Exhibit 10.3


                              KANEB SERVICES, INC.
                 NON-EMPLOYEE DIRECTORS DEFERRED STOCK UNIT PLAN


         1. Purpose.  This Deferred Stock Unit Plan of Kaneb  Services,  Inc., a
Delaware  corporation,  is intended to advance the best interests of the Company
by providing non-employee directors of the Company with additional incentive and
by increasing their proprietary interest in the success of the Company,  thereby
encouraging  them to continue  their  service to the  Company.  By this Plan (as
defined  below) the Company (as defined  below)  seeks to  establish  an orderly
compensation  plan to more  closely  align the  interests of a  Participant  (as
defined below) with those of the Company's  stockholders over a multi-year term,
in return for the Participant's service to the Company or its subsidiaries.

         2. Definitions.

                  A.  "Board  of  Directors"  or  "Board"  means  the  Board  of
         Directors of the Company.

                  B. "Change of Control" means, with respect to the Company, the
         occurrence of any one or more of the following events:

                           (1) the  acquisitions  by any individual or entity of
                  the legal or beneficial ownership of securities of the Company
                  having 20% or more of the total votes that may be cast for the
                  election of  directors  of the  Company;  (3) the  approval by
                  stockholders  of the Company of the sale or other  disposition
                  of all or  substantially  all of  the  assets  of the  Company
                  (including a plan of liquidation or dissolution) or the merger
                  or   consolidation   of  the  Company  with  or  into  another
                  corporation,   in   accordance   with  the   requirements   of
                  Certificate  of  Incorporation  of the Company and  applicable
                  law; or

                           (2) as a result of or in  connection  with any tender
                  offer, exchange offer, merger or other business combination of
                  the foregoing,  the failure of the individuals who are members
                  of the Board of Directors  immediately  prior to such event to
                  continue to constitute the majority of the Board.

                  C. "Committee"  means the Compensation  Committee of the Board
         of Directors, or any successor committee appointed by resolution of the
         Board.

                  D.  "Company"  means  Kaneb   Services,   Inc.  ,  a  Delaware
         Corporation.

                  E. "Common  Stock"  means the Common Stock of the Company,  no
         par value.

                  F.  "Compensation"  means  with  respect  to a  Director,  his
         regular  cash payment from the Company in respect of his service to the
         Company.

                  G.  "Contribution  Period"  means  the  first day of the first
         payment  period  commencing on or after the Initial  Valuation Date and
         ending on the last day of the last payment  period as determined by the
         Committee  and  elected  by a  Participant,  during  which  period  the
         Participant defers Compensation into this Plan.

                  H. "Contributions" means the cumulative amount of Compensation
         which has been credited to a  Participant's  Deferred Stock Unit Ledger
         Account, in accordance with Section 7 hereof.

                  I. "Deferred Stock Unit" or "DSU",  means a unit credited to a
         Participant's  Deferred  Stock Unit Ledger  Account in accordance  with
         Section 7 hereof.

                  J. "Deferred Stock Unit Ledger" or "DSU Ledger" means a record
         that  from  time to time  reflects  the  name of each  Participant  and
         credits  such  Participant  with the  number of DSU's  which  have been
         purchased  on his or her  behalf  under the Plan.  As each  Participant
         becomes  Partially  Vested and Fully  Vested in DSU's,  the record will
         also indicate the vesting status of the DSU's.

                  K. "Disability"  means the inability of a Participant  through
         life-threatening  illness or other  life-threatening  cause, within the
         judgment of the Committee  based on the advice of competent  physicians
         of their selection,  to continue in the employment of the Company for a
         consecutive  period of six (6)  months or more,  as  determined  by the
         Committee.

                  L.  "Entrance  Date"  means  the  date on  which  an  Eligible
         Director  elects to become a  Participant  in the Plan by delivering to
         the Company the election authorization described in Section 6 hereof.

                  M. "Eligible Director" means any non-employee  director of the
         Company.

                  N.  "Final   Valuation   Date"   means,   with  respect  to  a
         Participant,  the earlier to occur of the following dates: (i) the date
         on which a Participant is not reelected to the Board;  (ii) the date of
         a  Participant's  death or  Disability;  (iii)  the  date on which  the
         Company undergoes a Change of Control; (iv) or any date selected by the
         Participant  which is on or after  January 1 of the calendar  year next
         succeeding the calendar year in which the Contribution Period ends.

                  O.  "Initial  Valuation  Date" means the date  selected by the
         Committee  on  which a  Participant's  DSU  Ledger  is  established  as
         prescribed in Section 7 hereof.

                  P.  "Participant"  means each Eligible  Director who elects to
         participate in the Plan pursuant to Section 5 hereof.

                  Q.  "Plan"  means  this  Kaneb  Services,   Inc.  Non-Employee
         Directors  Deferred  Stock Unit Plan as the same shall be amended  from
         time to time.

                  R.   "DSU Value"  means:

                           (1) on any Final  Valuation Date occurring  after the
                  end of the full Contribution Period, the dollar value of DSU's
                  determined by multiplying the DSU's credited to the DSU Ledger
                  account of a  Participant  by the closing sale price per share
                  of the Company's  Common Stock on the New York Stock  Exchange
                  on such date (or, if there is no  reported  sale on such date,
                  on the last preceding date on which such sale occurred; or

                           (2) on any Final  Valuation  Date prior to the end of
                  the full Contribution  Period, the amount of cash compensation
                  actually deferred by the Participant as of the Final Valuation
                  Date  divided  by the amount of total  aggregate  compensation
                  that was previously  calculated on the Initial  Valuation Date
                  to be the total expected  aggregate  amount  deferred over the
                  Contribution  Period  multiplied  by the closing  price of the
                  Company's  Common  Stock on the Final  Valuation  Date (or, if
                  there is no reported sale on such date, on the last  preceding
                  day on which any such reported sale occurred).

                  S. "Fully Vested" shall mean the  Participant's DSU Value when
         computed pursuant to Section 2, item R (1) above.

                  T. "Partially  Vested" shall mean the  Participant's DSU Value
         when computed pursuant to Section 2, item R (2) above.

         3.    Administration.

                  A.  The Plan  shall  be  administered  by the  Committee.  The
         Committee may delegate the  Administration of the Plan to an officer or
         executive of the Company,  however the  Committee  may not delegate its
         authority to amend, change or terminate the Plan.

                  B. The Committee may make such rules and  regulations  for the
         conduct of its  affairs,  and  subject to the  provisions  of the Plan,
         interpret  the Plan,  amend the Plan and make all other  determinations
         and  perform  such  actions  as it  deems  necessary  or  advisable  to
         administer the Plan.

                  C. No member of the  Committee  shall be liable for any action
         taken or  determination  made in good faith with respect to the Plan or
         any Option granted hereunder.

         4. Notification of Eligibility.  The Committee shall notify such person
in writing of eligibility prior to the Initial Valuation Date.

         5.  Method  of  Participation.  Each  Eligible  Director  may  elect to
participate in the Plan by executing and delivering to the Company, on or before
the Election Date, an election authorization  described in Section 6 below. Such
Eligible  Director  shall  thereby  become  a  Participant  effective  as of the
Election Date and shall remain a Participant  until such  Participant  or his or
her  beneficiary,  as the case may be, has received  payment of the DSU value of
such Participant's  Deferred Stock Units in accordance with Section 9 hereof, or
until such Participant's  rights are earlier forfeited as provided in Section 11
hereof.  Upon the  effectiveness of the  Participant's  election to participate,
each  Participant  shall be granted a  non-qualified  stock  option to  purchase
shares of Common  Stock of the Company  for a price  equal to the  closing  sale
price of the Company's Common Stock on the Initial Valuation Date. The number of
shares  subject  to such  non-qualified  stock  option  and  vesting  provisions
attached  thereto shall be  determined by the Committee in its sole  discretion.
Upon the grant of such non-qualified stock option to a Participant,  the Company
and the Participant shall execute a non-qualified stock option agreement.

         6. Election  Authorization.  The Company shall furnish to each Eligible
Director an election  authorization in such form or forms as the Committee shall
prescribe. The election authorization shall request a deferral of pay during the
Contribution  Period  of an  amount  up to  100% of  such  Participant's  annual
Compensation (but not less than 5% of such Participant's  annual  compensation).
No election  authorization  shall be effective sooner than the next compensation
period that begins after the  Company's  receipt of the election  authorization.
All amounts deferred in accordance with a Participant's  election  authorization
shall be credited to such  Participant's  account under the Deferred  Stock Unit
Ledger,  more  fully  described  below.  No  interest  shall be  payable on such
accounts.

         7.  Establishment and Maintenance of Deferred Stock Unit Ledger. On the
Initial Valuation Date, the Company shall establish a Deferred Stock Unit Ledger
which  shall  reflect  the  name  of  each   Participant   and  credit  to  such
Participant's  account established  thereunder (i) the amounts actually deferred
from  his  or  her   Compensation   in  accordance  with  his  or  her  election
authorization  and (ii) the number of his or her Deferred Stock Units.  For this
purpose,  the number of DSU's to be credited to the account  shall be the number
of DSU's  determined by dividing (x) the aggregate  amount of the  Participant's
Compensation  to be  deferred  over the  Contribution  Period by (y) the closing
price per share of the Company's  Common stock on the New York Stock Exchange on
the Initial  Valuation Date. As each  Participant  becomes  Partially Vested and
Fully  Vested as defined in Section 3 above,  the DSU Ledger  shall also reflect
the number of his or her cumulative vested Units.  Finally, on the Participant's
Final  Valuation Date, his or her account shall be credited with a dollar amount
equal to the DSU value of all his or here Fully Vested or Partially Vested DSU's
on such Final Valuation Date.

         8. Amount and Form of Payment.  Upon a  Participant's  Final  Valuation
Date, such Participant or his or her  beneficiary,  as the case may be, shall be
entitled to receive an amount equal to the DSU Value of such Participant's Fully
Vested or Partially Vested DSU's determined as of such Final Valuation Date. All
amounts  distributed  to  Participants  or  beneficiaries  with respect to Final
Valuation  Dates  occurring  prior  the end of the full  Contribution  Period as
elected by the  Participant  shall be paid in cash.  All amounts  distributed to
Participants  or  beneficiaries  with respect to Final Valuation Dates occurring
after the end of such  Contribution  Period shall be in shares of the  Company's
Common Stock.  The Company may satisfy its obligation to deliver shares of stock
from treasury shares, from authorized but unissued shares of Common Stock, or by
repurchasing  shares of its Common Stock on the open market.  The Company shall,
where applicable, issue and deliver to the Participant certificates representing
shares of its Common  Stock as soon as  practicable  after the DSU Value of such
Participant  becomes  due and  payable  hereunder;  provided  however,  that the
obligation  of the Company to deliver  shares of Common Stock shall be postponed
for such period of time as may be  necessary  to register or qualify such shares
under the Securities Act of 1933 or any applicable state securities law.

         9. Timing of Payment. The Company shall pay to such Participant,  or to
his or her beneficiary,  as the case may be, the DSU Value of the  Participant's
DSU's in the form  determined  in accordance  with Section 8 above,  in a single
lump-sum  no later than  sixty  (60) days  following  such  Participant's  Final
Valuation Date;  provided however,  that on or before his or her Final Valuation
Date, the Participant may elect that his or her Unit Value be paid in accordance
with such alternate payment schedule as the Committee in its sole discretion may
approve.

         10. Beneficiary Designation.  Prior to the Initial Valuation Date, each
Participant  shall file with the Company a beneficiary  designation on such form
or forms as the Committee shall prescribe  naming gone or more  beneficiaries to
succeed to the Participant's right to receive payments hereunder in the event of
his  or her  death.  The  Participant  shall  have  the  right  to  change  such
designation  from time to time;  provided,  however,  that no such change  shall
become effective until received in writing by the Committee.

         11.  Forfeiture  of Deferred  Stock  Units.  Notwithstanding  any other
provision  hereof,  on a  Participant's  Final  Valuation  Date,  any  DSU's not
Partially Vested or Fully Vested shall be forfeited.

         12.   Contingent  Right  to  Receive  DSU  Value.  The  right  of  each
Participant to payment of the future DSU Value is contingent only and subject to
forfeiture as provided in Sections 3 and 17. Title to and  beneficial  ownership
of any assets,  whether cash or investments,  which the Company may set aside or
earmark to meet its contingent deferred obligation hereunder, shall at all times
remain  in the  Company  and no  Participant  or  beneficiary  shall  under  any
circumstances  acquire  any  interest  in any  specific  assets in the  Company.
Nothing  contained  herein  shall be  deemed to create a trust of any kind or to
create a fiduciary  relationship  between the  Company or the  Committee  or the
Committee's  Designee(s)  and a  Participant.  To the  extent  that  any  person
acquires a right to receive  payments  from the  Company  under this Plan,  such
right shall be no greater  than that of any  unsecured  general  creditor of the
Company.

         13. Limitation on Rights. Nothing in this Plan shall be construed to:

                  A. give a Participant  any rights  whatsoever  with respect to
         shares of Common Stock of the Company;

                  B.  give a  Participant  any  rights of a  stockholder  of the
         Company;

                  C.  limit  in any way the  right  of the  stockholders  of the
         Company to elect or choose not to elect a Participant to the Board;

                  D. be evidence of any agreement or  understanding,  express or
         implied,  that the Company will engage the services of a Participant in
         any particular position or at any particular rate of remuneration.

         14. Dividends and Dilution. The existence of outstanding Deferred Stock
Units  shall  not  affect in any way the  right or power of the  Company  or its
stockholders   to   make  or   authorize   any   adjustment,   recapitalization,
reorganization,  or any other change in the Company's  capital  structure or its
business,  any  merger  or  consolidation  of the  Company,  any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the Common
Stock or any right thereto,  the dissolution or liquidation of the Company,  any
sale or  transfer  of all or any part of its  assets or  business,  or any other
corporate act or proceeding whether of a similar character or otherwise.

         15. Transferability of Contingent Right to Future Payments. No right or
payment  under this Plan shall be subject  to  anticipation,  alienation,  sale,
assignment,  pledge,  encumbrance  or charge,  and any  attempt  to  anticipate,
alienate,  sell, assign,  pledge,  encumber or charge the same shall be void. No
right or payment  hereunder  shall in any manner be liable for or subject to the
debts, contracts,  liabilities or torts of any person entitled to such benefits.
If any Participant or beneficiary  hereunder shall become bankrupt or attempt to
anticipate,  alienate,  assign,  sell,  pledge,  encumber or charge any right or
benefit  hereunder,  or if any creditor  shall  attempt to subject the same to a
writ of garnishment,  attachment, execution, sequestration, or any other form of
process or involuntary lien or seizure, then such right or payment shall, in the
discretion of the Committee, either cease and terminate absolutely or be held by
the Company for the sole benefit of the Participant or such beneficiary,  his or
her spouse,  children or other dependents,  or any of them in such manner and in
such proportion as the Committee shall deem proper, free and clear of the claims
of any other party whatsoever.

         16.  Adjustments  Upon Changes in Common  Stock.  In the event that the
Company  shall effect a split of its Common stock or declare a dividend  payable
in Common  Stock,  or in the event that the  outstanding  Common  Stock shall be
combined into a smaller number of shares, the number of DSU's of any Participant
shall be increased or decreased proportionately,  in a manner deemed appropriate
by the  Committee.  In the  event of a  reclassification  of  Common  Stock  not
encompassed by the foregoing, or in the event of a liquidation or reorganization
of the  Company,  including  a  merger,  consolidation  or sale of  assets,  the
Committee shall make such adjustments, if any, as it may deem appropriate in the
number of DSU's of any Participant  that are subject to the Plan. The provisions
of this Section  shall only be applicable  if, and only to the extent that,  the
application  thereof  does  not  conflict  with  any  valid  government  statue,
regulation or rule.

         17.  Financial   Hardship.   Upon  written  petition  of  the  affected
Participant,  in a manner  specified by the Committee,  the Committee may in its
sole discretion, with satisfactory documentation from the Participant, determine
a Final  Valuation  Date for the affected  Participant.  The value at such Final
Valuation Date shall be determined as provided for under Section 2, Items R. (1)
and R. (2) above.

         18.  Withholding  Taxes.  As of the  Effective  Date of this Plan,  the
Company  believes  that it has no  obligation  to withhold  taxes from  Eligible
Directors of the Company;  however, if the Company in its discretion  determines
that it is  obligated  to  withhold  any tax in  connection  with the payment or
vesting of  benefits  with  respect to  Deferred  Stock  Units,  the Company may
withhold from the Participant's  remuneration the appropriate amount of the tax.
At the  discretion  of the  Company,  the amount  required to be withheld may be
withheld in cash from such  remuneration  or in cash or in kind from cash or the
Common  Stock,  respectively,  deliverable  to the  Participant  under the terms
hereof.  If the  Company  does not  withhold  an amount  from the  Participant's
remuneration  sufficient to satisfy the withholding obligation of the Company or
such  subsidiary,  the Participant  shall be required to make  reimbursement  on
demand, in cash, for the amount underwithheld.

         19.  Amendment or  Termination of Plan. The Company may amend this Plan
in  whole or in part at any time  and  from  time to  time.  Notice  of any such
amendment  shall be given in writing to each  Participant  and  beneficiary of a
deceased  participant.  No amendment shall operate  retroactively to deprive any
Participant or  beneficiary of any benefit  hereunder to which he or she is then
entitled.  The Company may  terminate  the Plan at any time.  Notice of any such
termination  shall be given in writing to each  participant and beneficiary of a
deceased  Participant.  No such  termination  shall be operate  retroactively to
deprive any  Participant or beneficiary of any benefit  hereunder to which he or
she is then entitled.

         20. Gender.  Reference  hereunder to the male gender shall be deemed to
include the female and neuter genders,  unless  otherwise stated or indicated by
the circumstances.

         21. Headings.  All the headings set forth in this Plan are intended for
convenience  only and shall not control or affect the meaning,  construction  or
effect of this Plan.

         22. Severability.  In case any term in this Plan shall be held invalid,
illegal  or  unenforceable  in whole or in part,  neither  the  validity  of the
remaining  part of such term,  nor the validity of the other terms of this Plan,
shall in any way be affected thereby.

         23.  Applicable  Law.  To the extent not in  conflict  with  applicable
federal  law,  the  laws of the  State  of  Texas  shall  govern  the  validity,
construction and interpretation of this Plan.

         24.  Effective  Date.  This Plan has been approved by the  Compensation
Committee, effective as of the 23rd day of July, 1998.