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 AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                       Commission file number 1-5083 KANEB SERVICES, INC.

             (Exact name of Registrant as specified in its Charter)

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

     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:

                                                        Name of each exchange
      Title of each class                               on which registered
      ----------------------------------                -----------------------
      Common Stock, Without Par Value                   New York Stock Exchange
      Adjustable Rate Cumulative Class A                New York Stock Exchange
        Preferred Stock
      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.[ ]

     Aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant:  $167,854,753.  This figure is estimated  as of March 16,  1998,  at
which date the closing  price of the  Registrant's  Common Stock on the New York
Stock  Exchange  was $5.50 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 16, 1998: 32,212,164.

                      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

         Kaneb Services,  Inc.  ("KSI" or the "Company")  conducts its principal
businesses in two industry segments,  specialized industrial field services, and
pipeline  transportation and storage of refined petroleum products.  The Company
operates  its  specialized   industrial   field  services   business  through  a
wholly-owned  subsidiary  of the Company,  Furmanite  Worldwide,  Inc.,  and its
domestic  and   international   subsidiaries   and   affiliates   (collectively,
"Furmanite").  The  Furmanite  group of  companies  provide  underpressure  leak
sealing,  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 Western Europe, North America,  Latin
America and the Pacific Rim. See  "Industrial  Field  Services."  The  Company's
wholly-owned subsidiary,  Kaneb Pipe Line Company ("KPL"),  operates and manages
refined  petroleum  products  pipeline   transportation  systems  and  petroleum
products and specialty liquids terminal storage and pipeline  facilities for the
benefit of Kaneb Pipe Line Partners,  L.P. ("KPP" or the  "Partnership"),  which
owns such systems and  facilities  through its  subsidiaries.  See "Pipeline and
Terminaling Services." The Company is also engaged in the information management
services industry through,  among other entities,  its wholly-owned  subsidiary,
Fields Financial Services,  Inc. ("Fields"),  which offers products and services
that enable financial  institutions to monitor the continual  insurance coverage
of their loan collateral and provides other information  management  services to
financial institutions and other customers.

         Kaneb Services,  Inc. was incorporated in Delaware on January 23, 1953.
The  Company  is a holding  company  that  conducts  its  business  through  the
subsidiaries  identified above, among others. The Company's  principal operating
office is located at 2435 North Central Expressway,  Richardson, Texas 75080 and
its telephone number is (972) 699-4000.

INDUSTRY SEGMENTS

         Financial  information  regarding the Company's  industry  segments and
foreign  operations is presented  under the caption  "Business  Segment Data" in
Note 11 to the Company's consolidated financial statements.  Such information is
hereby incorporated by reference into this Item 1.

INDUSTRIAL FIELD SERVICES

         The  Company,  through  Furmanite,  offers  a  variety  of  specialized
industrial field services to an international  base of process industry clients.
Founded in  Virginia  Beach,  Virginia  in the 1920s as a  manufacturer  of leak
sealing kits,  Furmanite has evolved into an international  service company.  In
the 1960s,  Furmanite expanded within the United Kingdom,  primarily through its
leak sealing  products and  services,  and,  during the 1970's and 1980's,  grew
through geographic  expansion and the addition of new techniques,  processes and
services  to become the largest  leak  sealing  company,  and one of the largest
on-site  machining  companies,  in the  world.  In 1991,  the  Company  acquired
Furmanite  to  diversify  the  Company's   operations   and  take  advantage  of
anticipated international growth opportunities.  For the year ended December 31,
1997, Furmanite's sales and operating income were approximately $108,223,000 and
$7,438,000, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

PRODUCTS AND SERVICES

         Furmanite is an industry  leader in providing  on-line repairs of leaks
in valves,  pipes and other  components of piping systems and related  equipment
("leak  sealing")  typically  used in 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 a variety of services,  such as hot
tapping,  fugitive  emissions  monitoring,  passive  fire  protection,  concrete
repair,  heat exchanger  repair and pipeline  engineering.  The Company performs
diagnostic services on valves and motors by, among other methods,  utilizing its
patented  Trevitest(R)  system and employing  proprietary  diagnostic  equipment
under an exclusive  license from  Framatome  Technologies.  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,  1997,  1996,  and  1995,   underpressure   services
represented  approximately  35%,  37%  and  34%,  respectively,  of  Furmanite's
revenues,  while turnaround  services  accounted for approximately  45%, 41% and
42%,  respectively,  and product sales and other industrial services represented
approximately 20%, 22% and 24%,  respectively,  of Furmanite's revenues for each
of such years.

         Furmanite's on-line,  underpressure leak sealing services are performed
on a variety of process industry machinery, often in difficult situations.  Many
of Furmanite's techniques and materials are proprietary and/or patented and, the
Company  believes,  provide  Furmanite  with a competitive  advantage over other
organizations that provide similar services.  The Company'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 in order to effect the  necessary  repairs.  These
efforts are supported by an internal  quality  control group that works together
with the on-site technicians in crafting these materials.

CUSTOMERS AND MARKETS

         Furmanite's  customer  base  spans a  broad  industry  spectrum,  which
includes  petroleum  refineries,  chemical  plants,  offshore energy  production
platforms,  steel mills,  power generation and other process  industries 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  and  similarly  situated
organizations.  Other factors that may influence the markets served by Furmanite
include  regulations  governing  construction of industrial  plants,  safety and
environmental compliance  requirements,  and fulfillment of specialized services
through the increased use of outsourcing, rather than an organization's in-house
staff.

         Furmanite  serves its customers from its  Richardson,  Texas  worldwide
headquarters and maintains a strong presence in England and continental  Europe.
Furmanite  currently  operates  North  American  offices in the United States in
Baton Rouge, Beaumont, Charlotte,  Chicago, Houston, Los Angeles,  Philadelphia,
Salt Lake City and San Francisco; and in Edmonton,  Alberta and Sarnia, Ontario,
Canada. Furmanite's worldwide strength is further supported by offices currently
located in Australia,  Austria,  Belgium,  China,  France,  Germany,  Hong Kong,
Malaysia, the Netherlands,  New Zealand, Norway, Singapore, South Africa and the
United Kingdom (14 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
Africa, South Korea, Sweden,  Thailand,  Trinidad,  Ukraine, and the United Arab
Emirates. Sales by geographic region for 1997 were 31.1% for the Americas, 61.4%
for Europe and 7.5% for Asia-Pacific.  See "Management's Discussion and Analysis
of Financial  Condition and Results of Operations"  and Note 11 to the Company's
consolidated financial statements.

         Furmanite's  underpressure  leak  sealing  and  other  specialty  field
services  are  marketed  primarily  through  direct  sales calls on customers by
salesmen 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, to date, has had no material warranty claims.
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.  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.  National,  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.  Additionally,  Furmanite  participates,  from  time to  time,  with
various regulatory authorities in certain studies,  reviews and inquiries of its
projects and/or  operations.  Further,  because of its  international  presence,
Furmanite  is  subject  to a number of  political  and  economic  uncertainties,
including expropriation of equipment, taxation policies, labor practices, import
and export limitations,  foreign exchange  restrictions,  currency exchange rate
fluctuations  and  local  political  conditions.  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.

         Underpressure  leak  sealing  and other  Furmanite  services  are often
performed  in  emergency  situations  under  dangerous  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  classroom and
field  training  and  supervision,  maintaining  a system of  technical  support
through its staff of  professionally  qualified  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.

RECENT DEVELOPMENTS

         In July 1997, Furmanite acquired certain assets and business operations
from its  licensee in  Australia  and New Zealand  for $4.9  million,  including
transaction costs. The acquisition,  which was financed with a note due in 2001,
represented  the first major  geographical  expansion by Furmanite  since it was
acquired by the Company in 1991.

PIPELINE AND TERMINALING SERVICES

         Through  its KPL  subsidiary,  the  Company,  among  other  activities,
manages and operates refined petroleum products pipeline  transportation  system
and petroleum  products and specialty liquids terminal storage  businesses,  and
their associated properties, for the benefit of KPP, which owns such systems and
facilities through its subsidiaries. The pipeline business consists primarily of
the  transportation,  as a common  carrier,  of refined  petroleum  products  in
Colorado,  Iowa, Kansas,  Nebraska,  North Dakota,  South Dakota and Wyoming, as
well as related terminaling  activities.  Through its Support Terminal Services,
Inc.  subsidiary,  among others  (collectively,  "ST"),  the Company operates 31
terminal  storage  facilities in 16 states and the District of Columbia,  with a
total storage  capacity of  approximately  17,200,000  barrels.  Including those
situated  along  its  refined   petroleum   products   pipeline   systems,   the
Partnership's terminal storage operations comprise the third largest independent
liquids terminaling company in the United States. For a more detailed discussion
of the business,  activities and results of operations of the  Partnership  than
that which is contained  herein,  reference is made to the Annual Report on Form
10-K and other publicly filed documents of Kaneb Pipe Line Partners, L.P. (NYSE:
KPP, KPU).

<PAGE>

PIPELINE TRANSPORTATION SYSTEMS

MARKETS SERVED

         Initially  built in 1953,  the KPP pipeline  transportation  operations
currently  consist of two pipeline  systems:  the East and West  Pipelines  (the
"Pipelines"),  with its operational headquarters located in Wichita, Kansas. The
East  Pipeline  is a 2,075 mile  integrated  pipeline,  ranging  between six and
sixteen inches in diameter,  that transports refined petroleum products received
from  refineries  in  southeast  Kansas or other  interconnecting  pipelines  to
terminals  in Iowa,  Kansas,  Nebraska,  North  Dakota  and South  Dakota and to
receiving  pipeline   connections  in  Kansas.  The  East  Pipeline  has  direct
connections  to two  Kansas  refineries  and has  direct  access by  third-party
pipelines  to four other  refineries  in Kansas,  Oklahoma  and Texas.  The East
Pipeline  also  provides  access to Gulf Coast  suppliers  of refined  petroleum
products  through  connecting  pipelines which receive  products from a pipeline
originating  on the Gulf Coast and  receives  propane  through  five  connecting
pipelines from gas processing plants in Kansas, New Mexico,  Oklahoma and Texas.
The East  Pipeline's  operation also includes 15 public truck loading  terminals
located  in five  states,  comprised  of a total  of 224  tanks  having  storage
capacity of  approximately  3,100,000  barrels of product,  and has intermediate
storage  facilities in McPherson and El Dorado,  Kansas,  consisting of 23 tanks
having an aggregate storage capacity of approximately 922,000 barrels.

         The West  Pipeline,  acquired  by the  Partnership  from Wyco Pipe Line
Company in February 1995,  consists of  approximately  550 miles of six to eight
inch diameter  pipeline that  transports  refined  petroleum  products  received
directly  and by other  interconnecting  pipelines  from  refineries  located in
Colorado,  Montana,  South Dakota and Wyoming to  terminals  in Colorado,  South
Dakota and Wyoming.  The West  Pipeline's  operations  include four public truck
loading terminals,  also located in Colorado,  South Dakota and Wyoming,  having
storage capacity of approximately  1,600,000  barrels of product.  Through these
facilities  and  operations,  the West  Pipeline  serves the growing  Denver and
northeastern  Colorado  markets and  supplies jet fuel for  Ellsworth  Air Force
Base, Rapid City, South Dakota.

         The West Pipeline is the nearest  pipeline system  paralleling the East
Pipeline  to the west.  Consequently,  there is a high level of  commonality  of
shippers  on the  Pipelines,  and due to the  proximity  of the  East  and  West
Pipelines  to one  another,  they often face  similar  competitive  issues.  The
Pipelines'  more  significant  competitors  include  refineries,  common carrier
pipelines,  proprietary  pipelines  owned and operated by major  integrated  and
large  independent  oil  companies  and other  companies  in the areas where the
Partnership's  pipeline systems and operations deliver products.  In particular,
the  Pipelines'  major  competitor is an  independent  regulated  common carrier
pipeline system that operates  approximately 100 miles east of and parallel with
the  East  Pipeline.  Competition  between  common  carrier  pipelines  is based
primarily on transportation  charges,  quality of customer service and proximity
to end users. The Company believes that high capital costs,  tariff  regulation,
environmental  considerations  and problems in acquiring  rights-of-way  make it
unlikely that other competing  pipeline systems  comparable in size and scope to
the Pipelines  will be built in the near future,  provided that the Pipeline has
available  capacity  to satisfy  demand  and its  tariffs  remain at  reasonable
levels.  Further, while pipeline transportation systems are generally the lowest
cost  method  for  intermediate  and  long-haul  overland  movement  of  refined
petroleum  products,  trucks may also competitively  deliver products in some of
the areas served by the Pipelines.  However,  as trucking costs render that mode
of transportation  uncompetitive for longer hauls or larger volumes, the Company
does not believe that, over the long term,  trucks are effective  competition to
the Pipelines' long-haul volumes.

PRODUCTS DELIVERED

         The mix of refined petroleum products delivered by the pipelines varies
seasonally,  with gasoline  demand  peaking in early summer,  diesel fuel demand
peaking in late  summer and  propane  demand  higher in the fall.  In  addition,
weather  conditions in the geographic  areas served by the Pipelines  affect the
demand for and the mix of the refined petroleum  products  delivered through the
Pipelines, although any such impact on the volumes shipped has historically been
short-term.  Most of the refined petroleum  products  delivered through the East
Pipeline are ultimately used in agricultural operations, including fuel for farm
equipment,  irrigation  systems,  crop  drying  facilities  and  trucks  used to
transport crops to a variety of destinations; while the West Pipeline's products
are  generally  delivered  to a  more  urban  and  commercial  marketplace.  The
agricultural sector served by the East Pipeline is also affected by governmental
policy and crop prices.  Further,  the  Pipelines  are  dependent  upon adequate
levels of  production  of refined  petroleum  products  by  refineries  that are
connected  to the  Pipeline,  which  refineries  are,  in turn,  dependent  upon
adequate  supplies of  suitable  grades of crude oil.  KPL,  in its  capacity as
General Partner of the Partnership,  believes that, in the event that operations
at any one refinery  were  discontinued  (and assuming  unchanged  demand in the
markets  served by the  Pipelines),  the effects  thereof would be short-term in
nature and the Company's  business  would not be materially  adversely  affected
over the long  term.  However,  a  substantial  reduction  of output by  several
refineries as a group could affect the Pipelines'  operations to the extent that
a greater  percentage of the supply would have to come from  refineries  outside
the Pipelines' connecting access pipelines.

TARIFFS

         Substantially  all  of  the  Pipelines'  operations  constitute  common
carrier activities that are subject to Federal or state tariff regulation.  Such
common carrier activities are those under which transportation  services through
the Pipeline  are  available  at  published  tariffs,  as filed with the Federal
Energy  Regulatory  Commission  ("FERC")  or  the  applicable  state  regulatory
authority,  to any  shipper of refined  petroleum  products  who  requests  such
services,  provided that each refined petroleum product for which transportation
is requested  satisfies the  conditions,  requirements  and  specifications  for
transportation.

TERMINAL STORAGE OPERATIONS

FACILITIES

         Acquired by the  Partnership  in 1993, ST and its  predecessors  have a
proven track record of more than 40 years of quality  service and  experience in
the operation of specialty  liquids terminal storage  facilities.  ST's terminal
facilities  provide  throughput and storage on a fee basis for a wide variety of
products  from  petroleum  products to specialty  chemicals and edible and other
liquids.  ST's 31  facilities  offer  storage  capacity  ranging  from 40,000 to
5,403,000  barrels,  comprised of two to 124 tanks per facility.  As of December
31, 1997,  ST's five largest  facilities  were located at Piney Point,  Maryland
(5,403,000  Bbls capacity;  28 tanks);  Jacksonville,  Florida  (2,066,000  Bbls
capacity;  30 tanks);  Texas City, Texas  (2,002,000 Bbls capacity;  124 tanks);
Westwego, Louisiana (858,000 Bbls capacity; 54 tanks); and, Baltimore,  Maryland
(821,000 Bbls capacity;  49 tanks).  In addition to the foregoing,  the other ST
facilities are located in Alabama (2), Arizona,  California (2), the District of
Columbia (2), Florida,  Georgia (6), Illinois (2),  Indiana,  Kansas,  Maryland,
Minnesota,  New Mexico,  Oklahoma,  Texas,  Virginia  (2) and  Wisconsin.  These
terminals  provide  ST  with a  geographically  diverse  base of  customers  and
revenue. ST's operational headquarters is located in Dallas, Texas.

         The independent liquids terminaling industry is fragmented and includes
both large, well financed publicly-traded companies that own and/or operate many
terminal  locations and small private companies that may own and/or operate only
a single  terminal  location.  In addition to the terminals owned by independent
terminal operators,  many major energy and chemical companies also own extensive
terminal facilities. Although such terminals often have the same capabilities as
those owned by independent operators,  they generally do not provide terminaling
services  to  third  parties.  In many  instances,  major  energy  and  chemical
companies  that  own  storage  facilities  are  also  significant  customers  of
independent  terminal  operators,  when  independent  terminals  have  more cost
effective  locations  near key  transportation  links such as deep water  ports.
Major energy and chemical  companies also require  independent  terminal storage
when their captive  storage  facilities are  inadequate,  either because of size
constraints,   the  nature  of  the  stored  material  or  specialized  handling
requirements.  Independent  terminal owners, such as ST, compete on the basis of
location,  versatility of terminals, service and price. For example, a favorably
located   terminal  will  have  access  to  various   means  of   cost-effective
transportation both to and from the terminal. Terminal versatility is a function
of the operator's ability to offer safe handling for a diverse group of products
having complex handling requirements. The service function typically provided by
the terminal  includes,  among other things,  the safe storage of the product at
specified  temperature,  moisture and other  conditions,  as well as loading and
unloading of product at the terminal.  Additionally,  an increasingly  important
aspect of the  versatility  and  service  capabilities  of an  operator  is that
operator's  ability to offer product  handling and storage  which  complies with
applicable   environmental,   safety  and  health  regulations,   among  others,
especially  since  customers  may  retain  the  liability  for  certain  acts of
non-compliance with such regulations.

<PAGE>

PRODUCTS

         The variety of  products  that can be stored at ST's  terminal  storage
facilities  is a  significant  part  of,  what  the  Company  believes  is,  its
competitive  advantage among similarly  situated  organizations.  ST's terminals
provide  storage  capacity for such  products as petroleum  products,  specialty
chemicals,  asphalt,  fertilizer,  herbicides,  latex and caustic solutions, and
edible  liquids,  including  animal and vegetable  fats and oils.  Further,  the
terminaling and pipeline  transportation of jet fuel for the U.S.  Department of
Defense is an important part of ST's business. Eleven of ST's terminal sites are
involved in the  terminaling  or  transport  (via  pipeline) of jet fuel for the
Defense  Department.  Seven of the eleven  locations are utilized  solely by the
Defense Department and six of these locations include pipelines that deliver jet
fuel directly to nearby  military bases.  Revenue  attributable to Department of
Defense  activities  is derived from a  combination  of terminal  contracts  and
tenders for the  handling  and  movement  of jet fuel.  The  terminal  contracts
provide a fixed monthly  revenue for a period of one to four years per contract,
with additional  revenues generated if specific  throughput levels are exceeded.
The tenders  provide for  charges per barrel of  throughput  and have no minimum
guarantees.  From time to time,  military  base  closings  or other  events have
impacted the  operation of certain of ST's  facilities.  Presently,  two of ST's
terminals are unproductive due to loss of military  business.  However,  KPL, in
its capacity as General  Partner of the  Partnership,  does not believe that, in
the aggregate,  the Partnership  will experience a significant  decrease in cash
flows for the foreseeable future as a result of Department of Defense changes in
activity.  KPL, in its capacity as General Partner of the Partnership,  does not
believe that ST's business is dependent upon any one customer or any small group
of customers.

SAFETY, ENVIRONMENTAL AND OTHER REGULATORY MATTERS

         In  addition  to  tariff  regulation  of  the  Partnership's   pipeline
activities,  certain operations of the Partnership are subject to Federal, state
and local laws and  regulations  relating to the  construction,  maintenance and
management of its facilities,  the safety of its personnel and the protection of
the  environment.  Although  KPL,  in its  capacity  as  General  Partner of the
Partnership,  believes  that the  operations of the  Partnership  are in general
compliance with applicable laws and regulations,  risks of substantial costs and
liabilities are inherent in both pipeline and terminaling operations,  and there
can be no assurance that significant  costs and liabilities will not be incurred
by the Partnership. For example, contamination resulting from spills or releases
of refined petroleum products within the petroleum pipeline industry, or refined
petroleum or other products within the terminaling industry,  are not unusual in
such  industries.  From time to time, the Partnership  has  experienced  limited
contamination at certain of its pipeline related terminal sites,  resulting from
spills  of  refined  petroleum  products.  In  each  instance,  the  appropriate
regulatory  authorities  have been  notified  of these  events  and  appropriate
remediation  activities have either been completed or are ongoing. In connection
with the  formation  of the  Partnership,  the Company  agreed to bear the costs
associated with  environmental  contamination  relating to the operations of the
East  Pipeline  arising prior to October 3, 1989;  however,  such costs have not
been, and are not in the future anticipated to be, material.

         Additionally,  from  time to  time,  the  Partnership  has  experienced
limited  contamination  at certain of its  current and former  terminal  storage
facilities,  as a result of operations at or around these  locations.  Again, in
each instance,  the  appropriate  regulatory  authorities  have been notified of
these events and appropriate  remediation activities have either been completed,
are  ongoing  or are under  investigation.  In  certain  instances  where  other
unrelated  companies may also have  responsibility  for the  contamination  of a
particular facility or area, the Partnership,  through the appropriate operating
subsidiary,  has entered into  agreements  (or is in the process of  negotiating
such agreements) with such company or companies  providing for the allocation of
the costs and/or  responsibilities  of remediation of such  facilities or areas.
Further,  ST  has  been  named  as  a  "potentially  responsible  party"  for  a
federally-designated and EPA-supervised "Superfund" site where a small amount of
material  handled by the former operator was attributed to the facility owned by
ST. While the Company believes that the Partnership's  obligations in connection
with the remediation process at this location will be de minimis,  until a final
settlement agreement is signed with the EPA, there is a possibility that the EPA
could bring additional claims against ST.

<PAGE>

ENVIRONMENTAL CONTROLS

         The Company is 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.

EMPLOYEES

         At December 31, 1997, the Company and its  subsidiaries  employed 1,798
persons,  of which a total of 1,254 persons were employed by the Furmanite group
of companies,  collectively, and a total of 427 persons were employed by KPL and
subsidiaries  of the  Partnership.  The  Partnership  has no  employees,  as the
business and  operations  of the  Partnership  are conducted by KPL, the General
Partner of the Partnership and a wholly-owned  subsidiary of the Company.  As of
December 31, 1997,  approximately  565 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.  Additionally,  as of  December  31,  1997,
approximately  151 of the persons employed by KPL were subject to representation
by unions for collective bargaining purposes;  however, except for approximately
53 employees of KPL who were subject to  representation by the Oil, Chemical and
Atomic Workers  International  Union AFL-CIO ("OCAW"),  there were no collective
bargaining or other  similar  contracts  covering  employees of KPL in effect at
that date. The union contracts with the OCAW regarding  conditions of employment
for 38 and 15 of such persons,  are in effect through June 28, 1999 and November
1, 2000,  respectively.  Both  agreements  are subject to automatic  renewal for
successive  one year  periods  unless  either  party  serves  written  notice to
terminate or modify such agreement in a timely manner.

ITEM 2.    PROPERTIES

         The corporate  headquarters  of the Company are located in  Richardson,
Texas, in a modern,  sixteen story building  pursuant to a lease agreement which
expires in 2002, with an option to renew for an additional five year period.  In
addition  to  properties  owned or  leased  by its  industrial  field  services,
pipeline transportation and liquids terminaling businesses, the Company, through
its wholly-owned subsidiary, Fields Financial Services, Inc., also leases office
space in Bryan, Texas.

         Descriptions of other  properties  owned or utilized by the Company (or
its  subsidiaries)  are contained in Item 1 of this report and such descriptions
are  hereby  incorporated  by  reference  into  this Item 2.  Under the  caption
"Commitments  and  Contingencies"  in  Note  10 to  the  Company's  consolidated
financial statements, additional information is presented concerning obligations
of the  Company (or its  subsidiaries)  for lease and rental  commitments.  Such
additional information is also incorporated by reference into this Item 2.

ITEM 3.    LEGAL PROCEEDINGS

         A subsidiary of the Company that is no longer  actively  conducting any
operations was notified in 1989 that it is a "potentially  responsible party" in
connection  with a  governmental  investigation  relating  to a  waste  disposal
facility which has been subject to remedial  action as a location  listed on the
Environmental  Protection  Agency's  ("EPA")  Superfund  National  Priority List
("Superfund").  Proceedings  arising under Superfund  typically involve numerous
waste generators and other waste  transportation and disposal companies for each
identified  facility and seek to allocate or recover costs  associated with site
investigation  and cleanup,  which costs could be  substantial.  This proceeding
involves actions allegedly taken by a former operating subsidiary of the Company
at a time  prior to the  acquisition  of such  subsidiary  by the  Company.  The
Company's  subsidiary  has  been  included  within a de  minimis  group of waste
generators  that are involved in this  proceeding,  who have been  negotiating a
collective  settlement of their liabilities with the EPA.  However,  the Company
has joined with  others  within  this de minimis  group who are each  contesting
their respective liability.  Proceedings in this matter are ongoing. The Company
has reviewed its potential  exposure,  if any, in  connection  with this matter,
giving  consideration to the nature,  accuracy and strength of evidence relating
to the Company's alleged relationship to the location,  the amount and nature of
waste taken to the location, and the number,  relationship and financial ability
of other named and unnamed  "potentially  responsible  parties" at the location.
While the Company does not anticipate that the amount of  expenditures  from its
involvement  in the above  matter  will have a  material  adverse  effect on the
Company's  operations  or  financial  condition,  the  possibility  remains that
technological,  regulatory,  enforcement or legal  developments,  the results of
environmental  studies or other factors could  materially alter this expectation
at any time.

         In  addition,  from  time to  time,  the  Company  and  certain  of its
subsidiaries are involved in various  litigation and other legal  proceedings in
the ordinary course of business.  However,  the Company believes that resolution
of these matters will not have a material adverse affect on 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 1997.

                                                      PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY
           AND RELATED STOCKHOLDER MATTERS

         Shares of the Company's Common Stock are listed and traded  principally
on the New York Stock  Exchange.  At March 16,  1998,  there were  approximately
4,250 holders of Common Stock of record. The following table sets forth, for the
fiscal periods indicated,  the quoted high and low sales prices of the shares on
the New York Stock Exchange.

                                               QUOTED STOCK PRICES
                                         --------------------------------
     CALENDAR YEAR                         HIGH                    LOW
     --------------------------          --------                --------
     1996:
       First Quarter                      3 1/4                   2 1/4
       Second Quarter                     3 3/4                   2 3/8
       Third Quarter                      3 3/8                   2 1/2
       Fourth Quarter                     3 3/4                   3

     1997:
       First Quarter                      4 1/2                   3 1/8
       Second Quarter                     4 1/8                   3 1/2
       Third Quarter                      5 3/8                   3 5/8
       Fourth Quarter                     6 5/16                  4 1/2

     1998:
       First Quarter                      6                       4 13/16
         (through 3/16/98)

         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  future dividend policy
will be  determined  by its Board of Directors on the basis of various  factors,
including  the  Company's  results of operation,  financial  condition,  capital
requirements and investment opportunities.  Additionally,  the credit facilities
for the working  capital of each of Furmanite and KPL each 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 AND OPERATING DATA

         The following selected  financial data (in thousands,  except per share
amounts) is derived from the  consolidated  financial  statements of the Company
and should be read in conjunction with the consolidated financial statements and
related notes  thereto  included  elsewhere in this report.  The Company has not
declared a dividend on its Common Stock for any of the periods presented.

<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                   ----------------------------------------------------------
                                      1997        1996        1995        1994         1993
                                   ---------   ---------   ---------   ---------    ---------

INCOME STATEMENT DATA:
<S>                                <C>         <C>         <C>         <C>          <C>
Revenues........................   $ 236,936   $ 228,861   $ 212,062   $ 208,722    $ 198,549
                                   =========   =========   =========   =========    =========
Operating income................   $  58,660   $  53,815   $  43,465   $  31,964    $  29,530
                                   =========   =========   =========   =========    =========
Income before gains on
   sale or issuance of KPP units.. $  10,643   $   7,024   $   5,024   $   2,035    $   1,032
Gains on sale or issuance of
   KPP units....................        --          --        54,157        --         15,122
                                   ---------    ---------  ---------   ---------    ---------
     Net income.................   $  10,643   $   7,024   $  59,181   $   2,035    $  16,154
                                   =========   =========   =========   =========    =========

PER SHARE DATA:
Earnings per common share:
   Basic........................   $     .31   $     .19   $    1.72   $     .02    $     .46
                                   =========   =========   =========   =========    =========
   Diluted......................   $     .30   $     .19   $    1.59   $     .02    $     .46
                                   =========   =========   =========   =========    =========

BALANCE SHEET DATA:
Net cash provided by operating
   activities...................   $  55,120   $  48,628   $  39,964   $  25,890    $  30,880
Cash and cash equivalents.......      23,025      23,693      30,389       9,506       24,327
Working capital.................      20,423      20,033      16,302     (42,797)      15,842
Total assets....................     402,273     404,691     409,827     284,213      287,472
Long-term debt..................     181,052     186,544     191,846     103,376      152,678
Stockholders' equity (1)........      78,447      75,366      69,022      18,844       14,861

<FN>

(1)  See  Note  8 to  the  Company's  Consolidated  Financial  Statements  for a
discussion of the Company's Preferred Stock.

</FN>
</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.

CONSOLIDATED RESULTS OF OPERATIONS

                                                      (in millions)
                                            --------------------------------- 
                                               1997        1996        1995
                                            ---------   ---------    --------
Consolidated revenues.....................  $  236.9    $  228.9     $ 212.1
Consolidated operating income.............  $   58.7    $   53.8     $  43.5
Consolidated operating income before
   depreciation and amortization..........  $   75.4    $   69.2     $  56.5
Consolidated net income before gains
   on sale of pipeline partnership units..  $   10.6    $    7.0     $   5.0
Consolidated capital expenditures,
   excluding acquisitions.................  $   13.0    $   10.7     $  13.4


         Consolidated revenues increased $8.0 million, or 3%, in 1997, primarily
as a result of  improvements  in the industrial  field  services  operations and
improvements in operations of the terminaling assets that were acquired by Kaneb
Pipe Line  Partners,  L.P.  ("KPP") in December  1995 and in 1996.  Consolidated
operating  income  increased  $4.9  million,  or 9%,  from  1996  to  1997  with
substantial   improvements   in  the  industrial   field  services   operations.
Consolidated  revenues increased $16.8 million in 1996, primarily as a result of
the  acquisition  of  terminaling  assets that were  acquired by KPP in December
1995. Pipeline and terminaling  services operating income increased $8.8 million
in 1996 largely due to the terminaling assets acquired by KPP in December 1995.

Industrial Field Services

         The Company's  industrial field services  business is conducted through
Furmanite,  which was  acquired in March 1991.  Furmanite  provides  specialized
industrial  field services to plants in the process and power  industries and to
refineries and chemical plants.

                                                     (in millions)
                                       ----------------------------------------
                                         1997             1996           1995
                                       --------         -------        --------
Revenues:
     Americas........................  $  33.7          $  32.7        $  32.8
     Europe..........................     66.4             65.9           67.4
     Asia-Pacific....................      8.1              4.7            4.3
                                       -------          -------        -------
                                       $ 108.2          $ 103.3        $ 104.5
                                       =======          =======        =======
Operating income:
     Americas........................  $   1.8          $   1.5        $   1.9
     Europe..........................      6.1              4.0            2.4
     Asia-Pacific....................      1.1               .9             .4
     Headquarters....................     (1.6)            (1.3)           (.8)
                                       --------         -------        -------
                                       $   7.4          $   5.1        $   3.9
                                       =======          =======        =======
Operating income before
  depreciation and amortization......  $  12.0          $   9.3        $   8.0
                                       =======          =======        =======
Capital expenditures,
  excluding acquisitions.............  $   2.0          $   3.5        $   4.3
                                       =======          =======        =======

         Furmanite's  revenues increased $4.9 million,  or 5%, in 1997 primarily
as a result of  improvements  in turnaround  services in Europe and the Americas
and the  acquisition of a former licensee in Australia in July 1997, in spite of
a large  non-recurring  engineering  contract  that was  completed in Germany in
1996.  Revenues  decreased  $1.2  million  in  1996  primarily  as a  result  of
non-recurring  passive fire protection work completed in Europe in 1995 that was
only partially offset by increases in revenues in other countries. Revenues from
traditional  underpressure  services improved  primarily in the Americas in 1996
while  revenues from  turnaround  services in 1995 included some large  projects
that typically do not recur on an annual basis.

         Operating  income  increased  $2.3  million,   or  45%,  in  1997  with
substantial  improvements  in the core  businesses in Europe and the Americas in
addition to the  Asia-Pacific  business  acquired in mid-1997.  Operating income
increased  $1.2  million,   or  31%,  in  1996  as  a  result  of  improvements,
particularly in Europe and in Asia-Pacific,  in spite of  non-recurring  passive
fire  protection  work  completed  in Europe in 1995 and from  large  turnaround
projects that were completed in the Americas in 1995.

         Capital  expenditures are primarily related to field services equipment
and the  implementation  of new  services.  Capital  expenditures  for  1998 are
currently  estimated  to be $3 million to $5 million,  depending on the economic
environment and the needs of the business.

Pipeline and Terminaling Services

         The Company's  pipeline and terminaling  services business includes the
operations of KPP, which owns refined  petroleum  products  pipeline assets and,
since 1993,  petroleum  products and specialty  liquids  storage and terminaling
assets. The Company operates, manages, and controls the pipeline and terminaling
operations  of KPP through  its 2% general  partner  interest  and a 31% limited
partner interest in the partnership.

                                                  (in millions)
                                      -----------------------------------------
                                        1997            1996            1995
                                      -------          -------         --------
Revenues ..........................   $ 121.2          $ 117.6         $   96.9
                                      =======          =======         ========
Operating income ..................   $  53.4          $  51.3         $   42.5
                                      =======          =======         ========
Operating income before
  depreciation and amortization....   $  65.1          $  62.2         $   50.8
                                      =======          =======         ========
Capital expenditures,
  excluding acquisitions...........   $  10.6          $   7.1         $    9.0
                                      =======          =======         ========

         Revenues  increased $3.6 million,  or 3%, in 1997 and operating  income
increased $2.1 million, or 4%, primarily due to improvements in tankage utilized
at terminals  acquired by KPP in December 1995,  terminaling  assets acquired in
1996 and  increases in prices  charged for  storage.  Revenues  increased  $20.7
million,  or 21%, and operating income  increased $8.8 million,  or 21%, in 1996
primarily due to the acquisition of terminaling  assets in December 1995 by KPP,
combined with continued improvements at the West Pipeline.

         The  interest of outside  non-controlling  partners in KPP's net income
was $27.7  million,  $27.0  million  and $18.0  million in 1997,  1996 and 1995,
respectively. The increase in 1996 is attributable to the sale by the Company in
September  1995 of 3.5 million of the  preference  units that it had owned since
1989.  Proceeds  from the 1995  sale were used to  permanently  retire  debt and
redeem  a   preferred   stock   issue.   Distributions   paid  to  the   outside
non-controlling unitholders of KPP aggregated approximately $26.9 million, $24.7
million and $16.3 million in 1997, 1996 and 1995, respectively.

         Capital  expenditures relate to the maintenance of existing operations.
Routine capital  expenditures for 1998 are currently  estimated to be between $7
million and $10 million.

         In February 1995, KPP, through a wholly-owned subsidiary,  acquired the
pipeline  assets of WYCO Pipe Line  Company  (the  "West  Pipeline"),  a company
jointly owned by GATX  Terminals  Corporation  and Amoco Pipeline  Company,  for
$27.1   million,   plus   transaction   costs  and  the  assumption  of  certain
environmental  liabilities.  KPP financed the  acquisition  by the sale of first
mortgage  notes due February 24, 2002,  which bear interest at the rate of 8.37%
per annum.

         In December 1995, KPP, through a wholly-owned subsidiary,  acquired the
liquids  terminaling  assets of Steuart  Petroleum  Company  and  certain of its
affiliates  (collectively "Steuart") for $68 million, plus transaction costs and
the assumption of certain environmental liabilities.  KPP initially financed the
acquisition  by a bank  bridge  loan,  which was  later  refinanced  with  first
mortgage notes due in varying amounts in June 2001,  2003, 2006 and 2016 bearing
interest at rates ranging from 7.08% to 7.98% per annum.

Other Operations

         The Company had operating income of $2.7 million, $2.2 million and $1.7
million in 1997, 1996 and 1995, respectively,  on revenues of $7.6 million, $8.0
million,  and  $10.6  million  for  the  same  periods,   primarily  related  to
subsidiaries  that  provide  information  processing,   payment  and  collection
services primarily to financial institutions.

Accounting Pronouncements

         In February 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial  Accounting  Standards ("SFAS") 128, "Earnings Per
Share," which requires a dual  presentation  of earnings per share,  computed by
(1) dividing the net income  applicable to common stock by the weighted  average
number of common shares outstanding for the period ("Basic" earnings per share),
and (2)  dividing  the net income  applicable  to common  stock by the  weighted
average number of common shares outstanding plus the number of additional common
shares that would have been outstanding if dilutive  potential common shares had
been issued  ("Diluted"  earnings  per share).  The Company  adopted SFAS 128 at
December 31, 1997 and has applied its  provisions  retroactively  to all periods
presented.

         In June  1997,  the FASB  issued  SFAS  130,  "Reporting  Comprehensive
Income,"  which   establishes   standards  for  the  reporting  and  display  of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial statements.  The provisions of SFAS 130 must be adopted in fiscal year
1998.  The  Company  expects to comply  with the  provisions  of SFAS 130 in the
Consolidated Statements of Stockholders' Equity, when adopted.

         Also,  in June  1997,  the FASB  issued  SFAS  131,  "Disclosure  About
Segments  of an  Enterprise  and  Other  Information,"  which  requires  segment
information to be reported on a basis  consistent  with that used internally for
evaluating  segment  performance  and  deciding  how to  allocate  resources  to
segments.  The  provisions of SFAS 131 must be adopted in fiscal year 1998.  The
Company is  evaluating  the impact of adopting  SFAS 131 on the way it currently
reports segment information.

LIQUIDITY AND CAPITAL RESOURCES

         Cash provided by consolidated  operating  activities was $55.1 million,
$48.6  million  and  $40.0  million  during  the  years  1997,  1996  and  1995,
respectively.  The  increase in 1997  resulted  from an overall  improvement  in
revenues and  operating  income in both the  industrial  field  services and the
pipeline and terminaling  businesses.  A substantial portion of the increases in
1996 related to pipeline and terminaling services,  primarily as a result of the
acquisitions  by KPP of the  Steuart  terminals  in  December  1995 and the West
Pipeline in February 1995.

         At December  31, 1997,  $23.4  million was  outstanding  under a credit
facility, as amended, that was originally obtained by a wholly-owned  subsidiary
in conjunction with the acquisition of Furmanite.  The credit facility, which is
without  recourse  to the parent  company,  is due 2001,  bears  interest at the
option of the  borrower at variable  rates based on either the LIBOR rate or the
prime rate plus a differential of up to 150 basis points,  and contains  certain
financial and operational  covenants with respect to the specialized  industrial
field services group of companies.

         In 1994,  a  wholly-owned  subsidiary  of KPP  entered  into a Restated
Credit Agreement with a group of banks that, as amended,  provides a $25 million
revolving  credit  facility  through January 31, 2001. The credit facility bears
interest at variable  interest rates and has a commitment fee of 0.15% per annum
of the unused credit  facility.  No amounts were drawn under the credit facility
at December 31, 1997. In 1995, KPP financed the acquisition of the West Pipeline
with the issuance of $27 million of notes due February 24, 2002 ("Notes"), which
bear interest at the rate of 8.37% per annum.  The Notes and credit facility are
secured by a mortgage on the East  Pipeline and contain  certain  financial  and
operational covenants.  The acquisition by KPP of the Steuart terminaling assets
in December  1995 was  initially  financed  by a $68 million  bridge loan from a
bank.  KPP  refinanced  this  bridge  loan in June  1996  with a series of first
mortgage  notes (the  "Steuart  Notes")  bearing  interest at rates ranging from
7.08% to 7.98% and  maturing  in varying  amounts in June 2001,  2003,  2006 and
2016.  The  Steuart  Notes are  secured,  pari  passu  with the Notes and credit
facility, by a mortgage on the East Pipeline.

         In September 1995, the Company, through a wholly-owned subsidiary, sold
in a public  offering 3.5 million  Preference  Units it held in KPP. The Company
received net cash proceeds of approximately  $74 million related to the sale and
recorded a gain of $54.2 million. The Company used the proceeds from the sale to
retire its 8% convertible subordinated debentures totaling $43.2 million, retire
its 11.5% subordinated  debentures totaling $5.0 million,  repay its $10 million
term loan,  redeem, in 1996, its Series D Preferred Stock for approximately $8.0
million and retire,  in 1996,  a $6.0 million  8.85%  senior  note.  The Company
continues to control the pipeline and terminaling  operations of KPP through its
2% general partner interest and a 31% limited partner interest.

         In  December  1995,  the  Company  entered  into an  agreement  with an
international  bank that provides for a $15 million  revolving  credit  facility
through December 1, 2000 that bears interest at a variable rate at the Company's
option  based on the LIBOR  rate plus 100 basis  points or at the prime  rate in
effect  from time to time with a  commitment  fee of .5% per annum of the unused
credit facility. No amounts were drawn under the credit facility at December 31,
1997, 1996 or 1995.

         Most of the  software  systems  used by the Company are  licensed  from
third party vendors and are Year 2000 compliant or will be upgraded to Year 2000
compliant  releases over the next year. The Company does not anticipate that the
incremental costs to become fully Year 2000 compliant will be material.

         Consolidated  capital  expenditures  for 1998 have been budgeted at $10
million to $15 million,  depending on the economic  environment and the needs of
the business.  Consolidated debt maturities are $5.4 million, $6.8 million, $2.1
million, $88.5 million (including $68 million of KPP debt) and $27.0 million for
each of the five years ending  December 31, 2002.  Capital  expenditures in 1998
are expected to be funded from  existing  cash and  anticipated  cash flows from
operations.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated  financial  statements and  supplementary  data of the
Company  begins  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 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 IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) (1)  FINANCIAL STATEMENTS                                             PAGE

         Set forth below are financial statements appearing in this report.

         Report of Independent Accountants.............................   F - 1
         Financial Statements of Kaneb Services, Inc., and Subsidiaries:
             Consolidated Statements of Income - Years Ended December 31,
               1997, 1996 and 1995.....................................   F - 3

             Consolidated Balance Sheets - December 31, 1997 and 1996..   F - 4
             Consolidated Statements of  Cash Flows
               Years Ended December 31, 1997, 1996 and 1995............   F - 5
             Consolidated Statements of Changes in Stockholders'
               Equity - Years Ended December 31, 1997, 1996 and 1995....  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 - Kaneb Services, Inc. (Parent Company)
         Condensed Financial Statements:

             Statements of Income - Years Ended December 31, 1997,
               1996 and 1995............................................  F - 23
             Balance Sheets - December 31, 1997 and 1996................  F - 24
             Statements of Cash Flows - Years Ended
               December 31, 1997, 1996 and 1995.........................  F - 25

         Schedule II - Kaneb Services, Inc. Valuation and Qualifying Accounts
             Years Ended December 31, 1997, 1996 and 1995...............  F - 26

         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  presented in the
             Annual Report to Stockholders.

(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 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 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  Quarterly Report on 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  Annual  Report on Form 10-K for the year
         ended  December  31, 1990 ("1990 Form 10-K"),  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  Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1990, which exhibit is hereby  incorporated
         by reference.

3.7      By-laws of the Registrant, filed herewith.

4.1      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative Class A Preferred Stock,  filed as Exhibit 4 of the exhibits
         to the Registrant's Quarterly Report of Form 10-Q for the quarter ended
         September 30, 1983, which exhibit is hereby incorporated by reference.

4.2      Certificate  of  Designation,  Preferences  and  Rights  related to the
         Registrant's  Series B Junior  Participating  Preferred Stock, filed as
         Exhibit 1 of the exhibits to the  Registrant's  Current  Report on Form
         8-K and Registration  Statement on Form 8-A, dated April 5, 1988, which
         exhibit is hereby incorporated by reference.

4.3      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative  Class A Preferred  Stock,  Series C, dated April 23,  1991,
         filed as Exhibit 4.4 of the exhibits to  Registrant's  Annual Report on
         Form 10-K for the year ended December 31, 1991, which exhibit is hereby
         incorporated by reference.

4.4      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative  Class A  Preferred  Stock,  Series F, dated June 12,  1997,
         filed herewith.

4.5      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.

4.6      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 Annual Report on Form 10-K for the year
         ended  December  31,  1983,  which  exhibit is hereby  incorporated  by
         reference.

10.1     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) and as Exhibit 4.1
         to the exhibits of Registrant's Form S-8 (S.E.C.  File No.  333-14067),
         which exhibits are hereby incorporated by reference.

10.2     Kaneb  Services,  Inc. 1984  Nonqualified  Stock Option Plan,  filed as
         Exhibit 10.26 to the exhibits of the Registrant's Form S-8 (S.E.C. File
         No. 2-90929), which exhibit is hereby incorporated by reference.

10.3     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),  which exhibit is hereby  incorporated  by  reference.

10.4     Kaneb Services,  Inc. Deferred Stock Unit Plan, filed as Exhibit 4.1 to
         the exhibits of the Registrant's Form S-8 (S.E.C.  File No. 333-08725),
         which exhibit is hereby incorporated by reference.

10.5     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),  which exhibit is hereby  incorporated by
         reference.

10.6     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.

10.7     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.

10.8     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
         Registrant's Form S-8 (S.E.C.  File No. 333-22109),  which exhibits are
         hereby incorporated by reference.

10.9     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),  which exhibit is hereby  incorporated by
         reference.

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

10.11    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 Annual Report on Form 10-K for the year ended December
         31, 1994 and Exhibit 10.11 of the exhibits to the  Registrant's  Annual
         Report  on Form  10-K for the  year  ended  December  31,  1996,  which
         exhibits are hereby incorporated by reference.

10.12    Amendments to the Furmanite Loan Agreement, filed herewith.

10.13    Loan Agreement between the Registrant,  KPL and Bank of Scotland, dated
         as of December 1, 1995,  filed as Exhibit  10.10 of the exhibits to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1995, which exhibit is hereby incorporated by reference.

21       List of  subsidiaries  of the  Registrant,  filed  herewith.  
23       Consent of independent accountants Price Waterhouse LLP filed herewith 
27       Financial Data Schedule, 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.

(B) REPORTS ON FORM 8-K - NONE.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Kaneb Services, Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1) and (2) on page 15 present fairly, in all material
respects,  the financial  position of Kaneb Services,  Inc. and its subsidiaries
("the  Company")  at  December  31,  1997 and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting  principles.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

PRICE WATERHOUSE LLP

Dallas, Texas
February 19, 1998

<PAGE>

                      KANEB SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                               ----------------------------------------------------
                                                                     1997              1996               1995
                                                               --------------     --------------    ---------------
<S>                                                            <C>                <C>               <C>
Revenues...................................................    $  236,936,000     $  228,861,000    $   212,062,000
                                                               --------------     --------------    ---------------
Costs and expenses:
    Operating costs........................................       156,654,000        154,935,000        151,014,000
    Depreciation and amortization..........................        16,715,000         15,434,000         13,055,000
    General and administrative.............................         4,907,000          4,677,000          4,528,000
                                                               --------------     --------------    ---------------
      Total costs and expenses.............................       178,276,000        175,046,000        168,597,000
                                                               --------------     --------------    ---------------

Operating income...........................................        58,660,000         53,815,000         43,465,000
Interest income............................................           533,000            859,000            858,000
Other expense..............................................          (696,000)          (832,000)        (1,037,000)
Interest expense...........................................       (15,531,000)       (15,420,000)       (15,927,000)
Amortization of excess of cost over fair
    value of net assets of acquired business...............        (1,879,000)        (1,848,000)        (1,847,000)
                                                               ---------------    --------------    ---------------
Income before interest of outside non-controlling  
    partners in KPP's net income, income taxes 
    and gain on sale of KPP units..........................        41,087,000         36,574,000         25,512,000
Interest of outside non-controlling partners
    in KPP's net income....................................       (27,655,000)       (26,969,000)       (17,953,000)
Gain on sale of KPP units..................................             -                 -              54,157,000
Income tax expense.........................................        (2,789,000)        (2,581,000)        (2,535,000)
                                                               ---------------    --------------    ---------------
Net income.................................................        10,643,000          7,024,000         59,181,000
Dividends applicable to preferred stock....................           538,000            502,000          1,527,000
                                                               --------------     --------------    ---------------
Net income applicable to common stock......................    $   10,105,000     $    6,522,000    $    57,654,000
                                                               ==============     ==============    ===============

Earnings per common share:

    Basic..................................................    $          .31     $          .19    $         1.72
                                                               ==============     ==============    ==============
    Diluted................................................    $          .30     $          .19    $         1.59
                                                               ==============     ==============    ==============
</TABLE>

                 See notes to consolidated financial statements.
                                      F-2

<PAGE>

                      KANEB SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                           DECEMBER 31,
                                                                              -------------------------------------
                                                                                   1997                   1996
                                                                              --------------         --------------
                                                      ASSETS

<S>                                                                           <C>                    <C>
Current assets:
   Cash and cash equivalents......................................            $   23,025,000         $   23,693,000
   Accounts receivable, trade (net of allowance for  doubtful 
     accounts of $570,000 in 1997 and  $666,000 in 1996)..........                35,268,000             33,157,000
   Inventories....................................................                 7,079,000              6,706,000
   Prepaid expenses and other current assets......................                 5,693,000              6,367,000
                                                                              --------------         --------------
     Total current assets.........................................                71,065,000             69,923,000
                                                                              --------------         --------------
Property and equipment............................................               383,078,000            373,087,000
Less accumulated depreciation and amortization....................               121,717,000            106,449,000
                                                                              --------------         --------------
   Net property and equipment.....................................               261,361,000            266,638,000
                                                                              --------------         --------------
Excess of cost over fair value of net assets of  acquired business                62,719,000             63,183,000
Other assets......................................................                 7,128,000              4,947,000
                                                                              --------------         --------------
                                                                              $  402,273,000         $  404,691,000
                                                                              ==============         ==============

                                              LIABILITIES AND EQUITY

Current liabilities:
    Current portion of long-term debt:
     Industrial field services....................................            $    3,059,000         $    2,558,000
     Pipeline and terminaling services............................                 2,335,000              2,036,000
                                                                              --------------         --------------
       Total current portion of long-term debt....................                 5,394,000              4,594,000
   Accounts payable...............................................                 9,569,000              9,015,000
   Accrued expenses...............................................                35,679,000             36,281,000
                                                                              --------------         --------------
     Total current liabilities....................................                50,642,000             49,890,000
                                                                              --------------         --------------
Long-term debt, less current portion:
   Industrial field  services.....................................                25,268,000             23,425,000
   Pipeline and terminaling services..............................               132,118,000            139,453,000
   Parent company.................................................                23,666,000             23,666,000
                                                                              --------------         --------------
     Total long-term debt, less current portion...................               181,052,000            186,544,000
                                                                              --------------         --------------
Deferred income taxes and other liabilities.......................                15,903,000             16,906,000
Interest of outside non-controlling partners in KPP...............                76,229,000             75,985,000
Commitments and contingencies
Stockholders' equity:
   Preferred stock, without par value.............................                 5,792,000              5,792,000
   Common stock, without par value.  Authorized
     60,000,000 shares; issued 36,527,283 shares
     in 1997 and 36,491,027 shares in 1996                                         4,234,000              4,230,000
   Additional paid-in capital.....................................               197,242,000            197,213,000
   Accumulated deficit............................................              (101,491,000)          (111,596,000)
   Treasury stock, at cost........................................               (25,216,000)           (20,631,000)
   Cumulative foreign currency translation adjustment.............                (2,114,000)               358,000
                                                                              ---------------        --------------
     Total stockholders' equity...................................                78,447,000             75,366,000
                                                                              $  402,273,000         $  404,691,000
                                                                              ==============         ==============
</TABLE>

                 See notes to consolidated financial statements.
                                      F-3

<PAGE>

                      KANEB SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                             YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------------------
                                                                   1997               1996                1995
                                                              -------------       -------------     ---------------
<S>                                                           <C>                 <C>               <C>
Operating Activities:
   Net income ............................................    $  10,643,000       $   7,024,000     $   59,181,000
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Depreciation and amortization......................       16,715,000          15,434,000         13,055,000
       Amortization of excess of cost over net assets
         acquired.........................................        1,879,000           1,848,000          1,847,000
       Interest of outside non-controlling partners in KPP       27,655,000          26,969,000         17,953,000
       Deferred income taxes..............................           86,000             766,000           (778,000)
       Gain on sale of KPP units..........................            -                   -            (54,157,000)
       Changes in current assets and liabilities:
         Short-term investments...........................            -                   -              1,020,000
         Accounts receivable..............................       (2,111,000)           (449,000)        (6,857,000)
         Inventories......................................         (373,000)           (897,000)           301,000
         Prepaid expenses and other current assets........          674,000           1,098,000         (1,968,000)
         Accounts payable and accrued expenses............          (48,000)         (3,165,000)        10,367,000
                                                              --------------      --------------    --------------
     Net cash provided by operating activities............       55,120,000          48,628,000         39,964,000
                                                              -------------       -------------     --------------

Investing Activities:
   Capital expenditures...................................      (13,011,000)        (10,685,000)       (13,428,000)
   Acquisitions...........................................       (4,855,000)         (8,507,000)       (97,850,000)
   Decrease (increase) in other assets, net...............       (1,819,000)          3,320,000          3,740,000
                                                              --------------      -------------     --------------
     Net cash used in investing activities................      (19,685,000)        (15,872,000)      (107,538,000)
                                                              --------------      -------------     ---------------

Financing Activities:
   Issuance of long-term debt ............................        8,619,000           1,735,000          6,975,000
   Issuance of long-term debt by KPP......................            -              74,500,000         96,500,000
   Payments on long-term debt ............................       (5,732,000)        (10,138,000)       (67,957,000)
   Payments on long term debt by KPP......................       (7,036,000)        (71,276,000)        (3,047,000)
   Distributions to outside non-controlling
     partners in KPP......................................      (26,864,000)        (24,667,000)       (16,306,000)
   Preferred stock dividends paid.........................         (538,000)           (502,000)        (1,328,000)
   Net proceeds from sale of KPP units....................            -                  -              73,620,000
   Redemption of preferred stock..........................            -              (8,025,000)            -
   Common stock issued....................................           33,000              -                  -
   Purchase of treasury stock.............................       (4,585,000)         (1,079,000)            -
                                                              -------------       -------------      -------------
    Net cash provided by (used in) financing
      activities..........................................      (36,103,000)        (39,452,000)        88,457,000
                                                              -------------       -------------     --------------
Increase (decrease) in cash and cash equivalents..........         (668,000)         (6,696,000)        20,883,000
Cash and cash equivalents at beginning of year............       23,693,000          30,389,000          9,506,000
                                                              -------------       -------------     --------------
Cash and cash equivalents at end of year..................    $  23,025,000       $  23,693,000     $   30,389,000
                                                              =============       =============     ==============
</TABLE>

                 See notes to consolidated financial statements.
                                      F-4

<PAGE>

                      KANEB SERVICES, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                          FOREIGN
                                          PREFERRED         COMMON       ADDITIONAL        ACCUMULATED      TREASURY     CURRENCY
                                            STOCK            STOCK     PAID-IN CAPITAL       DEFICIT          STOCK     TRANSLATION
                                        ------------      -----------  ---------------    -------------   ------------  -----------
<S>                                     <C>               <C>           <C>               <C>             <C>           <C>
BALANCE AT JANUARY 1, 1995              $ 14,085,000      $ 4,224,000   $198,736,000      $(175,772,000)  $(23,435,000) $1,006,000
     Net income for the year.........           -                -              -            59,181,000           -           -
     Common stock issued.............           -               6,000     (2,764,000)              -         3,883,000        -
     Preferred stock dividends
       declared......................           -                -              -            (1,527,000)          -           -
     Series D preferred stock
       redemption...................      (8,201,000)            -         1,179,000               -              -     (1,179,000)
     Foreign currency translation
       adjustment....................        (70,000)            -              -                  -              -       (330,000)
                                       -------------    --------------  ------------      -------------   ------------ -----------
BALANCE AT DECEMBER 31, 1995               5,814,000        4,230,000    197,151,000       (118,118,000)   (19,552,000)   (503,000)
       Net income for the year.......           -               -               -             7,024,000           -           -
       Common stock issued...........           -               -             10,000               -              -           -
       Purchase of treasury stock....           -               -               -                  -        (1,079,000)       -
       Preferred stock dividends
        declared.....................           -               -               -              (502,000)           -          -
       Conversion of Series D
          preferred stock............           -               -             30,000               -               -          -
       Series C preferred stock
          redemption.................        (22,000)            -            22,000               -               -          -
       Foreign currency translation
          adjustment.................           -               -               -                  -               -       861,000
                                       -------------   --------------   ------------      -------------   ------------ -----------
BALANCE AT DECEMBER 31, 1996               5,792,000        4,230,000    197,213,000       (111,596,000)   (20,631,000)    358,000
       Net income for the year.......           -               -               -            10,643,000            -          -
       Common stock issued...........           -               4,000         29,000               -               -          -
       Purchase of treasury stock ...           -               -               -                  -        (4,585,000)       -
       Preferred stock dividends
         declared....................           -               -               -              (538,000)           -          -
       Foreign currency translation
          adjustment ................           -               -               -                  -               -    (2,472,000)
                                       -------------   --------------   ------------      -------------   ------------ -----------
BALANCE AT DECEMBER 31, 1997           $   5,792,000   $    4,234,000   $197,242,000      $(101,491,000)  $(25,216,000)$(2,114,000)
                                       =============   ==============   ============      =============   ============ ===========
</TABLE>

                See notes to consolidated financial statements.
                                      F-5

<PAGE>

                      KANEB SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       The  following  significant  accounting  policies  are  followed by Kaneb
       Services, Inc. (the "Company") and its subsidiaries in the preparation of
       financial statements.

       Principles of Consolidation

       The consolidated financial statements include the accounts of the Company
       and its  subsidiaries  and Kaneb Pipe Line Partners,  L.P.  ("KPP").  The
       Company  controls the  operations  of KPP through its 2% general  partner
       interest and 31% limited  partner  interest as of December 31, 1997.  All
       significant  intercompany  transactions  and balances are  eliminated  in
       consolidation.

       Segment Information

       The  Company  provides  specialized   industrial  field  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.  The Company,  as general partner,  also manages and operates
       the pipeline and terminaling business of KPP.

       Cash, Cash Equivalents and Short-term Investments

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

       Inventories

       Inventories  consist  primarily  of  finished  goods  of  the  industrial
       services  segment and are valued at the lower of average  cost or market.
       Cost is determined using the weighted average cost method.

       Property and Equipment

       Property and equipment are carried at original 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.  The rates  used for  pipeline  and  certain  storage
       facilities,  which  are  subject  to  regulation,  are the  same as those
       promulgated by the Federal Energy Regulatory Commission.

       The carrying  value of property and equipment is  periodically  evaluated
       using  undiscounted  future  cash flows as the basis for  determining  if
       impairment   exists  under  the  provisions  of  Statement  of  Financial
       Accounting  Standards ("SFAS") No. 121, "Accounting for the Impairment of
       Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  of" ("SFAS
       121"). To the extent impairment is indicated to exist, an impairment loss
       will be recognized under SFAS 121 based on fair value.

       Revenue Recognition

       Substantially  all revenues are recognized  when services to unaffiliated
       customers  have  been  rendered.  Pipeline  transportation  revenues  are
       recognized upon receipt of the products into the pipeline system.

       Earnings Per Share

       The Company adopted the provisions of SFAS No. 128,  "Earnings Per Share"
       ("SFAS  128"),  in 1997.  Under SFAS 128,  the amount of earnings for the
       period  applicable to each share of common stock  outstanding  during the
       period  ("Basic"  earnings  per share) and the amount of earnings for the
       period  applicable to each 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.  The  provisions of
       SFAS 128 have been applied retroactively to all periods presented.

                                      F-6

<PAGE>

       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 stockholders'  equity.  Gains
       and losses resulting from foreign  currency  transactions are included in
       the statements of income.

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

       The  excess  of the  purchase  price of a  specialized  industrial  field
       services  company over the fair value of the net assets acquired is being
       amortized on a straight-line basis over a period of 40 years. Accumulated
       amortization was $12.2 million and $10.3 million at December 31, 1997 and
       1996, respectively.

       The Company  periodically  evaluates the propriety of the carrying amount
       of the  excess  of cost  over  fair  value of net  assets  of  businesses
       acquired,  as well  as the  amortization  period,  to  determine  whether
       current events or circumstances warrant adjustments to the carrying value
       and/or  revised  estimates  of useful  lives.  As this time,  the Company
       believes  that no such  impairment  has occurred and that no reduction in
       estimated useful lives is warranted.

       Estimates

       The preparation of the Company's financial  statements in conformity with
       generally  accepted  accounting  principles  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.

       Change in Presentation

       Certain   financial   statement   items  for  1996  and  1995  have  been
       reclassified to conform with the 1997 presentation.

2.     ASSET ACQUISITIONS BY PIPELINE PARTNERSHIP

       In February 1995,  KPP acquired the refined  petroleum  product  pipeline
       assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million,
       plus  transaction  costs  and the  assumption  of  certain  environmental
       liabilities.  The West  Pipeline  was owned 60% by a  subsidiary  of GATX
       Terminals Corporation and 40% by a subsidiary of Amoco Pipe Line Company.
       KPP  financed  the  acquisition  by the  issuance of $27 million of first
       mortgage notes.

                                      F-7

<PAGE>

       In December 1995, KPP acquired the liquids  terminaling assets of Steuart
       Petroleum Company and certain of its affiliates (collectively, "Steuart")
       for $68 million,  plus  transaction  costs and the  assumption of certain
       environmental  liabilities.  KPP  financed the  acquisition  price by the
       issuance  of $68  million of first  mortgage  notes.  The asset  purchase
       agreement  includes  a  provision  for an  earn-out  payment  based  upon
       revenues  of one of the  terminals  exceeding  a  specified  amount for a
       seven-year  period beginning in January 1996. The contracts also included
       provisions for the continuation of all terminaling  contracts in place at
       the time of the acquisition, including those contracts with Steuart.

       KPP's  acquisitions  have been accounted for using the purchase method of
       accounting.  The  total  purchase  price  of each  acquisition  has  been
       allocated to the assets and  liabilities  based on their  respective fair
       values based on valuations and other studies.

       Assuming the above  acquisitions  in 1995 occurred as of the beginning of
       the year ended  December 31, 1995,  the  summarized  unaudited  pro forma
       consolidated  revenues,  net income, basic earnings per share and diluted
       earnings per share for 1995 would be $233,004,000, $59,025,000, $1.72 and
       $1.59,  respectively.  The unaudited pro forma financial  results are for
       comparative  purposes  only and may not be indicative of the results that
       would have  occurred if KPP had acquired the pipeline  assets of the West
       Pipeline  and the  liquids  terminaling  assets of  Steuart  on the dates
       indicated or which will be obtained in the future.

3.     SALE OF PIPELINE PARTNERSHIP UNITS

       In September 1995, the Company, through a wholly-owned  subsidiary,  sold
       in a public  offering,  3.5 million  Preference Units it held in KPP. The
       Company  received net cash proceeds of $73.6 million  related to the sale
       and recorded a gain of $54.2 million,  net of expenses.  The Company used
       the  proceeds  to  retire  its  8%  convertible  subordinated  debentures
       totaling $43.2 million,  its 11.5% subordinated  debentures totaling $5.0
       million  and repay its $10  million  term loan in 1995 and,  in 1996,  to
       redeem $8 million of its Series D Preferred Stock and repay $6 million of
       its long-term  debt.  The Company  continues to control the operations of
       KPP  through its 2% general  partner  interest  and 31%  limited  partner
       interest.

4.     INCOME TAXES

       Income   before   income  tax  expense  is  comprised  of  the  following
       components:

                                            YEAR ENDED DECEMBER 31,
                                ------------------------------------------------
                                  1997              1996                1995
                                ------------    ------------       -------------

       Domestic operations..    $ 11,769,000    $ 12,580,000       $ 63,607,000
       Foreign operations...       1,663,000      (2,975,000)        (1,891,000)
                                ------------    ------------       -------------
                                $ 13,432,000    $  9,605,000       $ 61,716,000
                                ============    ============       =============

  

       Income tax expense is comprised of the following components:

<TABLE>
<CAPTION>

       YEAR ENDED
       DECEMBER 31,                  FEDERAL            FOREIGN              STATE               TOTAL
       ------------------------  --------------      -------------       --------------     ---------------
       1997:
         <S>                     <C>                  <C>                 <C>                 <C>
         Current...............  $      577,000       $    925,000        $  1,201,000        $  2,703,000
         Deferred..............          74,000             12,000               -_                 86,000
                                 --------------       ------------        ------------        ------------
                                 $      651,000       $    937,000        $  1,201,000        $  2,789,000
                                 ==============       ============        ============        ============
</TABLE>
                                    F-8

<PAGE>

<TABLE>
<CAPTION>

       YEAR ENDED
       DECEMBER 31,                  FEDERAL            FOREIGN              STATE                TOTAL
       ------------------------  --------------      -------------       --------------     ---------------
       1996:
         <S>                     <C>                  <C>                 <C>                 <C>
         Current...............  $      435,000       $    423,000        $    957,000        $  1,815,000
         Deferred..............         500,000            266,000               -                 766,000
                                 --------------       ------------        ------------        ------------
                                 $      935,000       $    689,000        $    957,000        $  2,581,000
                                 ==============       ============        ============        ============

       1995:
         Current...............  $    1,415,000       $    328,000        $  1,570,000        $  3,313,000
         Deferred..............        (791,000)            13,000               -                (778,000)
                                 ---------------      ------------        ------------        -------------
                                 $      624,000       $    341,000        $  1,570,000        $  2,535,000
                                 ==============       ============        ============        ============
</TABLE>

       Deferred   income  tax  provisions  or  benefits  result  from  temporary
       differences  between the tax basis of assets  (principally  fixed assets)
       and liabilities of foreign subsidiaries and certain domestic subsidiaries
       not included in the Company's  consolidated Federal tax return, and their
       reported  amounts  in  the  financial  statements  that  will  result  in
       differences  between  income for tax  purposes  and income for  financial
       statement purposes in future years.

       The Company has recorded deferred tax assets of approximately $58 million
       and $88 million as of December 31, 1997 and 1996, respectively, primarily
       relating to the Company's  domestic net operating loss  carryforwards and
       investment  tax credit  carryforwards,  partially  offset by a  valuation
       reserve of approximately $56 million and $86 million,  respectively.  The
       Company has  recorded a deferred  tax  liability of $3.4 million and $2.3
       million  as of  December  31,  1997 and 1996,  which is  associated  with
       certain domestic subsidiaries not included in the Company's  consolidated
       Federal income tax return.

       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  from  continuing  operations  before
       income taxes for the years 1997, 1996 and 1995 are as follows:

<TABLE><CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------------------------
                                                   1997                      1996                 1995
                                          ---------------------      -------------------  ----------------------
                                               AMOUNT        %          AMOUNT       %       AMOUNT         %
                                          -------------    ----      ------------  -----  --------------  ------
       <S>                                <C>              <C>       <C>            <C>   <C>              <C>
       Tax expense at
         statutory rates................  $   4,701,000     35.0     $  3,360,000   35.0  $   21,601,000   35.0
       Increase (decrease) in taxes
         resulting from:
         Domestic loss carryforward
           adjustments..................     (3,048,000)   (22.7)      (3,215,000) (33.5)    (21,089,000) (34.2)
         State income taxes, net........        781,000      5.8          622,000    6.5       1,021,000    1.7
         Foreign losses not
           benefited and foreign
           income taxes.................        355,000      2.7        1,814,000   18.9       1,002,000    1.6
                                          -------------    -----     ------------  -----  --------------  -----
                                          $   2,789,000     20.8     $  2,581,000   26.9  $    2,535,000    4.1
                                          =============    =====     ============  =====  ==============  =====
</TABLE>

       At  December  31,  1997,  the  Company  had  available  domestic  tax net
       operating loss carryforwards  ("NOLs"),  which will expire, if unused, as
       follows:  $21,004,000 in 2001,  $73,015,000 in 2002, $12,626,000 in 2003,
       $16,866,000 in 2005, $17,508,000 in 2006 and $3,033,000 in 2007.

       Additionally,  at December  31,  1997,  the Company  had  investment  tax
       credits aggregating $8,276,000,  which will expire, if unused, in varying
       amounts  through  2000,  that  could be used to offset  current  domestic
       income taxes, but only after the Company utilized all available NOLs.

       If certain  substantial  changes in the Company's ownership should occur,
       there  would  be  an  annual   limitation   on  the  amount  of  the  tax
       carryforwards which could be utilized.

                                      F-9
<PAGE>

5.     RETIREMENT PLANS

       The Company has a defined  contribution  plan which covers  substantially
       all  domestic  employees  and  provides  for  varying  levels of employer
       matching.  Company  contributions  to this plan were $1.1  million,  $1.0
       million and $.9 million for 1997, 1996 and 1995, 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% 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 November 1, 1997.

       Net pension cost for the U.K. Plan included the following components:

<TABLE><CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------------------
                                                            1997                1996                1995
                                                        --------------     -------------      -------------
       <S>                                              <C>                <C>                <C>
       Service cost for benefits earned
         during the period...........................   $    1,254,000     $   1,269,000      $   1,107,000
       Interest cost on projected benefit
         obligations.................................        2,021,000         1,617,000          1,416,000
       Less actual return on plan assets.............       (3,829,000)       (2,884,000)        (2,126,000)
       Net amortization and deferral.................        1,015,000           620,000            243,000
                                                        --------------     -------------      -------------
       Net pension cost..............................   $      461,000     $     622,000      $     640,000
                                                        ==============     =============      =============
</TABLE>

       Actuarial  assumptions  used in the  accounting  for the U.K. Plan were a
       weighted average discount rate of 7.5% for 1997, 8.5% for 1996 and 9% for
       1995,  an expected  long-term  rate of return on assets of 9.0% for 1997,
       1996 and 1995 and a rate of increase in  compensation  levels of 5.5% for
       1997 and 6% for 1996 and 1995.  The funded  status of the U.K. Plan is as
       follows:

<TABLE><CAPTION>
                                                                                    DECEMBER 31,
                                                                          --------------------------------
                                                                               1997              1996
                                                                          --------------    --------------
       <S>                                                                <C>               <C>
       Actuarial present value of accumulated benefit
         obligations (all vested)......................................   $   29,564,000    $   23,648,000
                                                                          ==============    ==============
       Actuarial present value of projected benefit
         obligations...................................................   $  (30,564,000)   $  (24,449,000)
       Plan assets at fair value.......................................       33,138,000        29,557,000
       Unrecognized net gain...........................................       (3,213,000)       (6,451,000)
       Unrecognized prior service cost.................................          322,000           363,000
                                                                          --------------    --------------
       Net pension liability recorded in other liabilities.............   $     (317,000)   $     (980,000)
                                                                          ===============   ==============
</TABLE>

6.     PROPERTY AND EQUIPMENT

       The cost of property and equipment is as follows:

                                                           DECEMBER 31,
                                                 ------------------------------
                                                      1997            1996
                                                 -------------    -------------
       Industrial field services.............    $   30,388,000   $  31,292,000
       Pipeline and terminaling services.....       345,802,000     337,202,000
       General corporate.....................         3,848,000       3,819,000
       Other  ...............................         3,040,000         774,000
                                                 --------------   ------------- 
       Total property and equipment..........       383,078,000     373,087,000
       Accumulated depreciation and
         amortization........................      (121,717,000)   (106,449,000)
                                                 --------------   ------------- 
       Net property and equipment............    $  261,361,000   $ 266,638,000
                                                 ==============   =============


                                      F-10
<PAGE>

       Equipment  acquired  under  capital  leases and  included  in the cost of
       property and equipment is as follows:

                                                           DECEMBER 31,
                                                 ------------------------------
                                                       1997            1996
                                                 --------------    ------------

       Industrial field services equipment...    $    5,530,000    $  6,638,000
       Pipeline and terminaling services
          equipment (a)......................        22,513,000      22,271,000
                                                 --------------    ------------
       Total equipment acquired under
          capital leases....................         28,043,000      28,909,000
       Accumulated depreciation.............        (13,570,000)    (12,977,000)
                                                 --------------    ------------
       Net equipment acquired under
          capital leases....................     $   14,473,000    $ 15,932,000
                                                 ==============    ============

         (a)  Secured by certain pipeline equipment. KPP has recorded its option
              to purchase this equipment for  approximately  $4.1 million at the
              termination of the lease.

7.     DEBT

       Debt is summarized as follows:
<TABLE><CAPTION>

                                                                                     DECEMBER 31,
                                                                          --------------------------------
                                                                                1997             1996
                                                                          --------------    --------------
       <S>                                                                <C>               <C>
       Industrial field services:
         Credit facility due through 2001.....................            $   23,408,000    $   23,003,000
         Various notes of foreign subsidiaries ranging
           from 6.75% to 8.0% due through 2001................                 3,278,000           231,000
         Capital leases.......................................                 1,641,000         2,749,000
                                                                          --------------    --------------
              Total debt......................................                28,327,000        25,983,000
         Less current portion.................................                 3,059,000         2,558,000
                                                                          --------------    --------------
                                                                          $   25,268,000    $   23,425,000
                                                                          ==============    ==============

       Pipeline and terminaling services:
         Mortgage notes due 2001 and 2002.....................            $   60,000,000    $   60,000,000
         Mortgage notes due 2001 through 2016.................                68,000,000        68,000,000
         Capital lease........................................                 6,453,000         8,489,000
           Revolving credit facility..........................                      -            5,000,000
                                                                          --------------    --------------
              Total debt......................................               134,453,000       141,489,000
         Less current portion.................................                 2,335,000         2,036,000
                                                                          --------------    --------------
                                                                          $  132,118,000    $  139,453,000
                                                                          ==============    ==============
       Parent company:
         8.75% convertible subordinated debentures
           due through 2008...................................            $   23,666,000    $   23,666,000
         Revolving credit facility............................                      -                -
                                                                          --------------    --------------
              Total debt......................................                23,666,000        23,666,000
         Less current portion.................................                      -                -
                                                                          --------------    --------------
                                                                          $   23,666,000    $   23,666,000
                                                                          ==============    ==============

       Total consolidated long-term debt......................            $  186,446,000    $  191,138,000
       Current portion........................................                 5,394,000         4,594,000
                                                                          --------------    --------------
       Total consolidated long-term debt,
         less current portion.................................            $  181,052,000    $  186,544,000
                                                                          ==============    ==============
</TABLE>

                                      F-11
<PAGE>

       Industrial Field Services

       At  December  31,  1997,  $23.4  million was  outstanding  under a credit
       facility, as amended,  that was obtained by a wholly-owned  subsidiary in
       conjunction with the acquisition of Furmanite. The credit facility, which
       is without recourse to the parent company, is due 2001, bears interest at
       the option of the  borrower at  variable  rates based on either the LIBOR
       rate or the prime rate plus a differential of up to 150 basis points, has
       a commitment fee equal to one-half of one percent per annum on unutilized
       amounts,  contains  certain  financial  and  operational  covenants  with
       respect to the specialized  industrial field services group of companies,
       and restricts the subsidiary from paying  dividends to the parent company
       under certain  circumstances.  This credit  facility is secured by all of
       the tangible  assets of the industrial  field services  group,  excluding
       assets in Germany.

       Pipeline and Terminaling Services

       In 1994, KPP,  through a wholly-owned  subsidiary,  issued $33 million of
       first mortgage  notes  ("Notes") to a group of insurance  companies.  The
       Notes  bear  interest  at the  rate of  8.05%  per  annum  and are due on
       December 22,  2001.  In 1994,  KPP,  through a  wholly-owned  subsidiary,
       entered into a Restated  Credit  Agreement with a group of banks that, as
       amended, provides a $25 million revolving credit facility through January
       31, 2001. The credit  facility bears interest at variable  interest rates
       and has a commitment fee of .15% per annum of the unused credit facility.
       At December 31, 1997, no amounts were drawn under the credit facility. In
       1995, KPP financed the acquisition of the West Pipeline with the issuance
       of $27 million of Notes due February 24, 2002 which bear  interest at the
       rate of 8.37% per annum.  The Notes and credit  facility are secured by a
       mortgage  on  the  East  Pipeline  and  contain  certain   financial  and
       operational covenants.

       The acquisition of Steuart by KPP was initially financed by a $68 million
       bridge loan from a bank. In June 1996,  KPP  refinanced  this  obligation
       with $68.0  million of new first  mortgage  notes (the  "Steuart  notes")
       bearing  interest at rates ranging from 7.08% to 7.98%.  $35.0 million of
       the Steuart notes is due June 2001, $8.0 million is due June 2003,  $10.0
       million is due June 2006 and $15.0 million is due June 2016.  The loan is
       secured,  pari passu with the existing  Notes and credit  facility,  by a
       mortgage on the East Pipeline.

       Parent Company

       The 8.75%  subordinated  debentures  are  convertible  into shares of the
       Company's  common  stock at a conversion  price of $17.54 per share.  The
       Company has satisfied the sinking fund requirements on these subordinated
       debentures through 2000.

       On February 1, 1996, the Company  retired a 8.85% senior note,  which was
       convertible  into shares of the  Company's  common  stock at a conversion
       price of $6.00 per share.

       In  December  1995,  the  Company  entered  into  an  agreement  with  an
       international  bank that  provides  for a $15  million  revolving  credit
       facility through December 1, 2000, that bears interest at a variable rate
       at the Company's  option based on the LIBOR rate plus 100 basis points or
       at the prime rate in effect  from time to time with a  commitment  fee of
       .5% per annum of the  unused  credit  facility.  The credit  facility  is
       secured by 1.0 million of the Company's limited partnership units in KPP.
       No amounts  were drawn under the credit  facility at December 31, 1997 or
       1996.

       Consolidated Maturities

       Annual sinking fund requirements and debt maturities on consolidated long
       term debt, including capital leases, are $5.4 million, $6.8 million, $2.1
       million,  $88.5  million  (including  $68  million of KPP debt) and $27.0
       million for each of the five years ending December 31, 2002.

                                      F-12
<PAGE>

8.     CAPITAL STOCK

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

<TABLE><CAPTION>

                                                                                   COMMON STOCK
                                                                   ------------------------------------------------
                                                    PREFERRED                           HELD IN
                                                   STOCK ISSUED       ISSUED           TREASURY         OUTSTANDING
                                                   -------------   -------------  --------------    ---------------           
       <S>                                         <C>             <C>            <C>               <C>
       BALANCE AT JANUARY 1, 1995.................     1,558,374      36,428,823       3,357,615         33,071,208

       Series D preferred stock redemption........      (990,424)         -             -                   -
       Common shares issued.......................      -                 51,131        (524,739)           575,870
                                                   -------------   -------------  ---------------    --------------
       BALANCE AT DECEMBER 31, 1995...............       567,950      36,479,954       2,832,876         33,647,078

       Common shares issued or purchased..........         -              11,073         323,200           (312,127)
                                                   -------------  --------------  --------------   -----------------
       BALANCE AT DECEMBER 31, 1996...............       567,950      36,491,027       3,156,076         33,334,951
                                                   -------------  --------------  --------------   ----------------
       Series F preferred stock issued............         1,000          -               -                  -
       Common shares issued or purchased..........         -              36,256       1,190,900         (1,154,644)
                                                   -------------  --------------  --------------   -----------------
       BALANCE AT DECEMBER 31, 1997...............       568,950      36,527,283       4,346,976         32,180,307
                                                   =============  ==============  ==============   ================
</TABLE>

       Series A Preferred Stock

       The Company has 567,950 shares of its Cumulative  Class A Adjustable Rate
       Preferred  Stock,  Series A ("Series A Preferred") with a stated value of
       $10  per  share  outstanding  at  December  31,  1997.  Dividends  accrue
       quarterly  at the  applicable  U.S.  Treasury  rate plus 2.00  percentage
       points (200 basis points)  ("Applicable  Rate"),  but will in no event be
       less than 7.5% per annum or greater than 14% per annum.  If dividends are
       in arrears for two or more quarters,  additional  dividends accrue on all
       dividends in arrears at a rate equal to the Applicable Rate plus 25 basis
       points for each quarter  dividends  are in arrears (but not more than the
       lesser  of 14% per  annum or 300 basis  points  more than the  Applicable
       Rate).  If unpaid accrued  dividends  exist with respect to eight or more
       quarters, the holders of the Series A Preferred may elect individually to
       require  the Company to redeem  their  shares at a price of $12 per share
       plus dividends in arrears.  No such arrearages existed as of December 31,
       1997, 1996 and 1995. The Company, at its option, may redeem shares at any
       time at a price of $12 per share  (reduced  ratably  to $10 over 15 years
       unless  unpaid  accrued  dividends  exist  with  respect to eight or more
       quarters) plus accrued and unpaid dividends thereon.

       Series B Preferred Stock

       On March 26,  1988,  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,
       1988.  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 $10,  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 20% or more of the  Company's  common
       stock or  commences  a tender or  exchange  offer  that  would  result in
       ownership of 30% or more,  whichever  occurs earlier.  The Rights,  which
       expire on April 19, 1998,  are  redeemable in whole,  but not in part, at
       the  Company's  option  at any time for a price of $0.05  per  Right.  At
       December 31, 1997, 1996 and 1995 there were no Series B Preferred  shares
       outstanding.

                                      F-13
<PAGE>

       Series C Preferred Stock

       In April 1991,  the Company  authorized  1,000 shares of Adjustable  Rate
       Cumulative Class A Preferred Stock, Series C ("Series C Preferred") which
       has a  preference  value of $1.00  per share  and is only  entitled  to a
       dividend if the value of the Company's common stock increases. The Series
       C  Preferred,  as an entire  class,  is  entitled  to an annual  dividend
       commencing January 1, 1992, equal to 1/2 of 1%  (proportionately  reduced
       for authorized  but unissued  shares in the class) of the increase in the
       average per share market value of the  Company's  common stock during the
       year preceding payment of the dividend, over $4.79 (the average per share
       market value of the Company's common stock during 1990) multiplied by the
       average  number  of  shares of common  stock  outstanding.  The  Series C
       Preferred has mandatory  redemption  requirements in the event of certain
       types of corporate  reorganizations  and may be redeemed at the option of
       the Company  during the first 60 days of each year  commencing  1994. The
       redemption  price is the sum of (i) one  divided  by the  average  annual
       yield of all  issues of  preferred  stock  listed  on the New York  Stock
       Exchange  during the calendar year  preceding the date of the  redemption
       period times the average dividend for the two most recent years plus (ii)
       a pro rata portion of the prior year's  dividend based upon the number of
       elapsed days in the year of redemption  plus (iii) any accrued and unpaid
       dividends. The Company may also repurchase the shares of a holder at such
       redemption price during the first 60 days following the year in which the
       holder  first  ceases to be an employee of the  Company.  A holder of the
       Series C Preferred may, at his option,  require the Company to redeem his
       shares at 120% of such redemption price if the Company elects,  within 10
       days after the most recent dividend  payment date, not to pay the accrued
       dividend.  Upon  liquidation,  holders  of the  Series  C  Preferred  are
       entitled to receive  $1.00 per share plus  accrued and unpaid  dividends.
       The Company granted 600 shares of Series C Preferred to certain  officers
       in April 1991 and redeemed 100 shares in July 1996.

       Series D Preferred Stock

       In  conjunction  with the  acquisition  of Furmanite,  the Company issued
       1,098,373 shares of its 12% Convertible Class A Preferred Stock, Series D
       ("Series  D  Preferred")  with a stated  value of  pounds  sterling  5.34
       ($8.36)  per share.  The Series D  Preferred  was not  redeemable  by the
       holder;  however,  each share was convertible at the option of the holder
       into 1.691 shares of the  Company's  common  stock.  During 1994,  10,880
       shares of Series D Preferred  stock were  converted into 18,398 shares of
       the Company's  common stock.  On December 28, 1995, the Company  notified
       the Series D  Preferred  stockholders  that it would  redeem the Series D
       Preferred  Stock,  and it was fully redeemed on January 26, 1996 for $8.0
       million.

       Series F Preferred Stock

       In  June  1997,  the  Company  authorized  and  issued  1,000  shares  of
       Adjustable Rate Cumulative Class A Preferred  Stock,  Series F ("Series F
       Preferred"),  with a stated value of $1.00 per share to an officer of the
       Company.  The annual dividend for the entire class of Series F Preferred,
       which is payable on April 1 of each year, is  calculated  by  multiplying
       (i) 1% of the annual  improvement  (but not including  amounts related to
       any  gains or  losses  on the  sale of any KPP  units  and not  including
       amounts  related to any other  gains or losses in excess of $1 million on
       the sale of other capital assets) in the Company's  diluted  earnings per
       share of common stock  ("Common  EPS"),  by (ii) the amount of issued and
       outstanding shares of the Company's common stock on January 1, 1997.

                                      F-14
<PAGE>

       If the Common EPS increase for the five-year  period ending  December 31,
       2001  has not  exceeded  20%  compounded  annually,  the  series  will be
       redeemed for $1.00 per share on April 1, 2002. Otherwise, the series will
       be redeemed on April 1, 2002 at a "Redemption Price" for the entire class
       of the series equal to the average  percentage  increase in excess of 20%
       in Common EPS for such period  multiplied by (i)  three-fourths  of 1% of
       the  cumulative  Common  EPS for each  calendar  year ended for which the
       series is  outstanding,  and (ii) the  amount of issued  and  outstanding
       shares of the Company's Common stock on January 1, 1997.

       Redemption of the series may be deferred at the Company's option until no
       later than April 1, 2003 if the Common EPS increase for the 2001 calendar
       year is less than 15%.  The Series F  Preferred  may be  redeemed  at the
       option of the holder at 120% of the Redemption Price if the Company fails
       to pay an annual  dividend within 10 days of the due date or in the event
       of a change  of  control,  or at the  Redemption  Price  in the  event of
       certain  corporate  reorganizations  or the  authorization  of a class of
       preferred  stock  ranking  higher in priority to the Series F  Preferred.
       Upon  liquidation,  holders of the Series F  Preferred  are  entitled  to
       receive $1.00 per share plus accrued and unpaid dividends.

       Stock Compensation Plans

       The Company has stock option plans and agreements for officers, directors
       and key employees.  The options  granted under these plans and agreements
       generally  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, 1997, options on 1,578,515 shares at prices
       ranging  from  $1.63 to $5.00 were  outstanding,  of which  427,429  were
       exercisable at prices ranging from $1.63 to $3.50.

       The changes in stock options outstanding for the Company's plans for 1996
       and 1997 were as follows:

                                                                   Average Price
                                                     Shares           per Share
                                               ------------        -------------
       Outstanding at January 1, 1996......       1,431,436            $  4.76
       Granted and repriced ...............       1,277,678            $  2.67
       Exercised...........................          (6,000)           $  1.67
       Forfeited and repriced..............      (1,082,936)           $  5.56
                                               -------------

       Outstanding at December 31, 1996....       1,620,178            $  2.60
       Granted.............................         138,872            $  3.74
       Exercised...........................         (64,535)           $  2.29
       Forfeited...........................        (116,000)           $  2.63
                                               -------------

       Outstanding at December 31, 1997....       1,578,515            $  2.70
                                               ============

       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 include stock price  variance or volatility  ranging from 11.51% to
       12.03% based on weekly  average  variances of the stock for the five year
       period preceding issuance,  a risk-free rate of return ranging from 5.71%
       to 6.56% based on the 30-year U.S.  Treasury  bill rate for the five-year
       expected  life of the options,  and no dividend  yield.  Using  estimates
       calculated  by such option  pricing  model,  pro forma net income,  basic
       earnings  per share  and  diluted  earnings  per  share  would  have been
       $10,327,000,  $0.30 and $0.30,  respectively  for the year ended December
       31, 1997 as compared to the reported  amounts of  $10,643,000,  $0.31 and
       $0.30, respectively.  For the year ended December 31, 1996, pro forma net
       income,  basic  earnings  per share and diluted  earnings per share would
       have been $6,750,000,  $0.19 and $0.19, respectively,  as compared to the
       reported amounts of $7,024,000,  $0.19 and $0.19,  respectively.  For the
       year ended  December 31, 1995,  pro forma net income,  basic earnings per
       share and diluted earnings per share would have been  $59,134,000,  $1.72
       and  $1.59,  respectively,   as  compared  to  the  reported  amounts  of
       $59,181,000, $1.72 and $1.59, respectively.

                                      F-15
<PAGE>

       Deferred Stock Unit Plan

       In 1996,  the Company  initiated  its Deferred  Stock Unit Plan (the "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")  at a value  equal  to the  closing  price  of the
       Company's  common  stock on the day  following  the last day by which the
       employee must elect (if he so desires) to participate in the DSU Plan; as
       established  by the  Compensation  Committee,  from  time  to  time  (the
       "Election  Date").  During a vesting  period  following the Election Date
       (generally,  one or two  years),  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,  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 no earlier than the expiration of the vesting
       period and no later than ten years after the Election  Date. DSU accounts
       are  unfunded by the Company and do not bear  interest.  Each person that
       elects to  participate  in the DSU Plan is awarded,  under the  Company's
       1994 Stock  Incentive  Plan,  an option to purchase a number of shares of
       the  Company's  common  stock  equal to the  number of DSUs  agreed to be
       purchased  by such person at 100% of the closing  price of the  Company's
       common stock on the day following the date of election to  participate in
       the DSU Plan,  which options become  exercisable  over a specified period
       after the grant,  according to a schedule  determined by the Compensation
       Committee.

9.     EARNINGS PER SHARE

       The  following  is a  reconciliation  of basic and diluted  earnings  per
       share:

<TABLE><CAPTION>
                                                               Net              Common          Per-Share
                                                             Income             Shares           Amount
                                                        ----------------  ----------------   ---------------
       <S>                                              <C>                <C>               <C>
       YEAR ENDED DECEMBER 31, 1997

           Net income................................   $    10,643,000
           Dividend applicable to preferred stock....          (538,000)
                                                        ----------------
           Basic EPS:
              Income available to common stock.......        10,105,000        32,547,371    $         0.31
                                                                                             ==============
           Effect of dilutive securities:
              Common stock options...................            -                585,926
                                                        ---------------    --------------
           Diluted EPS:
              Income available to common stock
               and assumed options exercised.........   $    10,105,000        33,133,297    $         0.30
                                                        ===============    ==============    ==============

       YEAR ENDED DECEMBER 31, 1996

           Net income................................   $     7,024,000
           Dividend applicable to preferred stock....          (502,000)
                                                        ----------------
           Basic EPS:
              Income available to common stock.......         6,522,000        33,630,723    $         0.19
                                                                                             ==============
           Effect of dilutive securities:
              Common stock options...................            -                242,600
                                                        ---------------    --------------
           Diluted EPS:
              Income available to common stock
              and assumed options exercised..........   $     6,522,000        33,873,323    $         0.19
                                                        ===============    ==============    ==============

       YEAR ENDED DECEMBER 31, 1995

           Net income................................   $    59,181,000
           Dividend applicable to preferred stock....        (1,527,000)
                                                        ----------------
           Basic EPS:
              Income available to common stock.......        57,654,000        33,449,900    $         1.72
                                                                                             ==============
           Effect of dilutive securities:
              Common stock options...................            -                 41,578
              Convertible debt.......................         3,937,000         4,201,146
              Series D convertible preferred stock...         1,005,000         1,658,462
                                                        ---------------    --------------
           Diluted EPS:
              Income available to common stock
              and assumed conversions and options
              exercised..............................   $    62,596,000        39,351,086    $         1.59
                                                        ===============    ==============    ==============
</TABLE>

                                      F-16
<PAGE>


       Options to purchase  15,000,  80,308 and 1,208,936 shares of common stock
       at weighted average prices of $5.00, $3.73 and $5.31, were outstanding at
       December 31, 1997, 1996 and 1995, 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.

10.    COMMITMENTS AND CONTINGENCIES

       The Company leases  vehicles,  office space,  data processing  equipment,
       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 under  operating  leases was $3.5 million for
       1997, $4.0 million for 1996 and $3.5 million for 1995.

       At December  31, 1997,  minimum  rental  commitments  under all capital
       leases and operating leases for future years are as follows:

                                               CAPITAL             OPERATING
                                                LEASES               LEASES
                                           --------------       --------------  
              1998.....................    $    4,106,000       $    3,909,000
              1999.....................         4,750,000            2,759,000
              2000.....................            54,000            2,160,000
              2001.....................            11,000            1,574,000
              2002.....................              -               1,072,000
              2003 and thereafter......              -               3,947,000
                                           --------------       --------------
         Total minimum lease payments..         8,921,000       $   15,421,000
                                                                ==============
         Less amounts representing
           interest....................           827,000
                                           --------------
         Present value of net minimum
           lease payments..............    $    8,094,000
                                           ==============

       In March 1995, the Company  settled a lawsuit filed in the late 1980's by
       Stephen R. Herbel and other named  individuals doing business as Pinnacle
       Petroleum Company ("Pinnacle") that related to an interest in coalbed gas
       produced  from a property  that a  subsidiary  of the Company  previously
       owned. The settlement of this lawsuit was adequately reserved.

       In  August  1996,  the  Company  settled a lawsuit  filed in  Germany  in
       February  1996  on  behalf  of  Gesellschaft  fur   Industrieanlagen  und
       Maschineninstandhaltung  GmbH or G.I.M.  Engineering  against  one of the
       Company's  German  subsidiaries,  Furmanite  Technische  Dienstleistungen
       GmbH, concerning the consideration received in a German contract that was
       part of a  series  of  transactions  relating  to the  sale of one of the
       Company's  domestic  subsidiaries.  The  settlement  of this  lawsuit was
       adequately reserved.

       KPP  makes  quarterly  distributions  of 100% of its  Available  Cash (as
       defined in the Partnership  Agreement) to holders of limited  partnership
       units and the general partner.  Available Cash consists  generally of all
       the cash receipts of the Partnership  less all of its cash  disbursements
       and reserves.  KPP believes it will make  distributions of Available Cash
       for each quarter of not less than $.55 per Unit (the  "Minimum  Quarterly
       Distribution"),  or  $2.20  per  Unit  on an  annualized  basis  for  the
       foreseeable  future.  The Minimum  Quarterly  Distribution  on the Senior
       Preference Units is cumulative and preferential to the partnership  units
       held by the Company. The assets of KPP, other than Available Cash, cannot
       be distributed without a majority vote of the non-affiliated unitholders.

       The  operations  of KPP are subject to Federal,  state and local laws and
       regulations  relating to  protection  of the  environment.  Although  KPP
       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 KPP.  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 KPP, could result in substantial costs and liabilities to KPP. KPP has
       recorded an undiscounted  reserve in other  liabilities for environmental
       claims  of  $3.1  million,   including  $2.2  million   relating  to  the
       acquisitions of the West Pipeline and Steuart, as of December 31, 1997.


                                      F-17
<PAGE>

       The Company has other 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.

11.    BUSINESS SEGMENT DATA

       Selected  financial  data  pertaining to the  operations of the Company's
       business segments is as follows:

<TABLE><CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------------------
                                                              1997              1996              1995
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Revenues:

         Industrial field services...................   $   108,223,000    $  103,252,000    $  104,500,000
         Pipeline and terminaling services...........       121,156,000       117,554,000        96,928,000
         Other.......................................         7,557,000         8,055,000        10,634,000
                                                        ---------------    --------------    --------------
                                                        $   236,936,000    $  228,861,000    $  212,062,000
                                                        ===============    ==============    ==============
       Operating income:

         Industrial field services ..................   $     7,438,000    $    5,073,000    $    3,855,000
         Pipeline and terminaling services...........        53,420,000        51,285,000        42,488,000
         General corporate...........................        (4,907,000)       (4,741,000)       (4,593,000)
         Other.......................................         2,709,000         2,198,000         1,715,000
                                                        ---------------    --------------    --------------
                                                        $    58,660,000    $   53,815,000    $   43,465,000
                                                        ===============    ==============    ==============
       Depreciation and amortization:

         Industrial field services...................   $     4,563,000    $    4,227,000    $    4,152,000
         Pipeline and terminaling services...........        11,711,000        10,907,000         8,274,000
         General corporate...........................           290,000            66,000            65,000
         Other.......................................           151,000           234,000           564,000
                                                        ---------------    --------------    --------------
                                                        $    16,715,000    $   15,434,000    $   13,055,000
                                                        ===============    ==============    ==============
</TABLE>

<TABLE><CAPTION>

                                                                        YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------------------
                                                              1997              1996              1995
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Capital expenditures (including capitalized
         leases and excluding acquisitions):
         Industrial field services...................   $     2,013,000    $    3,504,000    $    4,323,000
         Pipeline and terminaling services...........        10,641,000         7,075,000         8,975,000
         General corporate...........................            30,000            23,000            32,000
         Other.......................................           327,000            83,000            98,000
                                                        ---------------    --------------    --------------
                                                        $    13,011,000    $   10,685,000    $   13,428,000
                                                        ===============    ==============    ==============
</TABLE>

<TABLE><CAPTION>
                                                                             DECEMBER 31,
                                                        ---------------------------------------------------
                                                              1997               1996             1995
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Identifiable assets:
         Industrial field services................      $   116,503,000    $  114,354,000    $  117,438,000
         Pipeline and terminaling services........          270,055,000       273,927,000       264,510,000
         General corporate........................           10,286,000        12,422,000        23,718,000
         Other....................................            5,429,000         3,988,000         4,161,000
                                                        ---------------    --------------    --------------
                                                        $   402,273,000    $  404,691,000    $  409,827,000
                                                        ===============    ==============    ==============
</TABLE>

                                      F-18
<PAGE>

       Selected  financial  data  pertaining to the operations of the Company in
       geographical areas is as follows:

<TABLE><CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                        ---------------------------------------------------
                                                              1997               1996             1995
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Revenues:
         United States............................      $   162,367,000    $  158,274,000    $  140,387,000
         Europe...................................           66,431,000        65,949,000        67,385,000
         Asia-Pacific.............................            8,138,000         4,638,000         4,290,000
                                                        ---------------    --------------    --------------
                                                        $   236,936,000    $  228,861,000    $  212,062,000
                                                        ===============    ==============    ==============
       Operating income:
         United States............................      $    51,384,000    $   48,884,000    $   40,649,000
         Europe...................................            6,139,000         4,001,000         2,399,000
         Asia-Pacific.............................            1,137,000           930,000           417,000
                                                        ---------------    --------------    --------------
                                                        $    58,660,000    $   53,815,000    $   43,465,000
                                                        ===============    ==============    ==============
</TABLE>

<TABLE><CAPTION>

                                                                             DECEMBER 31,
                                                        ---------------------------------------------------
                                                              1997               1996             1995
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Identifiable assets:
         United States............................      $   299,535,000    $  302,424,000    $  304,227,000
         Europe...................................           95,998,000       100,329,000       103,559,000
         Asia-Pacific.............................            6,740,000         1,938,000         2,041,000
                                                        ---------------    --------------    --------------
                                                        $   402,273,000    $  404,691,000    $  409,827,000
                                                        ===============    ==============    ==============
</TABLE>

12.    ACCRUED EXPENSES

       Accrued expenses is comprised of the following components at December 31,
       1997 and 1996:

<TABLE><CAPTION>
                                                                                       DECEMBER 31,
                                                                            ---------------------------------
                                                                                  1997             1996
                                                                            --------------     --------------
       <S>                                                                  <C>                <C>
       Accrued distribution payable....................................     $    7,177,000     $    6,588,000
       Accrued income taxes............................................          3,079,000          2,245,000
       Accrued compensation and benefits...............................          2,002,000          2,650,000
       Accrued interest................................................            970,000          1,058,000
       Other accrued expenses..........................................         22,451,000         23,740,000
                                                                            --------------     --------------
                                                                            $   35,679,000     $   36,281,000
                                                                            ==============     ==============
</TABLE>

                                      F-19
<PAGE>

13.    SUPPLEMENTAL CASH FLOW INFORMATION

       The  Company  issued  5,073 and 1,113  shares of its  common  stock  upon
       conversion  of 3,000 and 658  shares of its Series D  Preferred  Stock in
       1996 and 1995,  respectively.  The Company  contributed 394,739 shares of
       its common  stock to its 401(k)  Savings  Plan and 160,000  shares of its
       common stock to its subsidiary's defined benefit pension plan in 1995, in
       satisfaction of required  pension  payments.  During 1996,  $5,099,000 in
       property and equipment was netted against  accumulated  depreciation  and
       amortization.

       Supplemental information on cash paid during the period for:

<TABLE><CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------------------
                                                             1997              1996              1995
                                                       ---------------    --------------     -------------
       <S>                                             <C>                <C>                <C>
       Interest..................................      $    15,373,000    $   14,502,000     $  15,675,000
                                                       ===============    ==============     =============
       Income taxes..............................      $     1,535,000    $    1,340,000     $   2,293,000
                                                       ===============    ==============     =============
</TABLE>

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

       The  estimated  fair  value  of  cash,   cash   equivalents,   short-term
       investments and accounts receivable approximate their carrying amount due
       to the  relatively  short  period to maturity of these  instruments.  The
       estimated fair value of all long-term debt (excluding  capital leases) as
       of December  31, 1997 was  approximately  $183 million as compared to the
       carrying value of $178 million.  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 Company does not believe that it has a significant  concentration  of
       credit risk at December 31, 1997, as  approximately  65% of the Company's
       accounts  receivable  are generated  from its  industrial  field services
       customers located throughout the United States, Europe and Asia-Pacific.

15.    QUARTERLY FINANCIAL DATA (UNAUDITED)

       Quarterly operating results for 1997 and 1996 are summarized as follows:

<TABLE><CAPTION>
                                                                   QUARTER ENDED
                                    -----------------------------------------------------------------------
                                       MARCH 31,           JUNE 30,        SEPTEMBER 30,     DECEMBER 31,
                                    --------------     ---------------    --------------     --------------
       1997:
       <S>                          <C>                <C>                <C>                <C>
       Revenues................     $   53,154,000     $    58,388,000    $   62,074,000     $   63,320,000
                                    ==============     ===============    ==============     ==============
       Operating income........     $   12,444,000     $    14,245,000    $   15,695,000     $   16,276,000
                                    ==============     ===============    ==============     ==============
       Net income .............     $    1,529,000     $     2,707,000    $    3,276,000     $    3,131,000
                                    ==============     ===============    ==============     ==============
       Earnings per
         common share:
           Basic................    $          .04     $           .08    $          .10     $          .09
                                    ==============     ===============    ==============     ==============
           Diluted..............    $          .04     $           .08    $          .10     $          .09
                                    ==============     ===============    ==============     ==============
       1996:
       Revenues................     $   54,839,000     $    57,215,000    $   57,010,000     $   59,797,000
                                    ==============     ===============    ==============     ==============
       Operating income........     $   11,683,000     $    13,469,000    $   13,984,000     $   14,679,000
                                    ==============     ===============    ==============     ==============
       Net income .............     $      831,000     $     1,700,000    $    2,313,000     $    2,180,000
                                    ==============     ===============    ==============     ==============
       Earnings per
         common share:
           Basic................    $          .02     $           .05    $          .06     $          .06
                                    ==============     ===============    ==============     ==============
           Diluted..............    $          .02     $           .05    $          .06     $          .06
                                    ==============     ===============    ==============     ==============
</TABLE>
                                      F-20
<PAGE>

                                                                      SCHEDULE I

                      KANEB SERVICES, INC. (PARENT COMPANY)
                         CONDENSED STATEMENTS OF INCOME

<TABLE><CAPTION>

                                                                               YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------------------
                                                                   1997               1996                1995
                                                              -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>
General and administrative expenses.....................      $  (4,617,000)      $  (4,677,000)     $   (4,528,000)
Depreciation and amortization...........................           (290,000)            (64,000)            (65,000)
Interest expense........................................         (2,239,000)         (2,377,000)         (4,343,000)
Intercompany fees and expenses..........................          2,266,000           3,997,000           1,104,000
Interest income.........................................            372,000             247,000             261,000
Other income (expense)..................................         (1,024,000)           (332,000)           (307,000)
Equity in income of subsidiaries and KPP................         16,175,000          10,230,000          67,059,000
                                                              -------------       -------------      --------------

Net income..............................................         10,643,000           7,024,000          59,181,000
Dividends applicable to preferred stock.................            538,000             502,000           1,527,000
                                                              -------------       -------------      --------------

Net income applicable to common  stock..................      $  10,105,000       $   6,522,000      $   57,654,000
                                                              =============       =============      ==============
Earnings per common share:

   Basic................................................      $         .31       $         .19      $         1.72
                                                              =============       =============      ==============
   Diluted..............................................      $         .30       $         .19      $         1.59
                                                              =============       =============      ==============
</TABLE>


                                      F-21

             See "Notes to Consolidated Financial Statements" of
         Kaneb Services, Inc. and Subsidiaries included in this report.

<PAGE>

                                                                      SCHEDULE I

                                                                     (CONTINUED)

                      KANEB SERVICES, INC. (PARENT COMPANY)
                            CONDENSED BALANCE SHEETS

<TABLE><CAPTION>
                                                                                          DECEMBER 31,
                                                                             --------------------------------------
                                                                                  1997                   1996
                                                                             ---------------        ---------------
                                     ASSETS

<S>                                                                          <C>                    <C>
Current assets:
   Cash and cash equivalents............................................     $     8,043,000        $     8,931,000
   Accounts receivable..................................................              -                     102,000
   Prepaid expenses and other current assets............................              -                     818,000
                                                                             ---------------        ---------------
Total current assets....................................................           8,043,000              9,851,000
                                                                             ---------------        ---------------
Property and equipment..................................................           3,848,000              3,819,000
Less accumulated depreciation...........................................           3,848,000              3,559,000
                                                                             ---------------        ---------------
     Net property and equipment.........................................              -                     260,000
                                                                             ---------------        ---------------
Investments in, advances to and notes receivable
  from subsidiaries and KPP.............................................         104,135,000            104,035,000
Other assets............................................................           2,243,000              2,311,000
                                                                             ---------------        ---------------
                                                                             $   114,421,000        $   116,457,000
                                                                             ===============        ===============


                             LIABILITIES AND EQUITY

Current liabilities - accounts payable and accrued expenses.............     $     3,987,000        $     8,426,000

Long-term debt..........................................................          23,666,000             23,666,000

Deferred credits and other liabilities..................................           8,321,000              8,999,000

Stockholders' equity:
   Preferred stock, without par value...................................           5,792,000              5,792,000
   Common stock, without par value......................................           4,234,000              4,230,000
   Additional paid-in capital...........................................         197,242,000            197,213,000
   Accumulated deficit..................................................        (101,491,000)          (111,596,000)
   Treasury stock, at cost..............................................         (25,216,000)           (20,631,000)
   Cumulative foreign currency translation adjustment...................          (2,114,000)               358,000
                                                                             ----------------       ---------------
     Total stockholders' equity.........................................          78,447,000             75,366,000
                                                                             ---------------        ---------------
                                                                             $   114,421,000        $   116,457,000
                                                                             ===============        ===============
</TABLE>

                                      F-22

             See "Notes to Consolidated Financial Statements" of
        Kaneb Services, Inc. and Subsidiaries included in this report.

<PAGE>

                                                                      SCHEDULE I

                                                                     (CONTINUED)

                      KANEB SERVICES, INC. (PARENT COMPANY)
                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                       -----------------------------------------------------------
                                                              1997                1996                 1995
                                                       -----------------    ----------------    ------------------
<S>                                                    <C>                  <C>                 <C>
Operating Activities:
   Net income .......................................  $      10,643,000    $      7,024,000    $       59,181,000
   Adjustments to reconcile net income
     to net cash used in operating activities:
     Depreciation and amortization...................            290,000              64,000                65,000
     Equity in net income of subsidiaries and KPP....        (16,175,000)        (10,230,000)          (67,059,000)
     Changes in current assets and liabilities:
       Short-term investments........................                -                  -                1,020,000
       Accounts receivable...........................            102,000              99,000              (107,000)
       Prepaid expenses..............................            818,000             979,000            (1,797,000)
       Accrued expenses .............................         (4,439,000)         (1,245,000)            2,401,000
                                                       ------------------   -----------------   ------------------
       Net cash used in operating activities.........         (8,761,000)         (3,309,000)           (6,296,000)
                                                       ------------------   ----------------    ------------------
Investing Activities:
   Capital expenditures..............................            (30,000)            (25,000)              (32,000)
   Decrease in other assets, net.....................         (3,082,000)           (129,000)             (459,000)
                                                       ------------------   -----------------   -------------------
       Net cash used in investing activities.........         (3,112,000)           (154,000)             (491,000)
                                                       ------------------   -----------------   -------------------

Financing Activities:
   Payments on long-term debt........................              -              (6,000,000)          (15,011,000)
   Payment of subsidiary note........................              -                    -              (50,000,000)
   Preferred stock dividends paid....................           (538,000)           (502,000)           (1,328,000)
   Decrease in investments in, advances to and notes
     receivable from subsidiaries and KPP............         16,075,000           1,369,000            91,102,000
   Common stock issued...............................             33,000                -                    -
   Purchase of treasury stock, net...................         (4,585,000)         (1,079,000)                -
                                                       -----------------    -----------------   ------------------
        Net cash provided by (used in) financing
          activities.................................         10,985,000          (6,212,000)           24,763,000
                                                       -----------------    -----------------   ------------------
Increase (decrease) in cash and cash equivalents.....           (888,000)         (9,675,000)           17,976,000
Cash and cash equivalents at beginning of year.......          8,931,000          18,606,000               630,000
                                                       -----------------    ----------------    ------------------
Cash and cash equivalents at end of year.............  $       8,043,000    $      8,931,000    $       18,606,000
                                                       =================    ================    ==================
</TABLE>


                                      F-23

            See "Notes to Consolidated Financial Statements" of
        Kaneb Services, Inc. and Subsidiaries included in this report.


<PAGE>

                                                                     SCHEDULE II

                            KANEB SERVICES, INC.
                        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
------------------------------------   -------------    -------------    --------------    -------------         -------------
ALLOWANCE DEDUCTED FROM
 ASSETS TO WHICH THEY APPLY
<S>                                    <C>                <C>             <C>               <C>                  <C>
YEAR ENDED DECEMBER 31, 1997:

   For doubtful receivables
     classified as current assets...   $         666      $       246     $         (19)(a) $       (323)(b)    $         570
                                       =============      ===========     ==============    ============        =============
   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $      86,698      $     -         $        -        $    (31,014)       $      55,684
                                       =============      ===========     =============     ============        =============
YEAR ENDED DECEMBER 31, 1996:

   For doubtful receivables
     classified as current assets...   $       1,133      $       333     $         (23)(a) $       (777)(b)    $         666
                                       =============      ===========     ==============    ============        =============
   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $      84,284      $   -           $       6,598     $     (4,184)       $      86,698
                                       =============      ===========     =============     ============        =============
YEAR ENDED DECEMBER 31, 1995:

   For doubtful receivables
     classified as current assets...   $         854      $       598     $          41(a)  $       (360)(b)    $       1,133
                                       =============      ===========     =============     ============        =============
   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $     108,441      $    -          $       -         $    (24,157)       $      84,284
                                       =============      ===========     =============     ============        =============
</TABLE>

Notes:

   (a) Foreign currency translation adjustments.

   (b) Receivable write-offs and reclassifications, net of recoveries.

                                      F-24

            See "Notes to Consolidated Financial Statements" of
         Kaneb Services, Inc. and Subsidiaries included in this report.

<PAGE>

                                   SIGNATURES

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

                                          KANEB SERVICES, INC.

                                          By: JOHN R. BARNES

                                          President and Chief Executive Officer
                                          Date:    March 23, 1998

         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
Kaneb Services, Inc. and in the capacities and on the date indicated.

      SIGNATURE                       TITLE                           DATE
-------------------------- -------------------------------       -------------- 
Principal Executive Officer

  JOHN R. BARNES          President, Chief Executive             March 23, 1998
                          Officer and Director

Principal Accounting Officer

  HOWARD C. WADSWORTH     Vice President, Treasurer              March 23, 1998
                          and Secretary

Directors

  SANGWOO AHN             Director                               March 23, 1998

  JOHN R. BARNES          Director                               March 23, 1998

  FRANK M. BURKE, JR.     Director                               March 23, 1998

  CHARLES R. COX          Director                               March 23, 1998

  HANS KESSLER            Director                               March 23, 1998

  JAMES R. WHATLEY        Director                               March 23, 1998

<PAGE>
                                 EXHIBIT INDEX
EXHIBIT
NUMBER                            DESCRIPTION
-------  -----------------------------------------------------------------------
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 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 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  Quarterly Report on 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  Annual  Report on Form 10-K for the year
         ended  December  31, 1990 ("1990 Form 10-K"),  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  Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1990, which exhibit is hereby  incorporated
         by reference.

3.7      By-laws of the Registrant, filed herewith.

4.1      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative Class A Preferred Stock,  filed as Exhibit 4 of the exhibits
         to the Registrant's Quarterly Report of Form 10-Q for the quarter ended
         September 30, 1983, which exhibit is hereby incorporated by reference.

4.2      Certificate  of  Designation,  Preferences  and  Rights  related to the
         Registrant's  Series B Junior  Participating  Preferred Stock, filed as
         Exhibit 1 of the exhibits to the  Registrant's  Current  Report on Form
         8-K and Registration  Statement on Form 8-A, dated April 5, 1988, which
         exhibit is hereby incorporated by reference.

4.3      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative  Class A Preferred  Stock,  Series C, dated April 23,  1991,
         filed as Exhibit 4.4 of the exhibits to  Registrant's  Annual Report on
         Form 10-K for the year ended December 31, 1991, which exhibit is hereby
         incorporated by reference.

4.4      Certificate of Designation related to the Registrant's  Adjustable Rate
         Cumulative  Class A  Preferred  Stock,  Series F, dated June 12,  1997,
         filed herewith.

4.5      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.

4.6      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 Annual Report on Form 10-K for the year
         ended  December  31,  1983,  which  exhibit is hereby  incorporated  by
         reference.

10.1     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) and as Exhibit 4.1
         to the exhibits of Registrant's Form S-8 (S.E.C.  File No.  333-14067),
         which exhibits are hereby incorporated by reference.

10.2     Kaneb  Services,  Inc. 1984  Nonqualified  Stock Option Plan,  filed as
         Exhibit 10.26 to the exhibits of the Registrant's Form S-8 (S.E.C. File
         No. 2-90929), which exhibit is hereby incorporated by reference.

10.3     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),  which exhibit is hereby  incorporated  by  reference.

10.4     Kaneb Services,  Inc. Deferred Stock Unit Plan, filed as Exhibit 4.1 to
         the exhibits of the Registrant's Form S-8 (S.E.C.  File No. 333-08725),
         which exhibit is hereby incorporated by reference.

10.5     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),  which exhibit is hereby  incorporated by
         reference.

10.6     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.

10.7     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.

10.8     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
         Registrant's Form S-8 (S.E.C.  File No. 333-22109),  which exhibits are
         hereby incorporated by reference.

10.9     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),  which exhibit is hereby  incorporated by
         reference.

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

10.11    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 Annual Report on Form 10-K for the year ended December
         31, 1994 and Exhibit 10.11 of the exhibits to the  Registrant's  Annual
         Report  on Form  10-K for the  year  ended  December  31,  1996,  which
         exhibits are hereby incorporated by reference.

10.12    Amendments to the Furmanite Loan Agreement, filed herewith.

10.13    Loan Agreement between the Registrant,  KPL and Bank of Scotland, dated
         as of December 1, 1995,  filed as Exhibit  10.10 of the exhibits to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1995, which exhibit is hereby incorporated by reference.

21       List of  subsidiaries  of the  Registrant,  filed  herewith.  
23       Consent of independent accountants Price Waterhouse LLP filed herewith 
27       Financial Data Schedule, filed herewith.