the
          exhibits to the Registrant's Form 10-K for the year ended December 31,
          1994;  Exhibit 10.12 of the exhibits to the Registrant's Form 10-K for
          the year ended  December 31, 1996;  Exhibit 10.12 of the  Registrant's
          Form 10-K for the year ended December 31, 1997; and,  Exhibit 10.13 of
          the Registrant's Form 10-K for the year ended December 31, 1999, which
          exhibits are hereby incorporated by reference.

     21   List of subsidiaries of the Registrant, filed herewith.

     23   Consent of KPMG LLP, filed herewith.


   31.1   Certification of Chief Executive  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.

   31.2   Certification of Chief Financial  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.

   32.1   Certification of Chief Executive  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.

   32.2   Certification of Chief Financial  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.

     *    Denotes management contracts.

(b)  Reports on Form 8-K

     Current Report on Form 8-K filed with the SEC on October 30, 2003.



<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and
Stockholders of Xanser Corporation:

We have audited the consolidated  financial statements of Xanser Corporation and
its  subsidiaries  as listed in the index  appearing  under  Item  15(a)(1).  In
connection with our audits of the  consolidated  financial  statements,  we have
also audited the financial  statement schedules as listed in the index appearing
under Item  15(a)(2).  These  consolidated  financial  statements  and financial
statement  schedules are the  responsibility  of the Company's  management.  Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of the Company and its
subsidiaries  as of  December  31,  2003  and  2002,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2003, in conformity  with  accounting  principles  generally
accepted in the United  States of America.  Also,  in our  opinion,  the related
financial  statement  schedules,  when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.

As  discussed  in Note 1, the Company  adopted the  provisions  of  Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in
2002.


                                          KPMG LLP


Dallas, Texas
February 25, 2004


                                     F - 1


<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME



<TABLE>
<CAPTION>


                                                                              Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     2003              2002               2001
                                                               --------------     --------------    ---------------

<S>                                                            <C>                <C>               <C>
Revenues:
    Services...............................................    $  120,790,000     $  114,659,000    $   127,421,000
    Products...............................................        14,930,000         16,777,000         17,283,000
                                                               --------------     --------------    ---------------
      Total revenues.......................................       135,720,000        131,436,000        144,704,000
                                                               --------------     --------------    ---------------

Costs and expenses:
    Operating costs........................................       116,503,000        112,159,000        114,735,000
    Cost of products sold..................................        13,538,000         15,828,000         15,529,000
    Depreciation and amortization..........................         5,860,000          3,665,000          5,208,000
    General and administrative.............................         3,186,000          3,991,000          3,803,000
                                                               --------------     --------------    ---------------
      Total costs and expenses.............................       139,087,000        135,643,000        139,275,000
                                                               --------------     --------------    ---------------

Operating income (loss)....................................        (3,367,000)        (4,207,000)         5,429,000

Interest income............................................           260,000            460,000            665,000
Other income...............................................              -                  -             6,741,000
Interest expense...........................................        (1,273,000)        (1,764,000)        (3,486,000)
                                                               --------------     --------------    ---------------
Income (loss) from continuing operations before
    income taxes and cumulative effect of change in
    accounting principle...................................        (4,380,000)        (5,511,000)         9,349,000

Income tax benefit (expense)...............................        (8,725,000)         3,269,000         13,039,000
                                                               ---------------    --------------    ---------------

Income (loss) from continuing operations before cumulative
    effect of change in accounting principle...............       (13,105,000)        (2,242,000)        22,388,000
Cumulative effect of change in accounting principle -
    adoption of new accounting standard for goodwill,
    net of income taxes....................................              -           (45,269,000)             -
                                                               --------------     --------------    ---------------

Income (loss) from continuing operations...................       (13,105,000)       (47,511,000)        22,388,000
Income from discontinued operations - businesses
    distributed to common shareholders, net of
    income taxes...........................................              -                  -             3,337,000
                                                               --------------     --------------    ---------------
      Net income (loss)....................................       (13,105,000)       (47,511,000)        25,725,000

Dividends and redemption premium applicable to
    preferred stock........................................              -                  -               493,000
                                                               --------------     --------------    ---------------
Net income (loss) applicable to common stock...............    $  (13,105,000)    $  (47,511,000)   $    25,232,000
                                                               ==============     ==============    ===============


</TABLE>

                 See notes to consolidated financial statements.

                                      F - 2

<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Continued)


<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     2003              2002               2001
                                                               --------------     --------------    ---------------

<S>                                                            <C>                <C>               <C>
Earnings (loss) per common share:
    Basic:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.41)     $       (0.07)    $          0.68
        Cumulative effect of change in
          accounting principle.............................              -                (1.38)              -
                                                               -------------      -------------     ---------------
                                                                       (0.41)             (1.45)               0.68
      Discontinued operations..............................              -                  -                  0.10
                                                               -------------      -------------     ---------------
                                                               $       (0.41)     $       (1.45)    $          0.78
                                                               =============      =============     ===============
    Diluted:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.41)     $       (0.07)    $          0.64
        Cumulative effect of change in
          accounting principle.............................              -                (1.38)              -
                                                               -------------      -------------     ---------------
                                                                       (0.41)             (1.45)               0.64
      Discontinued operations..............................              -                  -                  0.10
                                                               -------------      -------------     ---------------
                                                               $       (0.41)     $       (1.45)    $          0.74
                                                               =============      =============     ===============

</TABLE>


                 See notes to consolidated financial statements.

                                      F - 3



<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                           December 31,
                                                                              -------------------------------------
                                                                                   2003                   2002
                                                                              --------------         --------------
                                     ASSETS
<S>                                                                           <C>                    <C>
Current assets:
   Cash and cash equivalents......................................            $   21,240,000         $   25,624,000
   Accounts receivable, trade (net of allowance for doubtful
     accounts of $1,183,000 in 2003 and $1,500,000 in 2002).......                31,902,000             36,208,000
   Receivable from businesses distributed to common shareholders..                 7,564,000              7,412,000
   Inventories....................................................                 8,697,000              8,424,000
   Prepaid expenses and other.....................................                 4,182,000              5,264,000
                                                                              --------------         --------------
     Total current assets.........................................                73,585,000             82,932,000
                                                                              --------------         --------------

Property and equipment............................................                42,152,000             38,830,000
Less accumulated depreciation and amortization....................                29,879,000             24,875,000
                                                                              --------------         --------------
   Net property and equipment.....................................                12,273,000             13,955,000
                                                                              --------------         --------------

Excess of cost over fair value of net assets of acquired businesses               13,802,000             13,802,000
Deferred income taxes and other assets............................                 5,130,000             16,958,000
                                                                              --------------         --------------
                                                                              $  104,790,000         $  127,647,000
                                                                              ==============         ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt..............................            $      738,000         $      747,000
   Accounts payable...............................................                 3,098,000              3,919,000
   Accrued expenses...............................................                18,255,000             21,419,000
   Accrued income taxes...........................................                 7,391,000              9,792,000
                                                                              --------------         --------------

     Total current liabilities....................................                29,482,000             35,877,000
                                                                              --------------         --------------
Long-term debt, less current portion:
   Technical services.............................................                15,457,000             18,479,000
   Parent company.................................................                 5,000,000              9,930,000
                                                                              --------------         --------------
     Total long-term debt, less current portion...................                20,457,000             28,409,000
                                                                              --------------         --------------

Other liabilities.................................................                 2,399,000              1,812,000

Commitments and contingencies

Stockholders' equity:
   Common stock, without par value.  Authorized, 60,000,000 shares;
     issued, 37,336,176 shares in 2003 and 2002                                    4,333,000              4,333,000
   Additional paid-in capital.....................................               126,561,000            126,675,000
   Treasury stock, at cost........................................               (26,267,000)           (26,390,000)
   Retained earnings (accumulated deficit)........................               (48,695,000)           (35,590,000)
   Accumulated other comprehensive income (loss)..................                (3,480,000)            (7,479,000)
                                                                              --------------         --------------
     Total stockholders' equity...................................                52,452,000             61,549,000
                                                                              --------------         --------------
                                                                              $  104,790,000         $  127,647,000
                                                                              ==============         ==============
</TABLE>

                 See notes to consolidated financial statements.

                                      F - 4

<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                             ------------------------------------------------------
                                                                   2003               2002                2001
                                                             --------------       -------------     ---------------
<S>                                                          <C>                  <C>               <C>
Operating activities:
   Income (loss) from continuing operations...............   $  (13,105,000)      $ (47,511,000)    $   22,388,000
   Adjustments to reconcile income from continuing
     operations to net cash provided by operating activities:
       Depreciation and amortization......................        5,860,000           3,665,000          5,208,000
       Deferred income taxes..............................        7,863,000          (1,266,000)       (15,436,000)
       Cumulative effect of change in accounting principle             -             45,269,000              -
       Other, net.........................................          587,000             736,000            296,000
       Changes in current assets and liabilities:
         Accounts receivable, net.........................        4,306,000             978,000         (7,866,000)
         Inventories......................................         (273,000)            518,000         (1,301,000)
         Prepaid expenses and other.......................        1,579,000           2,370,000         (3,102,000)
         Accounts payable and accrued expenses............       (1,928,000)         (1,239,000)         2,939,000
                                                             --------------       -------------     --------------
     Operating activities of continuing operations........        4,889,000           3,520,000          3,126,000
     Operating activities of discontinued operations......             -                  -             59,753,000
                                                             --------------       -------------     --------------
     Net cash provided by operating activities............        4,889,000           3,520,000         62,879,000
                                                             --------------       -------------     --------------

Investing activities:
   Capital expenditures...................................       (3,311,000)         (5,504,000)        (4,625,000)
   Acquisitions...........................................             -                  -               (811,000)
   Other, net.............................................        1,363,000           1,298,000            605,000
   Investing activities of discontinued operations........             -                  -           (128,258,000)
                                                             --------------       -------------     --------------
     Net cash used in investing activities................       (1,948,000)         (4,206,000)      (133,089,000)
                                                             --------------       -------------     --------------

Financing activities:
   Issuance of debt and capital leases....................          330,000           4,750,000          4,441,000
   Payments on debt and capital leases ...................       (8,278,000)        (15,641,000)        (4,655,000)
   Preferred stock dividends and redemption premium paid..             -                  -               (493,000)
   Common stock issued and other..........................            9,000             450,000            545,000
   Purchase of treasury stock.............................             -             (3,286,000)              -
   Redemption of preferred stock..........................             -                  -             (5,676,000)
   (Increase) decrease in receivable from businesses
     distributed to common shareholders...................         (152,000)         10,492,000         14,076,000
   Financing activities of discontinued operations........             -                  -             71,000,000
                                                             --------------       -------------     --------------
     Net cash provided by (used in) financing activities..       (8,091,000)         (3,235,000)        79,238,000
                                                             --------------       -------------     --------------
Effect of exchange rate changes on cash...................          766,000               -                  -
                                                             --------------       -------------     --------------

Increase (decrease) in cash and cash equivalents..........       (4,384,000)         (3,921,000)         9,028,000
Cash and cash equivalents at beginning of year............       25,624,000          29,545,000         20,517,000
                                                             --------------       -------------     --------------
Cash and cash equivalents at end of year..................   $   21,240,000       $  25,624,000     $   29,545,000
                                                             ==============       =============     ==============

Supplemental cash flow information from continuing
   operations:
     Cash paid for interest...............................   $    1,534,000       $   2,244,000     $    3,383,000
                                                             ==============       =============     ==============
     Cash paid for income taxes...........................   $    1,899,000       $     926,000     $    1,270,000
                                                             ==============       =============     ==============
</TABLE>


                 See notes to consolidated financial statements.

                                      F - 5

<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  PART 1 OF 2

<TABLE>
<CAPTION>

                                           Preferred         Common          Additional        Treasury
                                             Stock            Stock        Paid-In Capital       Stock
                                        -------------     -------------    ---------------   -------------
<S>                                     <C>               <C>              <C>               <C>
Balance at January 1, 2001              $   5,792,000     $   4,250,000    $ 203,989,000     $ (31,440,000)
   Net income........................            -                -                -                 -
   Common stock issued...............            -               20,000          380,000           257,000
   Deferred stock units, vested......            -                -              651,000             -
   Redemption of Series A Preferred
     stock...........................      (5,680,000)            -                 -                -
   Repurchase of Series C and F
     Preferred stock.................        (112,000)            -           (7,725,000)        7,760,000
   Dividends and redemption premium
     applicable to preferred stock...            -                -                 -                -
   Distribution of KSL...............            -                -          (74,664,000)            -
   Gain on issuance of units by KPP..            -                -            6,113,000             -
   Minimum pension liability
     adjustment for subsidiary.......            -                -                 -                -
   Foreign currency translation
     adjustment......................            -                -                 -                -
                                        -------------     -------------    -------------     -------------
   Comprehensive income..............

Balance at December 31, 2001                     -            4,270,000      128,744,000       (23,423,000)
   Net income (loss).................            -                -                 -                -
   Common stock issued...............            -               63,000           68,000           319,000
   Deferred stock units, vested......            -                -              171,000             -
   Purchase of treasury stock........            -                -                 -           (3,286,000)
   Minimum pension liability
     adjustment for subsidiary.......            -                -                 -                -
   Foreign currency translation
     adjustment......................            -                -                 -                -
   Taxes associated with the
     Distribution of KSL and other...            -                -           (2,308,000)            -
                                        -------------     -------------    -------------     -------------
   Comprehensive income (loss).......

Balance at December 31, 2002                     -            4,333,000      126,675,000       (26,390,000)
   Net income (loss).................            -                -                 -                -
   Common stock issued...............            -                -             (153,000)          123,000
   Deferred stock units, vested......            -                -               39,000             -
   Minimum pension liability
     adjustment for subsidiary.......            -                -                 -                -
   Foreign currency translation
     adjustment .....................            -                -                 -                -
                                        -------------     -------------    -------------     -------------
   Comprehensive income (loss).......

Balance at December 31, 2003            $        -        $   4,333,000    $ 126,561,000     $ (26,267,000)
                                        =============     =============    =============     =============

</TABLE>

                 See notes to consolidated financial statements.

                                      F - 6

<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  PART 2 OF 2
<TABLE>
<CAPTION>
                                           Retained
                                           Earnings       Accumulated Other
                                         (Accumulated      Comprehensive      Comprehensive
                                           Deficit)        Income (Loss)      Income (Loss)
                                        -------------    ------------------   --------------
<S>                                     <C>               <C>                 <C>
Balance at January 1, 2001              $ (13,311,000)    $  (3,241,000)
   Net income........................      25,725,000             -           $   25,725,000
   Common stock issued...............           -                 -                    -
   Deferred stock units, vested......           -                 -                    -
   Redemption of Series A Preferred
     stock...........................           -                 -                    -
   Repurchase of Series C and F
     Preferred stock.................           -                 -                    -
   Dividends and redemption premium
     applicable to preferred stock...        (493,000)            -                    -
   Distribution of KSL...............           -               640,000                -
   Gain on issuance of units by KPP..           -                 -                    -
   Minimum pension liability
     adjustment for subsidiary.......           -            (2,773,000)          (2,773,000)
   Foreign currency translation
     adjustment......................           -              (632,000)            (632,000)
                                        -------------     -------------       --------------
   Comprehensive income..............                                         $   22,320,000
                                                                              ==============
Balance at December 31, 2001               11,921,000        (6,006,000)
   Net income (loss).................     (47,511,000)            -          $   (47,511,000)
   Common stock issued...............            -                 -                   -
   Deferred stock units, vested......            -                 -                   -
   Purchase of treasury stock........            -                 -                   -
   Minimum pension liability
     adjustment for subsidiary.......            -           (3,374,000)          (3,374,000)
   Foreign currency translation
     adjustment......................            -            1,901,000            1,901,000
   Taxes associated with the
     Distribution of KSL and other...            -                 -                   -
                                        -------------     -------------       --------------
   Comprehensive income (loss).......                                         $  (48,984,000)
                                                                              ==============
Balance at December 31, 2002              (35,590,000)      (7,479,000)
   Net income (loss).................     (13,105,000)            -           $  (13,105,000)
   Common stock issued...............            -                -                    -
   Deferred stock units, vested......            -                -                    -
   Minimum pension liability
     adjustment for subsidiary.......            -           1,147,000             1,147,000
   Foreign currency translation
     adjustment .....................            -           2,852,000             2,852,000
                                        -------------     -------------       --------------
   Comprehensive income (loss).......                                         $   (9,106,000)
                                                                              ==============
Balance at December 31, 2003            $ (48,695,000)    $  (3,480,000)
                                        =============     =============
</TABLE>


                 See notes to consolidated financial statements.

                                      F - 6

<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     General

     The  consolidated  financial  statements  include  the  accounts  of Xanser
Corporation (the "Company" or "Parent") and its wholly-owned subsidiaries.

     On November 27, 2000, the Board of Directors of the Company  authorized the
distribution of its pipeline and 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. As a result,  the accompanying  financial  statements
reflect  the  operations  of KSL  prior  to the  Distribution  as  "Discontinued
operations - businesses distributed to common shareholders" (See Note 10).

     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. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the  Distribution  Agreement.
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
judgement 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.

     The following  significant  accounting policies are followed by the Company
and  its  subsidiaries  in  the  preparation  of  its   consolidated   financial
statements.   All  significant   intercompany   transactions  and  balances  are
eliminated in consolidation.

     Cash and Cash Equivalents

     The Company's  policy is to invest cash in highly liquid  investments  with
original  maturities  of three  months  or less.  Accordingly,  uninvested  cash
balances are kept at minimum levels.  Such investments are valued at cost, which
approximates  market,  and are classified as cash equivalents.  The Company does
not have any derivative financial instruments.

     Inventories

     Inventories  consist  primarily of materials and supplies and are valued at
the lower of cost or market.  Cost is determined using the weighted average cost
method.

     Property and Equipment

     Property and equipment are carried at historical cost.  Certain leases have
been  capitalized  and the leased  assets have been  included  in  property  and
equipment.  Additions of new equipment and major  renewals and  replacements  of
existing  equipment are capitalized.  Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed.  Depreciation of
property  and  equipment is provided on the  straight-line  basis at rates based
upon the expected useful lives of the various classes of assets.

     Effective  January 1, 2002,  the Company  adopted  Statement  of  Financial
Accounting  Standards  ("SFAS")  No.  144,  "Accounting  for the  Impairment  or
Disposal  of  Long-Lived  Assets",  which  addresses  financial  accounting  and
reporting for the impairment or disposal of long-lived  assets.  The adoption of
SFAS No.  144 did not  have a  material  impact  on the  consolidated  financial
statements  of the Company.  Under SFAS No. 144, the carrying  value of property
and equipment is periodically  evaluated using undiscounted future cash flows as
the basis for  determining  if impairment  exists.  To the extent  impairment is
indicated to exist, an impairment loss will be recognized based on fair value.

     Capitalized Software

     Costs  incurred  to  purchase  or develop  computer  software to be sold or
leased is capitalized in accordance  with SFAS No. 86 "Accounting  for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed".  Under SFAS No.
86,  amortization  expense is based on current and  projected  revenues for each
capitalized product, with an annual minimum equal to the straight-line method of
amortization over the product's  remaining  estimated economic life. At December
31, 2002,  unamortized  software costs  capitalized under SFAS No. 86 aggregated
$1.3 million.  The Company had no  unamortized  software  costs  capitalized  at
December 31, 2003. For the years ended December 31, 2003 and 2002,  amortization
expense  totaled $2.0 million and $0.1 million,  respectively.  No  amortization
expense was incurred in 2001.

     Revenue Recognition

     Revenues are  recognized  when services to customers  have been rendered or
when products have been delivered.

     The  information  technology  services  segment's  revenues under long-term
service contracts are accounted for using a proportional  performance  method or
on a  straight-line  basis  in  accordance  with  the  Securities  and  Exchange
Commission's Staff Accounting  Bulletin ("SAB") No. 101 "Revenue  Recognition in
Financial  Statements",  as amended by SAB No. 104. The accounting  policies for
revenue  recognition in the information  technology services segment comply with
AICPA  Statement of Position No. 97-2 "Software  Revenue  Recognition".  SOP No.
97-2 requires  revenue to be recognized  only after  software is delivered,  all
significant  obligations  of the  Company  are  fulfilled,  and all  significant
uncertainties  regarding  customer  acceptance  have expired.  SOP No. 97-2 also
requires the  unbundling of multiple  elements and the  allocation of pricing to
each element based upon vendor specific objective evidence of fair value.

     Earnings Per Share

     The amount of earnings for the period  applicable to each weighted  average
share of common stock outstanding during the period ("Basic" earnings per share)
and the amount of earnings for the period  applicable to each  weighted  average
share of common stock outstanding during the period and to each share that would
have been  outstanding  assuming  the  issuance  of common  shares for  dilutive
potential common shares  outstanding  during the period ("Diluted"  earnings per
share) have been presented in the consolidated statements of income.

     Foreign Currency Translation

     The Company translates the balance sheets of its foreign subsidiaries using
year-end  exchange  rates and  translates  income  statement  amounts  using the
average exchange rates in effect during the year. The gains and losses resulting
from  the  change  in  exchange  rates  from  year to year  have  been  reported
separately as a component of accumulated  other  comprehensive  income (loss) in
stockholders'   equity.   Gains  and  losses  resulting  from  foreign  currency
transactions are included in the consolidated statements of income.

     Comprehensive Income

     The  Company   follows  the   provisions   of  SFAS  No.  130,   "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial  statements.  SFAS No.
130 only  requires  additional  disclosure  and does not  affect  the  Company's
financial  position or results of  operations.  At  December  31, 2003 and 2002,
accumulated  other  comprehensive  income (loss) consists of cumulative  foreign
currency   translation   adjustments   of  ($1.5)   million  and  $1.3  million,
respectively,  and  minimum  pension  liability  adjustments  (see  Note  3) for
subsidiaries of $5.0 million and $6.2 million, respectively.

     Excess of Cost Over Fair Value of Net Assets of Acquired Businesses

     Effective January 1, 2002, the Company adopted SFAS No. 142,  "Goodwill and
Other Intangible Assets", which eliminates the amortization for goodwill (excess
of cost  over  fair  value of net  assets  of  acquired  businesses)  and  other
intangible assets with indefinite lives.  Under SFAS No. 142,  intangible assets
with lives restricted by contractual,  legal, or other means will continue to be
amortized  over their useful  lives.  At December  31, 2003,  the Company had no
intangible assets subject to amortization under SFAS No. 142. Goodwill and other
intangible assets not subject to amortization are tested for impairment annually
at year end or more  frequently if events or changes in  circumstances  indicate
that the assets might be impaired.  SFAS No. 142 requires a two-step process for
testing impairment.  First, the fair value of each reporting unit is compared to
its carrying value to determine  whether an indication of impairment  exists. If
an impairment is indicated, then second, the implied fair value of the reporting
unit's  goodwill is determined by allocating the unit's fair value to its assets
and  liabilities  (including  any  unrecognized  intangible  assets)  as if  the
reporting  unit had been  acquired  in a  business  combination.  The  amount of
impairment for goodwill and other intangible assets is measured as the excess of
a  reporting  unit's  carrying  value  over its  implied  fair  value.  Based on
valuations and analysis performed by independent  valuation  consultants and the
Company in the first quarter of 2002, the Company  determined  that the carrying
value of its goodwill  exceeded implied fair value,  and therefore,  the Company
recorded  a  non-cash  charge,  after  income  taxes,  of $45.3  million  as the
cumulative effect of a change in accounting principle.  No impairment charge was
appropriate  under the previous  goodwill  impairment  standard  (SFAS No. 121),
which was based on  undiscounted  cash flows.  Based on valuations  and analysis
performed by the Company at December 31, 2003, no additional  impairment  charge
was required.

     The changes in the carrying amount of excess of cost over fair value of net
assets of acquired businesses for the years ended December 31, 2003 and 2002 are
as follows:

     Excess of cost over fair value of net assets of acquired
         businesses at December 31, 2001..........................  $61,054,000

     Cumulative effect of change in accounting principle
         recorded in the first quarter of 2002....................  (47,252,000)
                                                                   ------------
     Excess of cost over fair value of net assets of acquired
         businesses (technical services) at December 31, 2002
         and 2003.................................................  $13,802,000
                                                                   ============

     The  effects  of the  adoption  of  SFAS  No.  142 on  income  (loss)  from
continuing operations is as follows:

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31
                                                                                    -------------------------------
                                                                                        2002              2001
                                                                                    -------------    --------------

 <S>                                                                                 <C>              <C>
       Reported income (loss) from
          continuing operations...........................................          $ (47,511,000)   $   22,388,000
       Amortization of excess of cost
          over fair value of net assets
          of acquired businesses, net
          of income taxes.................................................                   -            2,164,000
       Cumulative effect of change in
          accounting principle - adoption
          of new accounting standard
          for goodwill, net of income taxes...............................             45,269,000             -
                                                                                    -------------    --------------
       Adjusted income (loss) from
          continuing operations...........................................          $  (2,242,000)   $   24,552,000
                                                                                    =============    ==============
</TABLE>

<TABLE>
<CAPTION>

                                                                                        Year Ended December 31
                                                                                    -------------------------------
                                                                                        2002              2001
                                                                                    -------------    --------------

<S>                                                                                 <C>              <C>
       Reported diluted earnings (loss)
          per common share from
          continuing operations...........................................          $      (1.45)    $         0.64
       Amortization of excess of cost over
          fair value of net assets of
          acquired businesses, net of
          income taxes....................................................                   -                 0.06
       Cumulative effect of change in accounting
          principle, net of income taxes..................................                  1.38              -
                                                                                    ------------     --------------
       Adjusted diluted earnings (loss)
          per common share from
          continuing operations...........................................          $      (0.07)    $         0.70
                                                                                    ============     ==============
</TABLE>

     Stock Option Plans

     In  December  of  2002,  the FASB  issued  SFAS No.  148,  "Accounting  for
Stock-Based  Compensation-Transition and Disclosure." SFAS No. 148, which amends
SFAS No. 123,  provides for  alternative  methods of transition  for a voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation and requires additional disclosures in annual and interim financial
statements   regarding  the  method  of  accounting  for  stock-based   employee
compensation  and the  effect  of the  method  used  on  financial  results.  In
accordance  with the  provisions of SFAS No. 123,  "Accounting  for  Stock-Based
Compensation", the Company applies APB Opinion 25 and related interpretations in
accounting  for its stock  option  plans and,  accordingly,  does not  recognize
compensation  cost based on the fair value of the options  granted at grant date
as prescribed by SFAS No. 123. The  Black-Scholes  option pricing model has been
used to estimate the value of stock options  issued,  and the assumptions in the
calculations  under such  model for the three  years  ended  December  31,  2003
include stock price variance or volatility ranging from 9.32% to 13.38% based on
weekly  average  variances  of the  stock  for the five  year  period  preceding
issuance,  a risk-free  rate of return  ranging from 3.25% to 4.98% based on the
30-year U.S. treasury bill rate for the five-year  expected life of the options,
and no dividend yield.

     The  following  illustrates  the effect on net income  (loss) and basic and
diluted  earnings  (loss)  per share if the fair  value  based  method  had been
applied:
<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2003              2002              2001
                                                                 ---------------   --------------    --------------

<S>                                                              <C>               <C>               <C>
      Reported net income (loss)...............................  $   (13,105,000)  $  (47,511,000)   $   25,725,000

      Stock-based employee compensation expense determined
        under the fair value based method, net of income taxes.         (138,000)        (620,000)         (593,000)
                                                                 ---------------   --------------    --------------

      Pro forma net income (loss)..............................  $   (13,243,000)  $  (48,131,000)   $   25,132,000
                                                                 ===============   ==============    ==============

      Earning (loss) per share:
        Basic - as reported....................................  $         (0.41)  $        (1.45)   $         0.78
                                                                 ===============   ==============    ==============
        Basic - pro forma......................................  $         (0.41)  $        (1.48)   $         0.75
                                                                 ===============   ==============    ==============

        Diluted - as reported..................................  $         (0.41)  $        (1.45)   $         0.74
                                                                 ===============   ==============    ==============
        Diluted - pro forma....................................  $         (0.41)  $        (1.48)   $         0.71
                                                                 ===============   ==============    ==============

</TABLE>

     Change in Presentation

     Certain prior year  financial  statement  items have been  reclassified  to
conform with the 2003 presentation.

     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.

     Adoption of Recent Accounting Pronouncements

     Effective  January 1, 2003, the Company  adopted SFAS No. 143,  "Accounting
for  Asset  Retirement  Obligations",  which  establishes  requirements  for the
removal-type  costs associated with asset  retirements.  The initial adoption of
SFAS No.  143 had no  effect on the  consolidated  financial  statements  of the
Company.

     Effective  January 1, 2003, the Company  adopted SFAS No. 146,  "Accounting
for Costs Associated with Exit or Disposal Activities",  which requires that all
restructurings  initiated  after  December  31, 2002 be  recorded  when they are
incurred and can be measured at fair value. The initial adoption of SFAS No. 146
had no effect on the consolidated financial statements of the Company.

     The  Company  has adopted the  provisions  of FASB  Interpretation  No. 45,
"Guarantor's  Accounting and Disclosure  Requirements  of Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  to  Others,  an  interpretation  of FASB
Statements No. 5, 57, and 107, and a rescission of FASB  Interpretation No. 34."
This  interpretation  elaborates on the disclosures to be made by a guarantor in
its  interim  and  annual  financial  statements  about  its  obligations  under
guarantees  issued.  The  interpretation  also  clarifies  that a  guarantor  is
required to  recognize,  at inception of a guarantee,  a liability  for the fair
value of the obligation  undertaken.  The initial  recognition  and  measurement
provisions of the interpretation are applicable to guarantees issued or modified
after December 31, 2002. The initial  application of this  interpretation had no
effect on the consolidated financial statements of the Company.

     In December 2003, the FASB issued  Interpretation  No. 46 (Revised December
2003),  "Consolidation of Variable  Interest Entities ("FIN 46R"),  primarily to
clarify the required  accounting  for  interests in variable  interest  entities
("VIEs").  This standard replaces FASB  Interpretation No. 46,  Consolidation of
Variable Interest  Entities,  that was issued in January 2003 to address certain
situations in which a company  should  include in its financial  statements  the
assets,   liabilities  and  activities  of  another  entity.  For  the  Company,
application  of FIN 46R is  required  for  interests  in  certain  VIEs that are
commonly referred to as  special-purpose  entities,  or SPEs, as of December 31,
2003 and for  interests  in all other  types of VIEs as of March 31,  2004.  The
application of FIN 46R has not and is not expected to have a material  impact on
the consolidated financial statements of the Company.

     The Company has adopted  SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity", which requires
certain financial instruments, which were previously accounted for as equity, to
be classified as liabilities.  The adoption of SFAS No. 150 had no effect on the
consolidated financial statements of the Company.

     The Company has adopted the  provisions of EITF Issue No.  00-21,  "Revenue
Arrangements with Multiple Deliverables". EITF Issue No. 00-21 provides guidance
on how to account for  arrangements  that involve the delivery or performance of
multiple products,  services,  and/or rights to use assets. The adoption of EITF
Issue No. 00-21,  which applies to revenue  arrangements  entered into in fiscal
periods  beginning  after  September 15, 2003, did not have a material effect on
the consolidated financial statements of the Company.

     In December of 2003, SFAS No. 132 (revised),  "Employers' Disclosures about
Pensions and Other Postretirement  Benefits", was issued. SFAS No. 132 (revised)
prescribes  employers'  disclosures about pension plans and other postretirement
benefit  plans,  but does not change the  measurement  or  recognition  of those
plans.  SFAS No. 132 (revised)  retains and revises the disclosure  requirements
contained in the original SFAS No. 132 and requires additional disclosures about
the assets,  obligations,  cash flows,  and net periodic benefit cost of defined
benefit  pension  plans  and other  postretirement  benefit  plans.  SFAS No 132
(revised),  which  applies  to a  defined  benefits  pension  plan of a  foreign
subsidiary  of the  Company,  must be adopted by the  Company in the fiscal year
ending December 31, 2004.


2.   INCOME TAXES

     Income (loss) from continuing operations before cumulative effect of change
in  accounting  principle  and income tax expense is comprised of the  following
components:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                        -----------------------------------------------------
                                                             2003                2002                2001
                                                        --------------      -------------       -------------

<S>                                                     <C>                 <C>                 <C>
       Domestic operations.........................     $  (12,562,000)     $ (11,427,000)      $  3,246,000
       Foreign operations..........................          8,182,000          5,916,000          6,103,000
                                                        --------------      -------------       ------------
       Income (loss) before income taxes...........     $   (4,380,000)     $  (5,511,000)      $  9,349,000
                                                        ==============      =============       ============
</TABLE>

     Income tax expense  (benefit) from continuing  operations before cumulative
effect  of  change  in  accounting  principle  is  comprised  of  the  following
components:

<TABLE>
<CAPTION>
       Year Ended
       December 31,                     Federal              Foreign            State               Total
       -------------------------     -------------        ------------       ------------       -------------
<S>                                  <C>                  <C>                <C>                <C>
       2003:
         Current...............      $  (1,704,000)       $  2,623,000       $    (57,000)      $     862,000
         Deferred..............          8,616,000          (1,530,000)           777,000           7,863,000
                                     -------------        ------------       ------------       -------------
                                     $   6,912,000        $  1,093,000       $    720,000       $   8,725,000
                                     =============        ============       ============       =============
       2002:
         Current...............      $  (2,140,000)       $     65,000       $     72,000       $  (2,003,000)
         Deferred..............         (1,825,000)          1,427,000           (868,000)         (1,266,000)
                                     -------------        ------------       ------------       -------------
                                     $  (3,965,000)       $  1,492,000       $   (796,000)      $  (3,269,000)
                                     =============        ============       ============       =============
       2001:
         Current...............      $   1,483,000        $    649,000       $    265,000       $   2,397,000
         Deferred..............        (15,418,000)            919,000           (937,000)        (15,436,000)
                                     -------------        ------------       ------------       -------------
                                     $ (13,935,000)       $  1,568,000       $   (672,000)      $ (13,039,000)
                                     =============        ============       ============       =============
</TABLE>

<PAGE>


     The reasons for the differences between the amount of tax expense (benefit)
provided  and the amount of tax  expense  (benefit)  computed  by  applying  the
statutory  federal income tax rate to income (loss) from  continuing  operations
before income taxes and cumulative effect of change in accounting  principle for
the years 2003, 2002 and 2001 are as follows:
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                          -----------------------------------------------------------------
                                                 2003                    2002                    2001
                                          -----------------       ------------------      -----------------
<S>                                       <C>                     <C>                     <C>
       Expected tax expense (benefit)
         at statutory rates.............  $      (1,533,000)      $       (1,929,000)     $       3,272,000
       Increase (decrease) in taxes
         resulting from:
         Change in valuation allowance..         12,112,000                     -                      -
         State income taxes, net........           (468,000)                (517,000)              (437,000)
         Foreign tax rate differences...         (1,689,000)                (629,000)               141,000
         Goodwill amortization .........              -                         -                   664,000
         Benefit from recapitalization
           of foreign subsidiary........              -                         -               (18,137,000)
         Resolution of state and foreign
           tax issues and other.........            303,000                 (194,000)             1,458,000
                                          -----------------       ------------------       ----------------
                                          $       8,725,000       $       (3,269,000)      $    (13,039,000)
                                          =================       ==================       ================

</TABLE>

     At December 31, 2003, the Company had available  domestic tax net operating
loss  carryforwards  ("NOLs"),   which  will  expire,  if  unused,  as  follows:
$1,211,000 in 2006; $3,033,000 in 2007;  $13,365,000 in 2022; and, $9,564,000 in
2023. The  utilization of these NOLs could be subject to significant  limitation
in the event of a "change in ownership", as defined in the tax laws, which might
be caused by purchases or sales of the Company's securities by persons or groups
now or in the future  having 5% or greater  ownership  of the  Company's  common
stock.

     For the year ended December 31, 2001, income taxes include $18.1 million in
tax  benefits  resulting  from the  recapitalization  of a  foreign  subsidiary.
Additionally,  income  taxes  for the year  ended  December  31,  2001  includes
benefits of $0.6 million related to favorable developments pertaining to certain
state and foreign income tax issues.

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 are as follows:
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                              -------------------------------------
                                                                                   2003                   2002
                                                                              --------------         --------------
<S>                                                                           <C>                    <C>
       Deferred tax assets:
         Net operating loss carryforwards.........................            $    9,610,000         $    5,793,000
         Alternative minimum tax credit carryforwards.............                 2,505,000              4,385,000
         Accrued liabilities......................................                 1,547,000              1,076,000
         Intangibles..............................................                 1,528,000              1,739,000
         Foreign deferred tax assets..............................                 2,036,000                424,000
         Other....................................................                 1,399,000                889,000
                                                                              --------------         --------------
         Total gross deferred tax assets..........................                18,625,000             14,306,000
       Deferred tax liabilities-plant and equipment, principally due to
         differences in depreciation..............................                  (343,000)              (355,000)
                                                                              --------------         --------------
       Net deferred tax asset before valuation allowance..........                18,282,000             13,951,000
       Less valuation allowance...................................               (16,246,000)            (4,134,000)
                                                                              --------------         --------------
         Net deferred tax asset...................................            $    2,036,000         $    9,817,000
                                                                              ==============         ==============
</TABLE>

     The  Company  maintains a  valuation  allowance  to adjust the basis of net
deferred  tax  assets in  accordance  with SFAS No. 109  "Accounting  for Income
Taxes".  Based on evaluations  performed by the Company pursuant to SFAS No. 109
in the fourth quarter of 2003, a non-cash  valuation  allowance of $12.1 million
was provided  with respect to the  Company's  federal and state net deferred tax
assets.

3.   RETIREMENT PLANS

     The Company has a defined  contribution plan which covers substantially all
domestic  employees  and  provides  for  varying  levels of  employer  matching.
Contributions  from continuing  operations to this plan were $0.7 million,  $0.8
million and $0.8 million for 2003, 2002 and 2001, respectively.

     One of the Company's  foreign  subsidiaries  has a defined  benefit pension
plan  covering  substantially  all of its United  Kingdom  employees  (the "U.K.
Plan").  The  benefit is based on the average of the  employee's  salary for the
last three years of  employment.  Generally,  the employee  contributes  5.5% to
12.0% and the employer  contributes  up to 12% of pay. Plan assets are primarily
invested in unitized  pension funds managed by United  Kingdom  registered  fund
managers. The most recent valuation of the U.K. Plan was performed as of October
31, 2003.

     Net pension cost for the U.K. Plan included the following components:
<TABLE>
<CAPTION>

                                                                      Year Ended December 31,
                                                        ---------------------------------------------------
                                                            2003               2002                2001
                                                        --------------     -------------      -------------
<S>                                                     <C>                <C>                <C>
       Net periodic pension cost:
         Service cost................................   $      787,000     $     658,000      $     515,000
         Interest cost...............................        2,954,000         2,522,000          2,287,000
         Expected return on plan assets..............       (2,946,000)       (3,012,000)        (3,516,000)
         Amortization of prior service cost..........           16,000            15,000             15,000
         Recognized net (gain) loss..................          768,000             4,000           (321,000)
                                                        --------------     -------------      -------------
       Net periodic pension cost (benefit)...........   $    1,579,000     $     187,000      $  (1,020,000)
                                                        ==============     =============      =============
</TABLE>

     Actuarial  assumptions  used in the  accounting  for the U.K.  Plan  were a
weighted  average  discount  rate of 6.0% for 2003,  2002 and 2001,  an expected
long-term rate of return on assets of 7.5% for 2003, 2002 and 2001 and a rate of
increase in compensation levels of 3.3% for 2003 and 3.0% for 2002 and 2001. The
funded status of the U.K. Plan is as follows:
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                          --------------------------------
                                                                                2003               2002
                                                                          --------------    --------------
<S>                                                                        <C>               <C>
       Projected benefit obligation:
         Beginning of year..........................................       $  48,326,000     $  40,798,000
         Service cost...............................................             787,000           658,000
         Interest cost..............................................           2,954,000         2,522,000
         Contributions..............................................             761,000           607,000
         Benefits paid..............................................          (1,472,000)       (1,243,000)
         Foreign currency translation adjustment and other..........           5,110,000         4,984,000
                                                                           -------------     -------------
         End of year................................................          56,466,000        48,326,000
                                                                           -------------     -------------
       Fair value of plan assets:
         Beginning of year..........................................          38,234,000        38,980,000
         Actual gain (loss) on plan assets..........................           4,667,000        (4,569,000)
         Contributions..............................................             761,000           607,000
         Benefits paid..............................................          (1,472,000)       (1,243,000)
         Foreign currency translation adjustment and other..........           4,632,000         4,459,000
                                                                           -------------     -------------
         End of year................................................          46,822,000        38,234,000
                                                                           -------------     -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                          --------------------------------
                                                                                2003               2002
                                                                          --------------    --------------

<S>                                                                        <C>               <C>
       Excess projected obligation over fair value at end of year...       $  (9,644,000)    $ (10,092,000)
       Unrecognized net actuarial loss..............................          13,591,000        13,115,000
       Unamortized prior service cost...............................          (1,416,000)          119,000
                                                                           -------------     -------------
       Net pension prepaid asset....................................           2,531,000         3,142,000

       Additional minimum liability.................................          (8,845,000)       (9,184,000)
                                                                           -------------     -------------
       Net pension liability........................................       $  (6,314,000)    $  (6,042,000)
                                                                           =============     =============
</TABLE>

     The Company  recognizes a minimum pension  liability for underfunded  plans
equal to the excess of the accumulated  benefit  obligation over plan assets.  A
corresponding  amount is recognized as either an intangible asset, to the extent
of previously  unrecognized  prior  service cost, or a reduction of  accumulated
other comprehensive  income included in stockholders'  equity. In 2003 and 2002,
the Company  recorded  adjustments to minimum  liabilities of $(1.9) million and
$4.9 million,  respectively,  which,  net of deferred income taxes of $(0.7) and
$1.5  million,  respectively,  is recorded as a reduction in  accumulated  other
comprehensive income.


4.   PROPERTY AND EQUIPMENT

     The cost of property and equipment is as follows:
<TABLE>
<CAPTION>

                                                        Estimated
                                                         Useful                     December 31,
                                                          Life            --------------------------------
                                                         (Years)                2003             2002
                                                     --------------       --------------    --------------

<S>                                                      <C>              <C>               <C>
       Technical services........................        3 - 20           $   31,237,000    $   26,833,000
       Information technology services...........        3 - 7                 6,962,000         8,149,000
       General corporate.........................        3 - 10                3,953,000         3,848,000
                                                                          --------------    --------------
       Total property and equipment..............                             42,152,000        38,830,000
       Less accumulated depreciation
         and amortization........................                             29,879,000        24,875,000
                                                                          --------------    --------------
       Net property and equipment................                         $   12,273,000    $   13,955,000
                                                                          ==============    ==============
</TABLE>

     Equipment  under capital  leases is included in the cost,  and  accumulated
depreciation and amortization, of property and equipment as follows:
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                          --------------------------------
                                                                                2003              2002
                                                                          --------------    --------------
<S>                                                                       <C>               <C>
       Technical services equipment...........................            $    2,707,000    $    2,808,000
       Less accumulated depreciation and amortization ........                 1,160,000           887,000
                                                                          --------------    --------------
       Net equipment acquired under capital leases............            $    1,547,000    $    1,921,000
                                                                          ==============    ==============

</TABLE>

<PAGE>
5.   LONG-TERM DEBT

     Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                          --------------------------------
                                                                                2003             2002
                                                                          --------------    --------------

<S>                                                                       <C>               <C>
       Technical services credit facility due in January
         of 2009..............................................            $   14,296,000    $   16,286,000
       Technical services foreign subsidiary notes, with
         interest ranging from 3.00% to 8.0%, due through
         2012.................................................                   301,000         1,010,000
       Technical services subsidiary capital leases...........                 1,598,000         1,930,000
       Parent company 8.75% convertible subordinated
         debentures due in 2008...............................                 5,000,000         9,930,000
                                                                          --------------    --------------
       Total long-term debt...................................                21,195,000        29,156,000
       Less current portion...................................                   738,000           747,000
                                                                          --------------    --------------
       Total long-term debt, less current portion.............            $   20,457,000    $   28,409,000
                                                                          ==============    ==============
</TABLE>

     At December 31, 2003,  $14.3  million was  outstanding  under a $25 million
Amended and  Restated  Bank Loan  Agreement  ("Loan  Agreement")  that  provides
working capital for the technical  services group and is without recourse to the
Company.  Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable  rates  (2.88% at December 31,  2003),  based on either the
LIBOR rate or prime rate,  have a  commitment  fee on the unused  portion of the
facility and contain certain financial and operational covenants with respect to
the  technical  services  group,  including  percentage  of tangible  assets and
revenues related to certain  geographical areas, ratios of debt to cash flow, as
defined  in the Loan  Agreement,  and cash  flow to fixed  charges  and  capital
expenditures.  At December  31,  2003,  the Company was in  compliance  with all
covenants.  The  Loan  Agreement  matures  in  January  2009 and is  secured  by
substantially all of the tangible assets of the technical services group.

     The Company's 8.75%  subordinated  debentures ($5.0 million  outstanding at
December 31, 2003) are convertible  into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share.  On March 1, 2002, the Company  purchased  $10.0 million of  subordinated
debentures at par value,  which satisfies its sinking fund requirements on these
subordinated debentures until their maturity in 2008. On September 30, 2003, the
Company  purchased an additional $4.9 million of subordinated  debentures at par
value, plus accrued interest. The purchases were funded with cash on hand.

     At December 31, 2003,  annual sinking fund requirements and debt maturities
on consolidated debt,  including capital leases, were as follows:  $0.7 million;
$0.5 million;  $0.4 million; $0.3 million; and $5.0 million;  respectively,  for
each of the five years ending December 31, 2008.

6.     CAPITAL STOCK

     The changes in the number of issued and outstanding shares of the Company's
common stock are summarized as follows:
<TABLE>
<CAPTION>

                                                                                    Common Stock
                                                                 --------------------------------------------------
                                                                    Issued        Held in Treasury    Outstanding
                                                                 ------------     ----------------   --------------

<S>                                                             <C>                 <C>               <C>
       Balance at January 1, 2001..........................        36,641,121          5,499,419         31,141,702
       Common shares issued (repurchased), net.............           168,146         (1,401,572)         1,569,718
                                                                 ------------       ------------     --------------
       Balance at December 31, 2001........................        36,809,267          4,097,847         32,711,420
       Common shares issued (repurchased), net.............           526,909          1,686,609         (1,159,700)
                                                                 ------------       ------------     --------------
       Balance at December 31, 2002........................        37,336,176          5,784,456         31,551,720
       Common shares issued (repurchased), net.............              -               (28,806)            28,806
                                                                 ------------       ------------     --------------
       Balance at December 31, 2003........................        37,336,176          5,755,650         31,580,526
                                                                 ============       ============     ==============

</TABLE>

<PAGE>


     In  connection  with a stock  repurchase  plan  authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's  common stock,  at a cost of $3.3 million.  The stock purchases
were funded with cash on hand.

     Series A Preferred Stock

     On March 30, 2001,  the Company  redeemed its 567,950  shares of Cumulative
Class A Adjustable  Rate Preferred  Stock,  Series A ("Series A Preferred")  for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends,  for a total cost of approximately $6.1 million.  The redemption cost
included a $0.4 million  redemption  premium,  which was recognized as dividends
and redemption premium applicable to preferred stock in 2001.

     Series B Preferred Stock

     On April 9, 1998, the Board of Directors of the Company declared a dividend
distribution of one stock purchase right ("Right") for each outstanding share of
common  stock to  stockholders  of record on April 19,  1998.  These  Rights are
substantially similar to, and were issued in replacement of, rights that expired
on April 19, 1998, pursuant to the Company's  Stockholders Rights Plan. Pursuant
to the replacement plan, each Right entitles the holder,  upon the occurrence of
certain  events,  to purchase from the Company one  one-hundredth  of a share of
Series B Junior Participating  Preferred Stock, no par value, at a price of $15,
subject to  adjustment.  The Rights will not  separate  from the common stock or
become exercisable until a person or group either acquires beneficial  ownership
of 15% or more of the  Company's  common stock or commences a tender or exchange
offer that would result in ownership of 20% or more,  whichever  occurs earlier.
The Rights,  which expire on April 19, 2008, are redeemable in whole, but not in
part,  at the  Company's  option at any time for a price of $0.01 per Right.  At
December 31, 2003 and 2002 there were no Series B Preferred shares outstanding.

     Stock Compensation Plans

     Series C and F Preferred Stock - On June 12, 2001, the Company exchanged in
non-cash  transactions,  1,356,777  shares of the Company's common stock for all
Adjustable Rate Cumulative Class A Preferred Stock, Series C and Series F shares
issued to certain officers of the Company.

     Stock Option Plans - The Company has stock option plans and  agreements for
officers, directors and key employees. The options granted under these plans and
agreements  generally  vest over  periods  ranging  from zero to five  years and
expire ten years from date of grant.  All options were granted at prices greater
than or equal to the market price at the date of grant or repricing. At December
31, 2003,  options on 3,008,711 shares at prices ranging from $.54 to $3.05 were
outstanding, of which 1,925,330, were exercisable at prices ranging from $.54 to
$3.05. At December 31, 2002,  options on 3,103,014 shares at prices ranging from
$.54 to $3.05 were  outstanding,  of which 1,749,743 were  exercisable at prices
ranging from $.54 to $3.05. At December 31, 2001, options on 3,049,083 shares at
prices  ranging from $.54 to $3.05 were  outstanding,  of which  2,168,083  were
exercisable at prices ranging from $.54 to $3.05. The aggregate weighted average
fair market  value of options at the time of grant for the years 2003,  2002 and
2001 was $0.1 million, $0.8 million and $1.0 million,  respectively,  calculated
using the Black-Scholes option pricing model.



<PAGE>


     At  December  31,  2003,  the range of option  exercise  prices,  number of
options outstanding, number of options exercisable and weighted average exercise
price, are as follows:

<TABLE>
<CAPTION>
                                                              Shares                       Average Price
             Range of Exercise                  ----------------------------------        per Outstanding
                  Price                           Outstanding         Exercisable              Share
         -------------------------------        ---------------    ---------------        ---------------

<S>      <C>                                    <C>                <C>                  <C>
         $0.54 - $0.81..................                 70,000             70,000               $ 0.56
         $0.82 - $1.23..................                817,629            817,629               $ 0.90
         $1.24 - $1.86..................                579,853            543,853               $ 1.57
         $1.87 - $2.81..................              1,382,229            385,248               $ 2.36
         $2.82 - $3.05..................                159,000            108,600               $ 2.95
                                                ---------------    ---------------
                                                      3,008,711          1,925,330               $ 1.80
                                                ===============   ================
</TABLE>

     The changes in stock options  outstanding  for the Company's  plans for the
years 2003, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>
                                                                                            Average Price
                                                                         Shares               per Share
                                                                     -------------          --------------
<S>                                                                  <C>                    <C>
       Outstanding at January 1, 2001.........................           2,198,283             $  3.54
       Granted................................................           1,016,000             $  2.67
       Exercised..............................................            (165,200)            $  2.89
                                                                     -------------
       Outstanding at December 31, 2001.......................           3,049,083             $  1.66
       Granted................................................             956,132             $  2.20
       Exercised..............................................            (533,234)            $  1.09
       Forfeited..............................................            (368,967)            $  2.71
                                                                     -------------
       Outstanding at December 31, 2002.......................           3,103,014             $  1.80
       Granted................................................             155,000             $  2.58
       Forfeited..............................................            (249,303)            $  2.22
                                                                     -------------
       Outstanding at December 31, 2003.......................           3,008,711             $  1.80
                                                                     =============
</TABLE>

     There were no stock options which expired  during the years ended  December
31, 2003, 2002 or 2001.

     In connection with the Distribution,  the exercise price for each option to
purchase shares of the Company's  common stock was reduced to an amount equal to
the result of (1) the fair market value of a share of the Company's common stock
on the ex-dividend date multiplied by (2) a fraction,  the numerator of which is
the original  exercise price for the option and the denominator of which was the
fair market value of a share of the  Company's  common stock on the last trading
date  prior to the  ex-dividend  date.  The  number  of  shares  subject  to the
Company's  stock  options  were not  changed  as a result  of the  Distribution.
Additionally,  KSL agreed to issue to the Company's  option holders an option to
purchase KSL shares.  The exercise  price  applicable  to a given KSL option was
that price that  created the same ratio of exercise  price to market price as in
the adjusted  exercise  price  applicable to the holder's  Company  option.  The
number of common shares  subject to KSL options was such number as was necessary
to produce an intrinsic value (determined as of the ex-dividend date) that, when
added to the intrinsic  value of the adjusted  Company option  (determined as of
the  ex-dividend  date),  equaled the  pre-distribution  intrinsic  value of the
Company's option,  if any,  (determined as of the last trading date prior to the
ex-dividend  date).  However,  options to purchase  fractional KSL common shares
were not granted. The fair market values of shares of the Company's common stock
and KSL common  shares were based upon the  closing  sales price of the stock on
the last trading date prior to the  ex-distribution  date and the opening  sales
price  of the  shares  on  the  ex-distribution  date.  Further,  excluding  the
Company's  corporate  staff,  the Company  removed  restrictions  on exercise or
"vested"  all  Company  options  which  were  not yet  exercisable  prior to the
Distribution.

     Deferred Stock Unit Plans - In 2002, the Company initiated a Deferred Stock
Unit Plan (the "2002 DSU Plan"),  pursuant to which key employees of the Company
have,  from time to time, been given the opportunity to defer a portion of their
compensation  for a specified period toward the purchase of deferred stock units
("DSUs"),  an instrument designed to track the Company's common stock. Under the
2002 DSU Plan,  DSUs are  purchased at a value equal to the closing price of the
Company's  common stock on the day by which the employee  must elect (if they so
desire) to  participate  in the 2002 DSU Plan;  which date is established by the
Compensation  Committee,  from  time to time  (the  "Election  Date").  During a
vesting   period  of  one  to  three  years   following  the  Election  Date,  a
participant's  DSUs  vest  only  in  an  amount  equal  to  the  lesser  of  the
compensation actually deferred to date or the value (based upon the then-current
closing price of the Company's common stock) of the pro-rata portion (as of such
date) of the  number of DSUs  acquired.  After  the  expiration  of the  vesting
period,  which is  typically  the same length as the deferral  period,  the DSUs
become fully vested, but may only be distributed  through the issuance of a like
number of shares of the Company's common stock on a pre-selected  date, which is
irrevocably  selected  by the  participant  on the  Election  Date and  which is
typically at or after the expiration of the vesting period and no later than ten
years after the  Election  Date,  or at the time of a "change of control" of the
Company, if earlier. DSU accounts are unfunded by the Company.  Each person that
elects to participate in the 2002 DSU Plan is awarded, under the Company's stock
incentive plan, an option to purchase a number of shares of the Company's common
stock ranging from one-half to one and one-half  times  (depending on the length
of deferral) the number of DSUs  purchased by such person at 100% of the closing
price of the Company's  common stock on the Election Date,  which options become
exercisable  over a specified  period  after the grant,  according to a schedule
determined by the Compensation  Committee.  At December 31, 2003, 1,696 DSUs had
vested under the 2002 DSU Plan.

     In 1996,  the Company  initiated a Deferred  Stock Unit plan (the "1996 DSU
Plan") with terms and  conditions  similar to the 2002 DSU Plan.  In  connection
with the Distribution, KSL agreed to issue to all DSU holders the number of DSUs
equivalent in price to KSL shares issuable in the Distribution.  All other terms
remained unchanged.  Similarly,  the Company agreed to issue to employees of KSL
who hold DSUs, the number of shares of the Company's common stock subject to the
DSUs held by those employees. At December 31, 2003, approximately 407,000 shares
of the Company's  common stock were issuable to employees of the Company and KSL
employees under this arrangement and the terms of the 1996 DSU Plan.


7.   EARNINGS PER SHARE

     The following is a  reconciliation  of basic and diluted earnings per share
("EPS")  from  continuing  operations  before  cumulative  effect  of  change in
accounting principle:
<TABLE>
<CAPTION>

                                                                               Weighted
                                                                                Average
                                                               Net              Common         Per-Share
                                                          Income (loss)         Shares          Amount
                                                        ---------------       -----------    -------------
<S>                                                     <C>                    <C>           <C>
         Year Ended December 31, 2003
         ----------------------------
           Basic EPS -
              Income (loss) from continuing
                operations applicable to

                common stock.........................   $   (13,105,000)       31,995,000    $       (0.41)

           Effect of dilutive securities.............             -                  -
                                                        ---------------    --------------

           Diluted EPS -
              Income (loss) from continuing operations
                applicable to common stock...........   $   (13,105,000)       31,995,000    $       (0.41)
                                                        ===============    ==============    =============

         Year Ended December 31, 2002
         ----------------------------
           Basic EPS -
              Income (loss) from continuing
                operations applicable to common
                stock, before cumulative effect of
                change in accounting principle.......   $    (2,242,000)       32,747,000    $       (0.07)
                                                                                             ==============

           Effect of dilutive securities.............               -                 -
                                                        ---------------    --------------

           Diluted EPS -
              Income (loss) from continuing
                operations applicable to common
                stock, before cumulative effect
                of change in accounting principle....   $    (2,242,000)       32,747,000    $       (0.07)
                                                        ===============    ==============    ==============

         Year Ended December 31, 2001
         ----------------------------
           Income from continuing operations.........   $    22,388,000
           Dividends and redemption premium
              applicable to preferred stock..........          (493,000)
                                                        ---------------

           Basic EPS -
              Income applicable to common stock......        21,895,000        32,503,000    $         0.68
                                                                                             ==============

           Effect of dilutive securities -
              Common stock options, Series F
                Preferred Stock and DSUs.............            -              1,631,000
                                                        ---------------    --------------

           Diluted EPS -
              Income applicable to common stock,
                Series F Preferred stock, DSUs
                and assumed options exercised........   $    21,895,000        34,134,000    $         0.64
                                                        ===============    ==============    ==============
</TABLE>

     As a result of the losses from continuing  operations  applicable to common
stock for 2003 and 2002, all 3,008,711 and 3,103,014 stock options,  at weighted
average prices of $1.80 and $1.80 for 2003 and 2002, respectively, were excluded
from the computation of diluted  earnings per share because the effects would be
anti-dilutive.  Options to purchase  959,000  shares of common stock at weighted
average  prices of $2.71 were  outstanding  at December 31,  2001,  but were not
included in the  computation of diluted EPS because the options'  exercise price
was greater than the average market price of the common stock. Additionally, the
Company's  8.75%  convertible  subordinated  debentures  were  excluded from the
computation of diluted EPS for all years presented because the effect of assumed
conversion is anti-dilutive.


8.   COMMITMENTS AND CONTINGENCIES

     The Company leases vehicles, office space, office equipment and other items
of personal property under leases expiring at various dates.  Management expects
that,  in the normal  course of business,  leases that expire will be renewed or
replaced by other leases.  Total rent expense  incurred under  operating  leases
attributable  to continuing  operations was $4.1 million for 2003,  $3.9 million
for 2002 and $3.6 million for 2001.

     At December 31, 2003, future minimum rental commitments  attributable under
all capital leases and operating leases are as follows:
<TABLE>
<CAPTION>

                                                                           Capital            Operating
                                                                           Leases               Leases
                                                                       --------------       --------------
<S>      <C>                                                           <C>                  <C>
         2004.....................................................     $      689,000       $    3,326,000
         2005.....................................................            441,000            2,519,000
         2006 ....................................................            369,000            1,792,000
         2007.....................................................            275,000            1,119,000
         2008.....................................................              6,000              248,000
         Thereafter...............................................               -               1,473,000
                                                                       --------------       --------------
         Total minimum lease payments.............................          1,780,000       $   10,477,000
                                                                                            ==============
         Less amounts representing interest.......................            182,000
                                                                       --------------
         Present value of net minimum lease payments..............     $    1,598,000
                                                                       ==============
</TABLE>

     The Company was the Plaintiff in a legal proceeding  involving  malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which,  net of
expenses,  totaled  $6.0  million and is  included in other  income for the year
ended December 31, 2001.

     The Company has contingent  liabilities  resulting from litigation,  claims
and  commitments  incident  to  the  ordinary  course  of  business.  Management
believes,  based on the advice of counsel,  that the ultimate resolution of such
contingencies  will  not  have a  materially  adverse  effect  on the  financial
position, results of operations or liquidity of the Company.


9.   BUSINESS SEGMENT DATA

     The Company provides  technical  services to an  international  client base
that includes  refineries,  chemical plants,  pipelines,  offshore  drilling and
production platforms,  steel mills, food and drink processing facilities,  power
generation,   and  other  process   industries.   Additionally,   the  Company's
information  technology services segment provides consulting services,  hardware
sales and other  related  information  management  and  processing  services  to
healthcare,   governmental,   insurance  and  financial  institutions.   General
corporate  includes  compensation and benefits paid to officers and employees of
the Company,  insurance  premiums,  general and  administrative  costs,  tax and
financial  reporting  costs,  legal and audit fees not  reasonably  allocable to
specific  business  segments.  General  corporate assets include cash,  deferred
taxes and other assets not related to its segments.

     The Company measures segment profit as operating  income.  Total assets are
those assets, including excess of cost over fair value of net assets of acquired
businesses, controlled by each reportable segment.
<PAGE>
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                             2003                2002            2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Business segment revenues:
         Technical services..........................   $   101,018,000    $   90,747,000    $   96,321,000
         Information technology services.............        34,702,000        40,689,000        48,383,000
                                                        ---------------    --------------    --------------
                                                        $   135,720,000    $  131,436,000    $  144,704,000
                                                        ===============    ==============    ==============
       Technical services segment revenues:
         Under pressure services.....................   $    41,875,000    $   41,192,000    $   39,903,000
         Turnaround services.........................        48,768,000        41,949,000        48,301,000
         Other services..............................        10,375,000         7,606,000         8,117,000
                                                        ---------------    --------------    --------------
                                                        $   101,018,000    $   90,747,000    $   96,321,000
                                                        ===============    ==============    ==============

</TABLE>

<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                             2003                2002            2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Business segment profit (loss):
         Technical services .........................   $     6,337,000    $    3,580,000    $    5,581,000
         Information technology services.............        (6,518,000)       (3,796,000)        3,651,000
         General corporate...........................        (3,186,000)       (3,991,000)       (3,803,000)
                                                        ---------------    --------------    --------------
           Operating income (loss)...................        (3,367,000)       (4,207,000)        5,429,000
         Interest income.............................           260,000           460,000           665,000
         Other income................................              -                  -           6,741,000
         Interest expense............................        (1,273,000)       (1,764,000)       (3,486,000)
                                                        ---------------    --------------    --------------
         Income (loss) from continuing operations
           before income taxes and cumulative
           effect of change in accounting principle..   $    (4,380,000)   $   (5,511,000)   $    9,349,000
                                                        ===============    ==============    ==============

       Business segment assets:
         Depreciation and amortization:
           Technical services........................   $     2,609,000    $    2,540,000    $    4,514,000
           Information technology services...........         3,251,000         1,125,000           694,000
                                                        ---------------    --------------    --------------
                                                        $     5,860,000    $    3,665,000    $    5,208,000
                                                        ===============    ==============    ==============

</TABLE>
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                             2003                2002            2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
         Capital expenditures (excluding acquisitions):
           Technical services........................   $     1,897,000    $    2,912,000    $    3,331,000
           Information technology services...........         1,309,000         2,592,000         1,294,000
           General corporate.........................           105,000               -                 -
                                                        ---------------    --------------    --------------
                                                        $     3,311,000    $    5,504,000    $    4,625,000
                                                        ===============    ==============    ==============

</TABLE>
<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2003               2002             2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
         Total assets:
           Technical services........................   $    66,117,000    $   63,319,000    $  102,147,000
           Information technology services...........        14,902,000        26,956,000        30,877,000
           General corporate.........................        23,771,000        37,372,000        53,195,000
                                                        ---------------    --------------    --------------
                                                        $   104,790,000    $  127,647,000    $  186,219,000
                                                        ===============    ==============    ==============
</TABLE>

     The following geographical area data includes revenues and operating income
(loss) based on location of the operating segment and net property and equipment
based on physical location:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                        ---------------------------------------------------
                                                              2003               2002             2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Geographical area revenues:
         United States............................      $    57,987,000    $   66,888,000    $   84,171,000
         Europe...................................           62,995,000        53,187,000        48,554,000
         Asia-Pacific.............................           14,738,000        11,361,000        11,979,000
                                                        ---------------    --------------    --------------
                                                        $   135,720,000    $  131,436,000    $  144,704,000
                                                        ===============    ==============    ==============

       Geographical area operating income (loss):
         United States............................      $   (13,270,000)   $  (11,204,000)   $   (2,461,000)
         Europe...................................            7,756,000         5,990,000         7,011,000
         Asia-Pacific.............................            2,147,000         1,007,000           879,000
                                                        ---------------    --------------    --------------
                                                        $    (3,367,000)   $   (4,207,000)   $    5,429,000
                                                        ===============    ==============    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2003               2002             2001
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Geographical area property and equipment, net:
         United States............................      $     5,128,000    $    7,269,000    $    5,346,000
         Europe...................................            5,874,000         5,652,000         5,110,000
         Asia-Pacific.............................            1,271,000         1,034,000           930,000
                                                        ---------------    --------------    --------------
                                                        $    12,273,000    $   13,955,000    $   11,386,000
                                                        ===============    ==============    ==============
</TABLE>


10.  DISCONTINUED OPERATIONS - BUSINESSES DISTRIBUTED TO COMMON SHAREHOLDERS

     The  results  of  operations  for the  pipeline,  terminaling  and  product
marketing businesses are reflected in the accompanying  consolidated  statements
of  income  as  "Discontinued  operations  -  businesses  distributed  to common
shareholders"  (See Note 1). Prior to the Distribution,  KSL held the 2% general
partner interest and a 25% limited partner interest in Kaneb Pipe Line Partners,
L.P.  ("KPP") and the  Company's  previously  wholly-owned  petroleum  marketing
subsidiary.  A summary of operating  results of discontinued  operations for the
year ended December 31, 2001 (through date of  Distribution on June 29, 2001) is
presented below:

<TABLE>
<CAPTION>
                                                                         Year Ended
                                                                      December 31, 2001
                                                                      -----------------
<S>                                                                     <C>
       Revenues:
         Pipeline and terminaling..........................             $   101,021,000
         Product marketing business........................                 187,231,000
                                                                        ---------------
                                                                        $   288,252,000
                                                                        ===============
       Operating profit:
         Pipeline and terminaling..........................             $    39,896,000
         Product marketing business........................                    (264,000)
         Distribution expenses.............................                  (1,923,000)
                                                                        ---------------
                                                                        $    37,709,000
                                                                        ===============
       Income before income taxes and interest of outside
         non-controlling partners in KPP's net income and
         extraordinary item................................             $    32,653,000
       Income taxes........................................                  (3,090,000)
       Extraordinary loss on KPP debt
         extinguishment, net of income taxes
         and interest of outside non-controlling
         partners in KPP's net income......................                    (859,000)
       Interest of outside non-controlling partners
         in KPP's net income...............................                 (25,367,000)
                                                                        ---------------
       Income from discontinued operations,
         net of income taxes...............................             $     3,337,000
                                                                        ===============
</TABLE>

     On January 3, 2001, KPP, through a wholly-owned subsidiary,  acquired Shore
Terminals  LLC  ("Shore")  for $107  million in cash and  1,975,090  KPP limited
partnership  units  (valued at $56.5  million on the date of  agreement  and its
announcement). Financing for the cash portion of the purchase price was supplied
under KPP's $275 million  unsecured  revolving  credit agreement with a group of
banks.  The  acquisition  has been  accounted  for using the purchase  method of
accounting.  As a result of KPP issuing  additional units to unrelated  parties,
the  Company's  pro-rata  share of net assets of KPP  increased by $9.9 million.
Accordingly,  the Company recorded a $9.9 million increase in additional paid-in
capital, before deferred income taxes of $3.8 million, in 2001.

     In  March  of 2001,  a  wholly-owned  subsidiary  of KPP  entered  into two
contracts  for the  purpose  of  locking in  interest  rates on $100  million of
anticipated ten-year public debt offerings.  As the interest rate locks were not
designated as hedging instruments  pursuant to the requirements of SFAS No. 133,
increases or decreases in the fair value of the contracts are  recognized by KPP
in results of operations on a current basis. On May 22, 2001, the contracts were
settled resulting in an aggregate gain to KPP of $3.8 million.


11.  ACCRUED EXPENSES

     Accrued expenses are comprised of the following components:
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                          ---------------------------------
                                                                                2003              2002
                                                                          --------------     --------------
<S>                                                                       <C>                <C>
       Accrued compensation and benefits.............................     $    9,664,000     $    8,694,000
       Accrued taxes other than income...............................            703,000            582,000
       Accrued interest..............................................            202,000            456,000
       Other.........................................................          7,686,000         11,687,000
                                                                          --------------     --------------
                                                                          $   18,255,000     $   21,419,000
                                                                          ==============     ==============
</TABLE>


12.  FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

     The  estimated  fair value of cash  equivalents,  accounts  receivable  and
accounts payable  approximate their carrying amounts due to the relatively short
period to maturity of these  instruments.  The estimated  fair value of all debt
(excluding  capital  leases) as of December 31, 2003 and 2002 was  approximately
$22 million and $27 million as compared to the carrying value of $21 million and
$27 million,  respectively.  These fair values were estimated  using  discounted
cash flow analysis,  based on the Company's current incremental  borrowing rates
for similar types of borrowing arrangements,  when quoted market prices were not
available.  The Company has not  determined the fair value of its capital leases
as it is not  practicable.  The estimates  presented  above are not  necessarily
indicative of the amounts that would be realized in a current  market  exchange.
The Company has no derivative financial instruments.

     The technical services segment provides services to an international client
base that  includes  petroleum  refineries,  chemical  plants,  offshore  energy
production  platforms,  steel mills, nuclear power stations,  conventional power
stations,  pulp and paper mills,  food and beverage  processing plants and other
flow-process  facilities.  The information  technology services segment provides
services and related  products to the U. S.  Government and commercial  sectors.
The Company does not believe that it has a significant  concentration  of credit
risk at December 31, 2003, as the Company's  accounts  receivable  are generated
from these  distinct  business  segments with customers  located  throughout the
United States, Europe and Asia-Pacific.

13.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Quarterly operating results for 2003 and 2002 are summarized as follows:
<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                            ----------------------------------------------------------------------
                                               March 31,          June 30,        September 30,      December 31,
                                            --------------    ---------------     --------------    --------------
<S>                                         <C>               <C>                 <C>               <C>
      2003:
      Revenues..........................    $   32,224,000    $    33,233,000     $   37,742,000    $   32,521,000
                                            ==============    ===============     ==============    ==============

       Operating income (loss)...........   $      226,000    $       689,000     $      238,000    $   (4,520,000)
                                            ==============    ===============     ==============    ==============

       Net income (loss).................   $      143,000    $       420,000     $      367,000    $  (14,035,000)(a)
                                            ==============    ===============     ==============    ==============

       Earnings (loss) per common share -
         basic and diluted...............   $         -       $          0.01     $         0.01    $        (0.44)
                                            ==============    ===============     ==============    ==============
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                                        Quarter Ended
                                            ----------------------------------------------------------------------
                                               March 31,          June 30,        September 30,      December 31,
                                            --------------    ---------------     --------------    --------------
<S>                                         <C>               <C>                 <C>               <C>
       2002:
       Revenues..........................   $   28,168,000    $    32,413,000     $   31,884,000    $   38,971,000
                                            ==============    ===============     ==============    ==============

       Operating income (loss)...........   $   (1,396,000)   $    (1,155,000)    $   (1,244,000)   $     (412,000)
                                            ==============    ===============     ==============    ==============

       Net income (loss) before
         cumulative effect of change
         in accounting principle.........   $     (914,000)   $      (573,000)    $     (431,000)   $     (324,000)
       Cumulative effect of change
         in accounting principle, net
         of income taxes (b).............      (45,269,000)               -                  -             -
                                            --------------    ---------------     --------------    --------------

       Net income (loss).................   $  (46,183,000)   $      (573,000)    $     (431,000)   $     (324,000)
                                            ==============    ===============     ==============    ==============

       Earnings (loss) per common share -
         basic and diluted:
           Before cumulative effect
              of change in accounting
              principle..................   $       (0.03)    $        (0.02)     $       (0.01)    $        (0.01)
           Cumulative effect of change
              in accounting principle (b)           (1.36)              -                  -                 -
                                            -------------     --------------      -------------     --------------
                Total....................   $       (1.39)    $        (0.02)     $       (0.01)    $        (0.01)
                                            =============     ==============      =============     ==============
</TABLE>


     (a)  See Note 2 regarding increase in valuation  allowance for deferred tax
          assets. Additionally,  fourth quarter 2003 results include a charge of
          $3.5 million  pertaining  to the  write-down of inventory and software
          costs, and employee and other termination  expenses resulting from the
          closing of such operations.

     (b)  See  Note 1  regarding  cumulative  effect  of  change  in  accounting
          principle  resulting  from  adoption of new  accounting  standard  for
          goodwill.


<PAGE>
                                                                     Schedule I


                       XANSER CORPORATION (PARENT COMPANY)
                         CONDENSED STATEMENTS OF INCOME



<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                              -----------------------------------------------------
                                                                   2003               2002                2001
                                                              -------------       -------------      --------------

<S>                                                           <C>                 <C>                <C>
General and administrative expenses.....................      $  (3,186,000)      $  (3,991,000)     $   (3,803,000)
Interest expense........................................           (693,000)           (991,000)         (2,270,000)
Interest and other income, net..........................            159,000             360,000           7,254,000
Equity in income (loss) of subsidiaries.................         (1,426,000)         (1,969,000)          6,558,000
                                                              -------------       -------------      --------------

Income (loss) from continuing operations
   before income taxes and cumulative effect
   of change in accounting principle....................         (5,146,000)         (6,591,000)          7,739,000
Income tax benefit (expense)............................         (7,959,000)          4,349,000          14,649,000
                                                              -------------       -------------      --------------

Income (loss) from continuing operations before
   cumulative effect of change in accounting principle..        (13,105,000)         (2,242,000)         22,388,000

Cumulative effect of change in accounting principle -
   adoption of new accounting standard for
   goodwill, net of income taxes........................               -            (45,269,000)               -
                                                              -------------       -------------      --------------

Income (loss) from continuing operations................        (13,105,000)        (47,511,000)         22,388,000

Income from discontinued operations - businesses
   distributed to common shareholders, net of
   income taxes.........................................               -                  -               3,337,000
                                                              -------------       -------------      --------------

Net income (loss).......................................        (13,105,000)        (47,511,000)         25,725,000

Dividends and redemption premium applicable
   to preferred stock...................................               -                  -                 493,000
                                                              -------------       -------------      --------------

Net income (loss) applicable to common  stock...........      $ (13,105,000)      $ (47,511,000)     $   25,232,000
                                                              =============       =============      ==============

Earnings (loss) per common share:
    Basic:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle..........................      $       (0.41)      $       (0.07)     $         0.68
        Cumulative effect of change in accounting
          principle.....................................               -                  (1.38)               -
                                                              -------------       -------------      --------------
                                                                      (0.41)              (1.45)               0.68
      Discontinued operations...........................               -                   -                   0.10
                                                              -------------       -------------      --------------
                                                              $       (0.41)      $       (1.45)     $         0.78
                                                              =============       =============      ==============
    Diluted:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle..........................      $       (0.41)      $       (0.07)     $         0.64
        Cumulative effect of change in accounting
          principle.....................................               -                  (1.38)               -
                                                              -------------       -------------      --------------
                                                                      (0.41)              (1.45)               0.64
      Discontinued operations...........................               -                   -                   0.10
                                                              -------------       -------------      --------------
                                                              $       (0.41)      $       (1.45)     $         0.74
                                                              =============       =============      ==============
</TABLE>

               See "Notes to Consolidated Financial Statements" of Xanser
                Corporation and Subsidiaries included in this report.

                                     F - 26


<PAGE>
                                                                     Schedule I
                                                                     (Continued)


                       XANSER CORPORATION (PARENT COMPANY)
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                             --------------------------------------
                                                                                  2003                   2002
                                                                             ---------------        ---------------

                                     ASSETS
<S>                                                                          <C>                    <C>
Current assets:
   Cash and cash equivalents............................................     $    13,109,000        $    17,432,000
   Receivable from businesses distributed to common shareholders........           7,564,000              7,412,000
   Current deferred income tax assets...................................               -                    253,000
   Prepaid expenses and other...........................................             961,000                561,000
                                                                             ---------------        ---------------
     Total current assets...............................................          21,634,000             25,658,000
                                                                             ---------------        ---------------

Property and equipment..................................................           3,953,000              3,848,000
Less accumulated depreciation and amortization..........................           3,848,000              3,848,000
                                                                             ---------------        ---------------
     Net property and equipment.........................................             105,000                  -
                                                                             ---------------        ---------------

Investments in, advances to and notes receivable
  from subsidiaries.....................................................          43,891,000             50,939,000

Deferred income tax and other assets....................................               -                  2,499,000
                                                                             ---------------        ---------------
                                                                             $    65,630,000        $    79,096,000
                                                                             ===============        ===============


                             LIABILITIES AND EQUITY

Current liabilities:
   Accounts payable and accrued expenses................................     $     7,004,000        $     6,920,000
                                                                             ---------------        ---------------
     Total current liabilities..........................................           7,004,000              6,920,000
                                                                             ---------------        ---------------

Long-term debt, less current portion....................................           5,000,000              9,930,000

Other liabilities.......................................................           1,174,000                697,000

Stockholders' equity:
   Common stock, without par value......................................           4,333,000              4,333,000
   Additional paid-in capital...........................................         126,561,000            126,675,000
   Treasury stock, at cost..............................................         (26,267,000)           (26,390,000)
   Retained earnings (accumulated deficit)..............................         (48,695,000)           (35,590,000)
   Accumulated comprehensive income (loss)..............................          (3,480,000)            (7,479,000)
                                                                             ---------------        ---------------
       Total stockholders' equity.......................................          52,452,000             61,549,000
                                                                             ---------------        ---------------
                                                                             $    65,630,000        $    79,096,000
                                                                             ===============        ===============
</TABLE>



               See "Notes to Consolidated Financial Statements" of Xanser
                Corporation and Subsidiaries included in this report.

                                     F - 27

<PAGE>
                                                                     Schedule I
                                                                     (Continued)


                       XANSER CORPORATION (PARENT COMPANY)
                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                          Year Ended December 31,
                                                       -----------------------------------------------------------
                                                              2003                2002                 2001
                                                       -----------------    ----------------    ------------------
<S>                                                    <C>                  <C>                 <C>
Operating activities:
   Income (loss) from continuing operations..........  $     (13,105,000)   $    (47,511,000)   $       22,388,000
   Adjustments to reconcile income from
     continuing operations to net cash used in
     operating activities:
       Equity in income of subsidiaries, net of
         dividends...................................          1,554,000            (155,000)           (3,767,000)
       Deferred income taxes.........................          9,393,000             181,000           (21,032,000)
       Cumulative effect of change in accounting
         principle...................................              -              45,269,000                 -
       Other, net....................................            477,000             648,000                 -
       Changes in current assets and liabilities:
         Prepaid expenses and other current assets...           (400,000)          2,246,000               121,000
         Accounts payable and accrued expenses ......             84,000          (4,672,000)            1,250,000
                                                       -----------------    ----------------    ------------------
         Net cash used in operating activities.......         (1,997,000)         (3,994,000)           (1,040,000)
                                                       -----------------    ----------------    ------------------
Investing activities:
   Capital expenditures..............................           (105,000)              -                     -
   Change in other assets, net.......................          2,852,000           1,883,000              (507,000)
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           investing activities......................          2,747,000           1,883,000              (507,000)
                                                       -----------------    ----------------    ------------------

Financing activities:
   Payments on debt..................................         (4,930,000)        (11,466,000)                -
   Common stock issued...............................              9,000             450,000               545,000
   Purchase of treasury stock........................              -              (3,286,000)                -
   Preferred stock dividends and redemption
     premium paid....................................              -                   -                  (493,000)
   Redemption of preferred stock.....................              -                   -                (5,676,000)
   Increase (decrease) in receivable from businesses
     distributed to common shareholders..............           (152,000)         10,492,000            14,076,000
   Change in net assets of discontinued operations...              -                   -                 2,495,000
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           financing activities......................         (5,073,000)         (3,810,000)           10,947,000
                                                       -----------------    ----------------    ------------------

Increase (decrease) in cash and cash equivalents.....         (4,323,000)         (5,921,000)            9,400,000
Cash and cash equivalents at beginning of year.......         17,432,000          23,353,000            13,953,000
                                                       -----------------    ----------------    ------------------
Cash and cash equivalents at end of year.............  $      13,109,000    $     17,432,000    $       23,353,000
                                                       =================    ================    ==================

</TABLE>



               See "Notes to Consolidated Financial Statements" of Xanser
                Corporation and Subsidiaries included in this report.

                                     F - 28

<PAGE>
                                                                    Schedule II


                               XANSER CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                     Additions
                                                                         ------------------------------
                                         Balance at       Charged to      Charged to                        Balance at
                                        Beginning of      Costs and          Other                            End of
           Descriptions                   Period           Expenses         Accounts       Deductions         Period
------------------------------------   --------------    -------------   -------------   --------------   -------------
<S>                                    <C>                <C>             <C>            <C>              <C>
ALLOWANCE DEDUCTED FROM
  ASSETS TO WHICH THEY APPLY

Year Ended December 31, 2003:
   For doubtful receivables
     classified as current assets...   $       1,500      $       979     $         43(a)   $   (1,339)(b) $      1,183
                                       =============      ===========     ============      ==========     ============
   For deferred tax asset valuation
     allowance classified as
     non-current assets.............   $       4,134      $    12,112     $        -        $     -        $     16,246
                                       =============      ===========     ============      ==========     ============

Year Ended December 31, 2002:
   For doubtful receivables
     classified as current assets...   $       1,034      $       719     $         33(a)   $     (286)(b) $      1,500
                                       =============      ===========     ============      ==========     ============

   For deferred tax asset valuation
     allowance classified as
     non-current assets.............   $       4,134      $      -        $        -        $     -        $      4,134
                                       =============      ===========     ============      ==========     ============

Year Ended December 31, 2001:
   For doubtful receivables
     classified as current assets...   $         605      $       485     $         (9)(a) $      (47)(b)  $      1,034
                                       =============      ===========     ============     ==========      ============

   For deferred tax asset valuation
     allowance classified as
     non-current assets.............   $       2,450      $     1,684     $      -         $    -          $      4,134
                                       =============      ===========     ============     ==========      ============

</TABLE>


                                     F - 29

Notes:

     (a)  Foreign currency translation adjustments.
     (b)  Receivable write-offs and reclassifications, net of recoveries.





<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange  Act of 1934,  Xanser  Corporation  has duly  caused  this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



                                   XANSER CORPORATION

                                   By:              //s//  JOHN R. BARNES
                                       -----------------------------------------
                                       President and Chief Executive Officer
                                   Date:    March 25, 2004

     Pursuant to the  requirements  of the  Securities and Exchange Act of 1934,
this report has been signed below by the  following  persons on behalf of Xanser
Corporation and in the capacities and on the date indicated.
<TABLE>
<CAPTION>

            Signature                                                 Title                              Date
----------------------------------------                  ----------------------------             --------------
Principal Executive Officer

<S>                                                       <C>                                      <C>
        //s//  JOHN R. BARNES                              President, Chief Executive              March 25, 2004
----------------------------------------                     Officer and Director

Principal Accounting Officer

       //s// MICHAEL R. BAKKE                              Controller                              March 25, 2004
----------------------------------------



Directors

          //s// SANGWOO AHN                                Director                                March 25, 2004
----------------------------------------



        //s//  JOHN R. BARNES                              Director                                March 25, 2004
---------------------------------------



      //s// FRANK M. BURKE, JR.                            Director                                March 25, 2004
----------------------------------------



        //s//  CHARLES R. COX                              Director                                March 25, 2004
----------------------------------------



         //s//  HANS KESSLER                               Director                                March 25, 2004
----------------------------------------



       //s//  JAMES R. WHATLEY                             Director                                March 25, 2004
----------------------------------------

</TABLE>



<PAGE>
                                                                    Exhibit 31.1



                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:

1.   I have reviewed this annual report on Form 10-K of Xanser Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and  procedures  and presented in this annual  report our  conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  cover by this annual  report,  based on such
          evaluation; and

     d)   disclosed  in  this  annual  report  any  change  in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.



Date: March 25, 2004




                                                 //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer


<PAGE>
                                                                    Exhibit 31.2


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Howard C. Wadsworth,  Chief Financial Officer of Xanser  Corporation  certify
that:

1.   I have reviewed this annual report on Form 10-K of Xanser Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and  procedures  and presented in this annual  report our  conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  cover by this annual  report,  based on such
          evaluation; and

     d)   disclosed  in  this  annual  report  any  change  in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.



Date: March 25, 2004


                                            //s//  HOWARD C. WADSWORTH
                                         ---------------------------------------
                                         Howard C. Wadsworth
                                         Vice President, Treasurer and Secretary
                                        (Chief Financial Officer)



<PAGE>
                                                                    Exhibit 32.1



                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002



     The undersigned,  being the Chief Executive  Officer of Xanser  Corporation
(the "Company")  hereby  certifies that, to his knowledge,  the Company's Annual
Report on Form 10-K for the year ended December 31, 2003,  filed with the United
States Securities and Exchange  Commission pursuant to Section 13(a) or 15(d) of
the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully complies
with the  requirements of Section 13(a) or 15(d) of the Securities  Exchange Act
of 1934 and that information contained in such Annual Report fairly presents, in
all material respects,  the financial condition and results of operations of the
Company.

     This written  statement is being  furnished to the  Securities and Exchange
Commission  as an exhibit to such Form 10-K.  A signed  original of this written
statement  required by Section 906 has been provided to Xanser  Corporation  and
will be retained by Xanser  Corporation  and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.


Date: March 25, 2004




                                                 //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer




<PAGE>
                                                                    Exhibit 32.2



                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002



     The undersigned,  being the Chief Financial  Officer of Xanser  Corporation
(the "Company")  hereby  certifies that, to his knowledge,  the Company's Annual
Report on Form 10-K for the year ended December 31, 2003,  filed with the United
States Securities and Exchange  Commission pursuant to Section 13(a) or 15(d) of
the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully complies
with the  requirements of Section 13(a) or 15(d) of the Securities  Exchange Act
of 1934 and that information contained in such Annual Report fairly presents, in
all material respects,  the financial condition and results of operations of the
Company.

     This written  statement is being  furnished to the  Securities and Exchange
Commission  as an exhibit to such Form 10-K.  A signed  original of this written
statement  required by Section 906 has been provided to Xanser  Corporation  and
will be retained by Xanser  Corporation  and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.

Date: March 25, 2004


                                            //s//  HOWARD C. WADSWORTH
                                         ---------------------------------------
                                         Howard C. Wadsworth
                                         Vice President, Treasurer and Secretary
                                        (Chief Financial Officer)