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, 1998

                                       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 Employee 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.[ X ]

     Aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant:  $124,484,300.  This figure is estimated  as of March 15,  1999,  at
which date the closing  price of the  Registrant's  Common Stock on the New York
Stock  Exchange was $4.1875 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 15, 1999: 31,415,622.

                       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. ("Kaneb" or the "Company") conducts its principal
businesses in three industry  segments,  specialized  industrial field services,
pipeline,  terminaling  and product  marketing and  information  services.  Each
segment operates through separate groups of wholly-owned subsidiaries, Furmanite
Worldwide,  Inc., Kaneb Pipe Line Company and Kaneb Information Services,  Inc.,
respectively.  Furmanite  Worldwide,  Inc.,  and its domestic and  international
subsidiaries and affiliates  (collectively,  "Furmanite"),  provide  specialized
industrial  field  services,   including  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."  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.
KPL also conducts  product  marketing  activities  through another  wholly-owned
subsidiary.  Acquired by KPL in March 1998,  this  business  provides  wholesale
motor fuel  marketing  services  throughout  the Great Lakes and Rocky  Mountain
regions and in California.  See  "Pipeline,  Terminaling  and Product  Marketing
Services."  Kaneb  Information  Services,  Inc.  is engaged  in the  information
management services industry through its wholly-owned subsidiaries,  which offer
products and services that, among other functions, enable financial institutions
to monitor the insurance  coverage of their loan  collateral,  provide  computer
hardware and consulting services to federal and state governmental  agencies and
private  sector  customers  and provide  consulting  services to  hospitals  and
hospital networks implementing telemedicine systems. See "Information Services."


         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. Kaneb's principal operating office
is located at 2435 North  Central  Expressway,  Richardson,  Texas 75080 and its
telephone number is (972) 699-4000.


OPERATING SEGMENTS

         Financial  information regarding Kaneb's operating segments and foreign
operations is presented under the caption  "Business Segment Data" in Note 10 to
the Company's  consolidated  financial  statements.  Such  information is hereby
incorporated by reference into this Item 1.


INDUSTRIAL FIELD SERVICES

         The  Furmanite  group of  companies  offers a  variety  of  specialized
industrial  field services to an  international  base of  flow-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  one of the  largest  leak  sealing  and  on-site  machining
companies  in the world.  Kaneb  acquired  Furmanite  in 1991 to  diversify  the
Company's  operations  and take advantage of  anticipated  international  growth
opportunities.  For the year ended  December  31,  1998,  Furmanite's  sales and
operating income were approximately  $115,116,000 and $6,656,000,  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
("leak  sealing") in valves,  pipes and other  components of piping  systems and
related equipment typically used in flow-process industries.  See "Customers and
Markets."  Other  services  provided by  Furmanite  include  on-site  machining,
bolting  and valve  testing  and repair on such  systems  and  equipment.  These
services  tend to  complement  Furmanite's  leak  sealing  service,  since these
"turnaround  services" are usually  performed  while a plant or piping system is
off-line.  In  addition,  Furmanite  provides hot  tapping,  fugitive  emissions
monitoring, passive fire protection,  concrete repair, heat exchanger repair and
pipeline  engineering  services.  Furmanite also performs diagnostic services on
valves and motors by, among other methods,  utilizing its patented  Trevitest(R)
system  and  employing  proprietary  diagnostic  equipment  under  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, 1998,  1997, and
1996,  underpressure  services  represented  approximately  38%,  35%  and  37%,
respectively,  of Furmanite's revenues,  while turnaround services accounted for
approximately  46%,  45% and 41%,  respectively,  and  product  sales  and other
industrial services represented approximately 16%, 20% and 22%, respectively, of
Furmanite's revenues for each of such years.

         Furmanite's on-line,  underpressure leak sealing services are performed
on a variety of flow-process industry machinery,  often in difficult situations.
Many of Furmanite's  techniques and materials are  proprietary  and/or  patented
and, the Company believes,  provide Furmanite with a competitive  advantage over
other   organizations  that  provide  similar  services.   Furmanite's   skilled
technicians  work with  equipment  in a manner  designed  to enhance  safety and
efficiency in temperature  environments  ranging from cryogenic to 1,400 degrees
Fahrenheit  and  pressure  environments  ranging from vacuum to 5,000 pounds per
square  inch.  In many  circumstances,  Furmanite  personnel  are called upon to
custom-design  tools,  equipment  or other  materials  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  flow-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  Houston,  Texas  worldwide
headquarters and maintains a strong presence in England,  continental Europe and
the  Asia-Pacific.  Furmanite  currently  operates North American offices in the
United States in Baton Rouge, Beaumont,  Benecia,  Charlotte,  Chicago, Houston,
Merrillville,  New Jersey  and Salt Lake  City;  and in  Edmonton,  Alberta  and
Sarnia, Ontario, Canada.  Furmanite's worldwide strength is further supported by
offices  currently  located in Australia (6 offices),  Belgium,  China,  France,
Germany, Hong Kong, Malaysia, the Netherlands,  New Zealand, Norway,  Singapore,
South Africa and the United Kingdom (6 locations) and by licensee, agency and/or
minority ownership interest  arrangements in Argentina,  Brazil, Chile, Croatia,
Cyprus, Czech Republic, Egypt, Finland, Hungary, India, Indonesia, Italy, Japan,
Kuwait, Macedonia, Poland, Portugal, Puerto Rico, Saudi Arabia, Slovak Republic,
Korea,  Sweden,  Thailand,  Trinidad,  Ukraine,  the United  Arab  Emirates  and
Venezuela.  Sales by major  geographic  region  for 1998 were 31% for the United
States,  59% for Europe and 10% for Asia-Pacific.  See "Management's  Discussion
and Analysis of Financial  Condition and Results of  Operations"  and Note 10 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 or potential customers. In addition to
staff  reductions  and the  trend  toward  outsourcing,  Furmanite  believes  it
currently has an advantage over in-house maintenance  departments because of the
ability of its multi-disciplined  technicians to use Furmanite's proprietary and
patented  techniques to perform quality repairs on a timely basis while customer
equipment remains in service.

Safety, Environmental and Other Regulatory Matters

         Many  aspects of  Furmanite's  operations  are subject to  governmental
regulation.  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   taxation   policies,   labor  practices,   currency   exchange  rate
fluctuations,  foreign exchange restrictions, local political conditions, import
and  export  limitations  and  expropriation  of  equipment.  Except in  certain
developing  countries,  where  payment in a  specified  currency  is required by
contract,  Furmanite's  services  are paid,  and its  operations  are  typically
funded,  in the  currency  of the  particular  country  in  which  its  business
activities are conducted.

         Underpressure  leak  sealing  and other  Furmanite  services  are often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures,  potential  contact with caustic or toxic materials,
fire and explosion  hazards and  environmental  contamination,  any of which can
cause  serious  personal  injury  or  property  damage.  Furmanite  manages  its
operating risks by providing its technicians with extensive  on-going  classroom
and field  training and  supervision,  maintaining  a technical  support  system
through its staff of  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.


PIPELINE, TERMINALING AND PRODUCT MARKETING SERVICES

         Through its KPL  subsidiary,  Kaneb  manages and  operates  its refined
petroleum  products pipeline  transportation  system and petroleum  products and
specialty liquids terminal storage business,  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.  The terminaling
business  is  conducted  by  KPP  under  the  tradenames  of "ST  Services"  and
"StanTrans,  Inc.," among others  (collectively,  "ST").  Kaneb operates ST's 33
terminal  storage  facilities  in 18 states and the District of Columbia and six
terminal  storage  facilities in the United Kingdom (See "Recent  Development"),
with total storage capacity of approximately 27,566,000 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 KPP than that which is
contained  herein,  reference is made to its Annual  Report on Form 10-K for the
year  ended  December  31,  1998,  and other  publicly  filed  documents  of the
Partnership (NYSE: KPP).

         Additionally,  in March 1998, a wholly-owned subsidiary of KPL acquired
a products  marketing  business  which provides  wholesale  motor fuel marketing
services   throughout  the  Great  Lakes  and  Rocky  Mountain  regions  and  in
California. See "Product Marketing Operations."


Pipeline Transportation Systems

Markets Served

         Initially  built in 1953,  the KPP pipeline  transportation  operations
currently consist of two primary pipeline  systems:  the East and West Pipelines
(the "Pipelines"), with its operational headquarters located in Wichita, Kansas.
The East Pipeline is a 2,092 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 16 public truck loading  terminals
located  in five  states,  comprised  of a total  of 233  tanks  having  storage
capacity of  approximately  3,500,000  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 over 1,700,000 barrels of product.  Through these facilities
and operations,  the West Pipeline serves the Denver and  northeastern  Colorado
markets and  supplies jet fuel to 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 to
the East Pipeline.  Competition  between  common carrier  pipelines is primarily
based upon transportation charges,  quality of customer service and proximity to
end users. KPL, in its capacity as General Partner of the Partnership,  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, Kaneb does not believe that, over the long term,
trucks are effective competition to the Pipelines' long-haul volumes.

Products

         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, the  terminaling  business has 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 33 facilities  offer storage  capacity ranging from 40,000 to 5.4
million barrels,  comprised of two to 124 tanks per facility. As of December 31,
1998,  ST's  six  largest  facilities  were  located  at Piney  Point,  Maryland
(5,403,000  Bbls  capacity;  28  tanks);  Linden,  New  Jersey  (3,900,000  Bbls
capacity; 22 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). The Linden, New Jersey terminal was acquired as a part of a
November 1998 joint venture  transaction  with  Northville  Industries  Corp. in
which ST acquired a 50% interest in, and the  management  of, the  facility.  In
addition  to the  foregoing,  the other  domestic ST  facilities  are located in
Alabama (2),  Arizona,  California,  the District of Columbia (2),  Florida (2),
Georgia (6), Illinois (3), Indiana,  Kansas,  Maryland,  Minnesota,  New Mexico,
Oklahoma,  Texas,  Virginia (2), Washington and Wisconsin.  In February 1999, ST
acquired  six  terminals in the United  Kingdom,  having  aggregate  capacity of
approximately 5.5 million Bbls capacity in 307 tanks. 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 variety in the
method of  loading  and  unloading  of product  at the  terminal.  Additionally,
another  increasingly  important  service  factor is the  ability  of a terminal
operator to offer product  handling and storage that  complies  with  applicable
environmental, safety and health regulations, among others.

Products

         The variety of  products  that can be stored at ST's  terminal  storage
facilities is a significant part of what KPL, in its capacity as General Partner
of the  Partnership,  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 its  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, nor
that its  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  along  the  pipelines  and at  certain  of  its  pipeline-related
terminal sites,  resulting from spills or leakage 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.

         In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain,  Colorado  failed and  approximately  1,000  barrels  of  product  was
released.  Containment  and  remedial  action was  immediately  commenced.  Upon
investigation,  it appeared  that the failure of the  pipeline was due to damage
caused by third party  excavations.  The Partnership has made claim to the third
party as well as to its insurance  carriers.  The Partnership has entered into a
Compliance  Order on  Consent  with the State of  Colorado  with  respect to the
remediation.  As of December 31, 1998, the Partnership has incurred $1.1 million
of cost in connection with this incident. Future costs are not anticipated to be
significant,  and the Partnership  expects to recover  substantially  all of its
costs from either the third party or its insurance carrier.

         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.

Recent Development

         In February 1999, ST acquired six terminal storage  facilities  located
in the United  Kingdom  from GATX  Terminals  Limited  for a  purchase  price of
(pound)22.6 million (approximately $37.4 million) plus the assumption of certain
liabilities.   This   acquisition,   which  was  financed  by  bank  borrowings,
represented the first international expansion of ST's operations.  The terminals
have an aggregate  capacity of  approximately  5.5 million  barrels in 307 tanks
and, consistent with most other ST facilities,  handle a variety of liquids. The
facilities  are located in  Eastham,  Runcorn  and Grays,  England;  Glasgow and
Leith, Scotland; and, Belfast, Northern Ireland.


Product Marketing Operations

         In  March  1998,  Kaneb,  through  a  wholly-owned  subsidiary  of KPL,
acquired a products  marketing  business for a purchase  price of $1.5  million,
plus the cost of product inventories.  For over 40 years, this operation and its
predecessors have engaged in the business of acquiring quantities of motor fuels
in large  batches and  reselling  them in smaller lots at truck racks located in
terminal  storage  facilities  along  pipelines   primarily  located  throughout
California,  Colorado,  Illinois,  Indiana, Ohio, Wisconsin and Wyoming. Kaneb's
products  marketing  subsidiary  does not own any retail  outlets,  pipelines or
terminals.

         The  products  marketing  business  serves a wide  range  of  wholesale
customers,  from the major oil  companies to jobbers,  by providing  supplies of
gasoline, fuel oils, ethanol and natural gasoline to areas where these marketers
have  inadequate  distribution  capabilities.  The  Company's  customers in this
business are  primarily  independent  distributors  and often cannot buy product
supplies from major oil companies  because they are not associated  with a major
oil company brand.  Some of its suppliers  offer their products  through product
exchanges,  either to broaden  their  distribution  areas or to obtain  types of
products  not readily  available  to these  companies.  The  Company  works with
commodities  traders, as well, to provide sufficient supplies of products to the
markets served by the Company.

         The  petroleum  products  marketing  industry is a highly  competitive,
price sensitive  business.  The Company attempts to minimize risk due to pricing
changes by maintaining a high inventory turnover rate  (approximately 10 days of
on-hand inventory,  on average) and through product exchanges.  The Company does
not currently engage in commodity  futures trading to hedge against such pricing
volatility,  but may do so in  connection  with  these  operations  in a limited
fashion  in the  future,  as its  volumes  and  inventory  capacities  increase.
Consistent  with industry  practice,  prices are  electronically  posted at each
distribution  point.  This  pricing  system  assists the Company in  maintaining
current information with regard to market pricing.


INFORMATION SERVICES

         Kaneb  Information  Services,  Inc. and its  wholly-owned  subsidiaries
(collectively,  "KIS") provide  information  management services to a variety of
targeted customers in specialized industries. KIS assists financial institutions
in  monitoring  the  insurance  coverage  of their  loan  collateral.  Using its
proprietary  software   applications  and  other  products  and  services,   KIS
coordinates  communications between and among financial institutions,  insurance
companies and borrowers regarding the status of insurance coverage that protects
the  institution's  loan collateral.  In the event of a lapse in coverage in the
institution's  loan  collateral,  KIS assists  the  institution  in  identifying
suitable replacement coverage with insurance carriers.

         Through  another  wholly-owned  subsidiary,  KIS  provides  information
technology  services and products to Federal and state  government  agencies and
commercial  clients and also provides  consulting  services to hospital networks
and other medical facilities in the implementation of telemedicine  systems. KIS
offers  hardware,  software and staffing  solutions to agencies  throughout  the
federal  government sector through its General Services  Administration  ("GSA")
schedule of products and services and assists its clients in the  configuration,
installation  and  maintenance  of general  purpose  data  networks and provides
training on the use and operation of these systems.  Additionally,  KIS offers a
wide variety of products manufactured by others,  including computers,  servers,
routers,  hubs,  monitors,  operating and application  software,  and peripheral
devices  such as printers  and  scanners.  KIS  maintains  an office in Fairfax,
Virginia in order to more effectively serve its Washington,  DC-based government
clients and promote awareness of its products,  services and  capabilities.  KIS
also provides  consulting services in support of the purchase and implementation
of digital  radiology  systems,  known as  Picture  Archival  and  Communication
Systems ("PACS"),  by hospitals,  radiology  clinics,  doctors offices and other
medical facilities, which systems are used in connection with such procedures as
magnetic   resonance   imaging   ("MRI"),   computed-tomography   ("CT")  scans,
ultrasounds,  and digital x-rays, among others. KIS offers technical services to
support its clients during all phases of a PACS project, including, planning and
feasibility studies, workflow redesign,  specification development,  procurement
assistance, on-site technical supervision of PACS vendors and quality assurance,
including   acceptance   testing.   KIS  also   coordinates   with  medical  and
administrative  staffs in the processing of warranty and service issues that may
arise with the manufacturers of PACS systems.  These services are performed by a
highly  trained  staff of degreed  electrical,  biomedical  and clinical  system
engineers,  among others.  KIS manages its businesses  from its  headquarters in
Richardson, Texas.


ENVIRONMENTAL CONTROLS

         Many of Kaneb's operations are subject to Federal, state and local laws
and  regulations  relating to  protection  of the  environment.  Although  Kaneb
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,  1998,  Kaneb  and its  subsidiaries  employed  1,857
persons,  of which a total of 1,168 persons were employed by the Furmanite group
of  companies;   540  persons  were  employed  by  KPL,  its   subsidiaries  and
subsidiaries  of KPP; and, 118 were employed by the KIS group of companies.  The
Partnership  itself has no employees,  as the business and operations of the KPP
are conducted by KPL, the General  Partner of KPP and a wholly-owned  subsidiary
of Kaneb. As of December 31, 1998,  approximately 538 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,
1998,  approximately  183  of  the  persons  employed  by KPL  were  subject  to
representation by unions for collective  bargaining purposes;  however,  only 77
persons  employed  at four of KPL's  terminal  unit  locations  were  subject to
collective  bargaining  or  similar  contracts  at that  date.  Union  contracts
regarding  conditions on employment for 36, 12, 20 and 9 employees are in effect
through  June 28, 1999,  November 1, 2000,  June 30, 2001 and February 28, 2002,
respectively. All such contracts are subject to automatic renewal for successive
one year periods  unless either party  provides  written  notice to terminate or
modify such agreement in a timely manner.


Item 2.    Properties

         The  properties  owned or  utilized by Kaneb and its  subsidiaries  are
generally described in Item 1 of this Report.  Additional information concerning
the obligations of Kaneb and its subsidiaries  for lease and rental  commitments
is presented under the caption  "Commitments and Contingencies" in Note 9 to the
Company's consolidated  financial statements.  Such descriptions and information
are hereby incorporated by reference into this Item 2.

         Kaneb's  corporate  headquarters  is located in an office  building  in
Richardson,  Texas,  pursuant to a lease agreement that expires in 2002, subject
to a five-year  renewal  option.  The  facilities  used in the operations of the
Company's  subsidiaries,  other than the  Partnership,  are generally held under
lease agreements having various expiration dates,  rental rates and other terms,
except for three Furmanite  properties located in the United Kingdom,  which are
owned in fee. The  properties  used in the operations of the Pipelines are owned
by  KPP,  through  its  subsidiary   entities,   except  for  KPL's  operational
headquarters,  located  in  Wichita,  Kansas,  which is held  under a lease that
expires in 2004. The majority of ST's facilities are owned, while the remainder,
including  most  of its  terminal  facilities  located  in  port  areas  and its
operational  headquarters,  located in Dallas, Texas, are held pursuant to lease
agreements having various  expiration  dates,  rental rates and other terms. For
additional  information  regarding the properties  utilized in the operations of
the  Partnership,  reference  is made to the  Annual  Report on Form 10-K of the
Partnership.


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.

         The Company is  Plaintiff  in  unrelated  legal  proceedings  involving
malpractice  issues with two professional  service providers  previously used by
the  Company.  These  actions  are  in  the  initial  stages  of  discovery  and
proceedings.  Accordingly,  at this time the  Company  is  unable to  reasonably
estimate potential recoveries, if any, under such actions.

         Certain  subsidiaries  of KPP are  defendants  in a lawsuit  filed in a
Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
whom KPP acquired ST in 1993,  involving certain issues allegedly arising out of
KPP's   acquisition   of  ST.  Grace   alleges  that  the   defendants   assumed
responsibility for certain environmental damages to a former ST facility located
in Massachusetts  that occurred at a time prior to KPP's  acquisition of ST. The
defendants  have also received and responded to inquiries from two  governmental
authorities in connection  with the same  allegation by Grace.  The  defendants'
consistent  position is that it did not acquire the facility in question as part
of the 1993 ST transaction and, consequently,  did not assume any responsibility
for the environmental damage. The case is set for trial in June, 1999.

         In addition,  from time to time,  Kaneb and certain of its subsidiaries
are defendants 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 effect on the Company.


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

         Kaneb did not hold a meeting of  stockholders  or otherwise  submit any
matter to a vote of stockholders in the fourth quarter of 1998.


                                     PART II


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

         Shares of Kaneb Common Stock are listed and traded  principally  on the
New York Stock  Exchange,  under the symbol KAB. At March 15,  1999,  there were
approximately  4,500 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
       ---------------------              ------                  -----
       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                      5 11/16                 4 13/16
       Second Quarter                     6 7/6                   5 3/16
       Third Quarter                      6                       4 1/8
       Fourth Quarter                     5 1/16                  3 1/2

       1999:

       First Quarter                      4 5/8                   3 7/8
       (through 3/15/99)

         Kaneb  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.   Kaneb's   dividend  policy  is  reviewed
periodically  and  determined  by its Board of Directors on the basis of various
factors,  including,  but not limited to, its results of  operations,  financial
condition, capital requirements and investment opportunities.  Additionally, the
credit  facilities  for  the  working  capital  of  Furmanite  and  KPL  contain
restrictions  on  the  respective  subsidiary's  ability  to  pay  dividends  or
distributions to the Company, if an event of default exists.


Item 6.  Summary Historical Financial and Operating Data

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

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                           ----------------------------------------------------------------------
                                              1998          1997           1996            1995           1994
                                           ----------     ---------      ----------     ----------      ---------
<S>                                        <C>            <C>            <C>            <C>             <C>    
Income Statement Data:
Revenues............................       $  375,857     $ 236,936      $  228,861     $  212,062      $  208,722
                                           ==========     =========      ==========     ==========      ==========
Operating income....................       $   61,312     $  58,660      $   53,815     $   43,465      $   31,964
                                           ==========     =========      ==========     ==========      ==========

Income before gain on
   sale of KPP units................       $   13,576     $  10,643      $    7,024     $    5,024      $    2,035
Gain on sale of  KPP units.........               -             -               -           54,157             -
                                           ----------     ---------      ----------     ----------      ----------
     Net income.....................       $   13,576     $  10,643      $    7,024     $   59,181      $    2,035
                                           ==========     =========      ==========     ==========      ==========

Per Share Data:
Earnings per common share:
   Basic............................       $      .41     $     .31      $      .19     $     1.72      $      .02
                                           ==========     =========      ==========     ==========      ==========
   Diluted..........................       $      .40     $     .30      $      .19     $     1.59      $      .02
                                           ==========     =========      ==========     ==========      ==========

Cash Flow Data - Net cash provided
   by operating activities..........       $   54,206     $  55,120     $    48,628     $   39,964      $   25,890

Balance Sheet Data:
Cash and cash equivalents...........       $    9,134     $  23,025      $   23,693     $   30,389      $    9,506
Working capital.....................            5,632        20,423          20,033         16,302         (42,797)
Total assets........................          448,045       402,273         404,691        409,827         284,213
Long-term debt......................          196,958       181,052         186,544        191,846         103,376
Stockholders' equity (a)............           87,445        78,447          75,366         69,022          18,844
</TABLE>

(a)  See  Note  7 to  the  Company's  Consolidated  Financial  Statements  for a
     discussion of the Company's Preferred Stock.

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 Kaneb and notes  thereto  included  elsewhere  in this
report.

Consolidated Results of Operations
                                                      (in millions)
                                       -----------------------------------------
                                            1998           1997         1996
                                       -----------    -----------   ------------
Consolidated revenues................. $     375.9    $     236.9   $     228.9
Consolidated operating income......... $      61.3    $      58.7   $      53.8
Consolidated net income............... $      13.6    $      10.6   $       7.0
Consolidated capital expenditures, 
     excluding acquisitions........... $      12.3    $      13.0   $      10.7


         For the year ended December 31, 1998,  consolidated  revenues increased
$139.0 million,  or 59%, when compared to 1997,  largely from the $114.2 million
in revenues  generated by the products marketing business acquired in late March
of 1998. In addition,  revenues from the industrial  field services  operations,
the pipeline and terminaling  operations and the information  services  business
increased by $6.9  million,  $4.6 million and $13.1  million,  respectively,  in
1998.  Consolidated  operating income in 1998 increased by $2.6 million,  or 5%,
with the most significant improvements in the pipeline,  terminaling and product
marketing and the information services businesses.

         For the year ended December 31, 1997,  consolidated  revenues increased
$8.0 million,  or 3%,  primarily the 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 1996.
Consolidated  operating  income  increased  $4.9 million,  or 9%, in 1997,  when
compared to 1996, with substantial improvements in the industrial field services
operations.


Industrial Field Services

         Kaneb's   industrial  field  services  business  is  conducted  through
Furmanite.  Furmanite provides  specialized  services,  including under pressure
leak  sealing,  on-site  machining,  safety and relief valve testing and repair,
passive fire  protection and fugitive  emissions  inspections to the process and
power industries worldwide.

                                                      (in millions)
                                       -----------------------------------------
                                            1998           1997          19960
                                       -----------    -----------   ------------
Revenues:
     United States...................  $      35.5    $      33.7   $      32.7
     Europe..........................         68.1           66.4          65.9
     Asia-Pacific....................         11.5            8.1           4.7
                                       -----------    -----------   ------------
                                       $     115.1    $     108.2   $     103.3
                                       ===========    ===========   ============
Operating income:
     United States...................  $       1.7    $       1.8   $       1.5
     Europe..........................          5.5            6.1           4.0
     Asia-Pacific....................          1.0            1.1            .9
     Headquarters....................         (1.5)          (1.6)         (1.3)
                                       -----------    -----------   -----------
                                       $       6.7    $       7.4   $       5.1
                                       ===========    ===========   ===========
Capital expenditures, 
     excluding acquisitions..........  $       2.6    $       2.0   $       3.5
                                       ===========    ===========   ===========


         For the year ended December 31, 1998, Furmanite's revenues increased by
$6.9 million,  or 6%, when compared to 1997, due to overall increases in each of
the three geographical  areas. In the United States,  revenues increased by $1.8
million,  or 5%, due  primarily to  improvements  in on-site  machining and leak
sealing services.  In Europe,  revenues increased by $1.7 million, or 3%, due to
increases in leak sealing,  passive fire protection and turnaround services. The
increase in  Asia-Pacific  revenues is primarily  attributable to the Australian
operations,  acquired  effective  July 1, 1997.  In 1997,  Furmanite's  revenues
increased  $4.9  million,  or 5%,  compared  to 1996,  primarily  as a result of
improvements  in  turnaround  services  in Europe and the United  States and the
Australian acquisition,  in spite of a large non-recurring  engineering contract
that was completed in Germany in 1996.

         Furmanite's operating income decreased by $0.7 million, or 9%, in 1998,
compared to 1997,  due  primarily to lower  margin work  performed in the United
Kingdom as a result of a general economic slowdown during the last half of 1998.
Operating  income  increased  $2.3 million,  or 45%, in 1997,  with  substantial
improvements  in the core businesses in Europe and the United States in addition
to the Australian business acquired in 1997.

         Capital  expenditures are primarily related to field services equipment
and the  implementation  of new  services.  Capital  expenditures  for  1999 are
currently  estimated  to be $3 million to $5 million,  depending on the economic
environment and the needs of the business.


Pipeline, Terminaling and Product Marketing Services

         This  business  segment  includes  the  operations  of KPP and  Kaneb's
products marketing business acquired in March 1998. KPP provides  transportation
services of refined  petroleum  products  through a pipeline system that extends
through the Midwest and Eastern Rocky  Mountain  areas and provides  terminaling
and storage  services for  petroleum  products and  specialty  chemicals.  Kaneb
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.  The products  marketing business provides wholesale motor fuel
marketing  services in the Great Lakes and Rocky  Mountain  regions,  as well as
California.

                                                      (in millions)
                                       -----------------------------------------
                                            1998          1997          1996
                                       -----------    -----------   ------------
Revenues:
     Pipeline and terminaling........  $     125.8    $     121.2   $     117.6
     Product marketing...............        114.2           -             -
                                       -----------    -----------   -----------
                                       $     240.0    $     121.2   $     117.6
                                       ===========    ===========   ===========
Operating income ....................  $      56.1    $      53.4   $      51.3
                                       ===========    ===========   ===========

Capital expenditures, 
     excluding acquisitions..........  $       9.4    $      10.6   $       7.1
                                       ===========    ===========   ===========


         For the year ended December 31, 1998, pipeline and terminaling revenues
increased  by $4.6  million,  or 4%,  compared  to 1997,  due to a $2.5  million
increase  in  terminaling  revenues  and a $2.1  million  increase  in  pipeline
revenues.  The increase in terminaling revenues is due to terminal  acquisitions
in 1998 and an increase in tank  utilization  resulting  from  favorable  market
conditions,  partially  offset by a decrease in the overall  price  realized for
storage in 1998. The increase in pipeline  revenues for 1998 is due to increases
in volumes  shipped,  when compared to the same period in 1997. The $2.7 million
increase in operating  income for the year ended December 31, 1998,  compared to
1997, is due primarily to improved pipeline  operating income,  due to increases
in volumes shipped,  and from the products  marketing business acquired in March
1998.

         Revenues  increased $3.6 million,  or 3%, in 1997 and operating  income
increased  $2.1  million,  or 4%,  primarily  due  to  improvements  in  tankage
utilization at terminals  acquired by KPP in December 1995,  terminaling  assets
acquired in 1996 and increases in prices charged for storage.

         The  interest of outside  non-controlling  partners in KPP's net income
was $29.2  million,  $27.7  million  and $27.0  million in 1998,  1997 and 1996,
respectively.  Distributions paid to the outside non-controlling  unitholders of
KPP aggregated  approximately $28.5 million,  $26.9 million and $24.7 million in
1998, 1997 and 1996, respectively.

         Capital  expenditures relate to the maintenance of existing operations.
Routine capital  expenditures for 1999 are currently estimated to be between $12
million and $16 million.

         On October 30, 1998,  KPP entered into  acquisition  and joint  venture
agreements with Northville Industries Corp. ("Northville") to acquire and manage
the  former  Northville  terminal  located  in  Linden,  New  Jersey.  Under the
agreements,  KPP acquired a 50% interest in the  newly-formed ST Linden Terminal
LLC for $20.5 million plus transaction  costs. The petroleum  storage  facility,
which has  capacity of 3.9 million  barrels in 22 tanks,  was  financed by KPP's
existing revolving credit facility and a $10 million revolving promissory note.

         On February 1, 1999,  KPP acquired six terminals in the United  Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.4 million)
plus  transaction  costs  and  the  assumption  of  certain   liabilities.   The
acquisition of the six locations,  which have an aggregate  tankage  capacity of
5.5  million  barrels,  was  financed  by term loans  from a bank.  Three of the
terminals,   handling   petroleum   products,   chemicals  and  molten   sulfur,
respectively,  operate  in  England.  The  remaining  three  facilities,  two in
Scotland and one in Northern Ireland, are primarily petroleum terminals. All six
terminals are served by deepwater marine docks.

Information Services

         Kaneb's information services business is conducted through a variety of
wholly-owned  subsidiaries.  The  information  services group provides  computer
hardware  manufactured  by others and consulting  services,  insurance  tracking
services  and other  related  information  management  and  processing  services
primarily for governmental, insurance and financial institutions.

                                                      (in millions)
                                       -----------------------------------------
                                           1998            1997         1996
                                       -----------    -----------   ------------
Revenues.............................  $      20.7    $       7.6   $       8.0
                                       ===========    ===========   ===========
Operating income ....................  $       3.7    $       2.7   $       2.2
                                       ===========    ===========   ===========
Capital expenditures, 
     excluding acquisitions..........  $       0.3    $       0.3   $       0.1
                                       ===========    ===========   ===========

         For the year ended December 31, 1998, revenues increased $13.1 million,
or 172%, and operating income  increased $1.0 million,  or 37%, when compared to
1997,  primarily from increased computer hardware sales and consulting  services
provided to various federal governmental  agencies.  For the year ended December
31, 1997, revenues decreased $0.4 million, or 5%, and operating income increased
$0.5 million,  or 23%, when compared to 1996, due primarily to  improvements  in
the operations of the segment's insurance and financial institution  information
management and processing services.

Liquidity and Capital Resources

         Cash provided by consolidated  operating  activities was $54.2 million,
$55.1  million  and  $48.6  million  during  the  years  1998,  1997  and  1996,
respectively.  The  decrease in 1998,  compared to 1997,  was due  primarily  to
increases in working capital requirements  resulting from the products marketing
business  acquired in March 1998.  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.

         At December  31, 1998,  $17.8  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 (6.25% at
December  31,  1998) 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 industrial field services group of companies.

         KPP has a credit agreement with two banks that currently provides a $25
million  revolving  credit  facility for working  capital and other  Partnership
purposes.  Borrowings  under the credit facility bear interest at variable rates
and are due and  payable  on January 1,  2001.  The credit  agreement,  which is
without recourse to the parent company,  has a commitment fee of 0.15% per annum
of the unused  credit  facility.  At December 31, 1998,  $25.0 million was drawn
under the credit facility.

         In October  1998,  a  wholly-owned  subsidiary  of KPP  entered  into a
Promissory  Note  Agreement  with a bank that,  as amended on  February 1, 1999,
provides a $15 million revolving credit availability  through June 30, 1999. The
Promissory  Note  Agreement,  which is without  recourse to the parent  company,
bears interest at variable interest rates (7.75% at December 31, 1998) and has a
commitment fee of 0.35% per annum of the unused available  balance.  At December
31, 1998, $10.0 million was drawn under the Promissory Note Agreement.

         In December 1995, Kaneb 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 0.5% per annum of the unused credit  facility.  No
amounts were drawn under the credit facility at December 31, 1998, 1997 or 1996.

         In March 1998, a wholly-owned  subsidiary of the Company entered into a
credit  agreement with a bank that provides for a $20 million  revolving  credit
facility  through March 1999.  The credit  facility  bears  interest at variable
rates,  has a  commitment  fee of 0.25%  per  annum on  unutilized  amounts  and
contains certain financial and operational covenants. The credit facility, which
is without recourse to the parent company,  is secured by essentially all of the
tangible and intangible assets of the products marketing business and by 500,000
KPP limited partnership units held by a wholly-owned  subsidiary of the Company.
At December 31, 1998, $2.9 million was drawn on the facility.  The Company is in
the process of negotiating  an amendment to the credit  agreement  which,  among
other items, is expected to extend the revolving  credit facility  through March
2001.

         Consolidated  capital  expenditures  for 1999 have been budgeted at $15
million to $21 million,  depending on the economic  environment and the needs of
the business.  Consolidated  debt maturities are $15.3 million  (including $10.0
million of KPP debt); $2.4 million;  $109.5 million  (including $93.0 million of
KPP debt);  $29.2  million  (including  $27.0  million  of KPP debt);  and $10.1
million (including $8.0 million of KPP debt), respectively, for each of the five
years ending December 31, 2003. Capital expenditures (excluding acquisitions) in
1999 are expected to be funded from  existing  cash and  anticipated  cash flows
from operations.

Year 2000 Issue

         Although  Kaneb believes that most of its activities and operations are
not materially impacted by Year 2000 issues ("Y2K"),  the Company recognizes the
challenges  associated  with Y2K and has  undertaken a review and testing of its
computer  systems to identify  Y2K-related  issues  associated with any items of
software or  hardware  used in its  business  operations.  Most of the  software
systems used by Kaneb are licensed  from third  parties and are Y2K compliant or
will be upgraded to Y2K compliant releases before the end of 1999. This issue is
being addressed by Kaneb in multiple phases, including assessment,  remediation,
testing and  implementation,  and progress is being  monitored by the  Company's
senior  management.  All  material  systems,  on a world-wide  basis,  including
non-information  technology  systems  which  may house  non-compliant,  embedded
technology are being evaluated.

         In addition to addressing Kaneb's own systems,  as described above, the
Company must assess the state of readiness of the systems of other entities with
which it does  business.  Failure by these third parties to  adequately  resolve
their Y2K  problems  could  have a  material  adverse  effect  on the  Company's
operations.

         Kaneb  believes  its  success  in  being  Y2K  compliant  will  not  be
conclusively known until the year 2000 is actually reached.  Although failure by
one or more of the Company's  own systems  could result in lost revenues  and/or
additional expenses required to carry out manual processing of transactions, the
Company  cannot  predict  the  effect  that  external  forces  could have on its
business. Failures by banking institutions,  the telecommunications industry and
others could have far-reaching effects on the entire economy and the Company.

         The Company's  operations  (including both  information  technology and
non-information  technology  systems)  are in varying  states of  readiness  for
compliance with Y2K issues.  The initial assessment phase has been completed for
substantially all of the Company's operations,  and in many cases,  remediation,
testing and  implementation  activities  have also been  completed.  The Company
expects to complete all phases of its Y2K program prior to December 31, 1999.

         Kaneb believes that it is not possible to determine with certainty that
all Y2K problems  affecting the Company have been  identified or corrected.  The
number of devices  that  could be  affected  and the  interactions  among  these
devices are simply too  numerous.  In addition,  the Company  cannot  accurately
predict how many failures related to the Y2K problem will occur or the severity,
duration or financial  consequences  of such failures.  The Company has hired an
outside  Y2K  consultant  to assist  the  Company  in  meeting  its goals and in
developing  contingency  plans to define and  address  the  worst-case  scenario
likely to be faced by the  Company.  The plan is  expected to be in place by the
end of the second quarter of 1999.

         Expenses incurred by Kaneb during 1997 and 1998,  related to assessing,
remediating  and  testing its  information  technology  systems,  which were not
material, have been expensed as incurred and funded from operations. The Company
does  not  anticipate  that the  cost to  become  fully  Y2K  compliant  will be
material.


Item 7(a).    Quantitative and Qualitative Disclosure About Market Risk

         The  principal  market risks  (i.e.,  the risk of loss arising from the
adverse  changes in market rates and prices) to which the Company is exposed are
interest  rates on the Company's  debt and  investment  portfolios.  The Company
centrally  manages its debt and  investment  portfolios  considering  investment
opportunities and risks, tax consequences and overall financing strategies.  The
Company's  investment portfolio consists of cash equivalents;  accordingly,  the
carrying  amounts  approximate  fair value.  The Company's  investments  are not
material to the  financial  position or  performance  of the  Company.  Assuming
year-end 1998 variable rate debt and investment  levels, a one percent change in
interest  rates would  increase  net interest  expense and decrease  interest of
outside  non-controlling  partners  in KPP's net  income by  approximately  $0.6
million and $0.2 million, respectively.


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

         Reference is made to the Registrant's  Current Reports on Forms 8-K and
8-K/A, dated November 6, 1998 and March 9, 1999, respectively, which reports are
incorporated herein by reference.


                                    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.


0                                     PART IV


Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

                                                                      Beginning
(a) (1)  Financial Statements                                           Page

         Set forth below are financial statements           
           appearing in this report.

         Reports of Independent Accountants...........................  F - 1

         Financial Statements of Kaneb Services, Inc., and Subsidiaries:

             Consolidated Statements of Income - Years  Ended
               December 31, 1998, 1997 and 1996.......................  F - 3

             Consolidated Balance Sheets - December 31, 1998 and 1997.  F - 4

             Consolidated Statements of  Cash Flows
               Years Ended December 31, 1998, 1997 and 1996...........  F - 5

             Consolidated Statements of Changes in Stockholders'
               Equity - Years Ended December 31, 1998, 1997 and 1996..  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, 1998,
               1997 and 1996..........................................  F - 24

             Balance Sheets - December 31, 1998 and 1997..............  F - 25

             Statements of Cash Flows - Years Ended
               December 31, 1998, 1997 and 1996.......................  F - 26

         Schedule II - Kaneb Services, Inc. Valuation and 
               Qualifying Accounts - 
               Years Ended December 31, 1998, 1997 and 1996...........  F - 27

         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 ("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,  19875,  filed as Exhibit 4.1 of the
         exhibits  to the  Registrant's  Quarterly  Report on Form  10-Q  ("Form
         10-Q") for the quarter  ended June 30,  1985,  which  exhibit is hereby
         incorporated by reference.

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

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

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

3.7      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 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  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 as Exhibit 4.4 of the Exhibits to Registrant's  Form 10-K for the
         year ended December 31, 1997,  which exhibit is hereby  incorporated by
         reference.

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  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, as amended,  filed as
         Exhibit 4.1 to the exhibits of the Registrant's  Form S-8 (S.E.C.  File
         No.  333-08725) and as Exhibit 10.1 to the Exhibits of the Registrant's
         Current  Report on Form 8-K ("Form  8-K"),  which  exhibits  are 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), and as Exhibit 10.2 to the Exhibits of the
         Registrant's  Form 8-K,  which  exhibits  are  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 the
         Registrant's Form S-8 (S.E.C. File No. 333-22109), and as supplemented,
         filed as  Exhibit  4.2 to the  Exhibits  of the  Registrant's  Form S-8
         (S.E.C. File No. 333-60195), and as Exhibit 10.1 to the Exhibits of the
         Registrant's  Form 8-K,  which  exhibits  are  hereby  incorporated  by
         reference.

10.9     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), and as Exhibit 10.3 to the Exhibits of the
         Registrant's  Form 8-K,  which  exhibits  are  hereby  incorporated  by
         reference.

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

10.11    Form of Indemnification Agreement, filed herewith.

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

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  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       Consents     of     independent     accountants:     KPMG    LLP    and
         PricewaterhouseCoopers LLP, filed herewith.

27        Financial Data Schedule, filed herewith.

99.1     Current  Report  on Form 8-K  regarding  a change  in the  Registrant's
         Certifying  Accountant,  dated November 6, 1998, which Report is hereby
         incorporated by reference.

99.2     Current  Report on Form 8-K/A  regarding  a change in the  Registrant's
         Certifying  Accountant,  dated  March 9, 1999,  which  Report is hereby
         incorporated by reference.

         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

         Current  Report  on Form 8-K  regarding  a change  in the  Registrant's
         Certifying Accountant, dated November 6, 1998.

         Current  Report on Form 8-K/A  regarding  a change in the  Registrant's
         Certifying Accountant, dated March 9, 1999.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS




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

We have audited the 1998  consolidated  financial  statements of Kaneb Services,
Inc. and its subsidiaries (the "Company") as listed in the index appearing under
Item 14(a)(1) on page 18. In connection with our audit of the 1998  consolidated
financial  statements,  we  have  also  audited  the  1998  financial  statement
schedules as listed in the index appearing under Item 14(a)(2) on page 18. These
consolidated  financial  statements  and financial  statement  schedules are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on  the  consolidated  financial  statements  and  financial  statement
schedules based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 1998,  and the results of its operations and its cash flows for the
year then ended, in conformity with generally  accepted  accounting  principles.
Also,  in our opinion,  the related 1998  financial  statement  schedules,  when
considered in relation to the 1998 basic consolidated financial statements taken
as a whole, present fairly, in all material respects,  the information set forth
therein.


KPMG LLP
Dallas, Texas
February 25, 1999


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS




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

In our opinion,  the  consolidated  balance  sheet and the related  consolidated
statements of income, of cash flows and of changes in stockholder's equity as of
and for each of the two years in the period  ended  December 31, 1997 (listed in
the index appearing  under Item 14(a)(1) and (2) on page 18) present fairly,  in
all material respects,  the financial  position,  results of operations and cash
flows of Kaneb Services, Inc. and its subsidiaries (the "Company") as of and for
each of the two 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. We have not
audited the consolidated  financial  statements of Kaneb Services,  Inc. and its
subsidiaries for any period subsequent to December 31, 1997.


PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1998




<PAGE>


                      KANEB SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
          
                                                                             Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     1998              1997               1996
                                                               --------------     --------------    ---------------
<S>                                                            <C>                <C>               <C>            
Revenues...................................................    $  375,857,000     $  236,936,000    $   228,861,000
                                                               --------------     --------------    ---------------

Costs and expenses:
    Operating costs........................................       171,742,000        156,654,000        154,935,000
    Cost of sales..........................................       121,509,000               -                 -
    Depreciation and amortization..........................        16,203,000         16,715,000         15,434,000
    General and administrative.............................         5,091,000          4,907,000          4,677,000
                                                               --------------     --------------    ---------------

      Total costs and expenses.............................       314,545,000        178,276,000        175,046,000
                                                               --------------     --------------    ---------------

Operating income...........................................        61,312,000         58,660,000         53,815,000
Interest income............................................           189,000            533,000            859,000
Other income (expense).....................................           679,000           (696,000)          (832,000)
Interest expense...........................................       (15,714,000)       (15,531,000)       (15,420,000)
Amortization of excess of cost over fair
    value of net assets of acquired businesses.............        (1,948,000)        (1,879,000)        (1,848,000)
                                                               --------------     ---------------   ---------------

Income before interest of outside non-controlling partners
    in KPP's net income and income tax expense.............        44,518,000         41,087,000         36,574,000
Interest of outside non-controlling partners
    in KPP's net income....................................       (29,174,000)       (27,655,000)       (26,969,000)
Income tax expense.........................................        (1,768,000)        (2,789,000)        (2,581,000)
                                                               --------------     ---------------   ---------------

Net income.................................................        13,576,000         10,643,000          7,024,000
Dividends applicable to preferred stock....................           508,000            538,000            502,000
                                                               --------------     --------------    ---------------

Net income applicable to common stock......................    $   13,068,000     $   10,105,000    $     6,522,000
                                                               ==============     ==============    ===============

Earnings per common share:
    Basic..................................................    $          .41     $          .31    $           .19
                                                               ==============     ==============    ===============
    Diluted................................................    $          .40     $          .30    $           .19
                                                               ==============     ==============    ===============
</TABLE>



<PAGE>
                      KANEB SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              -------------------------------------  
                                                                                   1998                   1997
                                                                              --------------         --------------
                                  ASSETS
<S>                                                                           <C>                    <C>
Current assets:
   Cash and cash equivalents......................................            $    9,134,000         $   23,025,000
   Accounts receivable, trade (net of allowance for  doubtful accounts
     of $925,000 in 1998 and $570,000 in 1997)....................                47,540,000             35,268,000
   Inventories....................................................                13,465,000              7,079,000
   Prepaid expenses and other current assets......................                 6,615,000              5,693,000
                                                                              --------------         --------------
     Total current assets.........................................                76,754,000             71,065,000
                                                                              --------------         --------------
Property and equipment............................................               432,290,000            383,078,000
Less accumulated depreciation and amortization....................               130,759,000            121,717,000
                                                                              --------------         --------------
   Net property and equipment.....................................               301,531,000            261,361,000
                                                                              --------------         --------------
Excess of cost over fair value of net assets of acquired businesses               62,521,000             62,719,000
Other assets......................................................                 7,239,000              7,128,000
                                                                              --------------         --------------
                                                                              $  448,045,000         $  402,273,000
                                                                              ==============         ==============

                     LIABILITIES AND EQUITY
Current liabilities:
    Short-term and current portion of long-term debt:
     Industrial field services....................................            $    2,441,000         $    3,059,000
     Pipeline, terminaling and product marketing services.........                12,852,000              2,335,000
                                                                              --------------         --------------
       Total short-term and current portion of long-term debt.....                15,293,000              5,394,000
   Accounts payable...............................................                14,520,000              9,569,000
   Accrued expenses...............................................                41,309,000             35,679,000
                                                                              --------------         --------------
     Total current liabilities....................................                71,122,000             50,642,000
                                                                              --------------         --------------
Long-term debt, less current portion:
   Industrial field  services.....................................                20,292,000             25,268,000
   Pipeline, terminaling and product marketing services...........               153,000,000            132,118,000
   Parent company.................................................                23,666,000             23,666,000
                                                                              --------------         --------------
     Total long-term debt, less current portion...................               196,958,000            181,052,000
                                                                              --------------         --------------
Deferred income taxes and other liabilities.......................                15,626,000             15,903,000
Interest of outside non-controlling partners in KPP...............                76,894,000             76,229,000
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 36,554,206 shares in
     1998 and 36,527,283 shares in 1997...........................                 4,239,000              4,234,000
   Additional paid-in capital.....................................               197,263,000            197,242,000
   Treasury stock, at cost........................................               (29,775,000)           (25,216,000)
   Unamortized restricted stock...................................                  (141,000)                 -
   Accumulated deficit............................................               (88,423,000)          (101,491,000)
   Accumulated other comprehensive income (loss) -
     foreign currency translation adjustment......................                (1,510,000)            (2,114,000)
                                                                              --------------         --------------
     Total stockholders' equity...................................                87,445,000             78,447,000
                                                                              --------------         --------------
                                                                              $  448,045,000         $  402,273,000
                                                                              ==============         ==============
</TABLE>

<PAGE>


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


<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                              ----------------------------------------------------
                                                                   1998               1997                1996
                                                              -------------       -------------     --------------
<S>                                                           <C>                 <C>               <C>    
Operating activities:
   Net income ............................................    $  13,576,000       $  10,643,000     $    7,024,000
   Adjustments to reconcile net income to
     net cash provided by operating activities:
       Depreciation and amortization......................       16,203,000          16,715,000         15,434,000
       Amortization of excess of cost over fair value
         of net assets of acquired businesses.............        1,948,000           1,879,000          1,848,000
       Interest of outside non-controlling partners in KPP       29,174,000          27,655,000         26,969,000 
       Deferred income
         taxes...........................................           518,000              86,000            766,000
       Changes in current assets and liabilities:
         Accounts receivable..............................      (12,272,000)         (2,111,000)          (449,000)
         Inventories......................................       (4,600,000)           (373,000)          (897,000)
         Prepaid expenses and other current assets........         (922,000)            674,000          1,098,000
         Accounts payable and accrued expenses............       10,581,000             (48,000)        (3,165,000)
                                                              -------------       --------------    ---------------

     Net cash provided by operating activities............       54,206,000          55,120,000         48,628,000
                                                              -------------       -------------     --------------

Investing activities:
   Capital expenditures...................................      (12,256,000)        (13,011,000)       (10,685,000)
   Acquisitions...........................................      (47,947,000)         (4,855,000)        (8,507,000)
   Decrease (increase) in other assets, net...............           (8,000)         (1,819,000)         3,320,000
                                                              -------------       --------------    --------------

     Net cash used in investing activities................      (60,211,000)        (19,685,000)       (15,872,000)
                                                              -------------       --------------    --------------


Financing activities:
   Issuance of short-term and long-term debt .............       40,717,000           8,619,000         76,235,000
   Payments on long-term debt and capital leases .........      (14,912,000)        (12,768,000)       (81,414,000)
   Distributions to outside non-controlling partners in KPP     (28,509,000)        (26,864,000)       (24,667,000)
   Preferred stock dividends paid.........................         (508,000)           (538,000)          (502,000)
   Redemption of preferred stock..........................            -                   -             (8,025,000)
   Common stock issued....................................          194,000              33,000              -
   Purchase of treasury stock.............................       (4,868,000)         (4,585,000)        (1,079,000)
                                                              -------------       --------------    --------------

     Net cash used in financing activities................       (7,886,000)        (36,103,000)       (39,452,000)
                                                              -------------       --------------    ---------------

Decrease in cash and cash equivalents.....................      (13,891,000)           (668,000)        (6,696,000)
Cash and cash equivalents at beginning of year............       23,025,000          23,693,000         30,389,000
                                                              -------------       -------------     --------------

Cash and cash equivalents at end of year..................    $   9,134,000       $  23,025,000     $   23,693,000
                                                              =============       =============     ==============
</TABLE>

<PAGE>



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

                                                            
<TABLE>
<CAPTION>
                                           Preferred         Common          Additional        Treasury        
                                             Stock            Stock        Paid-In Capital       Stock         
                                        -------------     -------------    ---------------   -------------    

<S>                                     <C>               <C>              <C>               <C>              
Balance at January 1, 1996              $   5,814,000     $   4,230,000    $ 197,151,000     $ (19,552,000)   

       Net income for the year.......            -                -                 -                -         
       Common stock issued...........            -                -               10,000             -           
       Purchase of treasury stock....            -                -                 -           (1,079,000)         
       Preferred stock dividends
         declared....................            -                -                 -                -                
       Converstion of Series D      
         preferred stock.............            -                -               30,000             -             
       Series C preferred stock
         redemption.. ...............         (22,000)            -               22,000             -               
       Foreign currency translation
         adjustment..................            -                -                 -                -            
                                        -------------     ------------     -------------     -------------    
       Comprehensive income
        for the year.................                                                                                
                                                                                                            
Balance at December 31, 1996                5,792,000         4,230,000      197,213,000       (20,631,000)      

       Net income for the year.......            -                -                 -                -            
       Common stock issued...........            -                4,000           29,000             -               
       Purchase of treasury stock ...            -                -                 -           (4,585,000)          
       Preferred stock dividends
         declared....................            -                -                 -                -             
       Foreign currency translation         
         adjustment .................            -                -                 -                -              
                                        -------------     ------------     -------------     -------------    
       Comprehensive income       
         for the year.................                                                                                      
                                                                                                                               

Balance at December 31, 1997                5,792,000         4,234,000      197,242,000       (25,216,000)         

        Net income for the year......            -                -                 -                -              
        Common stock issued..........            -                5,000           21,000           309,000         
        Purchase of treasury stock ..            -                -                 -           (4,868,000)         
        Preferred stock dividends
        declared.....................            -                -                 -                -              
        Foreign currency translation
             adjustment .............            -                -                 -                -              
                                        -------------     -------------    -------------     -------------   
        Comprehensive income
        for the year.................                                                                               
                                                                                                                           
Balance at December 31, 1998            $   5,792,000     $   4,239,000    $ 197,263,000     $ (29,775,000)  
                                        =============     =============    =============     ==============   
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                         Unamortized                      Accumulated Other
                                         Restricted        Accumulated      Comprehensive    Comprehensive
                                           Stock             Deficit        Income (Loss)        Income
                                        -------------     -------------    ---------------   -------------  

<S>                                     <C>               <C>              <C>               <C>       
Balance at January 1, 1996              $        -        $(118,118,000)   $    (503,000)    $        -

       Net income for the year.......            -            7,024,000             -           7,024,000
       Common stock issued...........            -                 -                -                 -
       Purchase of treasury stock....            -                 -                -                 -
       Preferred stock dividends
        declared.....................            -             (502,000)            -                 -
       Conversion of Series D
         preferred stock.............            -                 -                -                 -
       Series C preferred stock
         redemption..................            -                 -                -                 -
       Foreign currency translation
            adjustment...............            -                 -             861,000          861,000
                                        -------------     ------------     -------------     ------------ 
       Comprehensive income
        for the year.................                                                       $   7,885,000
                                                                                            =============

Balance at December 31, 1996                     -         (111,596,000)         358,000              -

       Net income for the year.......            -           10,643,000             -          10,643,000
       Common stock issued...........            -                 -                -                 -
       Purchase of treasury stock ...            -                 -                -                 -
       Preferred stock dividends
        declared.....................            -             (538,000)            -                 -
       Foreign currency translation
            adjustment ..............            -                 -          (2,472,000)       (2,472,000)
                                        -------------     ------------     -------------     -------------   
       Comprehensive income
        for the year.................                                                        $   8,171,000
                                                                                             =============

Balance at December 31, 1997                     -         (101,491,000)      (2,114,000)            -

        Net income for the year......            -           13,576,000             -           13,576,000
        Common stock issued..........        (141,000)             -                -                 -
        Purchase of treasury stock ..            -                 -                -                 -
        Preferred stock dividends
        declared.....................            -             (508,000)            -                 -
        Foreign currency translation
             adjustment .............            -                 -             604,000           604,000
                                        -------------     -------------    -------------     -------------    
        Comprehensive income
        for the year.................                                                        $  14,180,000
                                                                                             =============

Balance at December 31, 1998            $     141,000)    $ (88,423,000)   $  (1,510,000)
                                        =============     =============    =============    
</TABLE>

<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
       its consolidated 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, 1998.  All
       significant  intercompany  transactions  and balances are  eliminated  in
       consolidation.

       Cash and Cash Equivalents

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

       Inventories

       Inventories  consist  primarily  of  finished  goods  of  the  industrial
       services  segment  and  petroleum  products  purchased  for resale in the
       products  marketing  business  and are  valued  at the  lower  of cost or
       market. Cost is determined using the weighted average cost method.

       Property and Equipment

       Property and equipment are carried at 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 customers have
       been  rendered.  Pipeline  transportation  revenues are  recognized  upon
       receipt of the products into the pipeline system.

       Earnings Per Share

       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.

       Foreign Currency Translation

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

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

       The  excess of the cost  over the fair  value of net  assets of  acquired
       businesses is being amortized on a  straight-line  basis over a period of
       40 years. Accumulated amortization was $14.1 million and $12.2 million at
       December 31, 1998 and 1997, respectively.

       The Company  periodically  evaluates the propriety of the carrying amount
       of the  excess  of  cost  over  fair  value  of net  assets  of  acquired
       businesses,  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.  The Company  believes that no
       such  impairment  has occurred and that no reduction in estimated  useful
       lives is warranted.

       Environmental

       KPP  environmental  expenditures  that relate to current  operations  are
       expensed or capitalized as  appropriate.  Expenditures  that relate to an
       existing condition caused by past operations, and which do not contribute
       to current or future revenue  generation,  are expensed.  Liabilities are
       recorded  when  environmental  assessments  and/or  remedial  efforts are
       probable,  and the  costs can be  reasonably  estimated.  Generally,  the
       timing of these  accruals  coincides with the completion of a feasibility
       study or KPP's commitment to a formal plan of action.

       Comprehensive Income

       Effective January 1, 1998, the Company has adopted the provisions of SFAS
       No. 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.  SFAS No. 130 only
       requires  additional   disclosure  and  does  not  affect  the  Company's
       financial position or results of operations.

       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 prior year financial  statement  items have been  reclassified to
       conform with the 1998 presentation.


2.     ASSET ACQUISITIONS

       On March 25, 1998, a  wholly-owned  subsidiary of the Company  acquired a
       products  marketing  business for $1.5 million,  plus the cost of product
       inventories.  The products  marketing  business provides  wholesale motor
       fuel  marketing  services  throughout  the Great Lakes and Rocky Mountain
       regions,  as well as California.  The asset purchase agreement includes a
       provision  for an  earn-out  based on  annual  operating  results  of the
       acquired business for a five-year period ending in March 2003. No amounts
       were payable under the earn-out  provision in 1998. The  acquisition  was
       accounted for using the purchase method of accounting.

       On October 30,  1998,  KPP entered  into  acquisition  and joint  venture
       agreements with Northville Industries Corp. ("Northville") to acquire and
       manage the former  Northville  terminal  located in Linden,  New  Jersey.
       Under the agreements,  KPP acquired a 50% interest in the newly-formed ST
       Linden  Terminal  LLC for  $20.5  million  plus  transaction  costs.  The
       investment was financed by KPP's existing revolving credit facility and a
       revolving  promissory  note. The investment is being accounted for by the
       equity method of accounting,  with the excess cost over net book value of
       the equity  investment  being  amortized  over the life of the underlying
       assets.  During 1998,  KPP acquired  other  terminals  and  pipelines for
       aggregate  consideration of $23.9 million. The pro forma effects of these
       acquisitions, including the two described above, were not material to the
       results of operations.

       On February 1, 1999,  KPP  acquired six  terminals in the United  Kingdom
       from GATX Terminal Limited for (pound)22.6 million  (approximately  $37.4
       million)   plus   transaction   costs  and  the   assumption  of  certain
       liabilities.  The acquisition was financed by term loans from a bank. The
       acquisition will be accounted for,  beginning in February 1999, using the
       purchase method of accounting.


3.     INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                        -----------------------------------------------------
                                                             1998                1997                1996
                                                        --------------      -------------       -------------
 
       <S>                                              <C>                 <C>                 <C>          
       Domestic operations.........................     $   16,682,000      $  11,769,000       $  12,580,000
       Foreign operations..........................         (1,338,000)         1,663,000          (2,975,000)
                                                        --------------      -------------       -------------
                                                        $   15,344,000      $  13,432,000       $   9,605,000
                                                        ==============      =============       =============
</TABLE>

       Income tax expense is comprised of the following components:
<TABLE>
<CAPTION>
       Year Ended
       December 31,                     Federal              Foreign             State               Total
       --------------------------    -------------        ------------       ------------        ------------
       1998:
         <S>                         <C>                  <C>                <C>                 <C>         
         Current.................    $     330,000        $    320,000       $    600,000        $  1,250,000
         Deferred................          518,000               -                   -                518,000
                                     -------------        ------------       ------------        ------------
                                     $     848,000        $    320,000       $    600,000        $  1,768,000
                                     =============        ============       ============        ============
       1997:
         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>


<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
                                     =============        ============       ============        ============
</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 $51 million
       and $58 million as of December 31, 1998 and 1997, respectively, primarily
       relating to the  Company's  domestic net  operating  loss  carryforwards,
       partially offset by a valuation  reserve of approximately $49 million and
       $56  million,  respectively.  The  Company  has  recorded a deferred  tax
       liability  of $3.9  million and $3.4  million as of December 31, 1998 and
       1997, which is associated with certain domestic and foreign  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 before income taxes for the years 1998,
       1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                          ---------------------------------------------------------------------   
                                                    1998                    1997                    1996
                                          -----------------------    -------------------  ---------------------
                                               Amount         %        Amount         %       Amount         %
                                          --------------    -----    -------------  ----  --------------   ----
       <S>                                <C>               <C>      <C>            <C>   <C>              <C>
       Tax expense at
         statutory rates................  $   5,370,000     35.0     $  4,701,000   35.0  $    3,360,000   35.0
       Increase (decrease) in taxes
         resulting from:
         Domestic loss carryforward
           adjustments..................     (4,929,000)   (32.1)      (3,048,000) (22.7)     (3,215,000) (33.5)
         State income taxes, net........        390,000      2.5          781,000    5.8         622,000    6.5
         Foreign losses not
           benefited and foreign
           income taxes.................        937,000      6.1          355,000    2.7       1,814,000   18.9
                                          -------------    -----     ------------  -----  --------------  -----
                                          $   1,768,000     11.5     $  2,789,000   20.8  $    2,581,000   26.9
                                          =============    =====     ============  =====  ==============  =====
</TABLE>

       At  December  31,  1998,  the  Company  had  available  domestic  tax net
       operating loss carryforwards  ("NOLs"),  which will expire, if unused, as
       follows:  $72,026,000 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,  1998,  the Company  had  investment  tax
       credits aggregating $3,957,000,  which will expire, if unused, in varying
       amounts  through  2000,  that  could be used to offset  current  domestic
       income taxes, but only after all available NOLs are utilized.

       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.


<PAGE>


4.     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 $1.2  million,  $1.1
       million and $1.0 million for 1998, 1997 and 1996, 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 October 31, 1998.

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

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                        --------------------------------------------------
                                                            1998                1997               1996
                                                        --------------     -------------      ------------
       <S>                                              <C>                <C>                <C>    
       Net periodic benefit cost:
         Service cost................................   $    1,352,000     $   1,254,000      $   1,269,000
         Interest cost...............................        2,311,000         2,021,000          1,617,000
         Expected return on plan assets..............       (2,527,000)       (2,720,000)        (2,200,000)
         Amortization of prior service cost..........           27,000            27,000             27,000
         Recognized net gain.........................         (508,000)         (121,000)           (91,000)
                                                        --------------     -------------      -------------
       Net periodic pension cost.....................   $      655,000     $     461,000      $     622,000
                                                        ==============     =============      =============
</TABLE>

       Actuarial  assumptions  used in the  accounting  for the U.K. Plan were a
       weighted  average discount rate of 6.25% for 1998, 7.5% for 1997 and 8.5%
       for 1996, an expected long-term rate of return on assets of 7.5% for 1998
       and 9.0% for 1997 and 1996 and a rate of increase in compensation  levels
       of 3.0% for 1998, 5.5% for 1997 and 6% for 1996. The funded status of the
       U.K. Plan is as follows:

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                          --------------------------------
                                                                               1998               1997
                                                                          --------------    --------------

       <S>                                                                 <C>               <C>  
       Projected benefit obligation:
         Beginning of year..........................................       $  30,564,000     $  24,449,000
         Service cost...............................................           1,352,000         1,254,000
         Interest cost..............................................           2,311,000         2,021,000
         Contributions..............................................           1,116,000         1,346,000
         Benefits paid..............................................            (525,000)         (358,000)
         Other......................................................             620,000         1,852,000
                                                                           -------------     -------------
         End of year................................................          35,438,000        30,564,000
                                                                           -------------     -------------
       Fair value of plan assets:
         Beginning of year..........................................          33,138,000        29,557,000
         Actual return on plan assets...............................           1,957,000         3,829,000
         Contributions..............................................           1,116,000         1,346,000
         Benefits paid..............................................            (525,000)         (358,000)
         Other......................................................             580,000        (1,236,000)
                                                                           -------------     -------------
         End of year................................................          36,266,000        33,138,000
                                                                           -------------     -------------
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                          --------------------------------
                                                                                1998               1997
                                                                          --------------    --------------

       <S>                                                                  <C>               <C>          
       Excess fair value over projected obligation..................       $     828,000     $   2,574,000
       Unrecognized net actuarial gain..............................            (990,000)       (3,213,000)
       Unamortized prior service cost...............................             299,000           322,000
                                                                           -------------     -------------
       Net pension prepaid asset (liability)........................       $     137,000     $    (317,000)
                                                                           =============     =============
</TABLE>


5.     PROPERTY AND EQUIPMENT

       The cost of property and equipment is as follows:
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                          --------------------------------
                                                                                1998             1997
                                                                          --------------    --------------

       <S>                                                                <C>               <C>           
       Industrial field services..............................            $   26,782,000    $   30,388,000
       Pipeline, terminaling and product marketing services...               398,306,000       345,802,000
       Information services...................................                 3,354,000         3,040,000
       General corporate......................................                 3,848,000         3,848,000
                                                                          --------------    --------------
       Total property and equipment...........................               432,290,000       383,078,000
       Accumulated depreciation and amortization..............              (130,759,000)     (121,717,000)
                                                                          --------------    --------------
       Net property and equipment.............................            $  301,531,000    $  261,361,000
                                                                          ==============    ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                          --------------------------------
                                                                                1998              1997
                                                                          --------------    --------------

       <S>                                                                 <C>               <C>           
       Industrial field services equipment....................            $    4,044,000    $    5,530,000
       Pipeline, terminaling and product marketing
         services equipment...................................                      -           22,513,000
                                                                          --------------    --------------
       Total equipment acquired under capital leases..........                 4,044,000        28,043,000
       Accumulated depreciation...............................                (3,147,000)      (13,570,000)
                                                                          --------------    --------------
       Net equipment acquired under capital leases............            $      897,000    $   14,473,000
                                                                          ==============    ==============
</TABLE>

       In December 1998, KPP exercised its option to purchase pipeline equipment
       previously held under a capital lease for $5.1 million in cash.

<PAGE>
6.     DEBT

       Debt is summarized as follows:
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                          --------------------------------
                                                                                1998             1997
                                                                          --------------    --------------
       <S>                                                                <C>               <C>  
       Industrial field services:
         Credit facility due through 2001.....................            $   17,764,000    $   23,408,000
         Various notes of foreign subsidiaries, with interest
           ranging from 6.75% to 8.0%, due through 2001.......                 4,020,000         3,278,000
         Capital leases.......................................                   949,000         1,641,000
                                                                          --------------    --------------
              Total debt......................................                22,733,000        28,327,000
         Less current portion.................................                 2,441,000         3,059,000
                                                                          --------------    --------------
                                                                          $   20,292,000    $   25,268,000
                                                                          ==============    ==============
       Pipeline, terminaling and product marketing 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
           Revolving credit facility due January 2001.........                25,000,000             -
         Promissory note due June 1999........................                10,000,000             -
         Revolving credit facility due March 1999.............                 2,852,000             -
                                                                          --------------    --------------
              Total debt......................................               165,852,000       134,453,000
         Less short-term and current portion..................                12,852,000         2,335,000
                                                                          --------------    --------------
                                                                          $  153,000,000    $  132,118,000
                                                                          ==============    ==============
       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 debt................................            $  212,251,000    $  186,446,000
       Short-term and current portion.........................                15,293,000         5,394,000
                                                                          --------------    --------------
       Total consolidated debt, less short-term and
         current portion......................................            $  196,958,000    $  181,052,000
                                                                          ==============    ==============
</TABLE>


       Industrial Field Services

       At  December  31,  1998,  $17.8  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
       (6.25% at December  31,  1998) 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 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  substantially  all of the tangible  assets of the
       industrial field services group.

       Pipeline, Terminaling and Product Marketing Services

       In  October  1998,  a  wholly-owned  subsidiary  of  KPP  entered  into a
       Promissory  Note  Agreement  with a bank that,  as amended on February 1,
       1999,  provides for a $15 million revolving credit  availability  through
       June 30, 1999. The Promissory Note Agreement,  which is without  recourse
       to the parent company,  bears interest at variable  interest rates (7.75%
       at December 31, 1998) and has a commitment  fee of 0.35% per annum of the
       unused available  balance.  At December 31, 1998, $10.0 million was drawn
       under the Promissory Note Agreement and included in current liabilities.

       In March 1998, a  wholly-owned  subsidiary of the Company  entered into a
       credit  agreement  with a bank that provides for a $20 million  revolving
       credit facility through March 1999. The credit facility bears interest at
       variable  rates,  has a commitment  fee of 0.25% per annum on  unutilized
       amounts and contains  certain  financial and operational  covenants.  The
       credit  facility,  which is without  recourse to the parent  company,  is
       secured by

<PAGE>
       essentially  all of the  tangible and  intangible  assets of the products
       marketing business and by 500,000 KPP limited partnership units held by a
       wholly-owned  subsidiary  of the  Company.  At December  31,  1998,  $2.9
       million  was drawn on the  facility.  The  Company  is in the  process of
       negotiating  an  amendment  to the credit  agreement  which,  among other
       items, is expected to extend the revolving  credit facility through March
       2001.

       In 1994, KPP, through a wholly-owned subsidiary,  entered into a restated
       credit  agreement  with a group of banks that, as  subsequently  amended,
       provides for a $25 million  revolving credit facility through January 31,
       2001.  The  credit  facility,  which is  without  recourse  to the parent
       company,  bears interest at variable  interest rates and has a commitment
       fee of 0.15% per annum of the unused  credit  facility.  At December  31,
       1998, $25.0 million was drawn under the credit facility.

       Also in 1994, KPP, through another  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 1995,  KPP issued $27 million of additional
       Notes due February 24, 2002 which bear  interest at the rate of 8.37% per
       annum. The Notes and credit  facility,  which are without recourse to the
       parent  company,  are  secured by a  mortgage  on the East  Pipeline  and
       contain certain financial and operational covenants.

       In June 1996,  KPP issued $68 million of new first mortgage notes bearing
       interest at rates  ranging  from 7.08% to 7.98%.  $35.0  million of these
       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,  which is
       without recourse to the parent company,  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 an 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
       0.5% 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, 1998 or
       1997.

       Consolidated Maturities

       Annual  sinking fund  requirements  and debt  maturities on  consolidated
       debt,  including  capital  leases,  are: $15.3 million  (including  $10.0
       million of KPP debt);  $2.4  million;  $109.5  million  (including  $93.0
       million of KPP  debt);  $29.2  million  (including  $27.0  million of KPP
       debt);   and  $10.1  million   (including  $8.0  million  of  KPP  debt),
       respectively, for each of the five years ending December 31, 2003.


<PAGE>

 7.    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         Treasury        Outstanding
                                                   -------------  --------------  --------------   ----------------
       <S>                                         <C>            <C>             <C>              <C>       
       Balance at January 1, 1996.................       568,450      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...............       568,450      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...............       569,450      36,527,283       4,346,976         32,180,307
       Common shares issued or purchased..........         -              26,923         797,608           (770,685)
                                                   -------------  --------------  --------------   ----------------
       Balance at December 31, 1998...............       569,450      36,554,206       5,144,584         31,409,622
                                                   =============  ==============  ==============   ================
</TABLE>


       Series A Preferred Stock

       The Company has 567,950  shares of  Cumulative  Class A  Adjustable  Rate
       Preferred  Stock,  Series A ("Series A Preferred") with a stated value of
       $10  per  share  outstanding  at  December  31,  1998.  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,
       1998, 1997 and 1996. 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 April 9,  1998,  the Board of  Directors  of the  Company  declared  a
       dividend  distribution  of one stock  purchase  right  ("Right") for each
       outstanding  share of common stock to stockholders of record on April 19,
       1998.  These  Rights are  substantially  similar  to, and were  issued in
       replacement  of,  rights that expired on April 19, 1998,  pursuant to the
       Company's  Stockholders  Rights Plan.  Pursuant to the replacement  plan,
       each Right entitles the holder, upon the occurrence of certain events, to
       purchase from the Company one one-hundredth of a share of Series B Junior
       Participating  Preferred  Stock, no par value, at a price of $15, subject
       to  adjustment.  The Rights will not  separate  from the common  stock or
       become  exercisable  until a person or group either  acquires  beneficial
       ownership  of 15% or more of the  Company's  common  stock or commences a
       tender or exchange  offer that would  result in ownership of 20% or more,
       whichever occurs earlier. The Rights, which expire on April 19, 2008, are
       redeemable in whole, but not in part, at the Company's option at any time
       for a price of $0.01 per Right. At December 31, 1998, 1997 and 1996 there
       were no Series B Preferred shares outstanding.

       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
       have a  preference  value of $1.00 per share and are 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. As
       of December 31, 1998,  there were 500 shares of Series C Preferred issued
       and outstanding to certain officers of the Company.

       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 accrues on January 1 of each year and 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 nor any 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.

       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) seventy-five  hundredths
       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, 1998, options on 2,091,352 shares at prices
       ranging  from  $1.63 to $5.63 were  outstanding,  of which  626,860  were
       exercisable at prices ranging from $1.63 to $5.56.



<PAGE>


       The changes in stock  options  outstanding  for the  Company's  plans for
       1998, 1997 and 1996 were as follows:

                                                                  Average Price
                                               Shares               per Share
                                            -------------         ------------- 

       Outstanding at January 1, 1996.....      1,431,436             $  4.76
       Granted............................      1,277,678             $  2.67
       Exercised..........................         (6,000)            $  1.67
       Forfeited..........................     (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
       Granted............................        617,347             $  4.98
       Exercised..........................        (59,910)            $  2.51
       Forfeited..........................        (44,600)            $  3.75
                                            -------------

       Outstanding at December 31, 1998...      2,091,352             $  3.36
                                            =============

       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 11.35% to
       12.19% based on weekly  average  variances of the stock for the five year
       period preceding issuance,  a risk-free rate of return ranging from 4.53%
       to 5.73% 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
       $13,020,000,  $0.39 and $0.39,  respectively  for the year ended December
       31, 1998, as compared to the reported  amounts of $13,576,000,  $0.41 and
       $0.40, respectively.  For the year ended December 31, 1997, 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, 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.

       Deferred Stock Unit Plan

       In 1996,  the  Company  initiated  a  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"),  an  instrument  designed  to track the  Company's
       Common Stock. Under the plan, as amended in 1998, DSUs are purchased at a
       value equal to the closing price of the Company's common stock on the day
       by which the employee must elect (if he so desires) to participate in the
       DSU Plan; which date is established by the Compensation  Committee,  from
       time to time (the  "Election  Date").  During a vesting  period of one to
       three years following the Election Date, a  participant's  DSUs vest only
       in an amount equal to the lesser of the compensation actually deferred to
       date or the  value  (based  upon the  then-current  closing  price of the
       Company's  common stock) of the pro-rata portion (as of such date) of the
       number of DSUs  acquired.  After the  expiration  of the vesting  period,
       which is  typically  the same  length as the  deferral  period,  the DSUs
       become fully vested, but may only be distributed  through the issuance of
       a like number of shares of the Company's  common stock on a  pre-selected
       date, which is irrevocably selected by

<PAGE>


       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  ranging from
       one-half to one and one-half times  (depending on the length of deferral)
       the number of DSUs  purchased by such person at 100% of the closing price
       of the Company's  common stock on the Election Date, which options become
       exercisable  over a  specified  period  after the grant,  according  to a
       schedule determined by the Compensation Committee.


8.     EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                               Weighted
                                                                                Average
                                                               Net              Common          Per-Share
                                                             Income             Shares           Amount
                                                        ---------------    ---------------   --------------
       <S>                                              <C>                <C>               <C>
       Year Ended December 31, 1998
           Net income................................   $    13,576,000
           Dividend applicable to preferred stock....          (508,000)
                                                        ----------------

           Basic EPS -
              Net income applicable to common stock..        13,068,000        31,739,572    $         0.41
                                                                                             ==============

           Effect of dilutive securities -
              Common stock options and DSUs..........            -              1,057,846
                                                        ---------------    --------------

           Diluted EPS -
              Income applicable to common stock, DSUs
                and assumed options exercised........   $    13,068,000        32,797,418    $         0.40
                                                        ===============    ==============    ==============

       Year Ended December 31, 1997
           Net income................................   $    10,643,000
           Dividend applicable to preferred stock....          (538,000)
                                                        ----------------

           Basic EPS -
              Net income applicable to common stock..        10,105,000        32,547,371    $         0.31
                                                                                             ==============

           Effect of dilutive securities -
              Common stock options...................            -                585,926
                                                        ---------------    --------------

           Diluted EPS -
              Income applicable to common stock
                and assumed options exercised........   $    10,105,000        33,133,297    $         0.30
                                                        ===============    ==============    ==============

<PAGE>


       Year Ended December 31, 1996
           Net income................................   $     7,024,000
           Dividend applicable to preferred stock....          (502,000)
                                                        ----------------

           Basic EPS -
              Net income applicable to common stock..         6,522,000        33,630,723    $         0.19
                                                                                             ==============

           Effect of dilutive securities -
              Common stock options...................            -                242,600
                                                        ---------------    --------------

           Diluted EPS -
              Income applicable to common stock
                and assumed options exercised........   $     6,522,000        33,873,323    $         0.19
                                                        ===============    ==============    ==============
</TABLE>


       Options to purchase 189,523,  15,000 and 80,308 shares of common stock at
       weighted  average prices of $5.50,  $5.00 and $3.73,  were outstanding at
       December 31, 1998, 1997 and 1996, respectively,  but were not included in
       the  computation  of diluted EPS because the options'  exercise price was
       greater than the average market price of the common stock.  Additionally,
       the Company's  8.75%  convertible  subordinated  debentures were excluded
       from the  computation  of  diluted  EPS  because  the  effect of  assumed
       conversion is anti-dilutive.


9.     COMMITMENTS AND CONTINGENCIES

       The Company leases  vehicles,  office space,  office  equipment and other
       items of  personal  property  under  leases  expiring  at various  dates.
       Management  expects that,  in the normal course of business,  leases that
       expire will be renewed or replaced by other  leases.  Total rent  expense
       under  operating  leases was $3.8 million for 1998, $3.5 million for 1997
       and $4.0 million for 1996.

       At December 31, 1998, minimum rental commitments under all capital leases
       and operating leases for future years are as follows:  Capital  Operating
       Leases Leases

              1999.......................... $      354,000       $    4,064,000
              2000..........................        307,000            3,528,000
              2001..........................        261,000            2,952,000
              2002..........................         76,000            1,888,000
              2003..........................           -               1,342,000
              2004 and thereafter...........           -               1,197,000
                                             --------------       --------------
         Total minimum lease payments.......        998,000       $   14,971,000
                                                                  ==============
         Less amounts representing interest.         50,000
                                             --------------
         Present value of net minimum 
             lease payments................. $      948,000
                                             ==============

       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.  The assets of KPP,  other than Available  Cash,  cannot be
       distributed without a majority vote of the non-affiliated unitholders.

       The  operations  of the Company  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 $5.3 million,  including $4.5 million related to
       acquisitions  of pipelines and terminals.  During 1998, KPP incurred $0.6
       million of costs  related to such  acquisition  reserves  and reduced the
       liability accordingly.

       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.


10.    BUSINESS SEGMENT DATA

       The following  information is presented in accordance  with SFAS No. 131,
       "Disclosures  about Segments of an Enterprise  and Related  Information."
       The  Company's  adoption of SFAS No. 131,  effective  January 1, 1998 and
       applied  retroactively,  did not alter the  composition of its reportable
       operating segments.

       The Company provides 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 Pipeline,
       Terminaling and Product Marketing Segment includes:  (i) the pipeline and
       terminaling  operations  of KPP which  consist of the  transportation  of
       refined  petroleum  products in the Midwestern states as a common carrier
       and the storage of  petroleum  products,  specialty  chemicals  and other
       liquids,   and   (ii)  the   Company's   products   marketing   business.
       Additionally,  the Company provides information services to governmental,
       insurance and financial institutions.

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

                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                              1998              1997              1996
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Business segment revenues:
         Industrial field services...................   $   115,116,000    $  108,223,000    $  103,252,000
         Pipeline, terminaling and product
           marketing services........................       240,032,000       121,156,000       117,554,000
         Information services........................        20,709,000         7,557,000         8,055,000
                                                        ---------------    --------------    --------------
                                                        $   375,857,000    $  236,936,000    $  228,861,000
                                                        ===============    ==============    ==============

       Industrial field services segment revenues:
         Underpressure services......................   $    43,208,000    $   37,769,000    $   37,879,000
         Turnaround services.........................        52,924,000        48,655,000        42,537,000
         Other services..............................        18,984,000        21,799,000        22,836,000
                                                        ---------------    --------------    --------------
                                                        $   115,116,000    $  108,223,000    $  103,252,000
                                                        ===============    ==============    ==============

       Pipeline, terminaling, product marketing 
         services segment revenues:
         Pipeline operations.........................   $    63,421,000    $   61,320,000    $   63,441,000
         Terminaling operations......................        62,391,000        59,836,000        54,113,000
         Product marketing services..................       114,220,000              -                 -
                                                        ---------------    --------------    --------------
                                                        $   240,032,000    $  121,156,000    $  117,554,000
                                                        ===============    ==============    ==============
</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                        ---------------------------------------------------
                                                              1998              1997              1996
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>       
       Business segment profit:
         Industrial field services ..................   $     6,656,000    $    7,438,000    $    5,073,000
         Pipeline, terminaling and product
           marketing services........................        56,057,000        53,420,000        51,285,000
         Information services........................         3,690,000         2,709,000         2,198,000
         General corporate...........................        (5,091,000)       (4,907,000)       (4,741,000)
                                                        ---------------    --------------    --------------
           Operating income..........................        61,312,000        58,660,000        53,815,000
         Interest expense............................       (15,714,000)      (15,531,000)      (15,420,000)
         Other income (expense)......................           868,000          (163,000)           27,000
         Amortization of excess of cost over fair
           value of net assets of acquired businesses        (1,948,000)       (1,879,000)       (1,848,000)
                                                         --------------    --------------    --------------
         Income before interest of outside
           non-controlling partners in KPP's net
           income and income tax expense.............   $    44,518,000    $   41,087,000    $   36,574,000
                                                        ===============    ==============    ==============

       Business segment assets:
         Depreciation and amortization:
           Industrial field services.................   $     3,854,000    $    4,563,000    $    4,227,000
           Pipeline, terminaling and product
              marketing services.....................        12,157,000        11,711,000        10,907,000
           Information services......................           192,000           151,000           234,000
           General corporate.........................             -               290,000            66,000
                                                        ---------------    --------------    --------------
                                                        $    16,203,000    $   16,715,000    $   15,434,000
                                                        ===============    ==============    ==============

         Capital  expenditures (including capitalized  
           leases  and  excluding acquisitions):
           Industrial field services.................   $     2,574,000    $    2,013,000    $    3,504,000
           Pipeline, terminaling and product
              marketing services.....................         9,401,000        10,641,000         7,075,000
           Information services......................           281,000           327,000            83,000
           General corporate.........................             -                30,000            23,000
                                                        ---------------    --------------    --------------
                                                        $    12,256,000    $   13,011,000    $   10,685,000
                                                        ===============    ==============    ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------
                                                              1998               1997             1996
                                                        ---------------    --------------    --------------
         <S>                                            <C>                <C>               <C>  
         Total assets:
           Industrial field services.................   $   110,603,000    $  116,503,000    $  114,354,000
           Pipeline, terminaling and product
           marketing services........................       323,058,000       270,055,000       273,927,000
           Information services......................        11,082,000         5,429,000         3,988,000
           General corporate.........................         3,302,000        10,286,000        12,422,000
                                                        ---------------    --------------    --------------
                                                        $   448,045,000    $  402,273,000    $  404,691,000
                                                        ===============    ==============    ==============
</TABLE>


<PAGE>


       The following  geographical area data includes revenues based on location
       of operating  segment and net property  and  equipment  based on physical
       location:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                        ---------------------------------------------------
                                                              1998               1997             1996
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>    
       Geographical area revenues:
         United States............................      $   296,336,000    $  162,367,000    $  158,274,000
         Europe...................................           68,050,000        66,431,000        65,949,000
         Asia-Pacific.............................           11,471,000         8,138,000         4,638,000
                                                        ---------------    --------------    --------------
                                                        $   375,857,000    $  236,936,000    $  228,861,000
                                                        ===============    ==============    ==============
       Geographical area operating income:
         United States............................      $    54,858,000    $   51,384,000    $   48,884,000
         Europe...................................            5,456,000         6,139,000         4,001,000
         Asia-Pacific.............................              998,000         1,137,000           930,000
                                                        ---------------    --------------    --------------
                                                        $    61,312,000    $   58,660,000    $   53,815,000
                                                        ===============    ==============    ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                             December 31,
                                                        ---------------------------------------------------         
                                                              1998               1997             1996
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C> 
       Geographical area net property and equipment:
         United States............................      $   292,233,000    $  249,470,000    $  252,807,000
         Europe...................................            7,781,000        10,419,000        13,648,000
         Asia-Pacific.............................            1,517,000         1,472,000           183,000
                                                        ---------------    --------------    --------------
                                                        $   301,531,000    $  261,361,000    $  266,638,000
                                                        ===============    ==============    ==============
</TABLE>


11.    ACCRUED EXPENSES

       Accrued  expenses are comprised of the  following  components at December
       31, 1998 and 1997:

                                                       December 31,
                                            ---------------------------------
                                                  1998               1997
                                            --------------     --------------
       Accrued distribution payable.......  $    7,127,000     $    7,177,000
       Accrued income taxes...............       2,212,000          3,079,000
       Accrued taxes other than income....       2,631,000          1,957,000
       Accrued interest...................       2,454,000          2,380,000
       Accrued compensation and benefits..       3,735,000          2,728,000
       Accrued environmental..............       1,702,000          1,017,000
       Deferred terminaling fees..........       3,526,000          2,892,000
       Other accrued expenses.............      17,922,000         14,449,000
                                            --------------     --------------
                                            $   41,309,000     $   35,679,000
                                            ==============     ==============


12.    SUPPLEMENTAL CASH FLOW INFORMATION

       Supplemental information on cash paid during the period for:

                                               Year Ended December 31,
                               -------------------------------------------------
                                    1998              1997               1996
                               --------------    ---------------    ------------

       Interest.........       $   15,385,000    $    15,373,000    $ 14,502,000
                               ==============    ===============    ============

       Income taxes.....       $    2,310,000    $     1,535,000    $  1,340,000
                               ==============    ===============    ============


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

       The estimated  fair value of cash  equivalents,  accounts  receivable and
       accounts payable approximate their carrying amounts due to the relatively
       short period to maturity of these  instruments.  The estimated fair value
       of all debt  (excluding  capital leases) as of December 31, 1998 and 1997
       was  approximately  $217  million  and $183  million as  compared  to the
       carrying value of $211 million and $178 million, respectively. These fair
       values were estimated using  discounted cash flow analysis,  based on the
       Company's  current  incremental  borrowing  rates  for  similar  types of
       borrowing arrangements, when quoted market prices were not available. The
       Company has not  determined the fair value of its capital leases as it is
       not  practicable.  The  estimates  presented  above  are not  necessarily
       indicative  of the amounts  that would be  realized  in a current  market
       exchange. The Company has no derivative financial instruments.

       The Company does not believe that it has a significant  concentration  of
       credit risk at December 31, 1998,  as the Company's  accounts  receivable
       are  generated  from three  distinct  business  segments  with  customers
       located throughout the United States, Europe and Asia-Pacific.


 14.   QUARTERLY FINANCIAL DATA (UNAUDITED)

       Quarterly operating results for 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                                  Quarter Ended
                                    -----------------------------------------------------------------------
                                       March 31,           June 30,        September 30,      December 31,
                                    --------------     ---------------    --------------     --------------
       1998:
       <S>                          <C>                <C>                <C>                <C>           
       Revenues................     $   59,501,000     $   100,492,000    $  105,476,000     $  110,388,000
                                    ==============     ===============    ==============     ==============

       Operating income........     $   12,607,000     $    14,981,000    $   17,907,000     $   15,817,000
                                    ==============     ===============    ==============     ==============

       Net income .............     $    1,836,000     $     3,365,000    $    4,434,000     $    3,941,000
                                    ==============     ===============    ==============     ==============

       Earnings per
         common share:
           Basic................    $          .05     $           .10    $          .14     $          .12
                                    ==============     ===============    ==============     ==============
           Diluted..............    $          .05     $           .10    $          .13     $          .12
                                    ==============     ===============    ==============     ==============

       1997:
       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
                                    ==============     ===============    ==============     ==============
</TABLE>







<PAGE>

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




 
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                              -----------------------------------------------------   
                                                                   1998               1997                1996
                                                              -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>            
General and administrative expenses.....................      $  (5,091,000)      $  (4,617,000)     $   (4,677,000)
Depreciation and amortization...........................               -               (290,000)            (64,000)
Interest expense........................................         (2,212,000)         (2,239,000)         (2,377,000)
Intercompany fees and expenses..........................          3,022,000           2,266,000           3,997,000
Interest income.........................................            284,000             372,000             247,000
Other income (expense)..................................          1,354,000          (1,024,000)           (332,000)
Equity in income of subsidiaries and KPP................         16,219,000          16,175,000          10,230,000
                                                              -------------       -------------      --------------

Net income..............................................         13,576,000          10,643,000           7,024,000
Dividends applicable to preferred stock.................            508,000             538,000             502,000
                                                              -------------       -------------      --------------

Net income applicable to common  stock..................      $  13,068,000       $  10,105,000      $    6,522,000
                                                              =============       =============      ==============

Earnings per common share:
   Basic................................................      $         .41       $         .31      $          .19
                                                              =============       =============      ==============
   Diluted..............................................      $         .40       $         .30      $          .19
                                                              =============       =============      ==============
</TABLE>





<PAGE>
                                                                      Schedule I
                                                                     (Continued)
                      KANEB SERVICES, INC. (PARENT COMPANY)
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                             --------------------------------------        
                                                                                  1998                   1997
                                                                             ---------------        ---------------

                                     ASSETS
<S>                                                                          <C>                    <C>    
Current assets:
   Cash and cash equivalents............................................     $       875,000        $     8,043,000
   Prepaid expenses and other current assets............................             177,000                  -
                                                                             ---------------        ---------------

Total current assets....................................................           1,052,000              8,043,000
                                                                             ---------------        ---------------

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

     Net property and equipment.........................................              -                       -
                                                                             ---------------        ---------------

Investments in, advances to and notes receivable
  from subsidiaries and KPP.............................................         123,567,000            104,135,000

Other assets............................................................           2,250,000              2,243,000
                                                                             ---------------        ---------------

                                                                             $   126,869,000        $   114,421,000
                                                                             ===============        ===============


                             LIABILITIES AND EQUITY

Current liabilities - accounts payable and accrued expenses.............     $     7,367,000        $     3,987,000

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

Deferred credits and other liabilities..................................           8,391,000              8,321,000

Stockholders' equity:
   Preferred stock, without par value...................................           5,792,000              5,792,000
   Common stock, without par value......................................           4,239,000              4,234,000
   Additional paid-in capital...........................................         197,263,000            197,242,000
   Accumulated deficit..................................................         (88,423,000)          (101,491,000)
   Treasury stock, at cost..............................................         (29,775,000)           (25,216,000)
   Unamortized restricted stock.........................................            (141,000)                 -
   Accumulated comprehensive income (loss) -
     foreign currency translation adjustment............................          (1,510,000)            (2,114,000)
                                                                             ---------------        ----------------

       Total stockholders' equity.......................................          87,445,000             78,447,000
                                                                             ---------------        ---------------
                                                                             $   126,869,000        $   114,421,000
                                                                             ===============        ===============

</TABLE>




<PAGE>
                                                                      Schedule I
                                                                     (Continued)
                      KANEB SERVICES, INC. (PARENT COMPANY)
                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                       -----------------------------------------------------------
                                                              1998                1997                 1996
                                                       -----------------    ----------------    ------------------
<S>                                                    <C>                  <C>                 <C>
Operating activities:
   Net income .......................................  $      13,576,000    $     10,643,000    $        7,024,000
   Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization...................              -                 290,000                64,000
     Equity in net income of subsidiaries and KPP....        (16,219,000)        (16,175,000)          (10,230,000)
     Changes in current assets and liabilities:
       Accounts receivable...........................              -                 102,000                99,000
       Prepaid expenses..............................           (177,000)            818,000              979,000
       Accrued expenses .............................          3,380,000          (4,439,000)           (1,245,000)
                                                       -----------------    -----------------   -------------------
       Net cash provided by (used in)
         operating activities........................            560,000          (8,761,000)           (3,309,000)
                                                       -----------------    -----------------   ------------------

Investing activities:
   Capital expenditures..............................              -                 (30,000)              (25,000)
   Change in other assets, net.......................            667,000          (3,082,000)             (129,000)
                                                       -----------------    -----------------   -------------------
       Net cash provided by (used in)
         investing activities........................            667,000          (3,112,000)             (154,000)
                                                       -----------------    -----------------   -------------------
Financing activities:
   Payments on long-term debt........................              -                    -               (6,000,000)
   Preferred stock dividends paid....................           (508,000)           (538,000)             (502,000)
   Change in investments in, advances to and notes
     receivable from subsidiaries and KPP............         (3,213,000)         16,075,000             1,369,000
   Common stock issued...............................            194,000              33,000                 -
   Purchase of treasury stock........................         (4,868,000)         (4,585,000)           (1,079,000)
                                                       ------------------   -----------------   -------------------
        Net cash provided by (used in) financing
         activities..................................         (8,395,000)         10,985,000            (6,212,000)
                                                       -----------------    ----------------    -------------------

Decrease in cash and cash equivalents................         (7,168,000)           (888,000)           (9,675,000)
Cash and cash equivalents at beginning of year.......          8,043,000           8,931,000            18,606,000
                                                       -----------------    ----------------    ------------------
Cash and cash equivalents at end of year.............  $         875,000    $      8,043,000    $        8,931,000
                                                       =================    ================    ==================
</TABLE>



<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, 1998:
   For doubtful receivables
     classified as current assets...   $         570      $      430    $         99(a) $     (174)(b)   $        925
                                       =============      ==========    ==============  =============    ============ 

   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $      55,684      $    -        $       -        $     (7,166)   $     48,518
                                       =============      ==========    ==============   =============   ============

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
                                       =============      ==========    ==============    ============    ===========
</TABLE>

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




<PAGE>


                                   SIGNATURES

       Pursuant to the  requirements  of Section 13 or 15 (d) of the  Securities
Exchange  Act of 1934,  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 25, 1999

       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 25, 1999
                                 Officer and Director

Principal Accounting Officer

MICHAEL R. BAKKE                 Controller                       March 25, 1999



Directors

SANGWOO AHN                      Director                         March 25, 1999

JOHN R. BARNES                   Director                         March 25, 1999

FRANK M. BURKE, JR.              Director                         March 25, 1999

CHARLES R. COX                   Director                         March 25, 1999

HANS KESSLER                     Director                         March 25, 1999

JAMES R. WHATLEY                 Director                         March 25, 1999



<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                        Description
---------         ----------------------------------------
3.7               By-laws of the Registrant

10.11             Form of Indemnification Agreement

22                List of subsidiaries of the Registrant

23                Consents of independent accountants -  
                  KPMG LLP and PricewaterhouseCoopers LLP

28                Financial Data Schedule