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, 2000

                                       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 of                                (IRS Employer
incorporation or organization)                               Identification No.)

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

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

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

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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of  Regulation  S-K  (Subsection  229.405 of this  chapter) is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ X ]

     Aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant:  $178,939,194.  This figure is estimated  as of March 23,  2001,  at
which date the closing  price of the  Registrant's  Common Stock on the New York
Stock  Exchange  was $6.00 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 23, 2001: 31,143,777.


                       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  two  industry  segments,   specialized  technical  services  and
information   technology  services.   The  technical  services  and  information
technology  services  segments  operate  through  wholly-owned  subsidiaries  of
Furmanite Worldwide,  Inc. and Kaneb Information Services,  Inc.,  respectively.
Furmanite Worldwide,  Inc., and its domestic and international  subsidiaries and
affiliates (collectively,  "Furmanite"), provide specialized technical services,
including  leak sealing under  pressure,  on-site  machining,  valve testing and
repair and other engineering products and services,  primarily to electric power
generating  plants,  petroleum  refineries  and other process  industries in the
United  Kingdom,   Continental   Europe,   North  America,   Latin  America  and
Asia-Pacific.  See - "Technical 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,
provide  consulting   services  and  computer  hardware  to  federal  and  state
governmental agencies and private sector customers,  provide consulting services
to hospitals and hospital networks implementing  telemedicine systems and enable
financial   institutions  to  monitor  the  insurance  coverage  of  their  loan
collateral. See "Information Technology Services."

         In addition to the above operations,  the Company also has (i) pipeline
and  terminaling  and (ii)  product  marketing  segments  the  Company  plans to
distribute to its  shareholders  through a distribution  of interests in a newly
formed limited liability company,  Kaneb Services LLC ("KSL").  The pipeline and
terminaling and product marketing  segments operate and manage refined petroleum
products pipeline  transportation  systems and petroleum  products and specialty
liquids terminal storage  facilities and provide  wholesale motor fuel marketing
services   throughout  the  Great  Lakes  and  Rocky  Mountain  regions  and  in
California.  KSL operations have been classified as  "Discontinued  Operations -
Businesses  to be  Distributed  to  Common  Shareholders"  in  the  accompanying
consolidated financial statements.

         Kaneb was  incorporated  in Delaware on January 23, 1953. The Company'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 the Company's  operating segments and
foreign  operations is presented  under the caption  "Business  Segment Data" in
Note 9 to the Company's consolidated  financial statements.  Such information is
hereby incorporated by reference into this Item 1.


TECHNICAL SERVICES

         The Furmanite group of companies offers specialized  technical services
to an international base of clients.  Founded in Virginia Beach, Virginia in the
1920s as a  manufacturer  of leak sealing kits,  Furmanite  Worldwide,  Inc. has
evolved into an  international  service  company  that  provides  technical  and
technology  solutions.  In the  1960s,  Furmanite  expanded  within  the  United
Kingdom,  primarily through its leak sealing products and services,  and, during
the 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. The Company acquired Furmanite in 1991
to  diversify  the  Company's   operations  and  pursue   international   growth
opportunities.  For the year ended December 31, 2000,  Furmanite's  revenues and
operating   income  were   approximately   $92.1   million  and  $6.3   million,
respectively.  See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations."


Products and Services

         Furmanite provides on-line repairs of leaks ("leak sealing") in valves,
pipes and other  components of piping  systems and related  equipment  typically
used in  flow-process  industries.  See "Customers and Markets."  Other services
provided by Furmanite include on-site  machining,  bolting and valve testing and
repair  on such  systems  and  equipment.  These  services  tend  to  complement
Furmanite's leak sealing service,  since these "turnaround services" are usually
performed  while a plant or piping  system is off-line.  In addition,  Furmanite
provides hot tapping,  fugitive emissions  monitoring,  passive fire protection,
concrete repair and heat exchanger  repair.  Furmanite also performs  diagnostic
services on valves and motors by, among other  methods,  utilizing  its patented
Trevitest(R) system 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, 2000,  1999, and
1998,  under  pressure  services  represented  approximately  42%,  40% and 38%,
respectively,  of Furmanite's revenues,  while turnaround services accounted for
approximately  48%,  45% and 46%,  respectively,  and  product  sales  and other
industrial services represented approximately 10%, 15% and 16%, respectively, of
Furmanite's revenues for each of such years.

         Furmanite's on-line, leak sealing under pressure services are performed
on a variety of flow-process industry machinery,  often in difficult situations.
Many of Furmanite's  techniques and materials are  proprietary  and/or  patented
and, the Company believes,  provide Furmanite with a competitive  advantage over
other organizations that provide similar services. Furmanite holds approximately
200 patents and trademarks  for its  techniques,  products and materials.  These
patents, which are registered in jurisdictions around the world, expire on dates
ranging from October 2001 to December 2012. Furmanite's skilled technicians work
with  equipment  in a manner  designed  to  enhance  safety  and  efficiency  in
temperature  environments ranging from cryogenic to 1,400 degrees Fahrenheit and
pressure  environments  ranging from vacuum to 5,000 pounds per square inch.  In
many circumstances,  Furmanite personnel are called upon to custom-design tools,
equipment or other materials to effect the necessary repairs.  These efforts are
supported  by an  internal  quality  control  group that works with the  on-site
technicians in crafting these materials.

Customers and Markets

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

         Furmanite  believes  that  it is  the  most  recognized  brand  in  its
industry.  With its 65-year  history,  Furmanite's  customer  relationships  are
long-term and worldwide.  Furmanite serves its customers from its Houston, Texas
worldwide  headquarters  and  maintains  a  substantial  presence  in the United
Kingdom,  Continental Europe and the Asia-Pacific.  Furmanite currently operates
North American offices in the United States in Baton Rouge, Beaumont, Charlotte,
Chicago,  Houston,  Merrillville  and  Salt  Lake  City.  Furmanite's  worldwide
operations are further  supported by offices  currently  located in Australia (6
locations),   Belgium,   China,  France,   Germany,  Hong  Kong,  Malaysia,  the
Netherlands, New Zealand, Norway, Singapore and the United Kingdom (6 locations)
and by licensee,  agency and/or  minority  ownership  interest  arrangements  in
Argentina,  Brazil,  Chile,  Croatia,  Cyprus, Czech Republic,  Egypt,  Finland,
Hungary, India, Indonesia,  Italy, Japan, Kuwait,  Macedonia,  Poland, Portugal,
Puerto Rico, Saudi Arabia, Slovak Republic,  Korea, Sweden, Thailand,  Trinidad,
Ukraine,  the United Arab  Emirates  and  Venezuela.  Sales by major  geographic
region  for 2000 were 34% for the  United  States,  55% for  Europe  and 11% for
Asia-Pacific.  See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations"  and Note 9 to the Company's  consolidated  financial
statements.

         Furmanite's  leak  sealing  under  pressure and other  specialty  field
services  are  marketed  primarily  through  direct  sales calls on customers by
salesmen and technicians based at Furmanite's various operating locations, which
are situated to facilitate timely customer response,  24 hours a day, seven days
a week.  Customers are usually billed on a time and materials basis for services
typically  performed  pursuant to either job quotation sheets or purchase orders
issued under written  customer  agreements.  Customer  agreements  are generally
short-term in duration and specify the range of and rates for the services to be
performed.  Furmanite typically provides various limited  warranties,  depending
upon the services furnished,  and has had no material warranty claims during the
three years ended December 31, 2000. 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.  Further,  because of its  international  operations,  Furmanite  is
subject  to a  number  of  political  and  economic  risks,  including  taxation
policies, labor practices, currency exchange rate fluctuations, foreign exchange
restrictions,  local  political  conditions,  import and export  limitations and
expropriation  of  equipment.  Except in  certain  developing  countries,  where
payment in a specified  currency is required by contract,  Furmanite's  services
are paid,  and its  operations  are  typically  funded,  in the  currency of the
particular country in which its business  activities are conducted.  Furmanite's
operating results were impacted by foreign currency devaluations during the year
ended December 31, 2000. See "Management's  Discussion and Analysis of Financial
Condition and Results of Operations."

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


INFORMATION TECHNOLOGY SERVICES

         Kaneb  Information  Services,  Inc.,  together  with its  wholly  owned
subsidiaries  (collectively,  "KIS"), provides a suite of information technology
services and related products to the U.S. Government and commercial sectors. The
segment's  primary  business is  information  technology  services - consulting,
design,  development,  integration  and  maintenance - for database  management,
web-based,  wireless and  telemedicine  applications.  KIS also  provides  these
services in voice and data networks,  and network security systems. For the year
ended  December  31,  2000  the  information  services  segment's  revenues  and
operating  income  were  $35.5  million  and  $4.1  million,  respectively.  See
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operations".  A substantial portion of the revenues of this business segment are
attributable to contracts with agencies of the U.S. Government.  KIS manages its
businesses from its headquarters in Richardson,  Texas, and maintains offices in
Bryan, Texas, Chantilly, Manassas and McLean, Virginia, and Frederick, Maryland.


Products and Services

         Database Management Services

         KIS  provides   comprehensive   database  management  services  to  the
financial  industry and to the U.S.  Government  sector.  These services include
consulting,   design,   development  and  integration  of  database   management
applications, as well as database monitoring and customized reporting.

         KIS  developed  and  licenses a  database  management  application  for
financial  institutions,  primarily  community banks.  The application  supports
internal  accounting;  tracking,  monitoring,  analyzing and managing  loans and
deposits;  and other  banking  functions.  KIS also  developed  and  licenses  a
professional  lending  system to loan  companies,  and an automated  contingency
planning system for disaster  recovery to commercial banks.  These  applications
are licensed on a per-user basis annually.  KIS has recently expanded its market
for similar data management  applications and services to the equipment  leasing
industry.

         In addition to its software applications,  KIS provides a full suite of
services  to  the  financial  industry,   including   consultation  on  database
requirements,  development  of  applications  and  systems,  as well as  ongoing
maintenance,  reporting and support.  KIS charges  monthly fees to its customers
for these services. As part of its services offering, KIS monitors, on behalf of
its customers,  the status of insurance coverage on automobiles  pledged as loan
collateral and flood  insurance on homes.  It coordinates  communications  among
financial  institutions,  insurance companies and borrowers regarding the status
of insurance  coverage  protecting the financial  institution's loan collateral.
KIS uses its own software to  cross-collate  databases and generate  reports for
lenders and insurance  companies,  charging monthly fees to its customers.  Some
customers also pay fees to KIS in instances  where KIS's services  result in the
issuance of an insurance  policy to replace lapsed  coverage.  KIS believes that
the market for these services is fragmented among a number of small competitors,
and that  competition in this market is primarily  based upon the quality of the
service provided.

         In  the  U.S.  Government  sector,  KIS  provides  database  management
applications and services for the Head Start program of the Department of Health
and Human  Services.  KIS  contracts  for these  services  on  renewable  annual
contracts, with pricing based principally on its General Services Administration
Schedule ("GSA Schedule").

         Web-related Services

         KIS  provides a full suite of  web-related  services to its  customers,
including web site design, development and maintenance, e-commerce applications,
network engineering, and other web-enabled application development.  Web-enabled
applications developed by KIS include field research and program analysis tools,
shared statistical analysis tools, and logistics coordination tools.

         KIS'  web-related   services  are  provided  through  renewable  annual
contracts,  with  pricing  based on KIS'  GSA  Schedule,  primarily  to the U.S.
Department of Health and Human Services and the U.S. Department of Commerce.  In
marketing  these  services,  KIS  competes  with a number  of  other  government
contractors.  KIS competes on the basis of its  expertise  and its  knowledge of
customers' needs.

         The Company  believes that the  capabilities  KIS offers in web-related
services  with  large  database   components  offer  opportunities  for  further
expanding  its market.  For example,  during 2000,  the company  secured  annual
contracts with governmental  agencies in five states that provide information to
the U.S. Department of Health and Human Services.  These contracts resulted from
KIS'  reputation  for  performance  with the  Department  of  Health  and  Human
Services,  as well as the significant  efficiencies gained by states' use of the
same web-enabled platform as the Federal agency to which data is delivered.

         Telemedicine Services

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

         KIS  telemedicine  services also extend to the design,  development and
implementation  of  technology  solutions  for its  customers.  KIS  developed a
wireless Local Area Network device, the LAN2GoTM,  which was developed initially
for a  military  application  but has been  successfully  deployed  in the first
wireless clinical teleradiology  solution,  implemented in November 2000 for the
radiology  department of Texas Tech  University in El Paso,  Texas.  This system
delivers  wireless  connectivity  between a hospital  emergency  department  and
radiology  workstations  located  elsewhere  in the hospital and off-site at the
academic facility.  The solution provides  high-speed,  highly secure encryption
and wireless transmission of diagnostic quality images, allowing radiologists in
separate  facilities  to read images and provide  diagnoses.  KIS believes  this
solution has market  potential  beyond the medical industry that could extend to
education, training and other applications.

         KIS also performs work for PACS providers, such as General Electric and
Phillips,  in connection  with the sale and  installation  of PACS,  and for end
users of the systems.  KIS' principal  customer in the PACS consulting field has
been the Department of Defense,  with whom KIS contracted to provide  consulting
services for eleven  hospitals,  with Brooke Army Medical  Center,  San Antonio,
Texas,  as the hub. The contract  with the  Department  of Defense is a one year
contract,  with four annual  renewal  option years (KIS is  currently  providing
services under the first renewal option year).  KIS also provides these services
to  other  military  hospitals  and to  major  teaching  hospitals.  KIS is also
marketing wearable digitized medical records on Personal  Information  Carriers,
which are the size of "dog  tags," for the  military  and other  government  and
private  sector  applications.  KIS is exploring the potential for expanding its
services in this area to  teledermatology,  telecardiology  and home  monitoring
applications.

         Voice and Data Network Services

         KIS  provides an  end-to-end  network  services  solution for voice and
data, both wireline and wireless,  that includes consulting services,  specially
configured  computers,  system security and related  networking  equipment.  Its
principal  network  services  customers  are agencies of the U.S.  Department of
Justice,  which it serves through teaming  agreements on a contract  basis.  The
contract  is  renewable  annually  by the  Department  of  Justice.  Under  this
contract,  KIS also provides  installation and replacement  services,  training,
software and hardware  security  systems to the  agencies.  Hardware  components
provided  under  this  contract  are  fully   compatible  and   interchangeable,
permitting routine upgrades and swaps.

Double Eagle Acquisition

         In November 2000, KIS acquired Double Eagle Communications and Cabling,
Inc.  ("Double  Eagle"),  a full service  provider of voice and data cabling and
network support services based in Manassas,  Virginia. Through Double Eagle, KIS
provides fiber and copper cable network  installation for voice and data, system
design,  maintenance,  training  and  equipment  sales.  Specific  services  are
supplied  on annual  contracts  with  customers,  and  include  survey  and site
evaluations,  system planning,  installation of cabling and equipment,  software
installation  and testing,  and system  programming.  Customers  are  commercial
enterprises,  predominantly  in the  high  tech  industry  and  in  the  medical
industry. KIS was a customer of Double Eagle's prior to its acquisition. Through
this   multi-year   relationship,   KIS  had  experience   with  Double  Eagle's
capabilities  as  a  successful   outsource   partner  that  supplied   cabling,
maintenance  and training  services for  Department  of Justice  contracts.  KIS
believes that this acquisition extends its ability to deliver end-to-end network
services,  as well as providing  access to  commercial  customers  for potential
sales of KIS product and service offerings.


DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED
TO COMMON SHAREHOLDERS

         The pipeline,  terminaling and products marketing business segments are
classified as "Discontinued  Operations - Businesses to be Distributed to Common
Shareholders" in light of the proposed  distribution of those business  segments
to the  Company's  shareholders  in the form of  interest  in the  newly  formed
limited liability company,  KSL. It is anticipated that the distribution will be
completed in the second quarter of 2001.

         KSL, through a wholly-owned subsidiary, Kaneb Pipe Line Company ("KPL")
manages and  operates its refined  petroleum  products  pipeline  transportation
system and petroleum  products and specialty  liquids terminal storage business,
for the  benefit  of Kaneb Pipe Line  Partners,  L.P.  ("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,
which is the third largest independent liquids terminaling company in the United
States,  is  conducted  by  KPP  under  the  tradenames  of  "ST  Services"  and
"StanTrans,  Inc.,"  among others  (collectively,  "ST").  KPL operates  ST's 42
terminal  storage  facilities  in 24 states,  the  District of Columbia  and six
facilities in the United Kingdom,  with total storage  capacity of approximately
38.3 million barrels. For a more detailed discussion of the business, activities
and results of operations of KPP, reference is made to its Annual Report on Form
10-K for the year ended December 31, 2000, and other publicly filed documents of
KPP (NYSE:  KPP).  In March 1998,  KPL  acquired a products  marketing  business
engaged in the business of  acquiring  quantities  of motor fuels 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.

         Additional  information regarding KSL may be found in the Form 10 filed
by KSL on March 23, 2001 with the Securities and Exchange Commission.


ENVIRONMENTAL CONTROLS

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


EMPLOYEES

         At December 31, 2000, the continuing  operations of the Company and its
subsidiaries employed 1,131 persons. The Furmanite group of companies employed a
total  of 872  persons,  and 240  persons  were  employed  by the KIS  group  of
companies. As of December 31, 2000, approximately 252 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.


Item 2.    Properties

         The  properties  owned or utilized by the Company and its  subsidiaries
are  generally  described  in  Item 1 of  this  Report.  Additional  information
concerning  the  obligations of the Company and its  subsidiaries  for lease and
rental   commitments   is   presented   under  the  caption   "Commitments   and
Contingencies"  in  Notes  8 and  10 to  the  Company's  consolidated  financial
statements.  Such  descriptions  and  information  are  hereby  incorporated  by
reference into this Item 2.

         The Company's  corporate  headquarters is located in an office building
in  Richardson,  Texas,  pursuant  to a lease  agreement  that  expires in 2002,
subject to a five-year renewal option.  The facilities used in the operations of
the Company's  subsidiaries  are generally  held under lease  agreements  having
various  expiration  dates,  rental  rates and  other  terms,  except  for three
Furmanite properties located in the United Kingdom,  which are owned in fee. For
additional  information  regarding the properties  utilized in the operations of
KPP, reference is made to the Annual Report on Form 10-K of KPP.


Item 3.    Legal Proceedings

         The Company is a Plaintiff in a legal proceeding involving  malpractice
issues with a professional service provider previously used by the Company. This
action  is in the  advanced  stages of  discovery,  and  trial  proceedings  are
scheduled  for summer of 2001.  At this time the Company is unable to reasonably
estimate potential recoveries, if any, under this action.

         A subsidiary of the Company, classified as discontinued 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  Federal  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.

         Certain  subsidiaries  of KPP, which have been included in discontinued
operations, were sued in a Texas state court in 1997 by Grace Energy Corporation
("Grace"),  the entity from which KPP acquired ST Services in 1993.  The lawsuit
involves  environmental  response and remediation  allegedly  resulting from jet
fuel leaks in the early 1970's from a pipeline. The pipeline,  which connected a
former Grace terminal with Otis Air Force Base in  Massachusetts,  was abandoned
in 1976, when the connecting terminal was sold to an unrelated entity.

         Grace alleged that subsidiaries of KPP acquired the abandoned pipeline,
as part of the  acquisition of ST Services in 1993,  and assumed  responsibility
for environmental damages allegedly caused by the jet fuel leaks. Grace sought a
ruling  that these  subsidiaries  are  responsible  for all  present  and future
remediation  expenses  for these  leaks  and that  Grace  has no  obligation  to
indemnify these subsidiaries for these expenses.

         In the lawsuit,  Grace also sought indemnification for expenses that it
has  incurred  since  1996  of  approximately  $3.5  million  for  response  and
remediation  required by the State of Massachusetts and for additional  expenses
that it  expects  to incur  in the  future.  The  consistent  position  of KPP's
subsidiaries is that they did not acquire the abandoned  pipeline as part of the
1993 ST  transaction,  and therefore did not assume any  responsibility  for the
environmental damage nor any liability to Grace for the pipeline.

         At the end of the trial on May 19,  2000,  the jury  returned a verdict
including  findings that Grace had breached a provision of the 1993  acquisition
agreement and that the pipeline was  abandoned  prior to 1978. On July 17, 2000,
the Judge  entered  final  judgment  in the case,  which is now on appeal to the
Dallas Court of Appeals,  that Grace take nothing from the  subsidiaries  on its
claims,  including claims for future expenses.  Although KPP's subsidiaries have
not incurred any expenses in  connection  with the  remediation,  the court also
ruled,  in  effect,   that  the  subsidiaries   would  not  be  entitled  to  an
indemnification  from Grace if any such  expenses  were  incurred in the future.
However,  the Judge let stand a prior summary  judgment ruling that the pipeline
was an asset of the  company  acquired as part of the 1993 ST  transaction.  The
Judge also awarded attorney fees to Grace.

         While the judgment  means that the  subsidiaries  have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred,  as required
by the State of  Massachusetts,  KPP's  subsidiaries have filed an appeal of the
judgment finding that the Otis Pipeline was transferred to them and the award of
attorney fees.

         The  Otis  Air  Force  Base  is a part  of the  Massachusetts  Military
Reservation  ("MMR"),  which has been declared a Superfund  Site pursuant to the
Comprehensive  Environmental  Response,  Compensation and Liability Act. The MMR
Site contains nine groundwater  contamination plumes, two of which are allegedly
associated  with the  pipeline,  and  various  other waste  management  areas of
concern,  such as  landfills.  The United  States  Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government  remediation  demand for most of the  contamination
problems at the MMR Site.  Grace and others have also  received and responded to
formal  inquiries  from the United  States  Government  in  connection  with the
environmental  damages  allegedly  resulting  from  the jet  fuel  leaks.  KPP's
subsidiaries have voluntarily  responded to an invitation from the Government to
provide information  indicating that they do not own the pipeline. In connection
with  a  court-ordered  mediation  between  Grace  and  the  subsidiaries,   the
Government  advised  the  parties in April 1999 that it has  identified  the two
spill areas that it believes to be related to the  pipeline  that is the subject
of the Grace suit.  The  Government  advised the parties that it believes it has
incurred costs of approximately $34 million,  and expects in the future to incur
costs of approximately  $55 million,  for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs or to include all
categories of costs.  The Government  also advised the parties that it could not
at that time  allocate  its costs  attributable  to the second  spill area.  KPP
believes that the ultimate cost of the remediation,  while substantial,  will be
considerably less than the Government has indicated.

         The  Government  has made no claims  against KPP or any other person on
account of this  matter.  KPP  believes  that if any such claims were made,  its
subsidiaries would have substantial defenses to such claims. Under Massachusetts
law,  the party  responsible  for  remediation  of a facility  is the last owner
before the  abandonment,  which was a Grace  company.  KPP does not believe that
either the Grace  litigation  or any claims  that may be made by the  Government
will adversely affect its ability to make cash distributions to its unitholders,
but there can be no assurances in that regard.

         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.


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

         The Company did not hold a meeting of stockholders or otherwise  submit
any matter to a vote of stockholders in the fourth quarter of 2000.




<PAGE>
                                     PART II

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

         Shares of the Company Common Stock are listed and traded principally on
the New York Stock Exchange, under the symbol KAB. At March 23, 2001, 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
             ----------------                   -------                 ------
             1999:

             First Quarter                      4 5/8                   3 7/8
             Second Quarter                     4 9/16                  3 7/8
             Third Quarter                      5 1/8                   4 1/8
             Fourth Quarter                     5                       4 3/16

             2000:

             First Quarter                      5 7/8                   4 5/16
             Second Quarter                     6 3/4                   4
             Third Quarter                      4 7/8                   4
             Fourth Quarter                     6                       4 7/16


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


Item 6.  Summary Historical Financial Data

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

                                                                    Year Ended December 31,
                                           -----------------------------------------------------------------------
                                              2000          1999            1998            1997           1996
                                           ----------     ---------      ----------     ----------      ----------

<S>                                        <C>            <C>            <C>            <C>             <C>
Income Statement Data:

Revenues............................       $  127,641     $ 135,433      $  135,825     $  115,780      $  111,307
                                           ==========     =========      ==========     ==========      ==========
Operating income (loss).............       $    4,102     $  (4,566)     $    3,335     $    3,361      $      682
                                           ==========     =========      ==========     ==========      ==========
Income (loss) from continuing
   operations before benefit of
   recognizing tax loss carryforwards
   (change in valuation allowance)..       $      503     $  (6,674)    $    (1,264)    $   (2,725)     $   (5,030)

Benefit of recognizing tax loss
   carryforwards (change in
   valuation allowance).............            6,280        37,124             -              -              -
                                           ----------     ---------      ----------     ----------      ----------
Income (loss) from continuing
   operations.......................            6,783        30,450          (1,264)        (2,725)         (5,030)

Income from discontinued operations -
   businesses to be distributed
   to common shareholders...........           10,386        28,459          14,840         13,368          12,054
                                           ----------     ---------      ----------     ----------      ----------
Net income..........................       $   17,169     $  58,909      $   13,576     $   10,643      $    7,024
                                           ==========     =========      ==========     ==========      ==========
<PAGE>
Per Share Data:

Earnings (loss) per common share:
   Basic:
     Continuing operations..........       $      .20     $     .95      $     (.06)    $     (.10)     $     (.17)
     Discontinued operations........              .33           .91             .47            .41             .36
                                           ----------     ---------      ----------     ----------      ----------
        Total.......................       $      .53     $    1.86      $      .41     $      .31      $      .19
                                           ==========     =========      ==========     ==========      ==========
   Diluted:
     Continuing operations..........       $      .19     $     .92      $     (.06)    $     (.10)     $     (.17)
     Discontinued operations........              .31           .87             .47            .41             .36
                                           ----------     ---------      ----------     ----------      ----------
        Total.......................       $      .50     $    1.79      $      .41     $      .31      $      .19
                                           ==========     =========      ==========     ==========      ==========

Balance Sheet Data:
Cash and cash equivalents...........       $   20,517     $  14,516      $    7,264     $   15,626      $   15,360
Working capital.....................           81,185        42,191          18,709         24,796          18,359
Total assets........................          226,643       219,540         158,796        151,866         151,747
Long-term debt......................           39,593        44,223          43,958         48,934          47,091
Stockholders' equity (a)............          166,039       144,803          87,445         78,447          75,366

</TABLE>

(a)  See  Note  6 to  the  Company's  Consolidated  Financial  Statements  for a
discussion of the Company's Series A Preferred Stock.


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

         This  discussion  should be read in conjunction  with the  consolidated
financial statements of the Company and notes thereto included elsewhere in this
report.


General

         The Company's continuing  operations are conducted through two business
segments, specialized technical services and information technology services. As
a result of the planned  distribution (See Note 1 to the Consolidated  Financial
Statements),   the  Company's   pipeline,   terminaling  and  product  marketing
businesses have been reclassified as "discontinued operations - businesses to be
distributed to common shareholders" for all periods presented.


Consolidated Results of Operations
<TABLE>
<CAPTION>

                                                                            (in millions)
                                                              -------------------------------------------
                                                                  2000           1999             1998
                                                              -----------    -----------      -----------

  <S>                                                         <C>            <C>              <C>
  Revenues..................................................  $     127.6    $     135.4      $     135.8
                                                              ===========    ===========      ===========
  Operating income..........................................  $       4.1    $      (4.6)     $       3.3
                                                              ===========    ===========      ===========
  Income from continuing operations before benefit
    of recognizing tax loss carryforwards (change in
    valuation allowance)...................................   $       0.5    $      (6.7)     $      (1.3)
                                                              ===========    ===========      ===========
  Net income:
    Continuing operations..................................   $       6.8    $      30.4      $      (1.2)
    Discontinued operations - businesses to be
      distributed to common shareholders...................          10.4           28.5             14.8
                                                              -----------    -----------      -----------
        Net income  ........................................  $      17.2    $      58.9      $      13.6
                                                              ===========    ===========      ===========
  Capital expenditures from continuing operations,
    excluding acquisitions.................................   $       2.7    $       2.7      $       2.9
                                                              ===========    ===========      ===========
</TABLE>

         For the year ended December 31, 2000,  revenues decreased $7.8 million,
or 6%, when  compared to 1999,  due to a $6.0 million  decrease in revenues from
the technical services business and a $1.9 million decrease in revenues from the
information  technology  services  business.  Operating income increased by $8.7
million in 2000,  compared to 1999,  due to an increase  in  technical  services
operating income of $6.5 million, partially offset by a $1.4 million decrease in
information technology operating income. In addition, general and administrative
expenses  decreased  by $3.5  million in 2000,  compared  to 1999,  due to lower
non-cash  corporate  general  and  administrative  expenses  resulting  from the
estimated  redemption  value of the  Company's  Series  F  Preferred  stock.  In
connection with the planned distribution,  the Board of Directors has authorized
the exchange, in a non-cash transaction,  of common stock of the Company for all
Series F Preferred shares outstanding.  The exchange is expected to be completed
in the first half of 2001.

         Income from continuing operations before the benefit of recognizing tax
loss carryforwards  (change in valuation  allowance)  increased $7.2 million for
the year ended December 31, 2000, compared to 1999.  Consolidated net income for
2000  includes  $6.3 million in expected  benefits  from prior years' tax losses
(change in valuation  allowance)  that are  available to offset  future  taxable
income (See "Income Taxes").  Income from continuing operations,  including this
item,  was $6.8  million  for the year ended  December  31,  2000.  Income  from
discontinued  operations - businesses to be distributed  to common  shareholders
decreased by $18.1  million for the year ended  December  31, 2000,  compared to
1999,  which  includes a gain on sale of units by KPP of $10.4  million,  net of
deferred income taxes.

         For the year ended  December 31, 1999,  revenues were  essentially  the
same as  1998,  with a $16.7  million  increase  in  revenues  generated  by the
information  technology  business,  offset by a $17.0 million  decrease from the
technical services business. Operating income in 1999 decreased by $7.9 million,
due largely to a $5.0 million  decrease in technical  services  operating income
and a non-cash general and  administrative  charge of $4.9 million for increases
in the estimated  redemption  value of the Series F Preferred  stock,  partially
offset by a $1.8 million increase in information  technology  services operating
income.

         Income  (loss)  from  continuing   operations  before  the  benefit  of
recognizing tax loss  carryforwards  (change in valuation  allowance) was ($6.7)
million for the year ended  December  1999,  compared to ($1.3) million in 1998.
The decrease was primarily due to the non-cash general and administrative charge
of $4.9  million for the  estimated  redemption  value of its Series F Preferred
stock.  Consolidated  1999  income from  continuing  operations  includes  $37.1
million in expected  benefits from prior years' tax losses (changes in valuation
allowance)  that are  available  to offset  future  taxable  income (See "Income
Taxes").  1999 Income from continuing  operations including this item, was $30.4
million  for  the  year  ended  December  31,  1999.  Income  from  discontinued
operations - businesses to be distributed to common shareholders increased $13.7
million,  for the year ended December 31, 1999,  compared to 1998, due primarily
to a gain on the sale of units by KPP of $10.4 million,  net of deferred  income
taxes.

Technical Services

         The  Company's  technical  services  business is conducted  through its
Furmanite group of wholly-owned  subsidiaries.  Furmanite  provides  specialized
services,  including leak sealing under pressure, on-site machining,  safety and
relief valve testing and repair,  passive fire protection and fugitive emissions
inspections to the process, power and heavy industries worldwide.
<TABLE>
<CAPTION>

                                                                            (in millions)
                                                              -------------------------------------------
                                                                  2000           1999             1998
                                                              -----------    -----------      -----------
  <S>                                                         <C>            <C>              <C>
  Revenues:
     United States........................................    $      31.7    $      29.8      $      35.5
     Europe...............................................           50.4           57.3             68.1
     Asia-Pacific.........................................           10.0           11.0             11.5
                                                              -----------    -----------      -----------
                                                              $      92.1    $      98.1      $     115.1
                                                              ===========    ===========      ===========
  Operating income:
     United States........................................    $       1.6    $       1.0      $       1.7
     Europe...............................................            7.0            3.3              5.5
     Asia-Pacific.........................................            0.9            0.5              1.0
     Headquarters.........................................           (3.2)          (3.3)            (3.5)
                                                              -----------    -----------      -----------
     Operating income before severance and other costs....            6.3            1.5              4.7
     Severance and other costs............................            -             (1.8)            -
                                                              -----------    -----------      -----------
                                                              $       6.3    $      (0.3)     $       4.7
                                                              ===========    ===========      ===========
  Capital expenditures, excluding acquisitions............    $       2.2    $       2.3      $       2.6
                                                              ===========    ===========      ===========
</TABLE>


         For the year ended December 31, 2000, Furmanite's revenues decreased by
$6.0 million,  or 6%, when compared to 1999,  primarily due to  devaluations  in
foreign currencies and an overall weak market for technical services  worldwide.
In the United  States,  revenues  increased  by $1.9  million,  or 6%, due to an
increased level of turnaround  services.  In Europe,  revenues decreased by $6.9
million,  or 12%, due primarily to the  devaluations  of foreign  currencies and
decreases in demand for turnaround and other  technical  services in Continental
Europe,  which more than offset increased business levels in the United Kingdom.
The 2000 decrease of $1.0 million, or 9%, in Asia-Pacific  revenues is primarily
due to devaluations in foreign currencies and, to a lesser extent,  decreases in
turnaround and other services provided.

         For the year ended December 31, 1999, Furmanite's revenues decreased by
$17.0  million,  or 15%, when compared to 1998,  due to extremely  weak industry
market  conditions  in the United  States  and  Europe.  In the  United  States,
revenues  decreased by $5.7 million,  or 16%, due to declines in turnaround  and
other services  resulting from the weak market conditions.  In Europe,  revenues
decreased by $10.8  million,  or 16%, due to lower  turnaround and other process
plant services, primarily in the United Kingdom and Germany, as a result of weak
market conditions in these regions.  The 1999 decrease in Asia-Pacific  revenues
is primarily due to declines in under pressure and turnaround services.

         Overall,  Furmanite's  operating  income,  before  severance  and other
costs,  increased by $4.8 million,  or 320%, in 2000,  compared to 1999,  due to
improved  general market  conditions in the United States and overall  operation
efficiencies  realized as a result of  streamlining  the segment's  workforce in
1999 to match the market  conditions  in each of the  operating  regions.  These
improvements  were  partially  offset by  devaluations  in  foreign  currencies.
Furmanite's 1999 operating income,  before severance and other costs,  decreased
by $3.2 million,  or 67%,  compared to 1998,  due to the extremely weak industry
market  conditions  in the United  States and Europe.  Severance and other costs
incurred and paid in 1999 were a result of the streamlining effort.

         Capital  expenditures from continuing  operations are primarily related
to technical  services equipment and capital costs related to the implementation
of new services.  Capital expenditures for 2001 are currently estimated to be $2
million to $4 million,  depending on the economic  environment  and the needs of
the business.


Information Technology Services

         The Company's  information  technology  services  business is conducted
through  wholly-owned  subsidiaries.  The  information  services  group provides
network design and  installation  services,  database  management and processing
services,  specialized medical technology services, insurance tracking services,
hardware  distribution and other related information  technology  services.  The
medical   services    division    provides   systems    integration   and   open
architecture-based  telemedicine  solutions,  including assessment and planning,
installation assistance,  clinical systems integration,  acceptance testing, and
systems maintenance and management of telemedicine applications.
<TABLE>
<CAPTION>

                                                                            (in millions)
                                                              -------------------------------------------
                                                                  2000           1999             1998
                                                              -----------    -----------      -----------
  <S>                                                         <C>            <C>              <C>
  Revenues................................................    $      35.5    $      37.4      $      20.7
                                                              ===========    ===========      ===========
  Operating income........................................    $       4.1    $       5.5      $       3.7
                                                              ===========    ===========      ===========
  Capital expenditures, excluding acquisitions............    $       0.5    $       0.4      $       0.3
                                                              ===========    ===========      ===========
</TABLE>

         In November  2000,  the  Company,  through a  wholly-owned  subsidiary,
acquired Double Eagle Communications and Cabling, Inc. ("Double Eagle").  Double
Eagle is a full service  provider of voice and data cabling and network  support
services.  On March 23, 1999, the Company,  through a  wholly-owned  subsidiary,
acquired  the  capital  stock  of  Ellsworth  Associates,   Inc.  ("Ellsworth").
Ellsworth provides information technology services,  including network, database
and  systems  design,  and  application  programming,  primarily  to  government
agencies.

         For the year ended December 31, 2000,  revenues decreased $1.9 million,
or 5% and operating  income  decreased  $1.4  million,  or 25%, when compared to
1999.  Increases  in  services  revenues  were more than  offset by  declines in
equipment  sales.  Revenues from  equipment  sales,  furnished at the request of
selected  customers,  declined in 2000, compared to 1999, due to fluctuations in
customer needs. For the year ended December 31, 1999,  revenues  increased $16.7
million,  or 81% and  operating  income  increased  $1.8  million,  or 49%  when
compared to 1998,  primarily  due to the  Ellsworth  acquisition  and  increased
consulting  services and computer  hardware sales  provided to various  national
government agencies and the private sector.


Discontinued Operations - Businesses to be Distributed to Common Shareholders

<TABLE>
<CAPTION>
                                                                            (in millions)
                                                              -------------------------------------------
                                                                  2000           1999             1998
                                                              -----------    -----------      -----------
  <S>                                                         <C>            <C>              <C>
  Revenues:
     Pipeline and terminaling services....................    $     156.2    $     158.0      $     125.8
     Product marketing services...........................          381.2          212.3            114.2
                                                              -----------    -----------      -----------
                                                              $     537.4    $     370.3      $     240.0
                                                              ===========    ===========      ===========
  Operating income:
     Pipeline and terminaling services....................    $      58.1    $      64.3      $      55.1
     Product marketing services...........................            2.5            1.5              0.9
                                                              -----------    -----------      -----------
                                                              $      60.6    $      65.8      $      56.0
                                                              ===========    ===========      ===========
</TABLE>

         The pipeline and  terminaling  segment  includes the operations of KPP.
KPP provides  transportation  services of refined  petroleum  products through a
pipeline  system that  extends  throughout  the  Midwestern  states and provides
terminaling and storage services for petroleum products, specialty chemicals and
other  liquids.  The Company  operates,  manages and  controls  the pipeline and
terminaling  operations of KPP through its 2% general partner interest and a 28%
limited partner interest in the  Partnership.  The products  marketing  business
segment provides  wholesale motor fuel marketing  services  throughout the Great
Lakes and Rocky Mountain  regions,  as well as California.  On March 25, 1998, a
wholly-owned subsidiary of the Company acquired the petroleum products marketing
business for $1.5 million,  plus the cost of inventories.  The Company's product
marketing services segment consists of the operations of that business since the
acquisition date.

         For the year ended December 31, 2000, pipeline and terminaling revenues
decreased  by $1.8  million,  or 1%,  compared  to 1999,  due to a $4.9  million
decrease  in  terminaling  revenues  and a $3.1  million  increase  in  pipeline
revenues.  For the year  ended  December  31,  1999,  pipeline  and  terminaling
revenues  increased by $32.2 million,  or 26%,  compared to 1998, due to a $28.0
million increase in terminaling revenues and a $4.2 million increase in pipeline
revenues.  Terminaling  revenue  increases  in 2000  resulting  from the  United
Kingdom and other 1999 terminal  acquisitions were more than offset by decreases
in tank utilization due to unfavorable domestic market conditions resulting from
declines in forward product pricing.  The 1999 increase in terminaling  revenues
is due to terminal  acquisitions and increased utilization of existing terminals
due to  favorable  market  conditions,  partially  offset by a  decrease  in the
overall average price realized for storage.  Average annual tankage utilized for
the years  ended  December  31,  2000,  1999 and 1998  aggregated  21.0  million
barrels, 22.6 million barrels and 15.2 million barrels,  respectively.  The 2000
decrease  in average  annual  tankage  utilized  resulted  from the  unfavorable
domestic market conditions. The 1999 increase resulted from the acquisitions and
increased storage at KPP's largest petroleum storage facility.  Average revenues
per barrel of tankage  utilized for the years ended December 31, 2000,  1999 and
1998 was $4.12,  $4.00 and $4.11,  respectively.  The  increase in 2000  average
annual revenues per barrel of tankage  utilized,  when compared to 1999, was due
to the storage of a larger proportionate  volume of specialty  chemicals,  which
are  historically  at higher  per  barrel  rates than  petroleum  products.  The
unusually  low 1999 average  revenues per barrel of tankage  utilized was due to
the 1999  temporary  increase  in storage  at KPP's  largest  petroleum  storage
facility.  The  increase in pipeline  revenues for 2000 is due to an increase in
terminaling  charges.  The 1999 increase in pipeline revenues,  when compared to
1998,  is due to overall  increases in total volumes  shipped,  primarily on the
East Pipeline.  Barrel miles totaled 17.8 billion, 18.4 billion and 17.0 billion
for the years ended December 31, 2000, 1999 and 1998, respectively.

         Pipeline and terminaling operating income decreased by $6.2 million, or
10% in 2000,  compared to 1999,  due to a $6.3 million  decrease in  terminaling
operating income and a $0.1 million increase in pipeline  operating income.  The
decline in 2000 terminaling  operating  income is due to the unfavorable  market
conditions  resulting  from declines in forward  product  pricing.  For the year
ended December 31, 1999, pipeline and terminaling  operating income increased by
$9.2  million,  or 17%,  compared  to 1998,  due to a $7.0  million  increase in
terminaling  operating income and a $2.2 million increase in pipeline  operating
income.  The increase in 1999 terminaling  operating income is the result of the
acquisitions  and the  increase in tank  utilization.  The 1999  improvement  in
pipeline operating income is due to overall increases in volumes shipped.

         The  interest of outside  non-controlling  partners in KPP's net income
was $32.7  million,  $33.5  million  and $29.2  million in 2000,  1999 and 1998,
respectively.  Distributions paid to the outside non-controlling  unitholders of
KPP aggregated  approximately $37.0 million,  $35.4 million and $28.5 million in
2000, 1999 and 1998, respectively.

         For the years  ended  December  31,  2000 and 1999,  product  marketing
revenues  increased by $168.9 million and $98.1 million,  respectively due to an
increase in both sales volumes and sales price. Total gallons sold for the years
ended December 31, 2000, 1999 and 1998  aggregated 408 million,  349 million and
222 million,  respectively.  The volume  increases are due to a  combination  of
increasing  the  number  of  terminals  through  which  products  are  sold  and
increasing the sales volumes at existing  locations.  The average price realized
per gallon of product sold for the years ended December 31, 2000,  1999 and 1998
was $0.94,  $0.61 and  $0.52,  respectively,  due to  significant  increases  in
overall market prices, especially in 2000. For the years ended December 31, 2000
and 1999,  product  marketing  operating  income increased $1.0 million and $0.6
million,  respectively,  due to the  increase in both the  volumes  sold and the
sales price received.

         On January 3, 2001, KPP acquired Shore Terminals LLC ("Shore") for $107
million in cash and 1,975,090  KPP units.  Financing for the cash portion of the
purchase price was supplied under a new $275 million unsecured  revolving credit
agreement with a group of banks.  See "Liquidity and Capital  Resources".  Shore
owns seven terminals,  located in four states,  with a total tankage capacity of
7.8 million barrels.  All of the terminals  handle petroleum  products and, with
the exception of one, have deep water access.

         On February 1, 1999,  KPP acquired six terminals in the United  Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million)
plus  transaction  costs  and  the  assumption  of  certain   liabilities.   The
acquisition of the six locations,  which have an aggregate  tankage  capacity of
5.4 million  barrels,  was initially  financed by term loans from a bank.  $13.3
million of the term loans were repaid in July 1999 with the proceeds  from KPP's
public offering. (See "Liquidity and Capital Resources") 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.

         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 funded with bank
financing  which was paid off using a portion of the proceeds  from KPP's public
unit offering in July 1999. (See "Liquidity and Capital Resources")


Income Taxes

         The Company  recognized  expected benefits from prior years' tax losses
(change in valuation  allowance)  that are  available to offset  future  taxable
income of $6.3 million and $37.1  million for 2000 and 1999,  respectively.  The
Company reduced the valuation  allowance as a result of its  reevaluation of the
realizability  of income  tax  benefits  from  future  operations.  The  Company
considered positive evidence,  including the effect of the distribution,  recent
historical  levels of taxable  income,  the  scheduled  reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth,  and  expiration  periods of NOLs among  other  things,  in making  this
evaluation and concluding  that it is more likely than not that the Company will
realize the benefit of its net deferred tax assets.  Ultimate realization of the
deferred tax asset is dependent upon, among other factors, the Company's ability
to generate sufficient taxable income within the carryforward periods, including
the effect of the  distribution,  and is subject to change  depending on the tax
laws in effect in the years in which the  carryforwards are used. As a result of
the 1999  recognition  of expected  future income tax  benefits,  the results of
operations  for the year ended  December 31, 2000 reflects a full  effective tax
rate provision, before change in valuation allowance.

         Additionally,  the  Company's  income tax  expense  for the years ended
December  31, 2000 and 1999  includes  benefits of $1.1 million and $1.6 million
related to favorable developments pertaining to certain state and foreign income
tax issues.


Liquidity and Capital Resources

Continuing Operations

         Cash provided by (used in) operating activities was $8.8 million, ($4.9
million) and $3.0 million  during the years 2000,  1999 and 1998,  respectively.
The increase in 2000, compared to 1999, was due primarily to improvements in the
technical services business and normal fluctuations in working capital accounts.
The decline in 1999,  compared to 1998,  was due  primarily  to decreases in the
technical  services  revenues,  and  costs  incurred  in 1999 as a result of the
segment's streamlining effort.

         At December  31, 2000,  $14.1  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 in June 2002, bears interest at
the option of the borrower at variable  rates (7.94% at December 31, 2000) 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  technical  services  group of  companies.  The Company is in the
process of negotiating a new credit  agreement  which,  among other matters,  is
expected to extend the debt's due date past June 2002.

         In  December  1995,  the  Company  entered  into an  agreement  with an
international bank that, as amended, provides for a $15 million revolving credit
facility  through  June 2001  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, 2000, 1999 or 1998.

         Consolidated  capital  expenditures  for 2001 have been  budgeted at $2
million to $4 million,  depending on the economic  environment  and the needs of
the business.  Consolidated debt maturities,  including capital leases, are $0.6
million;   $19.1  million;   $2.3  million;  $2.1  million;  and  $2.1  million,
respectively,  for each of the five years  ending  December  31,  2005.  Capital
expenditures  (excluding  acquisitions)  in 2001 are  expected to be funded from
existing cash and anticipated cash flows from operations.


Discontinued Operations - Business to be Distributed to Common Shareholders

         In December 2000,  KPP entered into a credit  agreement with a group of
banks that  provides  for a $275 million  unsecured  revolving  credit  facility
through  December  2003.  No amounts  were drawn on the facility at December 31,
2000.  The credit  facility,  which is without  recourse to the parent  company,
bears interest at variable  rates,  has a variable  commitment fee on unutilized
amounts and contains  certain  financial and operational  covenants.  In January
2001,  proceeds  from the facility were used to repay in full KPP's $128 million
of mortgage notes and $15 million  outstanding  under its $25 million  revolving
credit facility. An additional $107 million was used to finance the cash portion
of the Shore  acquisition.  Under the  provisions  of the  mortgage  notes,  KPP
incurred $6.3 million in prepayment  penalties,  which will be recognized by KPP
as an  extraordinary  expense in the first  quarter of 2001. At January 3, 2001,
$257.5 million was drawn on the facility, at an interest rate of 6.31%, which is
due in December of 2003.

         In January 1999,  KPP entered into a credit  agreement with a bank that
provided for the issuance of $39.2 million of term loans in connection  with the
United Kingdom  terminal  acquisition  and $5.0 million for general  partnership
purposes.  $18.3  million  of the term  loans  were  repaid  in July 1999 with a
portion of the proceeds from KPP's public unit offering.  The remaining  portion
($23.9  million),  with a fixed rate of 7.14%,  is due in January 2002. The term
loans under the credit agreement,  as amended,  are unsecured and are pari passu
with the $275  million  revolving  credit  facility.  The term loans,  which are
without  recourse  to  the  parent  company,   contain  certain   financial  and
operational covenants.

         In July 1999, KPP issued 2.25 million  limited  partnership  units in a
public offering at $30.75 per unit,  generating  approximately  $65.6 million in
net  proceeds.  A portion of the  proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and $18.3
million of KPP's term loans  (including  $13.3  million in term loans  resulting
from the  United  Kingdom  terminal  acquisition).  As a result  of KPP  issuing
additional units to unrelated  parties,  the Company's pro-rata share of the net
assets of KPP increased by $16.8 million.  Accordingly, the Company recognized a
$16.8 million gain, before deferred income taxes of $6.4 million, in 1999.

         In March 1998, a wholly-owned  subsidiary of the Company entered into a
credit  agreement  with a bank that,  as  amended,  provides  for a $20  million
revolving credit facility through March 2002. The credit facility bears interest
at variable  rates (8.69% at December 31, 2000),  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, 2000,  $17.2 million
was drawn on the facility.

         In connection with the planned distribution, the Board of Directors has
authorized the redemption of its Series A Preferred  Stock for cash on March 30,
2001,  at the stated  redemption  price of $10.67 per share,  plus  accrued  and
unpaid dividends, for a total cost of approximately $6.1 million.  Additionally,
the Board of Directors has authorized the exchange, in non-cash transactions, of
1,356,777  shares of the  Company's  common stock for all Series C Preferred and
Series  F  Preferred  shares  outstanding.  The  exchanges  are  expected  to be
completed in the first half of 2001.

         Pursuant  to the  proposed  distribution,  Kaneb  Services  LLC ("KSL")
intends to enter into an  agreement  with the Company to pay all of the expenses
incurred by KSL and pay the Company an amount equal to expenses  incurred by the
Company  in  connection   with  the   distribution.   These   expenses   include
approximately  $6.1  million  in  expenses  that the  Company  has  incurred  in
connection with its redemption of its Series A Preferred Stock and approximately
$1.4 million in legal and  professional and other expenses that will be incurred
in connection with the  distribution.  The distribution of common shares will be
taxable to the Company which will  recognize  income to the extent of the excess
of the  value of KSL's  common  shares  distributed  over the tax basis of KSL's
assets in the hands of the Company.  The Company will use certain net  operating
losses to reduce that income, but the total amount of income is likely to exceed
such offsetting losses, and the distribution  agreement obligates KSL to pay the
Company  amounts  calculated  based on whatever  tax is due on the net amount of
income. The Company cannot predict exactly what this amount will be and what the
tax will be, but estimates that the tax may range from approximately $10 million
to $20  million,  assuming  that  KSL's  common  shares  (based  on the  planned
distribution  of one KSL  common  share for each three  shares of the  Company's
common  stock) have a value on the  distribution  date  ranging  from $13.50 per
common  share to $16.50 per  common  share.  The amount of income tax  liability
incurred by the Company could vary  dramatically if the KSL common shares have a
value on the distribution date outside of the estimated range or if the Internal
Revenue Service were to successfully disallow any of the offsetting losses.

         Additionally, in connection with the planned distribution,  the Company
and KSL intend to enter into an  agreement,  whereby KSL will pay the Company an
amount of money calculated based on any tax liability of the Company that (i) is
attributable  to  increases  in tax from past years  arising out of  adjustments
required by Federal and state tax authorities, to the extent that such increases
are properly allocable,  in the judgement of the Company, to the businesses that
become part of KSL, or (ii) is attributable to the  distribution of KSL's common
shares and to the  operations  of KSL's  businesses  in the current year and the
preceding  years.  In the event of an  examination  of the Company by Federal or
state tax  authorities,  the  Company  will  have  unfettered  control  over the
examination,  administrative  appeal,  settlement  or  litigation  that  may  be
involved, notwithstanding that KSL has agreed to pay any additional tax.


Recent Accounting Pronouncements

         The Company has assessed the reporting and disclosure  requirements  of
SFAS No. 133,  "Accounting and Derivative  Instruments and Hedging  Activities",
which  establishes the accounting and reporting  standards for such  activities.
Under SFAS No. 133,  companies must recognize all derivative  instruments on the
balance  sheet at fair  value.  Changes in the value of  derivative  instruments
which are  considered  hedges,  will either be offset against the change in fair
value of the hedged item through earnings,  or recognized in other comprehensive
income until the hedged item is recognized in earnings,  depending on the nature
of the hedge.  The Company  will adopt SFAS No.  133,  as amended,  in the first
quarter of 2001.  The Company does not have any derivative  contracts,  and does
not  anticipate  that  adoption  will have a  material  effect on the  Company's
results of operations or financial position.


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
variable rate debt of $17.6 million at December 31, 2000, a one percent increase
in interest rates would increase interest expense by approximately $176,000.


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

         Not applicable.

<PAGE>
                                    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.

                                     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.

        Independent Auditors' Report................................      F - 1

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

          Consolidated Statements of Income - Years  Ended
             December 31, 2000, 1999 and 1998.......................      F - 2

          Consolidated Balance Sheets - December 31, 2000 and 1999..      F - 3

          Consolidated Statements of  Cash Flows - Years Ended
             December 31, 2000, 1999 and 1998.......................      F - 4

          Consolidated Statements of Changes in Stockholders'
             Equity - Years Ended December 31, 2000, 1999 and 1998..      F - 5

          Notes to Consolidated Financial Statements................      F - 6


(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, 2000,
             1999 and 1998..........................................     F - 27

           Balance Sheets - December 31, 2000 and 1999..............     F - 28

           Statements of Cash Flows - Years Ended
             December 31, 2000, 1999 and 1998.......................     F - 29

         Schedule II - Kaneb Services, Inc. Valuation and
             Qualifying Accounts - Years Ended December
             31, 2000, 1999 and 1998................................     F - 30

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

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

4.1      Certificate of Designation 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 4.2 to the  Registrant's  10-K for the year ended  December 31,
         1998, which exhibit is incorporated herein 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. 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.

10.3*    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.

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

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

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

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

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

10.9*    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.

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

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

10.12    Amendment to the Furmanite Loan Agreement, filed herewith.

10.13    Loan Agreement between the Registrant,  KPL and Bank of Scotland,  (the
         "KSI Loan  Agreement")  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.

10.14    Amendment to the KSI Loan Agreement, filed herewith.

21       List of subsidiaries of the Registrant, filed herewith.

23       Consent of KPMG LLP, filed herewith.

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

*        Denotes management contracts.


(b)      Reports on Form 8-K

         Current Report on Form 8-K regarding the decision of Registrant's Board
         of  Directors  to  distribute  its  pipeline,  terminaling  and product
         marketing  business  to  stockholders  in  the  form  of a new  limited
         liability company, dated November 29, 2000.

         Current  Report on Form 8-K regarding  Kaneb Pipe Line Partners  L.P.'s
         Acquisition of Shore Terminals LLC, located in California,  Washington,
         Oregon and Nevada, dated January 3, 2001.

         Current Report on Form 8-K/A  updating Kaneb Pipe Line Partners  L.P.'s
         Acquisition of Shore Terminals LLC, located in California,  Washington,
         Oregon and Nevada, dated March 19, 2001.



<PAGE>
                          INDEPENDENT AUDITORS' REPORT




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

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of the Company and its
subsidiaries  as of  December  31,  2000  and  1999,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2000, in conformity  with  accounting  principles  generally
accepted in the United  States of America.  Also,  in our  opinion,  the related
financial  statement  schedules,  when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  present  fairly,  in all
material respects, the information set forth therein.




KPMG LLP
Dallas, Texas
March 2, 2001


                                      F - 1
<PAGE>
                      KANEB SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>



                                                                              Year Ended December 31,
                                                               ----------------------------------------------------
                                                                     2000              1999               1998
                                                               --------------     --------------    ---------------
<S>                                                            <C>                <C>               <C>
Revenues:
    Services...............................................    $  110,440,000     $  113,476,000    $   124,413,000
    Products...............................................        17,201,000         21,957,000         11,412,000
                                                               --------------     --------------    ---------------
      Total revenues.......................................       127,641,000        135,433,000        135,825,000
                                                               --------------     --------------    ---------------
Costs and expenses:
    Operating costs........................................        96,341,000        105,078,000        112,161,000
    Cost of products sold..................................        15,749,000         19,218,000          9,272,000
    Depreciation and amortization..........................         5,097,000          5,896,000          5,966,000
    General and administrative.............................         6,352,000          9,807,000          5,091,000
                                                               --------------     --------------    ---------------
      Total costs and expenses.............................       123,539,000        139,999,000        132,490,000
                                                               --------------     --------------    ---------------

Operating income (loss)....................................         4,102,000         (4,566,000)         3,335,000

Interest income............................................           909,000            534,000              -
Other income (expense).....................................          (239,000)          (208,000)           (26,000)
Interest expense...........................................        (3,883,000)        (3,817,000)        (4,100,000)
                                                               --------------     --------------    ---------------
Income (loss) from continuing operations before
    income taxes...........................................           889,000         (8,057,000)          (791,000)

Income tax benefit (expense)...............................         5,894,000         38,507,000           (473,000)
                                                               --------------     --------------    ---------------
Income (loss) from continuing operations...................         6,783,000         30,450,000         (1,264,000)
Income from discontinued operations - businesses to be
    distributed to common shareholders, net of
    income taxes...........................................        10,386,000         28,459,000         14,840,000
                                                               --------------     --------------    ---------------
      Net income...........................................        17,169,000         58,909,000         13,576,000

Dividends applicable to preferred stock....................           479,000            487,000            508,000
                                                               --------------     --------------    ---------------
Net income applicable to common stock......................    $   16,690,000     $   58,422,000    $    13,068,000
                                                               ==============     ==============    ===============

Earnings (loss) per common share:
    Basic:
      Continuing operations................................    $         0.20     $         0.95    $         (0.06)
      Discontinued operations..............................              0.33               0.91               0.47
                                                               --------------     --------------    ---------------
                                                               $         0.53     $         1.86    $          0.41
                                                               ==============     ==============    ===============
    Diluted:
      Continuing operations................................    $         0.19     $         0.92    $         (0.06)
      Discontinued operations..............................              0.31               0.87               0.47
                                                               --------------     --------------    ---------------
                                                               $         0.50     $         1.79    $          0.41
                                                               ==============     ==============    ===============
</TABLE>



                 See notes to consolidated financial statements.

                                      F - 2

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

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                              -------------------------------------
                                                                                   2000                   1999
                                                                              --------------         --------------
                                                      ASSETS
<S>                                                                           <C>                    <C>
Current assets:
   Cash and cash equivalents......................................            $   20,517,000         $   14,516,000
   Accounts receivable, trade (net of allowance for  doubtful
     accounts of $605,000 in 2000 and $999,000 in 1999)...........                29,198,000             33,334,000
   Inventories....................................................                 7,641,000              8,587,000
   Prepaid expenses and other current assets......................                 6,749,000              4,423,000
   Current deferred tax asset.....................................                36,489,000              5,250,000
                                                                              --------------         --------------
     Total current assets.........................................               100,594,000             66,110,000
                                                                              --------------         --------------

Property and equipment............................................                30,585,000             30,717,000
Less accumulated depreciation and amortization....................                20,043,000             19,529,000
                                                                              --------------         --------------
   Net property and equipment.....................................                10,542,000             11,188,000
                                                                              --------------         --------------

Excess of cost over fair value of net assets of acquired businesses               62,470,000             61,222,000
Deferred income taxes and other assets............................                11,215,000             37,656,000
Net assets of discontinued operations - businesses to be distributed
   to common shareholders.........................................                41,822,000             43,364,000
                                                                              --------------         --------------
                                                                              $  226,643,000         $  219,540,000
                                                                              ==============         ==============

                                              LIABILITIES AND EQUITY
Current liabilities:
   Current portion of long-term debt - technical services.........            $      595,000         $    2,471,000
   Accounts payable...............................................                 5,081,000              6,831,000
   Accrued expenses...............................................                13,733,000             14,617,000
                                                                              --------------         --------------
     Total current liabilities....................................                19,409,000             23,919,000
                                                                              --------------         --------------
Long-term debt, less current portion:
   Technical services.............................................                18,197,000             20,557,000
   Parent company.................................................                21,396,000             23,666,000
                                                                              --------------         --------------
     Total long-term debt, less current portion...................                39,593,000             44,223,000
                                                                              --------------         --------------
Other liabilities.................................................                 1,602,000              6,595,000

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 36,641,121 shares in 2000 and
     36,638,069 shares in 1999....................................                 4,250,000              4,249,000
   Additional paid-in capital.....................................               203,989,000            197,313,000
   Treasury stock, at cost........................................               (31,440,000)           (30,278,000)
   Accumulated deficit............................................               (13,311,000)           (30,001,000)
   Accumulated other comprehensive income (loss) -
     foreign currency translation adjustment......................                (3,241,000)            (2,272,000)
                                                                              --------------         --------------
     Total stockholders' equity...................................               166,039,000            144,803,000
                                                                              --------------         --------------
                                                                              $  226,643,000         $  219,540,000
                                                                              ==============         ==============

</TABLE>


                 See notes to consolidated financial statements.

                                      F - 3

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                              -----------------------------------------------------
                                                                   2000               1999                1998
                                                              -------------       -------------     ---------------
<S>                                                           <C>                 <C>               <C>
Operating activities:
   Income (loss) from continuing operations...............    $   6,783,000       $  30,450,000     $   (1,264,000)
   Adjustments to reconcile income (loss) from continuing
     operations to net cash provided by operating activities:
       Depreciation and amortization......................        5,097,000           5,896,000          5,966,000
       Increase in the estimated redemption value of
         Series F preferred stock.........................        1,387,000           4,863,000              -
       Deferred income taxes..............................       (6,150,000)        (37,197,000)           (35,000)
       Other..............................................          410,000             553,000              -
       Changes in current assets and liabilities:
         Accounts receivable..............................        5,857,000          (5,216,000)        (2,077,000)
         Inventories......................................        1,359,000           1,078,000         (2,586,000)
         Prepaid expenses and other current assets........       (2,346,000)         (2,236,000)          (480,000)
         Accounts payable and accrued expenses............       (3,589,000)         (3,044,000)         3,486,000
                                                              -------------       -------------     --------------
     Operating activities of continuing operations........        8,808,000          (4,853,000)         3,010,000
     Operating activities of discontinued operations......       53,407,000          54,937,000         51,196,000
                                                              -------------       -------------     --------------
     Net cash provided by operating activities............       62,215,000          50,084,000         54,206,000
                                                              -------------       -------------     --------------
Investing activities:
   Capital expenditures...................................       (2,690,000)         (2,719,000)        (2,855,000)
   Acquisitions...........................................       (4,804,000)         (4,049,000)             -
   Other, net.............................................         (418,000)             28,000          1,465,000
   Investing activities of discontinued operations........      (20,067,000)        (66,922,000)       (53,292,000)
                                                              -------------       -------------     --------------
     Net cash used in investing activities................      (27,979,000)        (73,662,000)       (54,682,000)
                                                              -------------       -------------     --------------
Financing activities:
   Issuance of debt ......................................          924,000           2,810,000          2,865,000
   Payments on debt and capital leases ...................       (7,429,000)         (2,515,000)        (8,459,000)
   Preferred stock dividends paid.........................         (479,000)           (487,000)          (508,000)
   Common stock issued....................................          255,000             253,000            194,000
   Purchase of treasury stock.............................       (1,530,000)           (555,000)        (4,868,000)
   Financing activities of discontinued operations........      (19,976,000)         31,324,000          2,890,000
                                                              -------------       -------------     --------------
     Net cash provided by (used in) financing activities..      (28,235,000)         30,830,000         (7,886,000)
                                                              -------------       -------------     --------------
Increase (decrease) in cash and cash equivalents..........        6,001,000           7,252,000         (8,362,000)
Cash and cash equivalents at beginning of year............       14,516,000           7,264,000         15,626,000
                                                              -------------       -------------     --------------
Cash and cash equivalents at end of year..................    $  20,517,000       $  14,516,000     $    7,264,000
                                                              =============       =============     ==============
</TABLE>



                 See notes to consolidated financial statements.

                                      F - 4


<PAGE>
                     KANEB SERVICES, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  PART 1 OF 2

<TABLE>
<CAPTION>

                                           Preferred         Common          Additional        Treasury
                                             Stock            Stock        Paid-In Capital       Stock
                                        -------------     -------------    ---------------   -------------

<S>                                     <C>               <C>              <C>               <C>
Balance at January 1, 1998              $   5,792,000     $   4,234,000    $ 197,242,000     $ (25,216,000)

       Net income for the year.......            -                -                 -                -
       Common stock issued...........            -                5,000         (120,000)          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      197,122,000       (29,775,000)

        Net income for the year......            -                -                 -                -
        Common stock issued..........            -               10,000          191,000            52,000
        Purchase of treasury stock ..            -                -                 -             (555,000)
        Preferred stock dividends
         declared....................            -                -                 -                -
        Foreign currency translation
         adjustment..................            -                -                 -                -
                                        -------------     -------------    -------------     -------------
        Comprehensive income
         for the year................

Balance at December 31, 1999                5,792,000         4,249,000      197,313,000       (30,278,000)

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


Balance at December 31, 1999            $   5,792,000     $   4,250,000    $ 203,989,000     $ (31,440,000)
                                        =============     =============    =============     =============
</TABLE>

                 See notes to consolidated financial statements.

                                      F - 5

<PAGE>
                     KANEB SERVICES, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  PART 2 OF 2
<TABLE>
<CAPTION>

                                                          Accumulated Other
                                         Accumulated       Comprehensive      Comprehensive
                                           Deficit         Income (Loss)          Income
                                        -------------    ------------------   --------------

<S>                                     <C>                <C>                <C>
Balance at January 1, 1998              $(101,491,000)     $ (2,114,000)       $       -

       Net income for the year.......      13,576,000             -               13,576,000
       Common stock issued...........            -                -                    -
       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              (88,423,000)       (1,510,000)               -

        Net income for the year......      59,909,000             -               58,909,000
        Common stock issued..........            -                -                    -
        Purchase of treasury stock ..            -                -                    -
        Preferred stock dividends
         declared....................        (487,000)            -                    -
        Foreign currency translation
         adjustment..................            -             (762,000)            (762,000)
                                        -------------      ------------        -------------
        Comprehensive income
         for the year................                                          $  58,147,000
                                                                               =============

Balance at December 31, 1999              (30,001,000)       (2,272,000)               -

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


                 See notes to consolidated financial statements.

                                      F - 5
<PAGE>
                      KANEB SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

       Principles of Consolidation

       The consolidated financial statements include the accounts of the Company
and its  subsidiaries.  On November  27,  2000,  the Board of  Directors  of the
Company  authorized the distribution of its pipeline and terminaling and product
marketing business (the "Distribution") to its shareholders in the form of a new
limited liability company,  Kaneb Services LLC ("KSL"). This new entity will own
the 2% general partner  interest and 28% limited partner  interest in Kaneb Pipe
Line Partners,  L.P. ("KPP") and the Company's  wholly-owned petroleum marketing
subsidiary.  As a result,  the  accompanying  financial  statements  reflect the
operations of KSL as "discontinued  operations - businesses to be distributed to
common  shareholders" (See Note 10). All significant  intercompany  transactions
and balances are eliminated in consolidation.

       Cash and Cash Equivalents

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

       Inventories

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

       The  Company  accounts  for  long-lived  assets  in  accordance  with 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 No. 121  requires  that  long-lived  assets and  certain
identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceeds the fair value of assets.

       Revenue Recognition

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

       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 periods ranging from
15 to 40 years.  Accumulated amortization was $18.4 million and $16.2 million at
December 31, 2000 and 1999, 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  assesses  the  recoverability  of the amounts by
determining  whether the  amortization  of the asset  balance over its remaining
life can be recovered  through  undiscounted  future operating cash flows of the
acquired  operation.  The amount of  impairment,  if any, is  measured  based on
projected   discounted   future   operating   cash  flows.   The  assessment  of
recoverability will be impacted if estimated future cash flows are not achieved.
The Company  believes that no such impairment has occurred and that no reduction
in estimated useful lives is warranted.

       Estimates

       The preparation of the Company's financial  statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

       Recent Accounting Pronouncement

       The Company has assessed the reporting  and  disclosure  requirements  of
SFAS No. 133,  "Accounting and Derivative  Instruments and Hedging  Activities",
which  establishes the accounting and reporting  standards for such  activities.
Under SFAS No. 133,  companies must recognize all derivative  instruments on the
balance  sheet at fair  value.  Changes in the value of  derivative  instruments
which are  considered  hedges,  will either be offset against the change in fair
value of the hedged item through earnings,  or recognized in other comprehensive
income until the hedged item is recognized in earnings,  depending on the nature
of the hedge.  The Company  will adopt SFAS No.  133,  as amended,  in the first
quarter of 2001.  The Company does not have any derivative  contracts,  and does
not  anticipate  that  adoption  will have a  material  effect on the  Company's
results of operations or financial position.

<PAGE>
2.     INCOME TAXES

       Income  (loss) from  continuing  operations  before income tax expense is
comprised of the following components:
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                        -----------------------------------------------------
                                                             2000                1999                1998
                                                        --------------      -------------       -------------

<S>                                                     <C>                 <C>                 <C>
       Domestic operations.........................     $   (2,371,000)     $  (7,004,000)      $    272,000
       Foreign operations..........................          3,260,000         (1,053,000)        (1,063,000)
                                                        --------------      -------------       ------------
       Income (loss) before income taxes...........     $      889,000      $  (8,057,000)      $   (791,000)
                                                        ==============      =============       ============
</TABLE>

       Income tax expense (benefit) is comprised of the following components:
<TABLE>
<CAPTION>

       Year Ended
       December 31,                     Federal              Foreign             State              Total
       ---------------               -------------        ------------       ------------       -------------
       <S>                           <C>                  <C>                <C>                <C>
       2000:
         Current...............      $      47,000        $  1,031,000       $   (822,000)      $     256,000
         Deferred..............         (5,699,000)           (278,000)          (173,000)         (6,150,000)
                                     -------------        ------------       ------------       -------------
                                     $  (5,652,000)       $    753,000       $   (995,000)      $  (5,894,000)
                                     =============        ============       ============       =============
       1999:
         Current.................    $      81,000        $   (735,000)      $   (656,000)      $  (1,310,000)
         Deferred................      (37,451,000)              8,000            246,000         (37,197,000)
                                     -------------        ------------       ------------       -------------
                                     $ (37,370,000)       $   (727,000)      $   (410,000)      $ (38,507,000)
                                     =============        ============       ============       =============
       1998:
         Current.................    $     188,000        $    320,000       $       -          $     508,000
         Deferred................          (32,000)              -                 (3,000)            (35,000)
                                     -------------        ------------       ------------       -------------
                                     $     156,000        $    320,000       $     (3,000)      $     473,000
                                     =============        ============       ============       =============
</TABLE>

       The  reasons  for the  differences  between  the  amount  of tax  expense
provided  and the amount of tax  expense  computed  by  applying  the  statutory
Federal  income tax rate to income  (loss)  from  continuing  operations  before
income taxes for the years 2000, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                          -----------------------------------------------------------------
                                                 2000                    1999                    1998
                                          -----------------       ------------------      -----------------
       <S>                                <C>                     <C>                     <C>
       Expected tax at
         statutory rates................  $         311,000       $       (2,820,000)     $        (277,000)
       Increase (decrease) in taxes
         resulting from:
         Change in valuation allowance..         (6,280,000)             (37,124,000)            (1,905,000)
         State income taxes, net........           (647,000)                (267,000)                (2,000)
         Foreign losses not benefited and
           foreign income taxes.........           (388,000)                 (13,000)             2,098,000
         Non-deductible charges related
           to Series F Preferred stock..            485,000                1,702,000                   -
         Goodwill amortization .........            598,000                  649,000                683,000
         Resolution of foreign tax
           issues and other.............             27,000                 (634,000)              (124,000)
                                          -----------------       ------------------      -----------------
                                          $      (5,894,000)      $      (38,507,000)     $         473,000
                                          =================       ==================      =================
</TABLE>

       At  December  31,  2000,  the  Company  had  available  domestic  tax net
operating loss carryforwards ("NOLs"), which will expire, if unused, as follows:
$33,641,000 in 2002,  $30,761,000 in 2003,  $16,866,000 in 2005,  $17,508,000 in
2006 and $3,033,000 in 2007. The  utilization  of these  carryforwards  could be
subject to significant  limitation in the event of a "change in  ownership",  as
defined  in the tax laws,  which  might be caused by  purchases  or sales of the
Company's  securities  by persons  or groups  now or in the future  having 5% or
greater ownership of the Company's common stock.

         The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                              -------------------------------------
                                                                                   2000                   1999
                                                                              --------------         --------------
<S>                                                                           <C>                    <C>
       Deferred tax assets:
         Net operating loss carryforwards.........................            $   35,633,000         $   41,119,000
         Investment tax credit carryforwards......................                     -                  1,786,000
         Alternative minimum tax credit carryforwards.............                 4,393,000              3,996,000
         Accrued liabilities......................................                 1,198,000              1,308,000
         Other....................................................                 2,570,000              1,479,000
                                                                              --------------         --------------
         Total gross deferred tax assets..........................                43,794,000             49,688,000
         Less valuation allowance.................................                     -                 (7,204,000)
                                                                              --------------         --------------
         Net deferred tax assets..................................                43,794,000             42,484,000
                                                                              --------------         --------------

       Deferred tax liabilities:
         Plant and equipment, principally due to differences
           in depreciation........................................                  (136,000)              (770,000)
         Foreign deferred tax liabilities.........................                   (21,000)              (341,000)
                                                                              --------------         --------------
         Total gross deferred tax liabilities.....................                  (157,000)            (1,111,000)
                                                                              --------------         --------------

         Net deferred tax asset...................................            $   43,637,000         $   41,373,000
                                                                              ==============         ==============
</TABLE>
<PAGE>
       The Company maintains a valuation  allowance to adjust the total deferred
tax assets to net realizable  value in accordance with SFAS No. 109. In 2000 and
1999,  the Company  reduced the  valuation  allowance  by $6.3 million and $37.1
million,  respectively,  as a result of its reevaluation of the realizability of
income tax benefits  from future  operations.  The Company  considered  positive
evidence, including the effect of the Distribution,  recent historical levels of
taxable income, the scheduled reversal of deferred tax liabilities, tax planning
strategies,  revised  estimates of future taxable income growth,  and expiration
periods of NOLs,  among other things,  in making this  evaluation and concluding
that it is more likely than not that the Company will realize the benefit of its
net  deferred  tax assets.  Ultimate  realization  of the  deferred tax asset is
dependent  upon,  among  other  factors,   the  Company's  ability  to  generate
sufficient taxable income within the carryforward periods,  including the effect
of the  Distribution,  and is  subject  to change  depending  on the tax laws in
effect in the years in which the carryforwards are used.


3.     RETIREMENT PLANS

       The Company has a defined  contribution  plan which covers  substantially
all domestic  employees  and provides for varying  levels of employer  matching.
Contributions  from continuing  operations to this plan were $0.7 million,  $0.6
million and $0.5 million for 2000, 1999 and 1998, 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, 2000.


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

                                                                       Year Ended December 31,
                                                        ---------------------------------------------------
                                                            2000                1999              1998
                                                        --------------     -------------      -------------

       <S>                                              <C>                <C>                <C>
       Net periodic benefit cost:
         Service cost................................   $      623,000     $   1,164,000      $   1,352,000
         Interest cost...............................        2,269,000         2,151,000          2,311,000
         Expected return on plan assets..............       (2,805,000)       (4,443,000)        (2,527,000)
         Amortization of prior service cost..........           15,000            27,000             27,000
         Recognized net (gain) loss..................         (222,000)        1,859,000           (508,000)
                                                        --------------     -------------      -------------
       Net periodic pension cost (income)............   $     (120,000)    $     758,000      $     655,000
                                                        ==============     =============      =============
</TABLE>
<PAGE>
       Actuarial  assumptions  used in the  accounting  for the U.K. Plan were a
weighted  average discount rate of 6.5% for 2000 and 1999 and 6.25% for 1998, an
expected  long-term rate of return on assets of 7.5% for 2000, 1999 and 1998 and
a rate of increase in  compensation  levels of 3.0% for 2000, 1999 and 1998. The
funded status of the U.K. Plan is as follows:

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                          --------------------------------
                                                                                2000             1999
                                                                          --------------    --------------

       <S>                                                                <C>                <C>
       Projected benefit obligation:
         Beginning of year..........................................       $  37,098,000     $  35,438,000
         Service cost...............................................             623,000         1,164,000
         Interest cost..............................................           2,269,000         2,151,000
         Contributions..............................................             596,000           786,000
         Benefits paid..............................................            (910,000)         (636,000)
         Other......................................................          (3,128,000)       (1,805,000)
                                                                           -------------     -------------
         End of year................................................          36,548,000        37,098,000
                                                                           -------------     -------------
       Fair value of plan assets:
         Beginning of year..........................................          41,905,000        36,266,000
         Actual return on plan assets...............................           2,940,000         6,364,000
         Contributions..............................................             596,000           786,000
         Benefits paid..............................................            (910,000)         (636,000)
         Other......................................................           1,976,000          (875,000)
                                                                           -------------     -------------
         End of year................................................          46,507,000        41,905,000
                                                                           -------------     -------------

       Excess fair value over projected obligation..................           9,959,000         4,807,000
       Unrecognized net actuarial gain..............................          (9,234,000)       (4,811,000)
       Unamortized prior service cost...............................             141,000           168,000
                                                                           -------------     -------------
       Net pension prepaid asset....................................       $     866,000     $     164,000
                                                                           =============     =============
</TABLE>

4.     PROPERTY AND EQUIPMENT

       The cost of property  and  equipment  from  continuing  operations  is as
follows:
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                          --------------------------------
                                                                                2000             1999
                                                                          --------------    --------------

<S>                                                                       <C>               <C>
       Technical services.....................................            $   22,614,000    $   23,226,000
       Information technology services........................                 4,123,000         3,643,000
       General corporate......................................                 3,848,000         3,848,000
                                                                          --------------    --------------
       Total property and equipment...........................                30,585,000        30,717,000
       Less accumulated depreciation and amortization.........                20,043,000        19,529,000
                                                                          --------------    --------------
       Net property and equipment.............................            $   10,542,000    $   11,188,000
                                                                          ==============    ==============
</TABLE>

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

                                                                                     December 31,
                                                                          --------------------------------
                                                                                2000              1999
                                                                          --------------    --------------

<S>                                                                       <C>               <C>
       Technical services equipment...........................            $    2,255,000    $    2,144,000
       Accumulated depreciation...............................                (1,122,000)       (1,222,000)
                                                                          --------------    --------------
       Net equipment acquired under capital leases............            $    1,133,000    $      922,000
                                                                          ==============    ==============
</TABLE>

<PAGE>
5.     LONG-TERM DEBT

       Long-term debt from continuing operations is summarized as follows:
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                          --------------------------------
                                                                                2000             1999
                                                                          --------------    --------------
<S>                                                                       <C>               <C>
       Technical services credit facility due in
         June 2002............................................            $   14,120,000    $   17,945,000
       Various notes of Technical services foreign
         subsidiaries, with interest ranging from 6.75% to
         8.0%, due through 2012...............................                 3,473,000         4,097,000
       Capital leases.........................................                 1,199,000           986,000
       Parent company 8.75% convertible subordinated
         debentures due through 2008..........................                21,396,000        23,666,000
       Parent company revolving credit facility...............                      -                  -
                                                                          --------------    --------------
       Total long-term debt...................................                40,188,000        46,694,000
       Less current portion...................................                   595,000         2,471,000
                                                                          --------------    --------------
       Total long-term debt, less current portion.............            $   39,593,000    $   44,223,000
                                                                          ==============    ==============
</TABLE>

         At December  31, 2000,  $14.1  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  Company,  is due in June 2002,  bears  interest at the
option of the  borrower at variable  rates (7.94% at December 31, 2000) 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  technical  services  group  of  companies,  and  restricts  the
subsidiary  from paying  dividends to the Company under  certain  circumstances.
This credit facility is secured by  substantially  all of the tangible assets of
the technical services group.

       The 8.75%  subordinated  debentures  are  convertible  into shares of the
Company's  common  stock at a  conversion  price of $17.54 per share.  Under the
terms of the  debentures,  the  conversion  rate will be adjusted  following the
Distribution.  The Company has satisfied its sinking fund  requirements on these
subordinated debentures through 2001.

       In  December  1995,  the  Company  entered  into  an  agreement  with  an
international bank that, as amended, provides for a $15 million revolving credit
facility  through  June 2001,  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 one million of the
Company's  limited  partnership  units in KPP.  No amounts  were drawn under the
credit   facility  at  December  31,  2000  or  1999.  In  connection  with  the
Distribution,  the  Company  expects  to enter into a new  credit  agreement  to
replace this agreement.

       Annual  sinking fund  requirements  and debt  maturities on  consolidated
debt, including capital leases, are: $0.6 million;  $19.1 million; $2.3 million;
$2.1 million and $2.1 million,  respectively,  for each of the five years ending
December 31, 2005.

<PAGE>
 6.    CAPITAL STOCK

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

<TABLE>
<CAPTION>
                                                                                      Common Stock
                                                                  --------------------------------------------------
                                                     Preferred                        Held in
                                                    Stock Issued       Issued        Treasury         Outstanding
                                                   -------------  --------------  --------------   -----------------
       <S>                                         <C>           <C>              <C>               <C>
       Balance at January 1, 1998.................       568,450      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...............       568,450      36,554,206       5,144,584         31,409,622
       Common shares issued or purchased..........         -              83,863         116,383            (32,520)
                                                   -------------  --------------  --------------   ----------------
       Balance at December 31, 1999...............       568,450      36,638,069       5,260,967         31,377,102
       Common shares issued or purchased..........         -               3,052         238,452           (235,400)
                                                   -------------  --------------  --------------   ----------------
       Balance at December 31, 2000...............       568,450      36,641,121       5,499,419         31,141,702
                                                   =============  ==============  ==============   ================
</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,  2000.  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, 2000, 1999
and 1998. 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.  In connection with the planned  distribution,  the Board of
Directors has  authorized  the  redemption of the Series A Preferred for cash on
March 30, 2001, at the stated redemption price of $10.67 per share, plus accrued
and unpaid dividends, for a total cost of approximately $6.1 million.


       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, 2000 and 1999 there were no Series B
Preferred shares outstanding.


       Stock Compensation Plans

       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,  2000,  there were 500 shares of Series C
Preferred  issued  and  outstanding  to certain  officers  of the  Company.  The
estimated  redemption value of the Series C Preferred Stock was not material for
any of the periods presented.  In connection with the planned Distribution,  the
Board of Directors has authorized the exchange,  in a non-cash  transaction,  of
5,426 shares of the  Company's  common  stock for all Series C Preferred  shares
outstanding. The exchange is expected to be completed in the first half of 2001.

       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.  The
calculation  of the annual  dividend for 2000 and 1999  excludes the gain on the
issuance of units by KPP ($10.4  million net of deferred  taxes in 1999) as well
as the benefit of  recognizing  tax loss  carryforwards  ($6.3 million and $37.1
million,  reduction in the valuation  allowance in 2000 and 1999,  respectively)
and calculations of the annual dividend for subsequent  periods will be adjusted
for any tax provision required as a result of recognizing the benefit of the tax
loss carryforwards.

       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.  General
and administrative expense in the accompanying consolidated statements of income
includes a non-cash  charge of $1.4 million and $4.9 million for the years ended
December 31, 2000 and 1999, respectively,  for the estimated value of the Series
F Preferred. In connection with the planned Distribution, the Board of Directors
has authorized the exchange, in a non-cash  transaction,  of 1,351,351 shares of
the Company's  common stock for all Series F Preferred shares  outstanding.  The
exchange is expected to be completed in the first half of 2001.

       Stock Option  Plans - The Company has stock  option plans and  agreements
for officers, directors and key employees. The options granted under these plans
and agreements  generally  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,  2000,  options on  2,198,283  shares at prices
ranging  from  $1.63  to  $6.00  were  outstanding,   of  which  1,007,319  were
exercisable at prices ranging from $1.63 to $5.63.

       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 10.20% to 10.63%  based on weekly  average
variances of the stock for the five year period preceding issuance,  a risk-free
rate of return  ranging from 4.99% to 6.63% based on the 30-year  U.S.  treasury
bill rate for the five-year expected life of the options, and no dividend yield.
Using estimates  calculated by such option pricing model,  pro forma net income,
basic  earnings  per share  and  diluted  earnings  per  share  would  have been
$16,544,000, $0.50 and $0.48, respectively for the year ended December 31, 2000,
as  compared  to  the  reported   amounts  of  $17,169,000,   $0.53  and  $0.50,
respectively.  For the year ended December 31, 1999 pro forma net income,  basic
earning per share and diluted  earnings  per share would have been  $58,292,000,
$1.84  and  $1.77,  respectively,   as  compared  to  the  reported  amounts  of
$58,909,000,  $1.86 and $1.79,  respectively.  For the year ended  December  31,
1998, 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, as compared to
the reported amounts of $13,576,000, $0.41 and $0.41, respectively.

       The changes in stock  options  outstanding  for the  Company's  plans for
2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                                            Average Price
                                                                          Shares               per Share
                                                                        -----------         -------------
       <S>                                                              <C>                 <C>
       Outstanding at January 1, 1998.........................           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
       Granted................................................             210,191             $  4.29
       Exercised..............................................             (80,121)            $  2.64
       Forfeited..............................................            (154,622)            $  4.14
                                                                        ----------
       Outstanding at December 31, 1999.......................           2,066,800             $  3.42
       Granted................................................             207,840             $  5.18
       Exercised..............................................             (17,494)            $  4.99
       Forfeited..............................................             (58,863)            $  4.65
                                                                        ----------
       Outstanding at December 31, 2000.......................           2,198,283             $  3.54
                                                                        ==========
</TABLE>

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

<PAGE>
       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 they so
desire)  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 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.  At December 31, 2000, vested DSUs aggregating $540,000 were included
in stockholders' equity as additional paid-in capital.

       In connection with the  Distribution,  KSL will agree to issue to all DSU
holders  the number of DSUs  equivalent  in price to KSL shares  issuable in the
Distribution.  All other terms are expected to remain the same.  Similarly,  the
Company  will agree to issue to  employees  of KSL who hold DSUs,  the number of
shares  of the  Company's  common  stock  subject  to the  DSUs  held  by  those
employees. The Company cannot currently determine the number of shares that will
be issuable under this arrangement.

<PAGE>
7.     EARNINGS PER SHARE

       The following is a  reconciliation  of basic and diluted  earnings (loss)
       per share from continuing operations:

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                                 Average
                                                               Net               Common          Per-Share
                                                              Income             Shares           Amount
                                                        ---------------       ------------   ---------------

         <S>                                            <C>                   <C>            <C>
         Year Ended December 31, 2000
           Income from continuing operations.........   $     6,783,000
           Dividend applicable to preferred stock....          (479,000)
                                                        ---------------

           Basic EPS -
              Income applicable to common stock......         6,304,000        31,767,000    $         0.20
                                                                                             ==============
           Effect of dilutive securities -
              Common stock options, Series F
                Preferred Stock and DSUs.............            -              1,319,000
                                                        ---------------    --------------
           Diluted EPS -
              Income applicable to common stock,
                Series F Preferred stock, DSUs
                and assumed options exercised........   $     6,304,000        33,086,000    $         0.19
                                                        ===============    ==============    ==============

       Year Ended December 31, 1999
           Income from continuing operations.........   $    30,450,000
           Dividend applicable to preferred stock....          (487,000)
                                                        ---------------
           Basic EPS -
              Income applicable to common stock......        29,963,000        31,453,000    $         0.95
                                                                                             ==============
           Effect of dilutive securities -
              Common stock options, Series F
                Preferred Stock and DSUs.............            -              1,237,000
                                                        ---------------    --------------
           Diluted EPS -
              Income applicable to common stock,
                Series F Preferred stock, DSUs
                and assumed options exercised........   $    29,963,000        32,690,000    $         0.92
                                                        ===============    ==============    ==============
       Year Ended December 31, 1998
           Loss from continuing operations...........   $    (1,264,000)
           Dividend applicable to preferred stock....          (508,000)
                                                        ----------------
           Basic EPS -
              Loss applicable to common stock........        (1,772,000)       31,740,000    $        (0.06)
                                                                                             ==============
           Effect of dilutive securities -
              Common stock options and DSUs..........            -                  -
                                                        ---------------    --------------
           Diluted EPS -
              Loss applicable to common stock, DSUs
                and assumed options exercised........   $    (1,772,000)       31,740,000    $        (0.06)
                                                        ===============    ==============    ===============
</TABLE>


       Options to purchase 284,597, 605,600 and 2,091,352 shares of common stock
at  weighted  average  prices of $5.40,  $4.90 and $3.36,  were  outstanding  at
December 31,  2000,  1999 and 1998,  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  (or in the case of 1998,  all
options  are  anti-dilutive  because  of the loss from  continuing  operations.)
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.

<PAGE>
8.     COMMITMENTS AND CONTINGENCIES

       The Company leases  vehicles,  office space,  office  equipment and other
items of personal  property under leases  expiring at various dates.  Management
expects  that,  in the normal  course of  business,  leases  that expire will be
renewed or replaced by other leases. Total rent expense incurred under operating
leases  attributable  to continuing  operations was $3.2 million for 2000,  $3.6
million for 1999 and $2.7 million for 1998.

       At December 31, 2000, future minimum rental  commitments  attributable to
continuing  operations  under all  capital  leases and  operating  leases are as
follows:

<TABLE>
<CAPTION>
                                                                           Capital             Operating
                                                                           Leases               Leases
                                                                       --------------       --------------
         <S>                                                           <C>                  <C>
         2001.....................................................     $      594,000       $    2,768,000
         2002.....................................................            415,000            1,835,000
         2003.....................................................            283,000            1,245,000
         2004 ....................................................             47,000              989,000
         2005.....................................................             12,000              553,000
         Thereafter...............................................                -              2,093,000
                                                                       --------------       --------------
         Total minimum lease payments.............................          1,351,000       $    9,483,000
                                                                                            ==============
         Less amounts representing interest.......................           (152,000)
                                                                       --------------
         Present value of net minimum lease payments..............     $    1,199,000
                                                                       ==============
</TABLE>


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

9.     BUSINESS SEGMENT DATA

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



<PAGE>


       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,
                                                        ---------------------------------------------------
                                                              2000              1999              1998
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Business segment revenues:
         Technical services..........................   $    92,142,000    $   98,075,000    $  115,116,000
         Information technology services.............        35,499,000        37,358,000        20,709,000
                                                        ---------------    --------------    --------------
                                                        $   127,641,000    $  135,433,000    $  135,825,000
                                                        ===============    ==============    ==============
       Technical services segment revenues:
         Under pressure services.....................   $    38,652,000    $   38,873,000    $   43,208,000
         Turnaround services.........................        44,283,000        43,859,000        52,924,000
         Other services..............................         9,207,000        15,343,000        18,984,000
                                                        ---------------    --------------    --------------
                                                        $    92,142,000    $   98,075,000    $  115,116,000
                                                        ===============    ==============    ==============
       Business segment profit:
         Technical services .........................   $     6,320,000    $     (255,000)   $    4,736,000
         Information technology services.............         4,134,000         5,496,000         3,690,000
         General corporate...........................        (6,352,000)       (9,807,000)       (5,091,000)
                                                        ---------------    --------------    --------------
           Operating income (loss) from continuing
              operations.............................         4,102,000        (4,566,000)        3,335,000
         Interest expense............................        (3,883,000)       (3,817,000)       (4,100,000)
         Other income (expense)......................           670,000           326,000           (26,000)
                                                        ---------------    --------------    --------------
         Income (loss) from continuing operations
           before income taxes.......................   $       889,000    $   (8,057,000)   $     (791,000)
                                                        ===============    ==============    ==============


                                                                       Year Ended December 31,
                                                        ---------------------------------------------------
                                                              2000              1999              1998
                                                        ---------------    --------------    --------------
       Business segment assets:
         Depreciation and amortization:
           Technical services........................   $     4,585,000    $    5,485,000    $    5,774,000
           Information technology services...........           512,000           411,000           192,000
                                                        ---------------    --------------    --------------
                                                        $     5,097,000    $    5,896,000    $    5,966,000
                                                        ===============    ==============    ==============

         Capital expenditures (excluding acquisitions):
           Technical services........................   $     2,160,000    $    2,328,000    $    2,574,000
           Information technology services...........           530,000           391,000           281,000
                                                        ---------------    --------------    --------------
                                                        $     2,690,000    $    2,719,000    $    2,855,000
                                                        ===============    ==============    ==============

                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2000               1999             1998
                                                        ---------------    --------------    --------------
         Total assets:
           Technical services........................   $   103,817,000    $  108,094,000    $  110,603,000
           Information technology services...........        20,086,000        17,911,000        11,082,000
           General corporate.........................        60,918,000        50,171,000        14,318,000
           Discontinued operations, net..............        41,822,000        43,364,000        22,793,000
                                                        ---------------    --------------    --------------
                                                        $   226,643,000    $  219,540,000    $  158,796,000
                                                        ===============    ==============    ==============
</TABLE>

<PAGE>
       The following  geographical area data includes revenues based on location
of the  operating  segment  and net  property  and  equipment  based on physical
location:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                        ---------------------------------------------------
                                                              2000               1999             1998
                                                        ---------------    --------------    --------------
       <S>                                              <C>                <C>               <C>
       Geographical area revenues:
         United States............................      $    67,242,000    $   67,145,000    $   56,304,000
         Europe...................................           50,446,000        57,258,000        68,050,000
         Asia-Pacific.............................            9,953,000        11,030,000        11,471,000
                                                        ---------------    --------------    --------------
                                                        $   127,641,000    $  135,433,000    $  135,825,000
                                                        ===============    ==============    ==============
       Geographical area operating income (loss):
         United States............................      $    (3,757,000)   $   (7,164,000)   $   (3,119,000)
         Europe...................................            6,997,000         2,041,000         5,456,000
         Asia-Pacific.............................              862,000           557,000           998,000
                                                        ---------------    --------------    --------------
                                                        $     4,102,000    $   (4,566,000)   $    3,335,000
                                                        ===============    ==============    ==============

                                                                             December 31,
                                                        ---------------------------------------------------
                                                              2000               1999             1998
                                                        ---------------    --------------    --------------
       Geographical area net property and equipment:
         United States............................      $     3,099,000    $    3,536,000    $    2,558,000
         Europe...................................            6,506,000         6,288,000         7,781,000
         Asia-Pacific.............................              937,000         1,364,000         1,517,000
                                                        ---------------    --------------    --------------
                                                        $    10,542,000    $   11,188,000    $   11,856,000
                                                        ===============    ==============    ==============
</TABLE>

10.    DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED
       TO COMMON SHAREHOLDERS

       The  results of  operations  for the  pipeline,  terminaling  and product
marketing businesses are reflected in the accompanying  consolidated  statements
of income as  "discontinued  operations - businesses to be distributed to common
shareholders"  (See Note 1). A summary  of  operating  results  of  discontinued
operations  for the years ended  December 31,  2000,  1999 and 1998 is presented
below:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                        -----------------------------------------------------
                                                             2000                1999                1998
                                                        --------------      -------------       -------------
       <S>                                              <C>                 <C>                 <C>
       Revenues:
         Pipeline and terminaling..................     $  156,232,000      $ 158,028,000       $ 125,812,000
         Product marketing business................        381,186,000        212,298,000         114,220,000
                                                        --------------      -------------       -------------
                                                        $  537,418,000      $ 370,326,000       $ 240,032,000
                                                        ==============      =============       =============
       Operating profit:
         Pipeline and terminaling..................     $   58,104,000      $  64,311,000       $  55,117,000
         Product marketing business................          2,472,000          1,495,000             940,000
                                                        --------------      -------------       -------------
                                                        $   60,576,000      $  65,806,000       $  56,057,000
                                                        ==============      =============       =============

                                                                        Year Ended December 31,
                                                        -----------------------------------------------------
                                                             2000                1999                1998
                                                        --------------      -------------       -------------
       Income before gain on issuance of units by
         KPP, income taxes and interest of outside
         partners in KPP's net income..............     $   48,688,000      $  52,337,000       $  45,309,000

       Gain on issuance of units by KPP............              -             16,764,000                -
       Income taxes................................         (5,609,000)        (7,163,000)        (1,295,000)
       Interest of outside non-controlling partners
         in KPP's net income.......................        (32,693,000)       (33,479,000)       (29,174,000)
                                                        --------------      -------------       ------------
       Income from discontinued operations,
         net of income taxes.......................     $   10,386,000      $  28,459,000       $  14,840,000
                                                        ==============      =============       =============
</TABLE>
<PAGE>
         A summary balance sheet of the  discontinued  operations as of December
31, 2000 and 1999 is presented below:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                            ---------------------------------
                                                                                 2000                1999
                                                                            -------------       -------------
<S>                                                                         <C>                 <C>
     Current assets...............................................          $  66,330,000       $  54,667,000
     Property and equipment, net..................................            321,448,000         316,956,000
     Investment in affiliates.....................................             22,568,000          21,978,000
     Other assets.................................................              1,607,000           1,435,000
                                                                            -------------       -------------
       Total assets...............................................            411,953,000         395,036,000

     Current liabilities..........................................            (41,796,000)        (39,868,000)
     Long-term debt...............................................           (184,052,000)       (167,028,000)
     Deferred taxes and other liabilities.........................            (24,302,000)        (19,956,000)
     Interest of outside non-controlling partners in KPP..........           (119,981,000)       (124,820,000)
                                                                            -------------       -------------

     Net assets of discontinued operations - businesses to be
       distributed to common shareholders.........................          $  41,822,000       $  43,364,000
                                                                            =============       =============
</TABLE>

         Public Offering of KPP Units

         In July 1999, KPP issued 2.25 million  limited  partnership  units in a
public offering at $30.75 per unit,  generating  approximately  $65.6 million in
net  proceeds.  A portion of the  proceeds  was used to repay in full KPP's term
loans  (including  $13.3 million in term loans resulting from the United Kingdom
terminal  acquisition  referred to below). As a result of KPP issuing additional
units to unrelated  parties,  the Company's  pro-rata share of the net assets of
KPP  increased by $16.8  million.  Accordingly,  the Company  recognized a $16.8
million gain, before deferred income taxes of $6.4 million, in 1999.

         Acquisitions

         On January 3, 2001, KPP acquired Shore Terminals LLC ("Shore") for $107
million in cash and 1,975,090 KPP limited  partnership units.  Financing for the
cash  portion  of the  purchase  price  was  supplied  under a new $275  million
unsecured revolving credit agreement with a group of banks. The acquisition will
be accounted for by KPP,  beginning in January 2001 using the purchase method of
accounting.

         On February 1, 1999,  KPP acquired six terminals in the United  Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million)
plus  transaction  costs  and  the  assumption  of  certain   liabilities.   The
acquisition,  which was initially financed with term loans from a bank, has been
accounted for using the purchase method of accounting. $13.3 million of the term
loans  were  repaid  in July 1999  with the  proceeds  from  KPP's  public  unit
offering.

         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 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.

         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.  In 2000,  $211,000  was paid under the
earn-out provision. No amounts were payable under the earn-out provision in 1999
and 1998.  The  acquisition  was  accounted  for using  the  purchase  method of
accounting.


       Long-term Debt

       In December  2000,  KPP entered into a credit  agreement  with a group of
banks that  provides  for a $275 million  unsecured  revolving  credit  facility
through  December  2003.  No amounts  were drawn on the facility at December 31,
2000.  The credit  facility,  which is without  recourse to the  Company,  bears
interest at variable interest rates, has a variable commitment fee on unutilized
amounts and contains certain operational and financial covenants.  In January of
2001,  proceeds  from the facility were used to repay in full KPP's $128 million
of mortgage notes and $15 million  outstanding  under its $25 million  revolving
credit facility. An additional $107 million was used to finance the cash portion
of the January  2001 Shore  acquisition.  Under the  provisions  of the mortgage
notes,  KPP  incurred  $6.3  million  in  prepayment  penalties  which  will  be
recognized by KPP as an  extraordinary  expense in the first quarter of 2001. At
January 3, 2001 $257.5  million was drawn on the facility at an interest rate of
6.31%, which is due in December of 2003.

       In January 1999, KPP, through two wholly-owned subsidiaries, entered into
a credit  agreement  with a bank that provided for the issuance of $39.2 million
of term loans in connection  with the United Kingdom  terminal  acquisition  and
$5.0 million for general partnership purposes.  $18.3 million of the terms loans
were repaid in July 1999 with the proceeds from a public  offering of KPP units.
The remaining  portion ($23.9  million),  with a fixed rate of 7.14%,  is due in
January  2002.  The term  loans  under the credit  agreement,  as  amended,  are
unsecured and are pari passu with the $275 million  revolving  credit  facility.
The term loans,  which are  without  recourse to the  Company,  contain  certain
financial and operational covenants.

         In March 1998, a wholly-owned  subsidiary of the Company entered into a
credit  agreement  with a bank that,  as  amended,  provides  for a $20  million
revolving credit facility through March 2002. The credit facility bears interest
at variable  rates (8.69% at December 31, 2000),  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 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, 2000, $17.2 million was
drawn on the facility.

         The $128 million of first  mortgage  notes  outstanding at December 31,
2000 and 1999,  which were due in varying amounts from 2001 to 2016, were repaid
in full in January of 2001 with the proceeds from the new $275 million revolving
credit facility.

         Commitments and Contingencies

         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 KPP are subject to Federal,  state and local laws and
regulations  relating to  protection of the  environment.  Although KPP believes
that its  operations are in general  compliance  with  applicable  environmental
regulation,  risks of  additional  costs and  liabilities  are  inherent  in its
operations, and there can be no assurance that significant costs and liabilities
will not be incurred by KPP. Moreover,  it is possible that other  developments,
such as increasingly  stringent  environmental  laws,  regulations,  enforcement
policies  thereunder,  and claims for damages to  property or persons  resulting
from the operations of KPP, could result in substantial costs and liabilities to
KPP. KPP has recorded an undiscounted  reserve for environmental  claims of $8.0
million,  including  $7.3  million  related to  acquisitions  of  pipelines  and
terminals.  During 2000 and 1999,  respectively,  KPP incurred  $2.3 million and
$0.9  million of costs  related to such  acquisition  reserves  and  reduced the
liability accordingly.

         On April 7, 2000,  a fuel oil  pipeline  in  Maryland  owned by Potomac
Electric  Power  Company  ("PEPCO")  ruptured.  The  pipeline  was operated by a
partnership of which a subsidiary of KPP is general partner.  PEPCO has reported
that,  through December 2000, it incurred  approximately $66 million in clean-up
costs and expects to incur total  cleanup  costs of $70 million to $75  million.
Since May 2000, KPP's  subsidiary has  participated  provisionally in a minority
share of the cleanup expense, which has been funded by KPP's insurance carriers.
KPP cannot predict the amount,  if any, that  ultimately may be determined to be
KPP's share of the remediation expense, but it believes that such amount will be
covered by insurance and will not materially affect KPP's financial condition.

         As a result of the rupture,  purported class actions have been filed in
federal and state court in Maryland by property  and/or business owners alleging
damages in unspecified  amounts against PEPCO and KPP's subsidiary under various
theories,  including  the federal  Oil  Pollution  Act.  The court has ordered a
consolidated complaint to be filed in this action. KPP's insurance carriers have
assumed the defense of these actions.  While KPP cannot  predict the amount,  if
any, of any liability it may have in these suits,  it believes that such amounts
will be covered by  insurance  and that these  actions  will not have a material
adverse effect on its financial condition.

         PEPCO and KPP's  subsidiary  have  agreed with the State of Maryland to
pay costs of assessing  natural resource damages under the federal Oil Pollution
Act, but they cannot  predict at this time the amount of any damages that may be
claimed  by  Maryland.  KPP  believes  that both the  assessment  costs and such
damages are covered by insurance and will not materially  affect KPP's financial
condition.

         The U.S.  Department of Transportation  has issued a Notice of Proposed
Violation to PEPCO and KPP's subsidiary  alleging  violations over several years
of pipeline safety regulations and proposing a civil penalty of $674,000.  KPP's
subsidiary  and PEPCO intend to contest the  allegations  of violations  and the
proposed penalty.  The ultimate amount of any penalty attributable to KPP cannot
be  determined  at this time,  but KPP believes that this matter will not have a
material effect on KPP's financial condition.

         Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace  Energy  Corporation  ("Grace"),  the entity  from which KPP  acquired  ST
Services in 1993. The lawsuit  involves  environmental  response and remediation
allegedly resulting from jet fuel leaks in the early 1970's from a pipeline. The
pipeline,  which  connected a former Grace  terminal with Otis Air Force Base in
Massachusetts,  was abandoned in 1976, when the connecting  terminal was sold to
an unrelated entity.

         Grace alleged that subsidiaries of KPP acquired the abandoned pipeline,
as part of the  acquisition of ST Services in 1993,  and assumed  responsibility
for environmental damages allegedly caused by the jet fuel leaks. Grace sought a
ruling  that these  subsidiaries  are  responsible  for all  present  and future
remediation  expenses  for these  leaks  and that  Grace  has no  obligation  to
indemnify these subsidiaries for these expenses.

         In the lawsuit,  Grace also sought indemnification for expenses that it
has  incurred  since  1996  of  approximately  $3.5  million  for  response  and
remediation  required by the State of Massachusetts and for additional  expenses
that it  expects  to incur  in the  future.  The  consistent  position  of KPP's
subsidiaries is that they did not acquire the abandoned  pipeline as part of the
1993 ST  transaction,  and therefore did not assume any  responsibility  for the
environmental damage nor any liability to Grace for the pipeline.

         At the end of the trial on May 19,  2000,  the jury  returned a verdict
including  findings that Grace had breached a provision of the 1993  acquisition
agreement and that the pipeline was  abandoned  prior to 1978. On July 17, 2000,
the Judge  entered  final  judgment  in the case,  which is now on appeal to the
Dallas Court of Appeals,  that Grace take nothing from the  subsidiaries  on its
claims,  including claims for future expenses.  Although KPP's subsidiaries have
not incurred any expenses in  connection  with the  remediation,  the court also
ruled,  in  effect,   that  the  subsidiaries   would  not  be  entitled  to  an
indemnification  from Grace if any such  expenses  were  incurred in the future.
However,  the Judge let stand a prior summary  judgment ruling that the pipeline
was an asset of the  company  acquired as part of the 1993 ST  transaction.  The
Judge also awarded attorney fees to Grace.

         While the judgment  means that the  subsidiaries  have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred,  as required
by the State of  Massachusetts,  KPP's  subsidiaries have filed an appeal of the
judgment finding that the Otis Pipeline was transferred to them and the award of
attorney fees.

         The  Otis  Air  Force  Base  is a part  of the  Massachusetts  Military
Reservation  ("MMR"),  which has been declared a Superfund  Site pursuant to the
Comprehensive  Environmental  Response,  Compensation and Liability Act. The MMR
Site contains nine groundwater  contamination plumes, two of which are allegedly
associated  with the  pipeline,  and  various  other waste  management  areas of
concern,  such as  landfills.  The United  States  Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government  remediation  demand for most of the  contamination
problems at the MMR Site.  Grace and others have also  received and responded to
formal  inquiries  from the United  States  Government  in  connection  with the
environmental  damages  allegedly  resulting  from  the jet  fuel  leaks.  KPP's
subsidiaries have voluntarily  responded to an invitation from the Government to
provide information  indicating that they do not own the pipeline. In connection
with  a  court-ordered  mediation  between  Grace  and  the  subsidiaries,   the
Government  advised  the  parties in April 1999 that it has  identified  the two
spill areas that it believes to be related to the  pipeline  that is the subject
of the Grace suit.  The  Government  advised the parties that it believes it has
incurred costs of approximately $34 million,  and expects in the future to incur
costs of approximately  $55 million,  for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs or to include all
categories of costs.  The Government  also advised the parties that it could not
at that time  allocate  its costs  attributable  to the second  spill area.  KPP
believes that the ultimate cost of the remediation,  while substantial,  will be
considerably less than the Government has indicated.

       The  Government  has made no claims  against  KPP or any other  person on
account of this  matter.  KPP  believes  that if any such claims were made,  its
subsidiaries would have substantial defenses to such claims. Under Massachusetts
law,  the party  responsible  for  remediation  of a facility  is the last owner
before the  abandonment,  which was a Grace  company.  KPP does not believe that
either the Grace  litigation  or any claims  that may be made by the  Government
will adversely affect its ability to make cash distributions to its unitholders,
but there can be no assurances in that regard.


11.    ACCRUED EXPENSES

       Accrued  expenses  from  continuing   operations  are  comprised  of  the
following components at December 31, 2000 and 1999:
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                          ---------------------------------
                                                                                  2000            1999
                                                                          ----------------   --------------
<S>                                                                       <C>                <C>
       Accrued income taxes..........................................     $    2,024,000     $      449,000
       Accrued taxes other than income...............................            403,000            828,000
       Accrued interest..............................................            882,000            972,000
       Accrued compensation and benefits.............................          2,366,000          2,775,000
       Other accrued expenses........................................          8,058,000          9,593,000
                                                                          --------------     --------------
                                                                          $   13,733,000     $   14,617,000
                                                                          ==============     ==============
</TABLE>


12.    SUPPLEMENTAL CASH FLOW INFORMATION

       Supplemental information on cash paid from continuing operations for:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                            -------------------------------------------------
                                                                 2000              1999               1998
                                                            --------------    ---------------    ------------

<S>                                                         <C>               <C>                <C>
       Interest......................................       $    3,755,000    $     3,719,000    $  3,957,000
                                                            ==============    ===============    ============
       Income taxes..................................       $    1,716,000    $     1,030,000    $  1,757,000
                                                            ==============    ===============    ============
</TABLE>


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
from continuing  operations  (excluding  capital leases) as of December 31, 2000
and 1999 was  approximately  $36  million  and $44  million as  compared  to the
carrying value of $39 million and $46 million,  respectively.  These fair values
were  estimated  using  discounted  cash flow  analysis,  based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements,
when quoted market prices were not available. The Company has not determined the
fair  value  of its  capital  leases  as it is not  practicable.  The  estimates
presented  above are not  necessarily  indicative  of the amounts  that would be
realized in a current market exchange.  The Company has no derivative  financial
instruments.

       The technical  services  segment  provides  services to an  international
client base that includes petroleum refineries, chemical plants, offshore energy
production  platforms,  steel mills, nuclear power stations,  conventional power
stations,  pulp and paper mills,  food and beverage  processing plants and other
flow-process  facilities.  The information  technology services segment provides
services and related products to the U. S. Government and commercial  sectors. A
substantial  portion of the revenues of the information  technology  segment are
attributable  to contracts  with agencies of the U. S.  Government.  The Company
does not  believe  that it has a  significant  concentration  of credit  risk at
December 31, 2000, as the Company's accounts receivable are generated from these
distinct business segments with customers located  throughout the United States,
Europe and Asia-Pacific.

<PAGE>
14.    QUARTERLY FINANCIAL DATA (UNAUDITED)

       Quarterly operating results for 2000 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                           -----------------------------------------------------------------------
                                               March 31,          June 30,        September 30,      December 31,
                                           ---------------    --------------     --------------    ---------------
       <S>                                 <C>                <C>                <C>               <C>
       2000:
       Revenues.........................   $    31,294,000    $   33,380,000     $   33,763,000    $    29,204,000
                                           ===============    ==============     ==============    ===============
       Operating income (loss)..........   $     1,092,000    $    2,115,000     $    2,544,000    $    (1,649,000)
                                           ===============    ==============     ==============    ===============
       Net income (loss):
         Continuing operations..........   $      (235,000)   $      587,000     $    1,190,000    $     5,241,000(a)
         Discontinued operations........         2,160,000         2,948,000          3,268,000          2,010,000
                                           ---------------    --------------     --------------    ---------------
           Total........................   $     1,925,000    $    3,535,000     $    4,458,000    $     7,251,000
                                           ===============    ==============     ==============    ===============

       Earnings (loss) per common share:
         Basic:
           Continuing operations........   $          (.01)   $          .02     $          .04    $           .17
           Discontinued operations......               .07               .09                .10                .06
                                           ---------------    --------------     --------------    ---------------
              Total.....................   $           .06    $          .11     $          .14    $           .23
                                           ===============    ==============     ==============    ===============
         Diluted:
           Continuing operations........   $          (.01)   $          .02     $          .04    $           .16
           Discontinued operations......               .07               .09                .10                .06
                                           ---------------    --------------     --------------    ---------------
              Total.....................   $           .06    $          .11     $          .14    $           .22
                                           ===============    ==============     ==============    ===============
       1999:
       Revenues.........................   $    31,144,000    $   32,607,000     $   32,931,000    $    38,751,000
                                           ===============    ==============     ==============    ===============
       Operating income (loss)..........   $       (77,000)   $      150,000     $    1,263,000    $    (5,902,000)
                                           ===============    ==============     ==============    ===============
       Net income (loss):
         Continuing operations..........   $    (1,468,000)   $     (268,000)    $      417,000    $    31,769,000(a)
         Discontinued operations........         3,781,000         4,276,000         15,130,000(b)       5,272,000
                                           ---------------    --------------     --------------    ---------------
           Total........................   $     2,313,000    $    4,008,000     $   15,547,000    $    37,041,000
                                           ===============    ==============     ==============    ===============
       Earnings (loss) per common share:
         Basic:
           Continuing operations........   $          (.05)   $         (.01)    $          .01    $          1.01
           Discontinued operations......               .12               .14                .48                .17
                                           ---------------    --------------     --------------    ---------------
              Total.....................   $           .07    $          .13     $          .49    $          1.18
                                           ===============    ==============     ==============    ===============
         Diluted:
           Continuing operations........   $          (.05)   $         (.01)    $          .01    $           .96
           Discontinued operations......               .12               .13                .46                .16
                                           ---------------    --------------     --------------    ---------------
              Total.....................   $           .07    $          .12     $          .47    $          1.12
                                           ===============    ==============     ==============    ===============
</TABLE>

       (a)    See Note 2 regarding reduction in valuation allowance for deferred
              tax assets.

       (b)    See Note 10 regarding gain on issuance of units by KPP.

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


<TABLE>
<CAPTION>



                                                                             Year Ended December 31,
                                                              -----------------------------------------------------
                                                                   2000               1999                1998
                                                              -------------       -------------      --------------

<S>                                                           <C>                 <C>                <C>
General and administrative expenses.....................      $  (6,352,000)      $  (9,807,000)     $   (5,091,000)
Interest expense........................................         (2,242,000)         (2,218,000)         (2,212,000)
Intercompany fees and expenses..........................          2,915,000           3,189,000           3,022,000
Interest and other income...............................            804,000           1,677,000           1,638,000
Equity in income (loss) of subsidiaries.................          9,648,000          (1,553,000)          1,379,000
                                                              -------------       -------------      --------------

Income (loss) from continuing operations
   before income taxes..................................          4,773,000          (8,712,000)         (1,264,000)
Income tax benefit......................................          2,010,000          39,162,000                -
                                                              -------------       -------------      --------------
Income (loss) from continuing operations................          6,783,000          30,450,000          (1,264,000)
Income from discontinued operations - businesses to be
   distributed to common shareholders, net of
   income taxes.........................................         10,386,000          28,459,000          14,840,000
                                                              -------------       -------------      --------------
Net income..............................................         17,169,000          58,909,000          13,576,000
Dividends applicable to preferred stock.................            479,000             487,000             508,000
                                                              -------------       -------------      --------------

Net income applicable to common  stock..................      $  16,690,000       $  58,422,000      $   13,068,000
                                                              =============       =============      ==============

Earnings (loss) per common share:
    Basic:
      Continuing operations.............................      $        0.20       $        0.95      $       (0.06)
      Discontinued operations...........................               0.33                0.91               0.47
                                                              -------------       -------------      -------------
                                                              $        0.53       $        1.86      $        0.41
                                                              =============       =============      =============
    Diluted:
      Continuing operations.............................      $        0.19       $        0.92      $       (0.06)
      Discontinued operations...........................               0.31                0.87               0.47
                                                              -------------       -------------      -------------
                                                              $        0.50       $        1.79      $        0.41
                                                              =============       =============      =============

</TABLE>

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

                                     F - 27

<PAGE>
                                                                      Schedule I
                                                                     (Continued)

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

<TABLE>
<CAPTION>


                                                                                          December 31,
                                                                             --------------------------------------
                                                                                  2000                   1999
                                                                             ---------------        ---------------

                                                      ASSETS
<S>                                                                          <C>                    <C>
Current assets:
   Cash and cash equivalents............................................     $    13,953,000        $     9,740,000
   Prepaid expenses and other current assets............................           2,928,000              1,234,000
                                                                                                                   -
   Current deferred tax asset...........................................          36,489,000              5,250,000
                                                                             ---------------        ---------------
Total current assets....................................................          53,370,000             16,224,000
                                                                             ---------------        ---------------
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.....................................................          96,450,000             89,457,000

Net assets of discontinued operations - businesses to be distributed
   to common shareholders...............................................          41,822,000             43,364,000

Deferred tax and other assets...........................................           6,910,000             33,649,000
                                                                             ---------------        ---------------
                                                                             $   198,552,000        $   182,694,000
                                                                             ===============        ===============


                                              LIABILITIES AND EQUITY

Current liabilities - accounts payable and accrued expenses.............     $     5,741,000        $     5,600,000

Long-term debt..........................................................          21,396,000             23,666,000

Deferred income taxes and other liabilities.............................           5,376,000              8,625,000

Stockholders' equity:
   Preferred stock, without par value...................................           5,792,000              5,792,000
   Common stock, without par value......................................           4,250,000              4,249,000
   Additional paid-in capital...........................................         203,989,000            197,313,000
   Treasury stock, at cost..............................................         (31,440,000)           (30,278,000)
   Accumulated deficit..................................................         (13,311,000)           (30,001,000)
   Accumulated comprehensive income (loss) -
     foreign currency translation adjustment............................          (3,241,000)            (2,272,000)
                                                                             ---------------        ---------------
       Total stockholders' equity.......................................         166,039,000            144,803,000
                                                                             ---------------        ---------------
                                                                             $   198,552,000        $   182,694,000
                                                                             ===============        ===============
</TABLE>

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

                                     F - 28

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

<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                       -----------------------------------------------------------
                                                              2000                1999                 1998
                                                       -----------------    ----------------    ------------------
<S>                                                    <C>                  <C>                 <C>
Operating activities:
   Income (loss) from continuing operations..........  $       6,783,000    $     30,450,000    $       (1,264,000)
   Adjustments to reconcile income (loss) from
     continuing operations to net cash provided
     by (used in) operating activities:
       Equity in net income of subsidiaries..........         (9,648,000)          1,553,000            (1,379,000)
       Deferred income taxes.........................         (1,223,000)        (36,918,000)                 -
       Increase in the estimated redemption value of
         Series F Preferred stock....................          1,387,000           4,863,000                  -
       Changes in current assets and liabilities:
         Prepaid expenses and other current assets...         (1,694,000)         (1,057,000)             (177,000)
         Accounts payable and accrued expenses ......            141,000          (1,767,000)            3,380,000
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           operating activities......................         (4,254,000)         (2,876,000)              560,000
                                                       -----------------    ----------------    ------------------
Investing activities:
   Change in other assets, net.......................         (2,092,000)         (3,450,000)            1,195,000
                                                       -----------------    ----------------    ------------------
         Net cash provided by (used in)
           investing activities......................         (2,092,000)         (3,450,000)            1,195,000
                                                       -----------------    ----------------    ------------------
Financing activities:
   Preferred stock dividends paid....................           (479,000)           (487,000)             (508,000)
   Payments on debt..................................         (2,270,000)              -                      -
   Change in investments in, advances to and notes
     receivable from subsidiaries....................          2,655,000           8,092,000           (11,319,000)
   Common stock issued...............................            255,000             253,000               194,000
   Purchase of treasury stock........................         (1,530,000)           (555,000)           (4,868,000)
   Change in net assets of discontinued operations...         11,928,000           7,888,000             7,578,000
                                                       -----------------    ----------------    ------------------
        Net cash provided by (used in) financing
         activities..................................         10,559,000          15,191,000            (8,923,000)
                                                       -----------------    ----------------    ------------------
Increase (decrease) in cash and cash equivalents.....          4,213,000           8,865,000            (7,168,000)
Cash and cash equivalents at beginning of year.......          9,740,000             875,000             8,043,000
                                                       -----------------    ----------------    ------------------
Cash and cash equivalents at end of year.............  $      13,953,000    $      9,740,000    $          875,000
                                                       =================    ================    ==================
</TABLE>


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

                                     F - 29

<PAGE>
<TABLE>
<CAPTION>
                                                                     Schedule II
                              KANEB SERVICES, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)


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

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

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

Year Ended December 31, 1999:
   For doubtful receivables
     classified as current assets...   $         727      $       664     $        (119)(a) $       (273)(b) $          999
                                       =============      ===========     =============     ============     ==============

   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $      52,797      $     -         $        -        $    (45,593)    $        7,204
                                       =============      ===========     =============     ============     ==============

Year Ended December 31, 1998:
   For doubtful receivables
     classified as current assets...   $         488      $      259      $          99(a)  $       (119)(b) $          727
                                       =============      ==========      =============     ============     ==============

   For deferred tax asset valuation
     allowance classified as
     noncurrent assets..............   $      55,584      $    -          $        -        $     (2,787)    $       52,797
                                       =============      ===========     =============     ============     ==============

</TABLE>


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



                                     F - 30


<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 30, 2001

         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.
<TABLE>
<CAPTION>

      Signature                                                       Title                         Date
----------------------------------                         --------------------------           --------------
<S>                                                        <C>                                  <C>
Principal Executive Officer

           JOHN R. BARNES                                  President, Chief Executive           March 30, 2001
                                                           Officer and Director
Principal Accounting Officer

           MICHAEL R. BAKKE                                Controller                           March 30, 2001


Directors

           SANGWOO AHN                                     Director                             March 30, 2001

           JOHN R. BARNES                                  Director                             March 30, 2001

           FRANK M. BURKE, JR.                             Director                             March 30, 2001

           CHARLES R. COX                                  Director                             March 30, 2001

           HANS KESSLER                                    Director                             March 30, 2001

           JAMES R. WHATLEY                                Director                             March 30, 2001

</TABLE>


<PAGE>
                                 EXHIBIT INDEX

Exh. No.                           Description
-------- -----------------------------------------------------------------------

10.12    Amendment to the Furmanite Loan Agreement.

10.14    Amendment to the KSI Loan Agreement.

21       List of subsidiaries of the Registrant.

23       Consent of KPMG LLP.