SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

For the Quarterly Period                                        Commission File
Ended June 30, 2000                                            Number 001-05083

                              KANEB SERVICES, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                             74-1191271
(State or other jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

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

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

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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Class of Common Stock                               Outstanding at July 31, 2000
   No par value                                           31,136,660 shares

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED JUNE 30, 2000

                                                                        Page No.
                           Part I. Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated Statements of Income - Three and Six Months
            Ended June 30, 2000 and 1999                                    1

         Condensed Consolidated Balance Sheets - June 30, 2000
            and December 31, 1999                                           2

         Condensed Consolidated Statements of Cash Flows - Six
            Months Ended June 30, 2000 and 1999                             3

         Notes to Consolidated Financial Statements                         4

Item 2.  Management's Discussion and Analysis of
            Financial Condition and Results of Operations                  11

                           Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K                                  17





<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
                                                  Three Months Ended         Six Months Ended
                                                       June 30,                  June 30,
                                                ----------------------    ----------------------
                                                   2000         1999         2000         1999
                                                ---------    ---------    ---------    ---------

<S>                                             <C>          <C>          <C>          <C>
Revenues:
     Services                                   $  67,171    $  69,032    $ 130,857    $ 132,270
     Products                                     101,744       53,919      186,421       90,037
                                                ---------    ---------    ---------    ---------
                                                  168,915      122,951      317,278      222,307
                                                ---------    ---------    ---------    ---------
Costs and expenses:
     Operating costs                               44,943       48,212       89,125       92,054
     Cost of sales                                 99,179       52,798      182,113       87,474
     Depreciation and amortization                  4,541        4,561        9,347        9,063
     General and administrative                     1,411        1,261        2,766        2,385
                                                ---------    ---------    ---------    ---------
         Total costs and expenses                 150,074      106,832      283,351      190,976
                                                ---------    ---------    ---------    ---------

Operating income                                   18,841       16,119       33,927       31,331

Other income                                          249          163          445          447
Interest expense                                   (4,169)      (4,789)      (8,352)      (9,324)
Amortization of excess of cost over fair
   value of net assets of acquired businesses        (550)        (555)      (1,096)      (1,066)
                                                ---------    ---------    ---------    ---------
Income before income taxes and interest
   of outside non-controlling partners in
   KPP's net income                                14,371       10,938       24,924       21,388
Income tax benefit (expense)                       (2,221)         412       (3,889)        (365)
Interest of outside non-controlling
  partners in KPP's net income                     (8,490)      (7,338)     (15,324)     (14,702)
                                                ---------    ---------    ---------    ---------
Net income                                          3,660        4,012        5,711        6,321
Dividends applicable to preferred stock               136          108          266          222
                                                ---------    ---------    ---------    ---------
Net income applicable to common stock           $   3,524    $   3,904    $   5,445    $   6,099
                                                =========    =========    =========    =========
Earnings per common share -
   Basic and Diluted                            $     .11    $     .12    $     .17    $     .19
                                                =========    =========    =========    =========

</TABLE>


                 See notes to consolidated financial statements.
                                        1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

                                                        June 30,   December 31,
                                                          2000         1999
                                                      -----------  -----------
                                                      (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                         $  28,349    $  20,766
     Accounts receivable, trade                           76,518       66,991
     Inventories                                          17,270       18,063
     Prepaid expenses and other current assets            12,442       14,957
                                                       ---------    ---------
        Total current assets                             134,579      120,777
                                                       ---------    ---------

Property and equipment                                   472,261      470,351
Less accumulated depreciation and amortization           149,497      142,207
                                                       ---------    ---------
     Net property and equipment                          322,764      328,144
                                                       ---------    ---------

Investment in affiliate                                   21,008       21,978

Excess of cost over fair value of net assets
     of acquired businesses                               61,836       62,657

Deferred tax assets                                       19,765       22,754
Other assets                                               3,711        4,005
                                                       ---------    ---------
                                                       $ 563,663    $ 560,315
                                                       =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Current portion of long-term debt (including
         $39,500 of KPP debt at June 30, 2000)         $  41,457    $   2,471
     Accounts payable                                     25,270       20,146
     Accrued expenses                                     40,328       41,170
                                                       ---------    ---------
         Total current liabilities                       107,055       63,787
                                                       ---------    ---------

Long-term debt, less current portion:
    Pipeline and terminaling services                    117,678      155,987
    Product marketing services                            12,001       11,041
    Industrial services                                   19,186       20,557
     Parent company                                       23,666       23,666
                                                       ---------    ---------
         Total long-term debt, less current portion      172,531      211,251
                                                       ---------    ---------

Deferred income taxes and other liabilities                9,904       10,791

Interest of outside non-controlling partners in KPP      120,989      124,820

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                    5,792        5,792
     Common stock, without par value                       4,248        4,249
     Additional paid-in-capital                          197,268      197,454
     Treasury stock, at cost                             (31,455)     (30,278)
     Other                                                  (121)        (141)
     Accumulated deficit                                 (19,693)     (25,138)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment          (2,855)      (2,272)
                                                       ---------    ---------
         Total stockholders' equity                      153,184      149,666
                                                       ---------    ---------
                                                       $ 563,663    $ 560,315
                                                       =========    =========

                 See notes to consolidated financial statements.
                                        2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
                                                             Six Months Ended June 30,
                                                             -------------------------
                                                                 2000        1999
                                                               --------    --------
<S>                                                            <C>         <C>
Operating activities:
   Net income                                                  $  5,711    $  6,321
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Equity in earnings of affiliate, net of distributions        663      (1,556)
        Interest of outside non-controlling partners in KPP      15,324      14,702
        Amortization of excess of cost over fair
          value of net assets of acquired businesses              1,096       1,066
        Deferred income taxes                                     3,147         596
        Depreciation and amortization                             9,347       9,063
        Changes in working capital components                    (1,937)     (6,140)
                                                               --------    --------

         Net cash provided by operating activities               33,351      24,052
                                                               --------    --------

Investing activities:
   Capital expenditures                                          (4,157)     (5,171)
   Acquisitions, net of cash acquired                              (280)    (41,255)
   Change in other assets, net                                   (1,467)       (995)
                                                               --------    --------

         Net cash used in investing activities                   (5,904)    (47,421)
                                                               --------    --------

Financing activities:
   Issuance of debt                                               9,347      51,490
   Payments on debt                                              (9,081)     (1,311)
   Distributions to outside non-controlling partners in KPP     (18,500)    (15,350)
   Preferred stock dividends                                       (266)       (222)
   Common stock issued                                              166          92
   Purchase of treasury stock                                    (1,530)       --
                                                               --------    --------

         Net cash provided by (used in) financing activities    (19,864)     34,699
                                                               --------    --------

Increase in cash and cash equivalents                             7,583      11,330
Cash and cash equivalents at beginning of period                 20,766       9,134
                                                               --------    --------

Cash and cash equivalents at end of period                     $ 28,349    $ 20,464
                                                               ========    ========

Supplemental cash flow information:
   Cash paid for interest                                      $  8,636    $  8,940
                                                               ========    ========
   Cash paid for income taxes                                  $    986    $    615
                                                               ========    ========
</TABLE>


                 See notes to consolidated financial statements.
                                        3


<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)

1.   SIGNIFICANT ACCOUNTING POLICIES

     The  unaudited  condensed   consolidated   financial  statements  of  Kaneb
     Services,  Inc. and its subsidiaries  (the "Company") for the three and six
     month  periods  ended  June 30,  2000  and  1999,  have  been  prepared  in
     accordance  with  generally  accepted  accounting  principles  applied on a
     consistent basis.  Significant  accounting policies followed by the Company
     are  disclosed  in the  notes  to  the  consolidated  financial  statements
     included  in the  Company's  Annual  Report on Form 10-K for the year ended
     December  31,  1999.  In the  opinion  of  the  Company's  management,  the
     accompanying   condensed  consolidated  financial  statements  contain  the
     adjustments,  consisting of normal recurring accruals, necessary to present
     fairly the consolidated  financial position of the Company at June 30, 2000
     and the  consolidated  results  of its'  operations  and cash flows for the
     periods ended June 30, 2000 and 1999.  Operating  results for the three and
     six  months  ended  June 30,  2000 are not  necessarily  indicative  of the
     results that may be expected for the year ending December 31, 2000.


2.   ACQUISITION BY KPP

     On February 1, 1999,  Kaneb Pipe Line Partners,  L.P.  ("KPP") acquired six
     terminals in the United Kingdom from GATX Terminals 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  by 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 a public  offering  of KPP units (see
     Note 3). The remaining portion ($25.9 million) is due in January 2002.


3.   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 $65.7 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 referred to in Note
     2.) 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, in the third quarter of 1999, the Company recognized
     a $16.8  million gain before  deferred  income taxes of $6.4  million.  The
     transaction  reduced the Company's limited partner interest in KPP from 31%
     to 28%.


4.   COMPREHENSIVE INCOME

     Comprehensive  income for the three and six months  ended June 30, 2000 and
     1999 is as follows:

<TABLE>
<CAPTION>
                                                          Three Months Ended                Six Months Ended
                                                                June 30,                        June 30,
                                                     -----------------------------    -----------------------------
                                                          2000            1999             2000           1999
                                                     -------------   -------------    -------------  --------------
                                                                             (in thousands)

     <S>                                             <C>             <C>              <C>            <C>
     Net income                                      $       3,660   $       4,012    $       5,711  $        6,321
     Other comprehensive income (loss)
        - foreign currency translation
        adjustment                                            (540)             35             (583)           (525)
                                                     -------------   -------------    -------------  --------------
     Comprehensive income                            $       3,120   $       4,047    $       5,128  $        5,796
                                                     =============   =============    =============  ==============
</TABLE>


<PAGE>
5.   EARNINGS PER SHARE

     The following is a  reconciliation  of Basic and Diluted earnings per share
     (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
                                                                                    Weighted
                                                                                     Average
                                                                    Net              Common            Per-Share
                                                                  Income             Shares             Amount
                                                             ---------------     ---------------     -------------
       <S>                                                   <C>                 <C>                 <C>
       Three Months Ended June 30, 2000
       --------------------------------
           Net income                                        $         3,660
           Dividends applicable to preferred stock                      (136)
                                                             ---------------
           Basic earnings per share -
              Income applicable to common stock                        3,524             31,151      $        .11
                                                                                                     ============
           Effect of dilutive securities -
              Common stock options and DSUs                             -                 1,291
                                                             ---------------     --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised             $         3,524             32,442      $        .11
                                                             ===============     ==============      ============

        Three Months Ended June 30, 1999
        --------------------------------
           Net income                                        $         4,012
           Dividends applicable to preferred stock                      (108)
                                                             ---------------
           Basic earnings per share -
              Income applicable to common stock                        3,904             31,436      $        .12
                                                                                                     ============
           Effect of dilutive securities -
              Common stock options and DSUs                             -                 1,084
                                                             ---------------     --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised             $         3,904             32,520      $        .12
                                                             ===============     ==============      ============

       Six Months Ended June 30, 2000
       ------------------------------
           Net income                                        $         5,711
           Dividends applicable to preferred stock                      (266)
                                                             ---------------
           Basic earnings per share -
              Income applicable to common stock                        5,445             31,206     $         .17
                                                                                                     ============
           Effect of dilutive securities -
              Common stock options and DSUs                             -                 1,253
                                                             ---------------     --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised             $        5,445              32,459      $        .17
                                                             ==============      ==============      ============

       Six Months Ended June 30, 1999
       ------------------------------
           Net income                                        $         6,321
           Dividends applicable to preferred stock                      (222)
                                                             ---------------
           Basic earnings per share -
              Income applicable to common stock                        6,099             31,425      $        .19
                                                                                                     ============
           Effect of dilutive securities -
              Common stock options and DSUs                             -                 1,069
                                                             ---------------     --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised             $         6,099             32,494      $        .19
                                                             ===============     ==============      ============
</TABLE>


     Options to purchase  131,557 and 94,553  shares of common stock at weighted
     average  prices of $5.56 and $5.20,  were  outstanding at June 30, 2000 and
     1999,  respectively,  but were not included in the  computation  of diluted
     earnings per share because the options' exercise price was greater than the
     average market price of the common stock. Additionally, the Company's 8.75%
     convertible  subordinated  debentures were excluded from the computation of
     diluted  earnings  per share  because the effect of assumed  conversion  is
     anti-dilutive.


6.   CONTINGENCIES

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

     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.

     The lawsuit involves environmental response and remediation required by the
     State of Massachusetts. 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  judgment,  which is not yet final, in the
     case 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 intend to appeal
     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.


7.   BUSINESS SEGMENT DATA

     The Pipeline and Terminaling  Segment includes the pipeline and terminaling
     operations of KPP which consist of the  transportation of refined petroleum
     products in the  Midwestern  states as a common  carrier and the storage of
     petroleum products,  specialty  chemicals and other liquids.  The Company's
     Product Marketing Segment provides  wholesale motor fuel marketing services
     throughout the Midwest and Rocky Mountain  regions,  as well as California.
     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.
     Additionally,  the Company provides Industrial 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.   General
     Corporate includes compensation and benefits paid to officers and employees
     of the Parent  Company,  insurance  premiums,  general  and  administrative
     costs,  tax and  financial  reporting  costs,  legal  and  audit  fees  not
     reasonably allocable to specific business segments.

     The Company measures segment profit as operating  income.  Total assets are
     those controlled by each reportable segment.

<TABLE>
<CAPTION>
                                                         Three Months Ended                Six Months Ended
                                                              June 30,                         June 30,
                                                     -----------------------------    -----------------------------
                                                          2000           1999              2000           1999
                                                     -------------   -------------    -------------  --------------
                                                                             (in thousands)
     <S>                                             <C>             <C>              <C>            <C>
     Business segment revenues:
        Pipeline and terminaling services            $      38,438   $      39,171    $      75,118  $       76,016
        Product marketing services                          97,097          51,173          177,486          82,540
        Information technology services                      9,029           7,542           17,364          14,570
        Industrial services                                 24,351          25,065           47,310          49,181
                                                     -------------   -------------    -------------  --------------
                                                     $     168,915   $     122,951    $     317,278  $      222,307
                                                     =============   =============    =============  ==============
     Pipeline and terminaling services segment
       revenues:
           Pipeline operations                       $      17,483   $      16,182    $      32,731  $       31,346
           Terminaling operations                           20,955          22,989           42,387          44,670
                                                     -------------   -------------    -------------  --------------
                                                     $      38,438   $      39,171    $      75,118  $       76,016
                                                     =============   =============    =============  ==============
     Industrial services segment
       revenues:
        Underpressure services                       $      10,243   $       9,500    $      19,617  $       19,225
        Turnaround services                                 11,923          12,909           22,791          23,525
        Other services                                       2,185           2,656            4,902           6,431
                                                     -------------   -------------    -------------  --------------
                                                     $      24,351   $      25,065    $      47,310  $       49,181
                                                     =============   =============    =============  ==============
<PAGE>
                                                         Three Months Ended                Six Months Ended
                                                              June 30,                         June 30,
                                                     -----------------------------    -----------------------------
                                                          2000           1999              2000           1999
                                                     -------------   -------------    -------------  --------------
                                                                             (in thousands)
     Business segment profit:
        Pipeline and terminaling services            $      14,930   $      15,642    $      27,830  $       30,566
        Product marketing services                           1,671             327            2,639             692
        Information technology services                      1,184           1,154            2,338           2,078
        Industrial services                                  2,467             257            3,886             380
        General corporate                                   (1,411)         (1,261)          (2,766)         (2,385)
                                                     -------------   -------------    -------------  --------------
           Operating income                                 18,841          16,119           33,927          31,331
        Other income                                           249             163              445             447
        Interest expense                                    (4,169)         (4,789)          (8,352)         (9,324)
        Amortization of excess of cost
           over fair value of net assets
           of acquired businesses                             (550)           (555)          (1,096)         (1,066)
                                                     -------------   -------------    -------------  --------------
        Income before income taxes and
           interest of outside non-controlling
           partners of KPP's net income              $      14,371   $      10,938    $      24,924  $       21,388
                                                     =============   =============    =============  ==============

                                                                                         June 30,      December 31,
                                                                                           2000           1999
     Total assets:
        Pipeline and terminaling services                                             $     362,744  $      366,935
        Product marketing services                                                           39,815          28,101
        Information technology services                                                      15,269          17,911
        Industrial services                                                                 104,468         108,094
        General corporate                                                                    41,367          39,274
                                                                                      -------------  --------------
                                                                                      $     563,663  $      560,315
                                                                                      =============  ==============
</TABLE>


<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition
and Results of Operations


     This  discussion  should  be  read in  conjunction  with  the  consolidated
     financial  statements of Kaneb  Services,  Inc. (the  "Company")  and notes
     thereto included elsewhere in this report.

     Operating Results:

     Pipeline and Terminaling Services

     This business  segment includes the operations of Kaneb Pipe Line Partners,
     L.P.  ("KPP").  KPP provides  transportation  services of refined petroleum
     products  through a pipeline  system that  extends  through the  Midwestern
     states as a common carrier 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.

<TABLE>
<CAPTION>
                                                     Three Months Ended                  Six Months Ended
                                                            June 30,                           June 30,
                                                   ---------------------------      ----------------------------
                                                      2000             1999             2000            1999
                                                   -----------     -----------      -------------   ------------
                                                                          (in thousands)
     <S>                                           <C>            <C>               <C>             <C>
     Revenues                                      $    38,438    $     39,171      $      75,118   $     76,016
                                                   ===========    ============      =============   ============
     Operating income                              $    14,930     $    15,642      $      27,830   $     30,566
                                                   ===========     ===========      =============   ============
     Capital expenditures,
         excluding acquisitions                    $       547     $     2,392      $       2,883   $      4,074
                                                   ===========     ===========      =============   ============
</TABLE>


     On February 1, 1999,  KPP acquired six terminals in the United Kingdom from
     GATX Terminals  Limited for  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 a public  unit
     offering (See  Liquidity and Capital  Resources).  Three of the  terminals,
     handling  petroleum  products,  chemical 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.

     For the three  months  ended June 30,  2000,  revenues for the Pipeline and
     Terminaling  business  decreased by $0.7  million,  or 2%, when compared to
     1999,  due  to a $2.0  million  decrease  in  revenues  in the  terminaling
     business, partially offset by a $1.3 million increase in pipeline revenues,
     when compared to the same 1999 period. The $0.9 million, or 1%, decrease in
     Pipeline and  Terminaling  revenues for the six month period ended June 30,
     2000 is due to a $2.3  million  decrease  in  revenues  in the  terminaling
     business,  partially  offset by a $1.4  million  increase  in the  pipeline
     revenues,  when compared to 1999. For the three and six month periods ended
     June 30, 2000,  terminaling  revenue  increases  resulting  from the United
     Kingdom and other 1999  acquisitions  were more than offset by decreases in
     tank  utilization due to unfavorable  domestic market  conditions.  Average
     annual tankage utilized for the six months ended June 30, 2000 decreased to
     20.8 million  barrels,  down from 22.3 million  barrels for the  comparable
     prior year period,  primarily the result of unusually  high  utilization at
     the  Partnership's  largest petroleum storage facility in 1999. For the six
     months  ended June 30,  2000,  average  annualized  revenues  per barrel of
     tankage  utilized  increased  to $4.10 per  barrel,  compared  to $4.00 per
     barrel  for the same  prior year  period,  the  result of the  storage of a
     higher proportionate volume of specialty chemicals,  which are historically
     at higher  per barrel  rates  than  petroleum  products.  Pipeline  revenue
     increases  for the three and six month  periods ended June 30, 2000 are due
     to an overall increase in short-haul volumes shipped.  Barrel miles totaled
     4.5 billion and 4.6  billion for the three  months  ended June 30, 2000 and
     1999,  respectively,  and 8.4  billion  and 8.6  billion for the six months
     ended June 30, 2000 and 1999, respectively.

     The $0.7 million decrease in Pipeline and Terminaling  operating income for
     the quarter ended June 30, 2000, compared to 1999, is due to a $1.2 million
     decrease  in  terminaling  operating  income,  partially  offset  by a $0.5
     million  increase in pipeline  operating  income.  For the six month period
     ended June 30, 2000,  operating income decreased by $2.7 million,  compared
     to 1999, due to a $3.1 million decrease in terminaling operating income and
     a $0.4  million  increase in pipeline  operating  income.  The  decrease in
     terminaling  operating  income  for the three and six month  periods,  is a
     result of the  decrease  in tank  utilization.  The  increase  in  pipeline
     operating income for the three and six month periods is due to the increase
     in short-haul volumes shipped.

     The  interest of outside  non-controlling  partners in KPP's net income was
     $8.5  million and $7.3 million for the three month  periods  ended June 30,
     2000 and 1999,  respectively,  and $15.3  million and $14.7 million for the
     six month periods ended June 30, 2000 and 1999, respectively. Distributions
     paid  to  the  outside   non-controlling   unitholders  of  KPP  aggregated
     approximately  $18.5  million and $15.4  million for the six month  periods
     ended June 30, 2000 and 1999, respectively.

     Capital expenditures of $0.5 million and $2.9 million for the three and six
     months  ended  June  30,  2000,  relate  to  the  maintenance  of  existing
     operations. Routine maintenance capital expenditures for 2000 are currently
     estimated to be between $10 million and $15 million.


     Product Marketing Services

     The Company's  petroleum  products  marketing  business provides  wholesale
     motor fuel marketing services throughout the Great Lakes and Rocky Mountain
     regions, as well as California.

<TABLE>
<CAPTION>
                                                     Three Months Ended                  Six Months Ended
                                                            June 30,                           June 30,
                                                   ---------------------------      ----------------------------
                                                      2000             1999             2000            1999
                                                   -----------     -----------      -------------   ------------
                                                                          (in thousands)

     <S>                                           <C>            <C>               <C>             <C>
     Revenues                                      $    97,097    $     51,173      $     177,486   $     82,540
                                                   ===========    ============      =============   ============
     Operating income                              $     1,671    $        327      $       2,639   $        692
                                                   ===========    ============      =============   ============

</TABLE>

     For the three  months  ended June 30,  2000,  revenues  increased  by $45.9
     million,  or 90%, and operating income increased by $1.3 million,  or 411%,
     when  compared to the same 1999  period.  For the six months ended June 30,
     2000,  revenues  increased by $94.9 million,  or 115%, and operating income
     increased by $1.9 million,  or 281%, when compared to 1999. The increase in
     revenues  and  operating  income  for the three and six month  periods is a
     result of an increase in both sales volumes and sales price,  when compared
     to 1999.  Total gallons sold  increased to 102 million for the three months
     ended June 30, 2000, compared to 92 million in 1999, and to 197 million for
     the six month period ended June 30, 2000,  compared to 160 million in 1999,
     due to a combination  of increasing  the number of terminals  through which
     products are sold and increasing volumes at existing locations. The average
     price  realized per gallon of product sold totaled  $0.95 and $0.56 for the
     three  months  ended June 30,  2000 and 1999,  respectively,  and $0.90 and
     $0.52 for the six months ended June 30, 2000 and 1999, respectively, due to
     favorable  market  conditions  resulting from sharp price  increases in the
     segment's operating area.

<PAGE>
     Information Technology Services

     The Company's information technology services business is conducted through
     a variety of wholly-owned subsidiaries. The information technology 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  system  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>


                                                     Three Months Ended                  Six Months Ended
                                                            June 30,                           June 30,
                                                   ---------------------------      -----------------------------
                                                      2000             1999             2000            1999
                                                   -----------     -----------      -------------   -------------
                                                                          (in thousands)

     <S>                                           <C>             <C>              <C>            <C>
     Revenues                                      $     9,029     $     7,542      $      17,364  $       14,570
                                                   ===========     ===========      =============  ==============
     Operating income                              $     1,184     $     1,154      $       2,338  $        2,078
                                                   ===========     ===========      =============  ==============

</TABLE>

     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 three  months  ended  June 30,  2000,  revenues  increased  by $1.5
     million, or 20%, and operating income increased by 3%, when compared to the
     same  1999  period.  For the six  months  ended  June  30,  2000,  revenues
     increased by $2.8 million,  or 19%, and operating  income increased by $0.3
     million,  or 13%, when  compared to 1999.  The increase in revenues for the
     three  month  period  ended  June 30,  2000 is the result of  increases  in
     computer hardware sales. The increases in revenues and operating income for
     the six month  period  ended  June 30,  2000 is a result  of the  Ellsworth
     acquisition  and increases in both computer  hardware  sales and consulting
     services provided to various national  government  agencies and the private
     sector.

<PAGE>
     Industrial Services

     This business segment provides specialized  industrial services,  including
     underpressure  leak  sealing,  on-site  machining,  safety and relief valve
     testing  and  repair,   passive  fire  protection  and  fugitive  emissions
     inspections to the process and power industry worldwide.

<TABLE>
<CAPTION>
                                                     Three Months Ended                  Six Months Ended
                                                            June 30,                         June 30,
                                                   ---------------------------      ------------------------------
                                                      2000             1999             2000             1999
                                                   -----------     -----------      -----------     --------------
                                                                           (in thousands)

     <S>                                           <C>             <C>              <C>             <C>
     Revenues:
         United States                             $     8,888     $   8,037        $    16,732     $       15,506
         Europe                                         13,059         14,091            25,622             27,911
         Asia-Pacific                                    2,404           2,937            4,956              5,764
                                                   -----------     -----------      -----------     --------------
         Total revenues                            $    24,351     $    25,065      $    47,310     $       49,181
                                                   ===========     ===========      ===========     ==============

     Operating income:
         United States                             $       997     $      409       $     1,484     $          448
         Europe                                          1,547          1,204             2,497              1,314
         Asia-Pacific                                      232            100               495                419
         Headquarters                                     (309)          (398)             (590)              (743)
                                                   -----------     ----------       -----------     --------------
         Operating income before
              severance and other costs                  2,467          1,315             3,886              1,438
         Severance and other costs                         -           (1,058)              -              (1,058)
                                                   -----------     ----------       -----------     -------------
         Total operating income                    $     2,467     $      257       $     3,886     $          380
                                                   ===========     ==========       ===========     ==============

     Capital expenditures,
         excluding acquisitions                    $       536     $      616       $       943     $          971
                                                   ===========     ==========       ===========     ==============
</TABLE>

     For the three and six month periods  ended June 30, 2000,  revenues for the
     Industrial  Services  segment  decreased by 3% and 4%,  respectively,  when
     compared to the same 1999 periods,  due to overall  decreases in turnaround
     and other services,  primarily in Continental Europe. In the United States,
     revenues increased by 11% and 8%, respectively, for the three and six month
     periods ended June 30, 2000,  compared to the same periods in 1999,  due to
     improvements in underpressure and turnaround services. In Europe,  revenues
     decreased by 7% and 8%,  respectively,  for the three and six month periods
     ended June 30, 2000,  due to the decrease in turnaround  and other services
     in  Continental  Europe.  Asia-Pacific  revenues  decreased by 18% and 14%,
     respectively, for the three and six month periods ended June 30, 2000, when
     compared to 1999, due to decreases in turnaround services.

     Overall,  Industrial Services operating income,  before severance and other
     costs,  increased  by $1.2  million and $2.4  million for the three and six
     months ended June 30, 2000,  respectively,  when  compared to the same 1999
     periods, due to improved market conditions in the United States and overall
     operating  efficiencies  realized as a result of streamlining the segment's
     workforce in 1999 to match the market  conditions  in each of the operating
     regions.  Severance  and  other  costs  incurred  and paid in 1999 were the
     result of the streamlining effort.


     Income Taxes

     In the fourth  quarter of 1999,  the Company  recognized  $37.1  million in
     expected  benefits  from  prior  years' tax  losses  (change  in  valuation
     allowance) that are available to offset future taxable income.  The Company
     reduced the  valuation  allowance  as a result of its  reevaluation  of the
     realizability  of income tax benefits from future  operations.  The Company
     considered  positive  evidence  supported  by 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 ($67.4  million  expires in 2002),  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  (2000 to 2007) 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 three and six
     month periods ended June 30, 2000  reflects  (and  subsequent  periods will
     reflect) a full effective tax rate provision.

     Income  tax  expense  for the  three and six  months  ended  June 30,  1999
     includes  a  $0.9  million  benefit   related  to  favorable   developments
     pertaining to the resolution of certain foreign income tax issues.


     Liquidity and Capital Resources

     During  the  first  six  months  of 2000,  the  Company's  working  capital
     requirements   for   operations   and   capital   expenditures   (excluding
     acquisitions) were funded through the use of internally generated funds.

     Cash provided by operations was $33.4 million and $24.1 million for the six
     months  ended June 30, 2000 and 1999,  respectively.  Capital  expenditures
     (excluding  acquisitions)  were $4.2  million for the six months ended June
     30, 2000,  compared to $5.2 million in 1999.  Routine  maintenance  capital
     expenditures  in 2000 are  expected  to be funded by  internally  generated
     funds. At June 30, 2000, current  liabilities  include $35.0 million of KPP
     mortgage notes due in June 2001.  KPP  management  expects to refinance the
     mortgage notes prior to maturity with long-term bank financing or through a
     public unit offering.

     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).

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


<PAGE>
                           PART II - Other Information

     Item 6.      Exhibits and Reports on Form 8-K

          (a)     Exhibits.

27.      Financial Data Schedule


(b)      Reports on Form 8-K

                      None.



                                    Signature


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned.



                                      KANEB SERVICES, INC.
                                      (Registrant)


Date:  August 14, 2000                    //s//
                                      -----------------------------------------
                                      Michael R. Bakke
                                      Controller