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, 2002

                                       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 of                                (IRS Employer
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:  $58,527,999. This figure is estimated as of June 28, 2002, at which
date the closing  price of the  registrant's  Common Stock on the New York Stock
Exchange was $1.82 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 21, 2003: 31,568,740.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III (Items 10, 11, 12 and 13) 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  application  software,  computer
hardware,  web hosted  data  processing,  networking,  consulting,  and  support
services to the healthcare, financial, and insurance industries, and to agencies
of the U.S. Government.  Xtria also provides integration and consulting services
to healthcare  organizations  implementing digital radiology imaging systems and
software  solutions to assist  healthcare  organizations  with  compliance  with
Health   Insurance   Portability   and   Accounting   Act  ("HIPAA")  and  other
accreditation  and  training   requirements.   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, 2002,  Furmanite's  revenues and
operating   income  were   approximately   $90.7   million  and  $3.6   million,
respectively.  See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations."

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, 2002,  2001 and
2000,  under  pressure  services  represented  approximately  46%,  42% and 42%,
respectively,  of Furmanite's revenues,  while turnaround services accounted for
approximately  46%,  50% and 48%,  respectively,  and  product  sales  and other
industrial  services  represented  approximately 8%, 8%, 10%,  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/or  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 2003 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 65-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;  Chicago,  Illinois;  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 (6 locations),  Belgium,  France,  Germany,  Hong Kong, Malaysia,  the
Netherlands, New Zealand, Norway, Singapore and the United Kingdom (6 locations)
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 2002 were 29% for the United  States,  59% for Europe and
12% 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, 2002. 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 provides information  technology services and related products to the
healthcare  industry,  the financial  industry,  the  insurance  industry and to
agencies of the U.S.  Government.  The segment's primary business is information
technology services including  application software,  hardware,  web hosted data
processing,  networking,  consulting,  and support services.  For the year ended
December 31, 2002 the  information  services  segment's  revenues and  operating
losses were $40.7  million and $3.8  million,  respectively.  See  "Management's
Discussion and Analysis of Financial  Conditions and Results of  Operations".  A
substantial  portion of the revenues of this business segment is attributable to
contracts  with agencies of the U.S.  Government.  Xtria manages its  businesses
from its  headquarters  in Richardson,  Texas,  and maintains  offices in Bryan,
Texas;  Chantilly,  Manassas  and McLean,  Virginia;  Burlington,  Vermont;  and
Frederick, Maryland.

Application Software Services

     Xtria  provides   comprehensive   application   software  services  to  the
healthcare,  financial and insurance  industries,  as well as to agencies of the
U.S.   Government.   These  services  include   consulting,   design,   software
development,   implementation,   data  processing,   and  on-going  support  and
maintenance.

     Healthcare. Xtria's healthcare application software consists of: Insight, a
comprehensive web-based enterprise wide policy and procedure management and risk
analysis tool;  Empower, a web-based  educational tool for employee training and
certification;  and  Encompass,  a customer  hosted  software  application  that
securely  delivers  applications  from existing legacy systems to the customer's
desktop via a standard web browser.  These  application  software  programs were
initially developed to meet the patient data privacy  requirements of HIPAA, but
they also fulfill other risk  management,  training,  and security  needs of the
healthcare  industry.  Xtria's  healthcare  application  software  enables these
organizations  to face the  immediate  challenges  of patient  data  privacy and
security,  as well as maintaining  compliance in the future and are designed for
long term use by its customers.

     Financial and Insurance.  Xtria's financial and insurance software, Insure,
provides a comprehensive web-based risk management application to help financial
institutions  lower the cost of insuring  the  collateral  pledged to their loan
portfolios,  to provide senior  insurance  executives with a reporting system to
alert them of positive and negative early  financial  performance  trends and to
help reduce the costs and risks  associated with timely and accurate  compliance
with state and federal regulatory  reporting  requirements.  This application is
linked with third party document imaging to create a paperless work environment.
As part of its services,  Xtria monitors, on behalf of its customers, the status
of  insurance  coverage  on  automobiles  pledged as loan  collateral  and flood
insurance on homes.  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.

     U.S. Government.  In the U.S. Government sector, Xtria provides web-enabled
software  applications  and  services  for the  Department  of Health  and Human
Services. Xtria contracts for these services on renewable annual contracts based
principally on its General  Services  Administration  Schedule.  The web-enabled
software  applications  developed by Xtria  include  field  research and program
analysis tools,  shared statistical  analysis tools, 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.

Digital Radiology Imaging Services

     Xtria provides consulting,  design, implementation training and maintenance
to healthcare  organizations  of digital  radiology  imaging  systems,  known as
Picture Archival and Communication Systems ("PACS"). PACS are used in connection
with digitally recorded images,  such as magnetic  resonance  imaging,  computer
tomography scans,  ultrasounds and digital x-rays,  among others. Xtria provides
technical  support at every stage of the  implementation of a PACS by healthcare
organizations,  including  planning and feasibility  studies,  workflow  design,
specification development, procurement assistance, on-site technical supervision
of PACS installers, quality assurance and acceptance testing. Xtria also assists
the  healthcare  organizations  with warranty and service  issues that may arise
with the  manufacturer of the PACS  components.  Xtria personnel who perform the
consulting  services are highly  trained  electrical,  biomedical,  and clinical
engineers.

     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 also works with PACS
providers,  such as Fuji, General Electric and Phillips,  in connection with the
sale and installation of PACS, and for end users of the systems.

Network Services

     Xtria provides, as part of its information technology services,  end-to-end
data network services that include technical  consulting  services,  third party
telecommunications  networks,  system security and related networking equipment.
Its  principal  network  services  customers  are  healthcare,   financial,  and
insurance commercial  customers and agencies of the U.S. Government.  Xtria also
provides installation and replacement services,  training, software and hardware
systems to these commercial sectors and government agencies.


ENVIRONMENTAL CONTROLS

     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 are in general  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,  2002,  the Company and its  subsidiaries  employed  1,082
persons.  The Furmanite  group of companies  employed a total of 837 persons and
226 persons were  employed by the Xtria group of  companies.  As of December 31,
2002,  approximately  368 of the persons  employed by Furmanite  were subject to
representation by unions or other similar associations for collective bargaining
or  other  similar  purposes;  however,  there  were no  significant  collective
bargaining or other similar contracts covering the Furmanite employees in effect
at that date. 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. You
may obtain additional information about the Public Reference Room 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 our 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 in fee.


Item 3. Legal Proceedings

     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 (expense) in the
accompanying 2001 consolidated statements of income.

     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 or results of operations 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 2002.


<PAGE>
                                     PART II

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

     Shares of the Company Common Stock are listed and traded principally 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 21, 2003, 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.
<TABLE>
<CAPTION>
                                                        Quoted Stock Prices          Quoted Stock Prices
                                                              for KAB                      for XNR
                                                     ------------------------     ------------------------
              Calendar Year                           High               Low       High               Low
              ----------------------                 ------             -----     ------             -----
              <S>                                    <C>                <C>       <C>                <C>
              2001:
                First Quarter                         $6.50             $5.69       NA                NA
                Second Quarter                         7.75              5.56       NA                NA
                Third Quarter                          NA                NA        $3.13             $1.88
                Fourth Quarter                         NA                NA         2.25              1.81

              2002:
                First Quarter                          NA                NA         2.76              1.87
                Second Quarter                         NA                NA         3.45              1.80
                Third Quarter                          NA                NA         2.01              1.25
                Fourth Quarter                         NA                NA         1.98              1.25

              2003:
                First Quarter                          NA                NA         1.89              1.33
                  (through March 21, 2003)

</TABLE>
              NA - Not Applicable

     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,
                                           -----------------------------------------------------------------------
                                              2002          2001           2000            1999           1998
                                           ----------     ---------      ----------     ----------      ----------
<S>                                        <C>            <C>            <C>            <C>             <C>
Income Statement Data:
Revenues............................       $  131,436     $ 144,704      $  127,641     $  135,433      $  135,825
                                           ==========     =========      ==========     ==========      ==========
Operating income (loss).............       $   (4,207)    $   5,429      $    4,102     $   (4,566)     $    3,335
                                           ==========     =========      ==========     ==========      ==========
Income (loss) from continuing
   operations before income taxes
   and cumulative effect of change
   in accounting principle..........       $   (5,511)    $   9,349      $      889     $   (8,057)     $     (791)

Income tax benefit (expense)........            3,269        13,039           5,894         38,507            (473)
                                           ----------     ---------      ----------     ----------      ----------
Income (loss) from continuing
   operations before cumulative
   effect of change in accounting
   principle........................           (2,242)       22,388           6,783         30,450          (1,264)

Cumulative effect of change in
   accounting principle-adoption
   of new accounting standard, net
   of income taxes..................          (45,269)          -               -              -              -
                                           ----------     ---------      ----------     ----------      ----------
Income (loss) from continuing
   operations.......................          (47,511)       22,388           6,783         30,450          (1,264)

Income from discontinued operations
   - businesses distributed to common
   shareholders                                   -           3,337          10,386         28,459          14,840
                                           ----------     ---------      ----------     ----------      ----------
Net income (loss)...................       $  (47,511)    $  25,725      $   17,169     $   58,909      $   13,576
                                           ==========     =========      ==========     ==========      ==========
Per Share Data:
Earnings (loss) per common share:
   Basic:
     Continuing operations:
       Before cumulative effect of
         change in accounting
         principle..................       $   (0.07)     $    0.68      $     0.20     $     0.95      $   (0.06)
       Cumulative effect of change
         in accounting principle....           (1.38)           -               -              -              -
                                           ---------      ---------      ----------     ----------      ----------
                                               (1.45)          0.68            0.20           0.95          (0.06)
     Discontinued operations........              -            0.10            0.33           0.91           0.47
                                           ----------     ---------      ----------     ----------      ---------
                                           $   (1.45)     $    0.78      $     0.53     $     1.86      $    0.41
                                           =========      =========      ==========     ==========      =========
   Diluted:
     Continuing operations:
       Before cumulative effect of
         change in accounting
         principle..................       $   (0.07)     $    0.64      $     0.19     $     0.92      $   (0.06)
       Cumulative effect of change
         in accounting principle....           (1.38)           -               -              -              -
                                           ---------      ---------      ----------     ----------      ----------
                                               (1.45)          0.64            0.19           0.92          (0.06)
     Discontinued operations........              -            0.10            0.31           0.87           0.47
                                           ---------      ---------      ----------     ----------      ---------
                                           $   (1.45)     $    0.74      $     0.50     $     1.79      $    0.41
                                           =========      =========      ==========     ==========      =========

</TABLE>

<TABLE>
<CAPTION>

                                                                       December 31,
                                           -----------------------------------------------------------------------
                                              2002          2001           2000            1999           1998
                                           ----------     ---------      ----------     ----------      ----------
<S>                                        <C>            <C>            <C>            <C>             <C>
Balance Sheet Data:
Cash and cash equivalents...........       $   25,624     $  29,545      $   20,517     $   14,516      $    7,264
Working capital.....................           47,055        71,789          81,185         42,191          18,709
Total assets........................          127,647       186,219         226,643        219,540         158,796
Long-term debt......................           28,409        37,801          39,593         44,223          43,958
Stockholders' equity................           61,549       115,506         166,039        144,803          87,445

</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

     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.

     The Company's  continuing  operations  are  conducted  through two business
segments, technical services and information technology services.


CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                              --------------------------------------------
                                                                 2002             2001            2000
                                                              -----------     -----------      -----------
                                                                             (in thousands)
<S>                                                           <C>             <C>              <C>
Revenues..................................................    $   131,436     $   144,704      $  127,641
                                                              ===========     ===========      ==========
Operating income (loss)...................................    $    (4,207)    $     5,429      $    4,102
                                                              ===========     ===========      ==========

Income (loss) from continuing operations before
   income taxes and cumulative effect of change
   in accounting principle................................    $    (5,511)    $     9,349      $      889
                                                              ===========     ===========      ==========
Net income (loss):
   Continuing operations..................................    $   (47,511)    $    22,388      $    6,783
   Discontinued operations - businesses
     distributed to common shareholders...................            -             3,337          10,386
                                                              -----------     -----------      ----------
      Net income (loss)...................................    $   (47,511)    $    25,725      $   17,169
                                                              ===========     ===========      ==========
Capital expenditures from continuing operations,
   excluding acquisitions.................................    $     5,504     $     4,625      $    2,690
                                                              ===========     ===========      ==========
</TABLE>


     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  of $45.3  million  for (net of income  taxes)  the
cumulative effect of a change in accounting principle-adoption of new accounting
standard for goodwill (see "Critical Accounting Policy").

     For the year ended December 31, 2001,  revenues increased by $17.1 million,
or 13%, when compared to 2000, due to a $12.9 million  increase in revenues from
the  information  technology  services  business and a $4.2 million  increase in
revenues from the technical  services  business.  Operating  income increased by
$1.3 million,  or 32%, in 2001, compared to 2000, due to a $2.5 million decrease
in general and administrative  expenses due to lower costs in the second half of
the year as a result of the  Distribution  and a non-cash charge of $1.4 million
in 2000 for increases in the  estimated  redemption  value of a preferred  stock
series,  partially  offset by a $0.7  million  decrease  in  technical  services
operating income and a $0.5 million decrease in information  technology services
operating  income.  Income from  continuing  operations  before income taxes and
cumulative effect of change in accounting principle increased by $8.5 million in
2001,  compared to 2000, due to the recognition of $6.0 million of other income,
net of expenses,  from the resolution of a legal proceeding in 2001 and the $2.5
million decrease in general and administrative expenses.  Income from continuing
operations  was $22.4 million for the year ended  December 31, 2001 and includes
$18.1 million in income tax benefits  resulting from the  recapitalization  of a
foreign subsidiary.


TECHNICAL SERVICES

     The  Company's   technical  services  business  is  conducted  through  its
Furmanite  group  of  subsidiaries.  Furmanite  provides  specialized  services,
including  leak sealing under  pressure,  on-site  machining,  safety and relief
valve  testing  and repair,  passive  fire  protection  and  fugitive  emissions
inspections to the process and power industries worldwide.
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                              ---------------------------------------
                                                                2002            2001            2000
                                                              ---------      ---------        -------
                                                                           (in thousands)
<S>                                                           <C>            <C>             <C>
  Revenues:
     United States........................................    $  26,199      $  35,788       $ 31,743
     Europe...............................................       53,186         48,554         50,446
     Asia-Pacific.........................................       11,362         11,979          9,953
                                                              ---------      ---------       --------
                                                              $  90,747      $  96,321       $ 92,142
                                                              =========      =========       ========
  Operating income (loss):
     United States........................................    $  (1,562)     $   1,306       $  1,624
     Europe...............................................        5,990          7,011          6,997
     Asia-Pacific.........................................        1,007            879            862
     Headquarters.........................................       (1,855)        (3,615)        (3,163)
                                                              ---------      ---------       --------
                                                              $   3,580      $   5,581       $  6,320
                                                              =========      =========       ========
  Capital expenditures, excluding acquisitions............    $   2,912      $   3,331       $  2,160
                                                              =========      =========       ========

</TABLE>

     For the year ended December 31, 2002, technical services revenues decreased
by $5.6 million, or 6%, when compared to 2001, 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  differences  in 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
differences  in  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 and 2000 include $1.9 million and $2.0 million,
respectively,  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 Policy").

     For the year ended December 31, 2001, technical services revenues increased
by $4.2  million,  or 5%,  compared  to 2000.  In the  United  States,  revenues
increased  by $4.1  million,  or 13%,  compared  to 2000,  due to  increases  in
turnaround  and leak sealing  services.  In Europe,  revenues  decreased by $1.9
million,  or 4%,  compared  to 2000,  due to  differences  in  foreign  currency
exchange  rates  and lower  levels of fire  protection  services  in the  United
Kingdom.  In Asia Pacific,  revenues increased by $2.0 million, or 20%, compared
to 2000, due to increases in turnaround  services in Australia and Singapore and
increases  in  product  sales  in  Australia.  Overall,  2001  operating  income
decreased  by $0.7  million in 2001,  compared to 2000,  due to  slightly  lower
operating   margins  in  the  United   States  and   increases  in  general  and
administrative expenses due to planned investments in management,  marketing and
product development costs.


INFORMATION TECHNOLOGY SERVICES

     The information  technology  services group provides  knowledge  management
services to the  commercial  (financial  and  insurance),  government  (federal,
state, county and local) and healthcare sectors. The group focuses on evaluating
customer's people (employees and customers), processes and technology to develop
solutions  that helps them achieve  better  outcomes  and results.  Services are
tailored to the specific needs of the customers and include consulting,  design,
development,  integration  of third party  hardware,  maintenance,  training and
customer  service  of custom  technology  solutions.

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                              ---------------------------------------
                                                                2002            2001           2000
                                                              ---------      ---------      ---------
                                                                           (in thousands)
<S>                                                           <C>            <C>            <C>
  Revenues................................................    $  40,689      $  48,383      $  35,499
                                                              =========      =========      =========
  Operating income (loss).................................    $  (3,796)     $   3,651      $   4,134
                                                              =========      =========      =========
  Capital expenditures, excluding acquisitions............    $   2,592      $   1,294      $     530
                                                              =========      =========      =========
</TABLE>


     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 and 2000 includes
$0.4 million and $0.2 million,  respectively,  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 Policy").

     For the year ended December 31, 2001,  revenues increased by $12.9 million,
or 36%,  compared to 2000, due to increases in service revenues and the November
2000 acquisition of a cabling and communications business. 2001 operating income
decreased by $0.5  million,  or 12%,  compared to 2000, as increases in services
operating  results were more than offset by planned  investments  in management,
marketing and product development costs.

INTEREST EXPENSE

     For the year ended December 31, 2002,  interest  expense  decreased by $1.7
million,  compared to 2001,  due to decreases in debt levels  resulting from the
March 1, 2002  purchase of $10  million of 8.75%  subordinated  debentures  (see
"Liquidity  and Capital  Resources"),  and lower interest rates on variable rate
debt.

     For the year ended December 31, 2001,  interest  expense  decreased by $0.4
million,  compared to 2000,  due to decreases in debt levels and lower  interest
rates on variable rate debt.


INCOME TAXES

     Income tax benefit for the periods  presented differs from the expected tax
at statutory rates due primarily to different tax rates in the various state and
foreign jurisdictions.

     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
years ended  December  31, 2001,  and 2000 include  benefits of $0.6 million and
$1.1  million,  respectively,  related to favorable  developments  pertaining to
certain state and foreign income tax issues.

     For the year ended December 31, 2000, the Company  recognized  $6.3 million
of  expected  benefits  from  prior  years'  tax  losses  (change  in  valuation
allowance)  that were  available to offset future  taxable  income.  The Company
reduced  the  valuation  allowance  as a  result  of  its  reevaluation  of  the
realizability  of income  tax  benefits  from  future  operations.  The  Company
considered positive evidence,  including the effect of the Distribution,  recent
historical  levels of taxable  income,  the  scheduled  reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth,  and  expiration  periods of net operating loss  carryforwards  ("NOLs")
among other things,  in making this  evaluation and  concluding  that it is more
likely than not that the Company  will  realize the benefit of its net  deferred
tax assets.  Upon  completion of the  Distribution  in June 2001,  all remaining
deferred  tax  assets  relating  to  previously   recorded  net  operating  loss
carryforwards  ($38.8  million),  which were utilized to offset  federal  income
taxes resulting from the  Distribution,  were charged  directly to stockholders'
equity.


LIQUIDITY AND CAPITAL RESOURCES

     Cash provided by operating  activities of  continuing  operations  was $3.5
million,  $3.1  million and $8.8 million  during the years 2002,  2001 and 2000,
respectively.  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. The decrease in 2001,  compared to 2000, was due primarily
to  increases  in  working  capital  requirements  in the  expanded  information
technology services business.

     Capital  expenditures  for continuing  operations  were $5.5 million,  $4.6
million and $2.7 million for the years ended  December 31, 2002,  2001 and 2000,
respectively.  Consolidated  capital expenditures for 2003 have been budgeted at
$4 million to $6 million, depending on the economic environment and the needs of
the business. Capital expenditures (excluding acquisitions) in 2003 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  and  2000  approximately
1,744,000  shares and 306,300  shares,  respectively,  of the  Company's  common
stock,  at a cost of $3.3  million  and $1.5  million,  respectively.  The stock
purchases were funded with cash on hand.

     At December 31, 2002,  $16.3  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  (3.12% at December 31,  2002),  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.  During the fourth quarter of 2002, the technical
services group replaced a significant  number of its vehicle capital leases with
new  capital  leases  containing  more  favorable  economic  terms  and the bank
modified,  subsequent to December 31, 2002,  the capital  expenditure  financial
covenant for the fourth quarter of 2002 to allow for these new leases.  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 ($9.9 million  outstanding at
December 31, 2002) 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 through 2007.

     At December 31, 2002,  annual sinking fund requirements and debt maturities
on consolidated debt,  including capital leases, were as follows:  $0.7 million;
$0.6 million;  $0.4 million; $0.4 million; and $0.3 million;  respectively,  for
each of the five years ending December 31, 2007.

     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 in the current
year and the preceding  years.  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.

     Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.


CRITICAL ACCOUNTING POLICIES

     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 to 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).  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 No. 101 "Revenue Recognition in Financial Statements".

     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, 2002,  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,  2002,  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, 2002, the Company had a significant  amount of net deferred
tax assets,  which  consisted  principally of net operating loss and 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,  in varying amounts and dates
from 2006 to 2022 and the alternative  minimum tax credit  carryforwards have no
expiration date (see Note 2 to the Company's Consolidated Financial Statements).
Under SFAS No. 109, the Company periodically  evaluates the realizability of its
deferred  tax assets from future  operations.  Such  evaluations  must  consider
various  factors,  including  estimates of future  taxable income growth and the
expiration periods of net operating loss carryforwards,  and conclude that it is
more  likely  than not that the  Company  will  realize  the  benefit of its net
deferred  tax  assets.  Additionally,  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. To the extent that factors or conditions
change,  it is possible that a valuation  allowance against the net deferred tax
asset might be  required,  which could have a material  effect on the results of
operations of the Company.


RECENT ACCOUNTING PRONOUNCEMENTS

     In July of 2001,  the  FASB  issued  SFAS No.  143  "Accounting  for  Asset
Retirement  Obligations",  which  establishes  requirements for the removal-type
costs associated with asset retirements.  The Company is currently assessing the
impact of SFAS No. 143, which must be adopted in the first quarter of 2003.

     In April of 2002, the FASB issued SFAS No. 145,  which,  among other items,
affects  the income  statement  classification  of gains and  losses  from early
extinguishment  of debt.  Under SFAS No. 145, which must be adopted by the first
quarter  of  2003,  early  extinguishment  of  debt  is  now  considered  a risk
management strategy,  with resulting gains and losses no longer classified as an
extraordinary  item,  unless the debt  extinguishment  meets certain  unusual in
nature and  infrequency  of occurrence  criteria,  which is expected to be rare.
Upon adoption,  companies must  reclassify  prior items that do not meet the new
extraordinary item  classification  criteria as a component of operating income.
Adoption of SFAS No. 145 will have no effect on the net income of the Company.

     In July of 2002,  the  FASB  issued  SFAS No.  146  "Accounting  for  Costs
Associated with Exit or Disposal Activities",  which requires all restructurings
initiated after December 31, 2002 to be recorded when they are both incurred and
can be measured at fair value. The Company is currently  assessing the impact of
SFAS No. 146, which must be adopted in the first quarter of 2003.

     In November of 2002, the FASB issued  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 disclosure  requirements are effective for financial statements of
interim or annual  periods ending after December 15, 2002 and have been adopted.
Management of the Company  believes that the application of this  interpretation
will have no effect on the consolidated financial statements of the Company.

     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. The Company
will  continue  to account  for  stock-based  compensation  in  accordance  with
Accounting  Principles  Board  Opinion No. 25  "Accounting  for Stock  Issued to
Employees"  and  has  provided  the  required  disclosures  in its  consolidated
financial statements.

     In January of 2003, the FASB issued  Interpretation No. 46,  "Consolidation
of  Variable  Interest  Entities,   an  interpretation  of  ARB  No.  51."  This
interpretation  addressed the consolidation by business  enterprises of variable
interest entities as defined in the interpretation.  The interpretation  applies
immediately to variable  interests in variable  interest  entities created after
January 31,  2003,  and to variable  interests  in  variable  interest  entities
obtained after January 31, 2003. The interpretation requires certain disclosures
in financial statements issued after January 31, 2003. Management of the Company
believes that the application of this  interpretation will have no effect on the
consolidated financial statements of the Company.


Item 7(a). 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 $17.3  million at December 31,
2002, a one percent  increase in interest rates would increase  interest expense
by approximately $0.2 million.

     A  significant  portion of the  technical  services  business is exposed to
fluctuations  in foreign  currency  exchange rates.  Foreign  currency gains and
losses  included  in the  consolidated  statement  of income  for the year ended
December 31, 2002 were not significant.


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.


                                    PART III

     The information required by Items 10, 11, 12 and 13 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, 2002.

Item 14. Controls and Procedures.

     Included in its recent Release No. 34-46427, effective August 29, 2002, the
Securities and Exchange  Commission adopted rules requiring  reporting companies
to maintain disclosure  controls and procedures to provide reasonable  assurance
that a  registrant  is  able  to  record,  process,  summarize  and  report  the
information required in the registrant's  quarterly and annual reports under the
Securities  Exchange Act of 1934 (the "Exchange Act"). While management believes
that the  Company's  existing  disclosure  controls  and  procedures  have  been
effective to  accomplish  these  objectives,  it intends to continue to examine,
refine and formalize the Company's  disclosure  controls and  procedures  and to
monitor ongoing developments in this area.

     The Company's  principal executive officer and principal financial officer,
after  evaluating the  effectiveness  of the Company's  disclosure  controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and Rule 15d-14(c)) as of
a date  within 90 days  before the filing date of this  Report,  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.

     There have been no changes in the Company's  internal  controls or in other
factors  known to  management  that could  significantly  affect those  internal
controls  subsequent  to  the  date  of  the  evaluation,  nor  were  there  any
significant  deficiencies  or  material  weaknesses  in the  Company's  internal
controls. As a result, no corrective actions were required or undertaken.



<PAGE>


                                     PART IV

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

<S>       <C>                                                                                             <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, 2002, 2001 and 2000..................................................           F - 2
             Consolidated Balance Sheets - December 31, 2002 and 2001............................           F - 4
             Consolidated Statements of Cash Flows - Three Years Ended
               December 31, 2002, 2001 and 2000..................................................           F - 5
             Consolidated Statements of Changes in Stockholders'
               Equity - Three Years Ended December 31, 2002, 2001 and 2000.......................           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, 2002, 2001 and 2000...........           F - 27
             Balance Sheets - December 31, 2002 and 2001.........................................           F - 28
             Statements of Cash Flows - Three Years Ended
               December 31, 2002, 2001 and 2000..................................................           F - 29

          Schedule II - Xanser Corporation Valuation and Qualifying Accounts -
             Three Years Ended December 31, 2002, 2001 and 2000..................................           F - 30

          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.
</TABLE>


(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),  and as Exhibit
               10.1 to the  Registrant's  Current  Report  on Form 8-K  filed on
               August  22,  2001,  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.

        99.1   Certification  of Chief  Executive  Officer,  Pursuant to Section
               906(a) of the  Sarbanes-Oxley  Act of 2002, dated as of March 28,
               2003, filed herewith.

        99.2   Certification  of Chief  Financial  Officer,  Pursuant to Section
               906(a) of the  Sarbanes-Oxley  Act of 2002, dated as of March 28,
               2003, filed herewith.

     Certain instruments  respecting  long-term debt of the Registrant have been
     omitted pursuant to instructions as to Exhibits.  The Registrant  agrees to
     furnish copies of any of such instruments to the Commission upon request.

          *    Denotes management contracts.

     (b)  Reports on Form 8-K

          None.



<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,  2002  and  2001,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2002, 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, 2003



<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     2002              2001               2000
                                                               --------------     --------------    ---------------
<S>                                                            <C>                <C>               <C>
Revenues:
    Services...............................................    $  114,659,000     $  127,421,000    $   110,440,000
    Products...............................................        16,777,000         17,283,000         17,201,000
                                                               --------------     --------------    ---------------
      Total revenues.......................................       131,436,000        144,704,000        127,641,000
                                                               --------------     --------------    ---------------

Costs and expenses:
    Operating costs........................................       112,159,000        114,735,000         96,341,000
    Cost of products sold..................................        15,828,000         15,529,000         15,749,000
    Depreciation and amortization..........................         3,665,000          5,208,000          5,097,000
    General and administrative.............................         3,991,000          3,803,000          6,352,000
                                                               --------------     --------------    ---------------
      Total costs and expenses.............................       135,643,000        139,275,000        123,539,000
                                                               --------------     --------------    ---------------

Operating income (loss)....................................        (4,207,000)         5,429,000          4,102,000

Interest income............................................           460,000            665,000            909,000
Other income (expense).....................................              -             6,741,000           (239,000)
Interest expense...........................................        (1,764,000)        (3,486,000)        (3,883,000)
                                                               --------------     --------------    ---------------
Income (loss) from continuing operations before
    income taxes and cumulative effect of change in
    accounting principle...................................        (5,511,000)         9,349,000            889,000

Income tax benefit.........................................         3,269,000         13,039,000          5,894,000
                                                               --------------     --------------    ---------------
Income (loss) from continuing operations before cumulative
    effect of change in accounting principle...............        (2,242,000)        22,388,000          6,783,000
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...................       (47,511,000)        22,388,000          6,783,000
Income from discontinued operations - businesses
    distributed to common shareholders, net of
    income taxes...........................................              -             3,337,000         10,386,000
                                                               --------------     --------------    ---------------
      Net income (loss)....................................       (47,511,000)        25,725,000         17,169,000

Dividends and redemption premium applicable to
    preferred stock........................................              -               493,000            479,000
                                                               --------------     --------------    ---------------
Net income (loss) applicable to common stock...............    $  (47,511,000)    $   25,232,000    $    16,690,000
                                                               ==============     ==============    ===============

</TABLE>


                See notes to consolidated financial statements.

                                      F - 2

<PAGE>

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     2002              2001               2000
                                                               --------------     --------------    ---------------
<S>                                                            <C>                <C>               <C>
Earnings (loss) per common share:
    Basic:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.07)     $         0.68    $          0.20
        Cumulative effect of change in
          accounting principle.............................            (1.38)               -                 -
                                                               -------------      --------------    ---------------
                                                                       (1.45)               0.68               0.20
      Discontinued operations..............................              -                  0.10               0.33
                                                               --------------     --------------    ---------------
                                                               $       (1.45)     $         0.78    $          0.53
                                                               =============      ==============    ===============
    Diluted:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle.............................    $       (0.07)     $         0.64    $          0.19
        Cumulative effect of change in
          accounting principle.............................            (1.38)               -                 -
                                                               -------------      --------------    ---------------
                                                                       (1.45)               0.64               0.19
      Discontinued operations..............................              -                  0.10               0.31
                                                               --------------     --------------    ---------------
                                                               $       (1.45)     $         0.74    $          0.50
                                                               =============      ==============    ===============


</TABLE>


                See notes to consolidated financial statements.

                                      F - 3


<PAGE>
                       XANSER CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                              -------------------------------------
                                                                                   2002                    2001
                                                                              --------------         --------------
                                     ASSETS
<S>                                                                           <C>                    <C>
Current assets:
   Cash and cash equivalents......................................            $   25,624,000         $   29,545,000
   Accounts receivable, trade (net of allowance for doubtful
     accounts of $1,500,000 in 2002 and $1,034,000 in 2001).......                36,208,000             37,186,000
   Receivable from businesses distributed to common shareholders..                 7,412,000             17,904,000
   Inventories....................................................                 8,424,000              8,942,000
   Current deferred income tax assets.............................                   253,000              2,300,000
   Prepaid expenses and other.....................................                 5,011,000              7,532,000
                                                                              --------------         --------------
     Total current assets.........................................                82,932,000            103,409,000
                                                                              --------------         --------------

Property and equipment............................................                38,830,000             33,381,000
Less accumulated depreciation and amortization....................                24,875,000             21,995,000
                                                                              --------------         --------------
   Net property and equipment.....................................                13,955,000             11,386,000
                                                                              --------------         --------------

Excess of cost over fair value of net assets of acquired businesses               13,802,000             61,054,000
Deferred income taxes and other assets............................                16,958,000             10,370,000
                                                                              --------------         --------------
                                                                              $  127,647,000         $  186,219,000
                                                                              ==============         ==============

                             LIABILITIES AND EQUITY
Current liabilities:
   Current portion of long-term debt..............................            $      747,000         $    2,173,000
   Accounts payable...............................................                 3,919,000              6,205,000
   Accrued expenses...............................................                21,419,000             13,159,000
   Accrued income taxes...........................................                 9,792,000             10,083,000
                                                                              --------------         --------------
     Total current liabilities....................................                35,877,000             31,620,000
                                                                              --------------         --------------
Long-term debt, less current portion:
   Technical services.............................................                18,479,000             17,871,000
   Parent company.................................................                 9,930,000             19,930,000
                                                                              --------------         --------------
     Total long-term debt, less current portion...................                28,409,000             37,801,000
                                                                              --------------         --------------
Other liabilities.................................................                 1,812,000              1,292,000

Commitments and contingencies

Stockholders' equity:
   Common stock, without par value.  Authorized
     60,000,000 shares; issued 37,336,176 shares in 2002 and
     36,809,267 shares in 2001....................................                 4,333,000              4,270,000
   Additional paid-in capital.....................................               126,675,000            128,744,000
   Treasury stock, at cost........................................               (26,390,000)           (23,423,000)
   Retained earnings (accumulated deficit)........................               (35,590,000)            11,921,000
   Accumulated other comprehensive income (loss)..................                (7,479,000)            (6,006,000)
                                                                              --------------         --------------
     Total stockholders' equity...................................                61,549,000            115,506,000
                                                                              --------------         --------------
                                                                              $  127,647,000         $  186,219,000
                                                                              ==============         ==============
</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,
                                                             ------------------------------------------------------
                                                                   2002               2001                2000
                                                             --------------       -------------     ---------------
<S>                                                          <C>                  <C>               <C>
Operating activities:
   Income (loss) from continuing operations...............   $  (47,511,000)      $  22,388,000     $    6,783,000
   Adjustments to reconcile income from continuing
     operations to net cash provided by operating
     activities:
       Depreciation and amortization......................        3,665,000           5,208,000          5,097,000
       Increase in the estimated redemption value of
         preferred stock..................................             -                  -              1,387,000
       Deferred income taxes..............................       (1,266,000)        (15,436,000)        (6,150,000)
       Cumulative effect of change in accounting principle       45,269,000               -                  -
       Other, net.........................................          736,000             296,000            410,000
       Changes in current assets and liabilities:
         Accounts receivable, net.........................          978,000          (7,866,000)         5,857,000
         Inventories......................................          518,000          (1,301,000)         1,359,000
         Prepaid expenses and other.......................        2,370,000          (3,102,000)        (2,346,000)
         Accounts payable and accrued expenses............       (1,239,000)          2,939,000         (3,589,000)
                                                             --------------       -------------     --------------
     Operating activities of continuing operations........        3,520,000           3,126,000          8,808,000
     Operating activities of discontinued operations......             -             59,753,000         53,407,000
                                                             --------------       -------------     --------------
     Net cash provided by operating activities............        3,520,000          62,879,000         62,215,000
                                                             --------------       -------------     --------------

Investing activities:
   Capital expenditures...................................       (5,504,000)         (4,625,000)        (2,690,000)
   Acquisitions...........................................             -               (811,000)        (4,804,000)
   Other, net.............................................        1,298,000             605,000           (418,000)
   Investing activities of discontinued operations........             -           (128,258,000)       (20,067,000)
                                                             --------------       -------------     --------------
     Net cash used in investing activities................       (4,206,000)       (133,089,000)       (27,979,000)
                                                             --------------       -------------     --------------

Financing activities:
   Issuance of debt and capital leases....................        4,750,000           4,441,000            924,000
   Payments on debt and capital leases ...................      (15,641,000)         (4,655,000)        (7,429,000)
   Preferred stock dividends and redemption premium paid..             -               (493,000)          (479,000)
   Common stock issued....................................          450,000             545,000            255,000
   Purchase of treasury stock.............................       (3,286,000)                -           (1,530,000)
   Redemption of preferred stock..........................             -             (5,676,000)             -
   Decrease in receivable from businesses distributed to
     common shareholders..................................       10,492,000          14,076,000              -
   Financing activities of discontinued operations........             -             71,000,000        (19,976,000)
                                                             --------------       -------------     --------------
     Net cash provided by (used in) financing activities..       (3,235,000)         79,238,000        (28,235,000)
                                                             --------------       -------------     --------------

Increase (decrease) in cash and cash equivalents..........       (3,921,000)          9,028,000          6,001,000
Cash and cash equivalents at beginning of year............       29,545,000          20,517,000         14,516,000
                                                             --------------       -------------     --------------
Cash and cash equivalents at end of year..................   $   25,624,000       $  29,545,000     $   20,517,000
                                                             ==============       =============     ==============

Supplemental cash flow information from continuing operations:
     Cash paid for interest...............................   $    2,244,000       $   3,383,000     $    3,755,000
                                                             ==============       =============     ==============
     Cash paid for income taxes...........................   $      926,000       $   1,270,000     $    1,716,000
                                                             ==============       =============     ==============

</TABLE>


                See notes to consolidated financial statements.

                                      F - 5


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

                                           Preferred         Common          Additional        Treasury
                                             Stock            Stock        Paid-In Capital       Stock
                                        -------------     -------------    ---------------   -------------
<S>                                     <C>               <C>              <C>               <C>
Balance at January 1, 2000              $   5,792,000     $   4,249,000    $ 197,313,000     $ (30,278,000)

   Net income for the year............           -                -                 -                -
   Common stock issued................           -                1,000         (114,000)          368,000
   Deferred stock units, vested.......           -                -              540,000             -
   Series F Preferred stock to be
     exchanged for common stock.......           -                -            6,250,000             -
   Purchase of treasury stock ........           -                -                 -           (1,530,000)
   Preferred stock dividends declared            -                -                 -                -
   Foreign currency translation
     adjustment ......................           -                -                 -                -
                                        -------------     -------------    -------------     -------------
   Comprehensive income for the year..

Balance at December 31, 2000                5,792,000         4,250,000      203,989,000       (31,440,000)

   Net income for the year............           -                -                 -                -
   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 for the year..

Balance at December 31, 2001                     -            4,270,000      128,744,000       (23,423,000)

   Net income (loss) for the year.....           -                -                 -                -
   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)
     for the year.....................

Balance at December 31, 2002            $        -        $   4,333,000    $ 126,675,000     $ (26,390,000)
                                        =============     =============    =============     =============

</TABLE>

                See notes to consolidated financial statements.

                                      F - 6



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

                                                        Accumulated Other
                                           Retained       Comprehensive     Comprehensive
                                           Earnings       Income (Loss)     Income (Loss)
                                        -------------   -----------------   -------------
<S>                                     <C>               <C>               <C>
Balance at January 1, 2000              $ (30,001,000)    $  (2,272,000)

   Net income for the year............     17,169,000             -         $ 17,169,000
   Common stock issued................           -                -                 -
   Deferred stock units, vested.......           -                -                 -
   Series F Preferred stock to be
     exchanged for common stock.......           -                -                 -
   Purchase of treasury stock ........           -                -                 -
   Preferred stock dividends
     declared.........................       (479,000)            -                 -
   Foreign currency translation
     adjustment ......................           -             (969,000)        (969,000)
                                        -------------     -------------    -------------
   Comprehensive income for the year..                                     $  16,200,000
                                                                           =============
Balance at December 31, 2000              (13,311,000)       (3,241,000)

   Net income for the year............     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 for the year..                                     $  22,320,000
                                                                           =============
Balance at December 31, 2001               11,921,000        (6,006,000)

   Net income (loss) for the year.....    (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)
     for the year.....................                                     $ (48,984,000)
                                                                           =============
Balance at December 31, 2002            $ (35,590,000)    $  (7,479,000)
                                        =============     =============



</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") 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 in the current
year and the preceding  years.  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 and 2001,  unamortized  software  costs  capitalized  under SFAS No. 86
totaled $1.3 million and $13,000,  respectively.  Amortization  expense  totaled
$0.1 million in 2002. No amortization expense was incurred in 2001 or 2000.

     Revenue Recognition

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

     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). 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 No. 101 "Revenue Recognition in Financial Statements".

     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, 2002 and 2001,
accumulated  other  comprehensive  loss consists of cumulative  foreign currency
translation  adjustments  of $1.3 million and $3.2  million,  respectively,  and
minimum pension liability  adjustments for subsidiaries of $6.2 million and $2.8
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.  As of December 31, 2002, 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, 2002, 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 year  ended  December  31,  2002 is 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...     $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              2000
                                                                  --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>
       Reported income (loss) from
          continuing operations...............................    $  (47,511,000)   $  22,388,000    $    6,783,000
       Amortization of excess of cost
          over fair value of net assets
          of acquired businesses, net
          of income taxes.....................................             -            2,164,000         2,101,000
       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    $    8,884,000
                                                                  ==============    =============    ==============
       Reported diluted earnings (loss)
          per common share from
          continuing operations...............................    $        (1.45)   $        0.64    $         0.19
       Amortization of excess of cost over
          fair value of net assets of
          acquired businesses, net of
          income taxes........................................             -                 0.06              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    $         0.25
                                                                  ==============    =============    ==============
</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"  ("SFAS 123"), 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 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, 2002 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
6.63% 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,
                                                                 --------------------------------------------------
                                                                      2002              2001              2000
                                                                 ---------------   --------------    --------------
<S>                                                              <C>               <C>               <C>
      Reported net income (loss)...............................  $   (47,511,000)  $   25,725,000    $   17,169,000

      Stock-based employee compensation expense determined
        under the fair value based method, net of income taxes.         (620,000)        (593,000)         (625,000)
                                                                 ---------------   --------------    --------------
      Pro forma net income (loss)..............................  $   (48,131,000)  $   25,132,000    $   16,544,000
                                                                 ===============   ==============    ==============

      Earning (loss) per share:
        Basic - as reported....................................  $         (1.45)  $         0.78    $         0.53
                                                                 ===============   ==============    ==============
        Basic - pro forma......................................  $         (1.48)  $         0.75    $         0.50
                                                                 ===============   ==============    ==============

        Diluted - as reported..................................  $         (1.45)  $         0.74    $         0.50
                                                                 ===============   ==============    ==============
        Diluted - pro forma....................................  $         (1.48)  $         0.71    $         0.48
                                                                 ===============   ==============    ==============
</TABLE>

     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.

     Recent Accounting Pronouncements

     In July of 2001,  the  FASB  issued  SFAS No.  143  "Accounting  for  Asset
Retirement  Obligations",  which  establishes  requirements for the removal-type
costs associated with asset retirements.  The Company is currently assessing the
impact of SFAS No. 143, which must be adopted in the first quarter of 2003.

     In April of 2002, the FASB issued SFAS No. 145,  which,  among other items,
affects  the income  statement  classification  of gains and  losses  from early
extinguishment  of debt.  Under SFAS No. 145, which must be adopted by the first
quarter  of  2003,  early  extinguishment  of  debt  is  now  considered  a risk
management strategy,  with resulting gains and losses no longer classified as an
extraordinary  item,  unless the debt  extinguishment  meets certain  unusual in
nature and  infrequency  of occurrence  criteria,  which is expected to be rare.
Upon adoption,  companies must  reclassify  prior items that do not meet the new
extraordinary item  classification  criteria as a component of operating income.
Adoption of SFAS No. 145 will have no effect on the net income of the Company.

     In July of 2002,  the  FASB  issued  SFAS No.  146  "Accounting  for  Costs
Associated with Exit or Disposal Activities",  which requires all restructurings
initiated after December 31, 2002 to be recorded when they are both incurred and
can be measured at fair value. The Company is currently  assessing the impact of
SFAS No. 146, which must be adopted in the first quarter of 2003.

     In November of 2002, the FASB issued  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 disclosure  requirements are effective for financial statements of
interim or annual  periods ending after December 15, 2002 and have been adopted.
Management of the Company  believes that the application of this  interpretation
will have no effect on the consolidated financial statements of the Company.

     In January of 2003, the FASB issued  Interpretation No. 46,  "Consolidation
of  Variable  Interest  Entities,   an  interpretation  of  ARB  No.  51."  This
interpretation  addressed the consolidation by business  enterprises of variable
interest entities as defined in the interpretation.  The interpretation  applies
immediately to variable  interests in variable  interest  entities created after
January 31,  2003,  and to variable  interests  in  variable  interest  entities
obtained after January 31, 2003. The interpretation requires certain disclosures
in financial statements issued after January 31, 2003. Management of the Company
believes that the application of this  interpretation will have no effect on the
consolidated financial statements of the Company.


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,
                                                        ----------------------------------------------------
                                                             2002                2001                2000
                                                        --------------      -------------       ------------
<S>                                                     <C>                 <C>                 <C>
       Domestic operations.........................     $  (11,427,000)     $   3,246,000       $ (2,371,000)
       Foreign operations..........................          5,916,000          6,103,000          3,260,000
                                                        --------------      -------------       ------------
       Income (loss) before income taxes...........     $   (5,511,000)     $   9,349,000       $    889,000
                                                        ==============      =============       ============
</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>
       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)
                                     =============        ============       ============       ============
       2000:
         Current...............      $      47,000        $  1,031,000       $   (822,000)      $    256,000
         Deferred..............         (5,699,000)           (278,000)          (173,000)        (6,150,000)
                                     -------------        ------------       ------------       ------------
                                     $  (5,652,000)       $    753,000       $   (995,000)      $ (5,894,000)
                                     =============        ============       ============       ============
</TABLE>

     The reasons for the differences  between the amount of tax expense provided
and the amount of tax expense 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 2002, 2001 and
2000 are as follows:

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                          -----------------------------------------------------------------
                                                 2002                    2001                    2000
                                          -----------------       ------------------      -----------------
<S>                                       <C>                     <C>                     <C>
       Expected tax (benefit) at
         statutory rates................  $      (1,929,000)      $        3,272,000      $         311,000
       Increase (decrease) in taxes
         resulting from:
         Change in valuation allowance..              -                         -                (6,280,000)
         State income taxes, net........           (517,000)                (437,000)              (647,000)
         Foreign tax rate differences...           (629,000)                 141,000               (388,000)
         Goodwill amortization .........              -                      664,000                598,000
         Benefit from recapitalization
           of foreign subsidiary........              -                  (18,137,000)                  -
         Resolution of state and
           foreign tax issues and
           other........................           (194,000)               1,458,000                512,000
                                          -----------------       ------------------       ----------------
                                          $      (3,269,000)      $      (13,039,000)      $     (5,894,000)
                                          =================       ==================       ================
</TABLE>

     At December 31, 2002, the Company had available  domestic tax net operating
loss  carryforwards  ("NOLs"),   which  will  expire,  if  unused,  as  follows:
$11,211,000 in 2006;  $3,033,000 in 2007; and, $715,000 in 2022. 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 years  ended  December  31,  2001 and 2000
include  benefits of $0.6  million and $1.1  million,  respectively,  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,
2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              -------------------------------------
                                                                                   2002                   2001
                                                                              --------------         --------------
<S>                                                                           <C>                    <C>
       Deferred tax assets:
         Net operating loss carryforwards.........................            $    5,793,000         $    1,469,000
         Alternative minimum tax credit carryforwards.............                 4,385,000              6,357,000
         Accrued liabilities......................................                 1,076,000                879,000
         Intangibles..............................................                 1,739,000                  -
         Foreign deferred tax assets..............................                   424,000                205,000
         Other....................................................                   889,000                531,000
                                                                              --------------         --------------
         Total gross deferred tax assets..........................                14,306,000              9,441,000
                                                                              --------------         --------------
       Deferred tax liabilities-plant and equipment, principally due to
         differences in depreciation..............................                  (355,000)               (85,000)
                                                                              --------------         --------------
         Net deferred tax asset...................................            $   13,951,000         $    9,356,000
                                                                              ==============         ==============
</TABLE>

     For the year ended December 31, 2000, the Company  recognized  $6.3 million
of  expected  benefits  from  prior  years'  tax  losses  (change  in  valuation
allowance)  that were  available to offset future  taxable  income.  The Company
reduced  the  valuation  allowance  as a  result  of  its  reevaluation  of  the
realizability  of income  tax  benefits  from  future  operations.  The  Company
considered positive evidence,  including the effect of the Distribution,  recent
historical  levels of taxable  income,  the  scheduled  reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth,  and  expiration  periods of NOLs among  other  things,  in making  this
evaluation and concluding  that it is more likely than not that the Company will
realize  the benefit of its net  deferred  tax assets.  Upon  completion  of the
Distribution,  all remaining deferred tax assets relating to previously recorded
net operating loss carryforwards ($38.8 million),  which were utilized to offset
federal income taxes resulting from the  Distribution,  were charged directly to
stockholders' equity.


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 $0.8 million,  $0.8
million and $0.7 million for 2002, 2001 and 2000, 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 6.5%
and  the  employer  contributes  up to 12% of pay.  Plan  assets  are  primarily
invested in unitized  pension funds managed by United Kingdom  registered  funds
managers. The most recent valuation of the U.K. Plan was performed as of October
31, 2002.

     Net pension cost for the U.K. Plan included the following components:
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                        ---------------------------------------------------
                                                            2002               2001                2000
                                                        --------------     -------------      -------------
<S>                                                     <C>                <C>                <C>
       Net periodic pension cost:
         Service cost................................   $      658,000     $     515,000      $     623,000
         Interest cost...............................        2,522,000         2,287,000          2,269,000
         Expected return on plan assets..............       (3,012,000)       (3,516,000)        (2,805,000)
         Amortization of prior service cost..........           15,000            15,000             15,000
         Recognized net (gain) loss..................            4,000          (321,000)          (222,000)
                                                        --------------     -------------      -------------
       Net periodic pension cost (benefit)...........   $      187,000     $  (1,020,000)     $    (120,000)
                                                        ==============     =============      =============
</TABLE>

     Actuarial  assumptions  used in the  accounting  for the U.K.  Plan  were a
weighted  average  discount rate of 6.0% for 2002 and 2001 and 6.5% for 2000, an
expected  long-term rate of return on assets of 7.5% for 2002, 2001 and 2000 and
a rate of increase in  compensation  levels of 3.0% for 2002, 2001 and 2000. The
funded status of the U.K. Plan is as follows:
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                          --------------------------------
                                                                               2002              2001
                                                                          --------------    --------------
<S>                                                                        <C>               <C>
       Projected benefit obligation:
         Beginning of year..........................................       $  40,798,000     $  36,548,000
         Service cost...............................................             658,000           515,000
         Interest cost..............................................           2,522,000         2,287,000
         Contributions..............................................             607,000           565,000
         Benefits paid..............................................          (1,243,000)       (1,907,000)
         Foreign currency translation adjustment and other..........           4,984,000         2,790,000
                                                                           -------------     -------------
         End of year................................................          48,326,000        40,798,000
                                                                           -------------     -------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                          --------------------------------
                                                                               2002              2001
                                                                          --------------    --------------
<S>                                                                           <C>               <C>
       Fair value of plan assets:
         Beginning of year..........................................          38,980,000        46,507,000
         Actual loss on plan assets.................................          (4,569,000)       (5,289,000)
         Contributions..............................................             607,000           565,000
         Benefits paid..............................................          (1,243,000)       (1,907,000)
         Foreign currency translation adjustment and other..........           4,459,000          (896,000)
                                                                           -------------     -------------
         End of year................................................          38,234,000        38,980,000
                                                                           -------------     -------------

       Excess projected obligation over fair value..................         (10,092,000)       (1,818,000)
       Unrecognized net actuarial loss..............................          13,115,000         4,136,000
       Unamortized prior service cost...............................             119,000           122,000
                                                                           -------------     -------------
       Net pension prepaid asset....................................           3,142,000         2,440,000

       Additional minimum liability.................................          (9,184,000)       (4,082,000)
                                                                           -------------     -------------
       Net pension liability........................................       $  (6,042,000)    $  (1,642,000)
                                                                           =============     =============
</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 2002 and 2001,
the Company recognized  additional minimum  liabilities of $4.9 million and $4.1
million,  respectively,  which, net of deferred income taxes of $1.5 million and
$1.3  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)                2002             2001
                                                     --------------       --------------    --------------

<S>                                                     <C>               <C>               <C>
       Technical services........................        3 - 20           $   26,833,000    $   23,969,000
       Information technology services...........        3 -  7                8,149,000         5,564,000
       General corporate.........................        3 - 10                3,848,000         3,848,000
                                                                          --------------    --------------
       Total property and equipment..............                             38,830,000        33,381,000
       Less accumulated depreciation
         and amortization........................                             24,875,000        21,995,000
                                                                          --------------    --------------
       Net property and equipment................                         $   13,955,000    $   11,386,000
                                                                          ==============    ==============
</TABLE>

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

                                                                                   December 31,
                                                                          --------------------------------
                                                                                2002              2001
                                                                          --------------    --------------
<S>                                                                       <C>               <C>
       Technical services equipment...........................            $    2,808,000    $    2,566,000
       Less accumulated depreciation..........................                   887,000         1,189,000
                                                                          --------------    --------------
       Net equipment acquired under capital leases............            $    1,921,000    $    1,377,000
                                                                          ==============    ==============

</TABLE>

<PAGE>


5.   LONG-TERM DEBT

     Long-term debt is summarized as follows:

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                          --------------------------------
                                                                                2002             2001
                                                                          --------------    --------------

<S>                                                                       <C>               <C>
       Technical services credit facility due
         in January of 2009...................................            $    16,286,000   $  16,283,000
       Notes of technical services foreign subsidiary,
         with interest ranging from 6.75% to 8.0%,
         due through 2012.....................................                  1,010,000         855,000
       Capital leases of technical services subsidiary........                  1,930,000       1,440,000
       Parent company 8.75% convertible subordinated
         debentures due in 2008...............................                  9,930,000      21,396,000
                                                                          ---------------   -------------
       Total long-term debt...................................                 29,156,000      39,974,000
       Less current portion...................................                    747,000       2,173,000
                                                                          ---------------   -------------
       Total long-term debt, less current portion.............            $    28,409,000   $  37,801,000
                                                                          ===============   =============
</TABLE>

     At December 31, 2002,  $16.3  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  (3.12% at December 31,  2002),  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.  During the fourth quarter of 2002, the technical
services group replaced a significant  number of its vehicle capital leases with
new  capital  leases  containing  more  favorable  economic  terms  and the bank
modified,  subsequent to December 31, 2002,  the capital  expenditure  financial
covenant for the fourth quarter of 2002 to allow for these new leases.  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 ($9.9 million  outstanding at
December 31, 2002) 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 through 2007.

     At December 31, 2002,  annual sinking fund requirements and debt maturities
on consolidated debt,  including capital leases, were as follows:  $0.7 million;
$0.6 million;  $0.4 million; $0.4 million; and $0.3 million;  respectively,  for
each of the five years ending December 31, 2007.

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, 2000..........................        36,638,069          5,260,967         31,377,102
       Common shares issued (repurchased), net.............             3,052            238,452           (235,400)
                                                                 ------------       ------------     --------------
       Balance at December 31, 2000........................        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
                                                                 ============       ============     ==============
</TABLE>

     In  connection  with a stock  repurchase  plan  authorized by the Company's
Board of  Directors,  the  Company  purchased  in 2002  and  2000  approximately
1,744,000  shares and 306,300  shares,  respectively,  of the  Company's  common
stock,  at a cost of $3.3  million  and $1.5  million,  respectively.  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, 2002 and 2001 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. General and administrative expense in
the accompanying consolidated statements of income includes a non-cash charge of
$1.4 million for the year ended December 31, 2000 for the estimated value of the
preferred shares.

     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, 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. At December 31, 2000, options on 2,198,283 shares at
prices  ranging from $1.63 to $6.00 were  outstanding,  of which  1,007,319 were
exercisable at prices ranging from $1.63 to $5.63.

     The changes in stock options  outstanding  for the Company's  plans for the
years 2002, 2001, and 2000 were as follows:

<TABLE>
<CAPTION>
                                                                                            Average Price
                                                                          Shares               per Share
                                                                        ----------          -------------
<S>                                                                      <C>                   <C>
       Outstanding at January 1, 2000.........................           2,066,800             $  3.42
       Granted................................................             207,840             $  5.18
       Exercised..............................................             (17,494)            $  4.99
       Forfeited..............................................             (58,863)            $  4.65
                                                                     -------------
       Outstanding at December 31, 2000.......................           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
                                                                     =============
</TABLE>

     There were no stock options which expired  during the years ended  December
31, 2002, 2001 or 2000.

     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, 2002,  no 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, 2002, approximately 500,000 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, 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
                                                        ===============    ==============    ==============
         Year Ended December 31, 2000
           Income from continuing operations.........   $     6,783,000
           Dividend applicable to preferred stock....          (479,000)
                                                        ---------------
           Basic EPS -
              Income applicable to common stock......         6,304,000        31,767,000    $         0.20
                                                                                             ==============
           Effect of dilutive securities -
              Common stock options, Series F
                Preferred Stock and DSUs.............            -              1,319,000
                                                        ---------------    --------------
           Diluted EPS -
              Income applicable to common stock,
                Series F Preferred stock, DSUs
                and assumed options exercised........   $     6,304,000        33,086,000    $         0.19
                                                        ===============    ==============    ==============
</TABLE>

     As a result of the losses from continuing  operations  applicable to common
stock for 2002,  all stock options  (3,013,014  options,  at a weighted  average
price of $1.80) were excluded from the computation of diluted earnings per share
because  the effects  would be  anti-dilutive.  Options to purchase  959,000 and
284,597  shares of common  stock at weighted  average  prices of $2.71 and $5.40
were  outstanding  at  December  31, 2001 and 2000,  respectively,  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  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 $3.9 million for 2002,  $3.6 million
for 2001, and $3.2 million for 2000.

     At December 31, 2002, 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>
         2003.....................................................     $      748,000       $    3,178,000
         2004.....................................................            551,000            2,666,000
         2005.....................................................            370,000            1,779,000
         2006 ....................................................            291,000            1,289,000
         2007.....................................................            200,000              545,000
         Thereafter...............................................               -               1,459,000
                                                                       --------------       --------------
         Total minimum lease payments.............................          2,160,000       $   10,916,000
                                                                                            ==============
         Less amounts representing interest.......................            230,000
                                                                       --------------
         Present value of net minimum lease payments..............     $    1,930,000
                                                                       ==============

</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 (expense) 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 or results of operations 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
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.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                             2002                2001            2000
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Business segment revenues:
         Technical services..........................   $    90,747,000    $   96,321,000    $   92,142,000
         Information technology services.............        40,689,000        48,383,000        35,499,000
                                                        ---------------    --------------    --------------
                                                        $   131,436,000    $  144,704,000    $  127,641,000
                                                        ===============    ==============    ==============
       Technical services segment revenues:
         Under pressure services.....................   $    41,192,000    $   39,903,000    $   38,652,000
         Turnaround services.........................        41,949,000        48,301,000        44,283,000
         Other services..............................         7,606,000         8,117,000         9,207,000
                                                        ---------------    --------------    --------------
                                                        $    90,747,000    $   96,321,000    $   92,142,000
                                                        ===============    ==============    ==============
       Business segment profit (loss):
         Technical services .........................   $     3,580,000    $    5,581,000    $    6,320,000
         Information technology services.............        (3,796,000)        3,651,000         4,134,000
         General corporate...........................        (3,991,000)       (3,803,000)       (6,352,000)
                                                        ---------------    --------------    --------------
           Operating income (loss)...................        (4,207,000)        5,429,000         4,102,000
         Interest income.............................           460,000           665,000           909,000
         Other income (expense)......................             -             6,741,000          (239,000)
         Interest expense............................        (1,764,000)       (3,486,000)       (3,883,000)
                                                        ---------------    --------------    --------------
         Income (loss) from continuing operations
           before income taxes and cumulative
           effect of change in accounting principle..   $    (5,511,000)   $    9,349,000    $      889,000
                                                        ===============    ==============    ==============
       Business segment assets:
         Depreciation and amortization:
           Technical services........................   $     2,540,000    $    4,514,000    $    4,585,000
           Information technology services...........         1,125,000           694,000           512,000
                                                        ---------------    --------------    --------------
                                                        $     3,665,000    $    5,208,000    $    5,097,000
                                                        ===============    ==============    ==============

         Capital expenditures (excluding acquisitions):
           Technical services........................   $     2,912,000    $    3,331,000    $    2,160,000
           Information technology services...........         2,592,000         1,294,000           530,000
                                                        ---------------    --------------    --------------
                                                        $     5,504,000    $    4,625,000    $    2,690,000
                                                        ===============    ==============    ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2002               2001             2000
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
         Total assets:
           Technical services........................   $    63,319,000    $  102,147,000    $  103,817,000
           Information technology services...........        26,956,000        30,877,000        20,086,000
           General corporate.........................        37,372,000        53,195,000        60,918,000
           Discontinued operations, net..............             -                 -            41,822,000
                                                        ---------------    --------------    --------------
                                                        $   127,647,000    $  186,219,000    $  226,643,000
                                                        ===============    ==============    ==============
</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,
                                                        ---------------------------------------------------
                                                              2002               2001             2000
                                                        ---------------    --------------    --------------
<S>                                                     <C>                <C>               <C>
       Geographical area revenues:
         United States............................      $    66,888,000    $   84,171,000    $   67,242,000
         Europe...................................           53,187,000        48,554,000        50,446,000
         Asia-Pacific.............................           11,361,000        11,979,000         9,953,000
                                                        ---------------    --------------    --------------
                                                        $   131,436,000    $  144,704,000    $  127,641,000
                                                        ===============    ==============    ==============
       Geographical area operating income (loss):
         United States............................      $   (11,204,000)   $   (2,461,000)   $   (3,757,000)
         Europe...................................            5,990,000         7,011,000         6,997,000
         Asia-Pacific.............................            1,007,000           879,000           862,000
                                                        ---------------    --------------    --------------
                                                        $    (4,207,000)   $    5,429,000    $    4,102,000
                                                        ===============    ==============    ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2002               2001             2000
                                                        ---------------    --------------    --------------

<S>                                                     <C>                <C>               <C>
      Geographical area net property and equipment:
         United States............................      $     7,269,000    $    5,346,000    $    3,099,000
         Europe...................................            5,652,000         5,110,000         6,506,000
         Asia-Pacific.............................            1,034,000           930,000           937,000
                                                        ---------------    --------------    --------------
                                                        $    13,955,000    $   11,386,000    $   10,542,000
                                                        ===============    ==============    ==============
</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
years ended  December 31, 2001 (through date of  Distribution  on June 29, 2001)
and 2000 is presented below:
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                       --------------------------------------------
                                                                             2001                         2000
                                                                       ---------------             ----------------
<S>                                                                    <C>                         <C>
       Revenues:
         Pipeline and terminaling..................                    $   101,021,000             $    156,232,000
         Product marketing business................                        187,231,000                  381,186,000
                                                                       ---------------             ----------------
                                                                       $   288,252,000             $    537,418,000
                                                                       ===============             ================
       Operating profit:
         Pipeline and terminaling..................                    $    39,896,000             $     58,104,000
         Product marketing business................                           (264,000)                   2,472,000
         Distribution expenses.....................                         (1,923,000)                       -
                                                                       ---------------             ----------------
                                                                       $    37,709,000             $     60,576,000
                                                                       ===============             ================
       Income before income taxes and interest
         of outside non-controlling partners in
         KPP's net income and extraordinary item...                    $    32,653,000             $     48,688,000

       Income taxes................................                         (3,090,000)                  (5,609,000)
       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)                 (32,693,000)
                                                                       ---------------             ----------------
       Income from discontinued operations,
         net of income taxes.......................                    $     3,337,000             $     10,386,000
                                                                       ===============             ================
</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,
                                                                          ---------------------------------
                                                                                2002              2001
                                                                          --------------     --------------
<S>                                                                       <C>                <C>
       Accrued compensation and benefits.............................     $    8,694,000     $    4,393,000
       Accrued taxes other than income...............................            582,000            409,000
       Accrued interest..............................................            456,000          1,014,000
       Other accrued expenses........................................         11,687,000          7,343,000
                                                                          --------------     --------------
                                                                          $   21,419,000     $   13,159,000
                                                                          ==============     ==============
</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, 2002 and 2001 was  approximately
$27 million and $37 million as compared to the carrying value of $27 million and
$39 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. A
substantial  portion of the revenues from the information  technology segment is
attributable  to contracts  with agencies of the U. S.  Government.  The Company
does not  believe  that it has a  significant  concentration  of credit  risk at
December 31, 2002, as the Company's accounts receivable are generated from these
distinct business segments with customers located  throughout the United States,
Europe and Asia-Pacific.




<PAGE>
13.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Quarterly operating results for 2002 and 2001 are summarized as follows:

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

       Operating income (loss)...........   $       (1,396)    $       (1,155)    $       (1,244)   $         (412)
                                            ==============     ==============     ==============    ==============
       Net income (loss) before
         cumulative effect of change
         in accounting principle.........   $         (914)    $         (573)    $         (431)   $         (324)
       Cumulative effect of change
         in accounting principle, net
         of income taxes (a).............          (45,269)               -                  -                 -
                                            --------------     --------------     --------------    --------------
       Net income (loss).................   $      (46,183)    $         (573)    $         (431)   $         (324)
                                            ==============     ==============     ==============    ==============

       Earnings (loss) per common share:
         Basic:
           Before cumulative effect
              of change in accounting
              principle..................   $        (0.03)    $        (0.02)    $        (0.01)   $        (0.01)
           Cumulative effect of change
              in accounting principle (a)            (1.36)               -                  -                 -
                                            --------------     --------------     --------------    --------------
                Total....................   $        (1.39)    $        (0.02)    $        (0.01)   $        (0.01)
                                            ==============     ==============     ==============    ==============

         Diluted:
           Before cumulative effect
              of change in accounting
              principle..................   $        (0.03)    $        (0.02)    $        (0.01)   $        (0.01)
           Cumulative effect of change
              in accounting principle (a)            (1.36)               -                  -                 -
                                            --------------     --------------     --------------    --------------
                Total....................   $        (1.39)    $        (0.02)    $        (0.01)   $        (0.01)
                                            ==============     ==============     ==============    ==============
       2001:
       Revenues..........................   $   35,892,000     $   38,724,000     $   34,935,000    $   35,153,000
                                            ==============     ==============     ==============    ==============

       Operating income..................   $    1,524,000     $    1,388,000     $    1,585,000    $      932,000
                                            ==============     ==============     ==============    ==============

       Net income (loss):
         Continuing operations...........   $      373,000     $      685,000     $    1,229,000    $   20,101,000(b)
         Discontinued operations.........          657,000          2,766,000                -             (86,000)
                                            --------------     --------------     --------------    --------------
           Total.........................   $    1,030,000     $    3,451,000     $    1,229,000    $   20,015,000
                                            ==============     ==============     ==============    ==============
       Earnings per common share:
         Basic:
           Continuing operations.........   $        -         $         0.02     $         0.04    $         0.60
           Discontinued operations.......             0.02               0.09                -                 -
                                            --------------     --------------     --------------    --------------
              Total......................   $         0.02     $          0.11    $         0.04    $         0.60
                                            ==============     ==============     ==============    ==============
         Diluted:
           Continuing operations.........   $        -         $         0.02     $         0.04    $         0.59
           Discontinued operations.......             0.02               0.08                -                 -
                                            --------------     -------------      --------------    --------------
              Total......................   $         0.02     $         0.10     $         0.04    $         0.59
                                            ==============     =============      ==============    ==============

</TABLE>

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

     (b)  See  Note  2  regarding   income  tax  benefits   resulting  from  the
          recapitalization of a foreign subsidiary ($18.1 million).



<PAGE>
                                                                      Schedule I

                       XANSER CORPORATION (PARENT COMPANY)
                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                              -----------------------------------------------------
                                                                   2002               2001                2000
                                                              -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>
General and administrative expenses.....................      $  (3,991,000)      $  (3,803,000)     $   (6,352,000)
Interest expense........................................           (991,000)         (2,270,000)         (2,242,000)
Intercompany fees and expenses..........................          1,145,000           2,446,000           2,915,000
Interest and other income, net..........................            360,000           7,254,000             804,000
Equity in income (loss) of subsidiaries.................         (3,114,000)          4,112,000           9,648,000
                                                              -------------       -------------      --------------

Income (loss) from continuing operations
   before income taxes and cumulative effect
   of change in accounting principle....................         (6,591,000)          7,739,000           4,773,000
Income tax benefit......................................          4,349,000          14,649,000           2,010,000
                                                              -------------       -------------      --------------

Income (loss) from continuing operations before
   cumulative effect of change in accounting principle..         (2,242,000)         22,388,000           6,783,000

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................        (47,511,000)         22,388,000           6,783,000

Income from discontinued operations - businesses
   distributed to common shareholders, net of
   income taxes.........................................               -              3,337,000          10,386,000
                                                              -------------       -------------      --------------

Net income (loss).......................................        (47,511,000)         25,725,000          17,169,000

Dividends and redemption premium applicable
   to preferred stock...................................               -                493,000             479,000
                                                              -------------       -------------      --------------

Net income (loss) applicable to common  stock...........      $ (47,511,000)      $  25,232,000      $   16,690,000
                                                              =============       =============      ==============

Earnings (loss) per common share:
    Basic:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle..........................      $       (0.07)      $        0.68      $         0.20
        Cumulative effect of change in accounting
          principle.....................................              (1.38)               -                  -
                                                              -------------       -------------      --------------
                                                                      (1.45)               0.68                0.20
      Discontinued operations...........................               -                   0.10                0.33
                                                              -------------       -------------      --------------
                                                              $       (1.45)      $        0.78      $         0.53
                                                              =============       =============      ==============
    Diluted:
      Continuing operations:
        Before cumulative effect of change in
          accounting principle..........................      $       (0.07)      $        0.64      $         0.19
        Cumulative effect of change in accounting
          principle.....................................              (1.38)               -                   -
                                                              -------------       -------------      --------------
                                                                      (1.45)               0.64                0.19
      Discontinued operations...........................               -                   0.10                0.31
                                                              -------------       -------------      --------------
                                                              $       (1.45)      $        0.74      $         0.50
                                                              =============       =============      ==============

</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 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                             --------------------------------------
                                                                                  2002                   2001
                                                                             ---------------        ---------------
                                     ASSETS
<S>                                                                          <C>                    <C>
Current assets:
   Cash and cash equivalents............................................     $    17,432,000        $    23,353,000
   Receivable from businesses distributed to common shareholders........           7,412,000             17,904,000
   Current deferred income tax assets...................................             253,000              2,300,000
   Prepaid expenses and other...........................................             561,000              2,807,000
                                                                             ---------------        ---------------
     Total current assets...............................................          25,658,000             46,364,000
                                                                             ---------------        ---------------

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

Investments in, advances to and notes receivable
  from subsidiaries.....................................................          50,939,000             97,444,000

Deferred income tax and other assets....................................          11,714,000              6,831,000
                                                                             ---------------        ---------------
                                                                             $    88,311,000        $   150,639,000
                                                                             ===============        ===============


                             LIABILITIES AND EQUITY

Current liabilities:
   Current portion of long-term debt....................................     $         -            $     1,466,000
   Accounts payable and accrued expenses................................          11,054,000             13,472,000
                                                                             ---------------        ---------------
     Total current liabilities..........................................          11,054,000             14,938,000
                                                                             ---------------        ---------------

Long-term debt, less current portion....................................           9,930,000             19,930,000

Deferred income taxes and other liabilities.............................           5,778,000                265,000

Stockholders' equity:
   Common stock, without par value......................................           4,333,000              4,270,000
   Additional paid-in capital...........................................         126,675,000            128,744,000
   Treasury stock, at cost..............................................         (26,390,000)           (23,423,000)
   Retained earnings (accumulated deficit)..............................         (35,590,000)            11,921,000
   Accumulated comprehensive income (loss)..............................          (7,479,000)            (6,006,000)
                                                                            ----------------       ---------------
       Total stockholders' equity.......................................          61,549,000            115,506,000
                                                                             ---------------        ---------------
                                                                             $    88,311,000        $   150,639,000
                                                                             ===============        ===============

</TABLE>


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

                                     F - 28

<PAGE>
                                                                     Schedule I
                                                                     (Continued)

                       XANSER CORPORATION (PARENT COMPANY)
                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                       -----------------------------------------------------------
                                                              2002                2001                 2000
                                                       -----------------    ----------------    ------------------
<S>                                                    <C>                  <C>                 <C>
Operating activities:
   Income (loss) from continuing operations..........  $     (47,511,000)   $     22,388,000    $        6,783,000
   Adjustments to reconcile income from
     continuing operations to net cash used in
     operating activities:
       Equity in loss (income) of subsidiaries.......          3,114,000          (4,112,000)           (9,648,000)
       Deferred income taxes.........................            181,000         (21,032,000)           (1,223,000)
       Cumulative effect of change in accounting
         principle...................................         45,269,000              -                      -
       Other, net....................................            648,000              -                      -
       Increase in the estimated redemption value of
         preferred stock.............................              -                  -                  1,387,000
       Changes in current assets and liabilities:
         Prepaid expenses and other current assets...          2,246,000             121,000            (1,694,000)
         Accounts payable and accrued expenses ......         (4,672,000)          1,250,000               141,000
                                                       -----------------    ----------------    ------------------
         Net cash used in operating activities.......           (725,000)         (1,385,000)           (4,254,000)
                                                       -----------------    ----------------    ------------------

Investing activities:
   Change in other assets, net.......................          1,883,000            (507,000)           (2,092,000)
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           investing activities......................          1,883,000            (507,000)           (2,092,000)
                                                       -----------------    ----------------    ------------------

Financing activities:
   Payments on debt..................................        (11,466,000)             -                 (2,270,000)
   Change in investments in, advances to and notes
     receivable from subsidiaries....................         (3,269,000)            345,000             2,655,000
   Common stock issued...............................            450,000             545,000               255,000
   Purchase of treasury stock........................         (3,286,000)              -                (1,530,000)
   Preferred stock dividends and redemption
     premium paid....................................              -                (493,000)             (479,000)
   Redemption of preferred stock.....................              -              (5,676,000)                -
   Decrease in receivable from businesses
     distributed to common shareholders..............         10,492,000          14,076,000                 -
   Change in net assets of discontinued operations...              -               2,495,000            11,928,000
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           financing activities......................         (7,079,000)         11,292,000            10,559,000
                                                       -----------------    ----------------    ------------------

Increase (decrease) in cash and cash equivalents.....         (5,921,000)          9,400,000             4,213,000
Cash and cash equivalents at beginning of year.......         23,353,000          13,953,000             9,740,000
                                                       -----------------    ----------------    ------------------
Cash and cash equivalents at end of year.............  $      17,432,000    $     23,353,000    $       13,953,000
                                                       =================    ================    ==================
</TABLE>


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

                                     F - 29

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

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

Year Ended December 31, 2000:
   For doubtful receivables
     classified as current assets...         $       999  $          92   $       (10)(a) $        (476)(b)$       605
                                             ===========  =============   ===========     =============    ===========

   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............         $     7,204  $        -      $       -       $      (7,204)   $      -
                                             ===========  =============   ===========     =============    ===========
</TABLE>



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 28, 2003

     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
<S>                                                        <C>                                     <C>
Principal Executive Officer

       //s// JOHN R. BARNES                                President, Chief Executive              March 28, 2003
----------------------------------------                   Officer and Director

Principal Accounting Officer

       //s// MICHAEL R. BAKKE                              Controller                              March 28, 2003
----------------------------------------

Directors

         //s// SANGWOO AHN                                 Director                                March 28, 2003
----------------------------------------


         //s// JOHN R. BARNES                              Director                                March 28, 2003
---------------------------------------


         //s// FRANK M. BURKE, JR.                         Director                                March 28, 2003
----------------------------------------


         //s// CHARLES R. COX                              Director                                March 28, 2003
----------------------------------------


         //s// HANS KESSLER                                Director                                March 28, 2003
----------------------------------------


         //s// JAMES R. WHATLEY                            Director                                March 28, 2003
----------------------------------------

</TABLE>



<PAGE>


                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER


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-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Date: March 28, 2003



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


<PAGE>


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER


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-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Date: March 28, 2003



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