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, 1999                                           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 30, 1999
   No par value                                          31,441,349 shares

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED JUNE 30, 1999
--------------------------------------------------------------------------------


                                                                        Page No.
                           Part I. Financial Information

Item 1. Financial Statements (Unaudited)

        Consolidated Statements of Income - Three and Six Months
          Ended June 30, 1999 and 1998                                     1

        Condensed Consolidated Balance Sheets - June 30, 1999
           and December 31, 1998                                           2

        Condensed Consolidated Statements of Cash Flows - Six
           Months Ended June 30, 1999 and 1998                             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                                  18





<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,
                                                ----------------------    ----------------------
                                                  1999         1998         1999         1998
                                                ---------    ---------    ---------    ---------

<S>                                             <C>          <C>          <C>          <C>
Revenues                                        $ 122,951    $ 100,492    $ 222,307    $ 159,993
                                                ---------    ---------    ---------    ---------

Costs and expenses:
     Operating costs                               48,212       41,342       92,054       81,275
     Cost of sales                                 52,798       38,607       87,474       40,455
     Depreciation and amortization                  4,561        4,202        9,063        8,249
     General and administrative                     1,261        1,360        2,385        2,426
                                                ---------    ---------    ---------    ---------
         Total costs and expenses                 106,832       85,511      190,976      132,405
                                                ---------    ---------    ---------    ---------

Operating income                                   16,119       14,981       31,331       27,588

Other income                                          163           62          447           25
Interest expense                                   (4,789)      (3,891)      (9,324)      (7,636)
Amortization of excess of cost over fair
   value of net assets of acquired businesses        (555)        (495)      (1,066)        (970)
                                                ---------    ---------    ---------    ---------

Income before interest of outside non-
   controlling partners in KPP's net
   income and income tax expense                   10,938       10,657       21,388       19,007
Interest of outside non-controlling
  partners in KPP's net income                     (7,338)      (6,762)     (14,702)     (12,817)
Income tax benefit (expense)                          412         (530)        (365)        (989)
                                                ---------    ---------    ---------    ---------
Net income                                          4,012        3,365        6,321        5,201
Dividends applicable to preferred stock               108          158          222          308
                                                ---------    ---------    ---------    ---------

Net income applicable to common stock           $   3,904    $   3,207    $   6,099    $   4,893
                                                =========    =========    =========    =========

Earnings per common share -
   Basic and Diluted                            $     .12    $     .10    $     .19    $     .15
                                                =========    =========    =========    =========
</TABLE>



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

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

                                                         June 30,    December 31
                                                           1999          1998
                                                        ---------    -----------
                                                       (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                          $  20,464    $   9,134
     Accounts receivable, trade                            57,205       47,540
     Inventories                                           14,523       13,465
     Prepaid expenses and other current assets              7,465        6,615
                                                        ---------    ---------
        Total current assets                               99,657       76,754
                                                        ---------    ---------

Property and equipment                                    454,112      411,285
Less accumulated depreciation and amortization            136,596      130,759
                                                        ---------    ---------
     Net property and equipment                           317,516      280,526
                                                        ---------    ---------

Investment in affiliate                                    22,423       21,005

Excess of cost over fair value of net assets
     of acquired businesses                                63,764       62,521

Other assets                                                7,102        7,239
                                                        ---------    ---------
                                                        $ 510,462    $ 448,045
                                                        =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Short-term and current portion of long-term debt   $   2,376    $  15,293
     Accounts payable                                      18,764       14,520
     Accrued expenses                                      41,558       41,309
                                                        ---------    ---------
         Total current liabilities                         62,698       71,122
                                                        ---------    ---------

Long-term debt, less current portion:
    Pipeline and terminaling services                     211,719      153,000
    Product marketing services                              3,632         --
    Industrial field services                              21,037       20,292
     Parent company                                        23,666       23,666
                                                        ---------    ---------
         Total long-term debt, less current portion       260,054      196,958
                                                        ---------    ---------

Deferred income taxes and other liabilities                19,004       15,626

Interest of outside non-controlling partners in KPP        75,595       76,894

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                     5,792        5,792
     Common stock, without par value                        4,241        4,239
     Additional paid-in-capital                           197,287      197,263
     Accumulated deficit                                  (82,324)     (88,423)
     Unamortized restricted stock                            (141)        (141)
     Treasury stock, at cost                              (29,709)     (29,775)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment           (2,035)      (1,510)
                                                        ---------    ---------
         Total stockholders' equity                        93,111       87,445
                                                        ---------    ---------
                                                        $ 510,462    $ 448,045
                                                        =========    =========

                 See notes to consolidated financial statements.
                                        2


<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)


                                                             Six Months Ended
                                                                  June 30
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
Operating activities:
   Net income                                              $  6,321    $  5,201
   Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation and amortization                         9,063       8,249
        Equity in earnings of affiliate                      (1,556)       --
        Interest of outside non-controlling partners
          in KPP                                             14,702      12,817
        Amortization of excess of cost over fair
          value of net assets of acquired businesses          1,066         970
        Deferred income taxes                                   596         292
        Changes in working capital components                (6,140)     (6,748)
                                                           --------    --------

         Net cash provided by operating activities           24,052      20,781
                                                           --------    --------

Investing activities:
   Capital expenditures                                      (5,171)     (7,192)
   Acquisitions, net of cash acquired                       (41,255)     (7,829)
   Change in other assets, net                                 (995)     (2,417)
                                                           --------    --------
         Net cash used in investing activities              (47,421)    (17,438)
                                                           --------    --------

Financing activities:
   Issuance of short-term and long-term debt                 51,490      10,247
   Payments on long-term debt                                (1,311)     (5,655)
   Preferred stock dividends                                   (222)       (228)
   Distributions to outside non-controlling partners
     in KPP                                                 (15,350)    (14,255)
   Common stock issued                                           92         137
   Purchase of treasury stock                                  --        (4,736)
                                                           --------    --------
         Net cash provided by (used in) financing
            activities                                       34,699     (14,490)
                                                           --------    --------
Increase (decrease) in cash and cash equivalents             11,330     (11,147)
Cash and cash equivalents at beginning of period              9,134      23,025
                                                           --------    --------

Cash and cash equivalents at end of period                 $ 20,464    $ 11,878
                                                           ========    ========
Supplemental cash flow information:
   Cash paid for interest                                  $  8,940    $  7,480
                                                           ========    ========
   Cash paid for income taxes                              $    615    $  2,060
                                                           ========    ========


                 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,  1999  and  1998,  have  been  prepared  in
     accordance  with  generally  accepted  accounting  principles  applied on a
     consistent basis.  Significant  accounting policies followed by the Company
     and  its  subsidiaries  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,  1998.  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 and
     its consolidated subsidiaries at June 30, 1999 and the consolidated results
     of their  operations and cash flows for the periods ended June 30, 1999 and
     1998.  Operating  results for the three and six months  ended June 30, 1999
     are not necessarily  indicative of the results that may be expected for the
     year ending December 31, 1999.


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 the  assumption  of  certain
     liabilities. The acquisition, which was financed by term loans from a bank,
     has been accounted for using the purchase  method of  accounting.  The term
     loans,  which bear interest in varying amounts,  are secured by the capital
     stock of the subsidiaries that acquired the United Kingdom  terminals,  and
     pari passu with the  existing  mortgage  notes and  credit  facility,  by a
     mortgage on the East Pipeline.  The term loans,  which are without recourse
     to the Company, contain certain financial and operational covenants.  $18.3
     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.  The pro forma effect of the  acquisition
     was not material to the results of operations.


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  resulting  from the  United  Kingdom
     terminal acquisition  referred to in Note 2. Accordingly,  the current debt
     repaid with  offering  proceeds  ($33.3  million at June 30, 1999) has been
     reclassified as long-term in the accompanying balance sheet.

     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 $15.2
     million.  Accordingly,  the Company will recognize a gain,  before deferred
     income taxes, of $15.2 million in the third quarter of 1999.


4.   COMPREHENSIVE INCOME

     Comprehensive  income for the three and six months  ended June 30, 1999 and
     1998 is as follows:

                                          Three Months Ended   Six Months Ended
                                                June 30,           June 30,
                                          -----------------   -----------------
                                            1999      1998     1999       1998
                                          -------   -------   -------   -------
                                                     (in thousands)

     Net income                           $ 4,012   $ 3,365   $ 6,321   $ 5,201
     Other comprehensive income (loss)
        foreign currency translation
        adjustment                             35        26      (525)       27
                                          -------   -------   -------   -------
     Comprehensive income                 $ 4,047   $ 3,391   $ 5,796   $ 5,228
                                          =======   =======   =======   =======

5.   EARNINGS PER SHARE

     The following is a  reconciliation  of Basic and Diluted earnings per share
     (in thousands, except for per share amounts):

                                                            Weighted
                                                             Average
                                                   Net       Common  Per-Share
                                                  Income     Shares    Amount
                                                 --------   -------- ---------
     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
                                                 =======    =======   =======

     Three Months Ended June 30, 1998
     --------------------------------
       Net income                                $ 3,365
       Dividends applicable to preferred stock      (158)
                                                 -------
       Basic earnings per share -
          Income applicable to common stock        3,207     31,944   $   .10
                                                                      =======
       Effect of dilutive securities -
          Common stock options and DSUs             --          800
                                                 -------    -------
       Diluted earnings per share -
          Income applicable to common stock,
          DSUs and assumed options exercised     $ 3,207     32,744   $   .10
                                                 =======    =======   =======

     Six Months Ended June 30, 1999
     ------------------------------
       Net income                                $ 6,321
       Dividends applicable to preferred stock      (222)
                                                 -------

       Basic earnings per share -
         Income available to common stock          6,099     31,425   $    .19
                                                                      ========
       Effect of dilutive securities -
         Common stock options                       --        1,069
                                                 -------   --------
       Diluted earnings per share -
         Income available to common stock
         and assumed options exercised           $ 6,099     32,494   $    .19
                                                 =======    =======   ========

     Six Months Ended June 30, 1998
     ------------------------------
       Net income                                $ 5,201
       Dividends applicable to preferred stock      (308)
                                                 -------
       Basic earnings per share -
         Income available to common stock          4,893     32,066   $   0.15
                                                                      ========
       Effect of dilutive securities -
          Common stock options                      --          777
                                                 -------   --------
       Diluted earnings per share -
          Income available to common stock
          and assumed options exercised          $ 4,893     32,843   $   0.15
                                                 =======    =======   ========

     Options  to  purchase  94,553 and 652  shares of common  stock at  weighted
     average  prices of $5.20 and $5.63,  were  outstanding at June 30, 1999 and
     1998,  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

     The 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.
     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 to the
     Company.

     Certain  subsidiaries  of KPP are  defendants in a lawsuit filed in a Texas
     state court in 1997 by Grace Energy  Corporation,  the entity from whom 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, was abandoned in 1973, and the connecting terminal was
     sold to an  unrelated  entity in 1976.  Grace  alleges that it has incurred
     since  1996  expenses  of   approximately   $3  million  for  response  and
     remediation  required by the State of Massachusetts  and that it expects to
     incur additional expenses in the future.  Future expenses could potentially
     include claims by the United States  Government,  as described below. Grace
     alleges that KPP acquired the abandoned pipeline as part of the acquisition
     of ST Services in 1993 and assumed responsibility for environmental damages
     caused by the jet fuel leaks from the  pipeline.  Grace is seeking a ruling
     that  KPP's  subsidiaries  are  responsible  for  all  present  and  future
     remediation  expenses for these leaks and that Grace has no  obligation  to
     indemnify  KPP for these  expenses.  The case is set for trial in September
     1999.

     KPP's  consistent  position  is that  they did not  acquire  the  abandoned
     pipeline  as  part of the  1993 ST  transaction  and  did  not  assume  any
     responsibility  for the  environmental  damage.  In a  motion  for  partial
     summary judgment,  the trial judge has ruled that the pipeline was an asset
     of the company KPP acquired.  KPP intends to seek a rehearing on this issue
     from the trial judge. In addition,  KPP is continuing with its defense that
     the pipeline had been abandoned prior to the acquisition of ST Services and
     could not have been  included in the assets KPP  acquired.  The  defendants
     also believe that they have certain  rights to  indemnification  from Grace
     under the  acquisition  agreement  with Grace.  These rights include claims
     against Grace for fraud and breach of environmental  representations in the
     acquisition  agreement.  The  acquisition  agreement also includes  Grace's
     agreement  to  indemnify  KPP  against  60% of  post-closing  environmental
     remediation costs, subject to a maximum indemnity payment of $10 million.

     The  Otis  Air  Force  Base  is  a  part  of  the  Massachusetts   Military
     Reservation,  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,  has 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 has  voluntarily  responded to an  invitation
     from the Government to provide information  indicating that it does not own
     the pipeline.  In connection with a court-ordered  mediation  between Grace
     and KPP,  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. Any claims
     by the  Government  could be material in amount and, if made and ultimately
     sustained  against KPP,  could  adversely  affect KPP's ability to pay cash
     distributions to its unitholders.

     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  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  Field  Services  to  an
     international  client  base  that  includes  refineries,  chemical  plants,
     pipelines,  offshore drilling and production  platforms,  steel mills, food
     and drink  processing  facilities,  power  generation,  and  other  process
     industries.

     During the second quarter of 1999, the Company  changed the  composition of
     its segments to report Product  Marketing  Services as a separate  segment.
     Comparable  prior year amounts have been restated to conform to the current
     presentation.

     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,
                                                     -----------------------------    -----------------------------
                                                          1999           1998              1999           1998
                                                     -------------   -------------    -------------  --------------
                                                                             (in thousands)
     <S>                                             <C>             <C>              <C>            <C>
     Business segment revenues:
        Pipeline and terminaling services            $      39,171   $      30,553    $      76,016  $       58,623
        Product marketing services                          51,173          37,699           82,540          39,626
        Information services                                 7,542           2,731           14,570           4,746
        Industrial field services                           25,065          29,509           49,181          56,998
                                                     -------------   -------------    -------------  --------------
                                                     $     122,951   $     100,492    $     222,307  $      159,993
                                                     =============   =============    =============  ==============
     Pipeline and terminaling services segment
       revenues:
           Pipeline operations                       $      16,182   $      15,351    $      31,346  $       29,452
           Terminaling operations                           22,989          15,202           44,670          29,171
                                                     -------------   -------------    -------------  --------------
                                                     $      39,171   $      30,553    $      76,016  $       58,623
                                                     =============   =============    =============  ==============
     Industrial field services segment revenues:
        Underpressure services                       $       9,500   $       9,955    $      19,225  $       20,648
        Turnaround services                                 12,909          13,948           23,525          25,573
        Other services                                       2,656           5,606            6,431          10,777
                                                     -------------   -------------    -------------  --------------
                                                     $      25,065   $      29,509    $      49,181  $       56,998
                                                     =============   =============    =============  ==============
     Business segment profit:
        Pipeline and terminaling services            $      15,642   $      12,924    $      30,566  $       24,808
        Product marketing services                             327             260              692             318
        Information services                                 1,154             956            2,078           1,680
        Industrial field services                              257           2,201              380           3,208
        General corporate                                   (1,261)         (1,360)          (2,385)         (2,426)
                                                     -------------   -------------    -------------  --------------
           Operating income                                 16,119          14,981           31,331          27,588
        Other income                                           163              62              447              25
        Interest expense                                    (4,789)         (3,891)          (9,324)         (7,636)
        Amortization of excess of cost
           over fair value of net assets
           of acquired businesses                             (555)           (495)          (1,066)           (970)
                                                     -------------   -------------    -------------  --------------
        Income before interest of outside
           non-controlling partners of
           KPP's net income and
           income tax expense                        $      10,938   $      10,657    $      21,388  $       19,007
                                                     =============   =============    =============  ==============

                                                                                         June 30,      December 31,
                                                                                           1999           1998
                                                                                      -------------  --------------
     Total assets:
        Pipeline and terminaling services                                             $     356,632  $      310,825
        Product marketing services                                                           17,617          12,233
        Information services                                                                 17,017          11,082
        Industrial field services                                                           109,503         110,603
        General corporate                                                                     9,693           3,302
                                                                                      -------------  --------------
                                                                                      $     510,462  $      448,045
                                                                                      =============  ==============

</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 31%  limited  partner
     interest (27% after KPP's July 1999 public unit  offering - See  "Liquidity
     and Capital Resources") in the partnership.

                                         Three Months Ended  Six Months Ended
                                              June 30,            June 30,
                                         -----------------   -----------------
                                           1999     1998      1999      1998
                                         -------   -------   -------   -------
                                                    (in thousands)

     Revenues                            $39,171   $30,553   $76,016   $58,623
                                         =======   =======   =======   =======
     Operating income                    $15,642   $12,924   $30,566   $24,808
                                         =======   =======   =======   =======
     Capital expenditures,
         excluding acquisitions          $ 2,392   $ 3,423   $ 4,074   $ 5,774
                                         =======   =======   =======   =======


     On October 30, 1998, KPP, through a wholly-owned  subsidiary,  entered into
     acquisition and joint venture  agreements with Northville  Industries Corp.
     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.
     During the year ended  December 31, 1998,  the  Partnership  acquired other
     terminals  for aggregate  consideration  of $15.9  million.  On February 1,
     1999,  KPP acquired six terminals in the United  Kingdom from GATX Terminal
     Limited for  approximately  $37.2  million plus the  assumption  of certain
     liabilities.  The acquisitions (the "Acquisitions") were funded by KPP with
     bank financing,  a portion of which were paid off using proceeds from KPP's
     public unit offering in July 1999 (see "Liquidity and Capital Resources").

     For the three  months  ended June 30,  1999,  revenues for the Pipeline and
     Terminaling  business  increased by $8.6 million,  or 28%, when compared to
     1998, due to a $0.8 million  increase in revenues in the pipeline  business
     and $7.8 million  increase in  terminaling  revenues,  when compared to the
     same 1998  period.  The $17.4  million,  or 30%,  increase in Pipeline  and
     Terminaling  business revenues for the six month period ended June 30, 1999
     is due to a $1.9 million increase in revenues in the pipeline  business and
     a $15.5 million increase in the terminaling revenues,  when compared to the
     same 1998 period.  The increase in pipeline  revenues for the three and six
     months ended June 30, 1999 is due to overall  increases in volumes  shipped
     when  compared to the same  periods in 1998.  Over 90% of the  year-to-date
     increase in volumes shipped was on the East Pipeline.  Barrel miles totaled
     4.6 billion and 4.0  billion for the three  months  ended June 30, 1999 and
     1998,  respectively,  and 8.6  billion  and 7.7  billion for the six months
     ended June 30, 1999 and 1998,  respectively.  The  increase in  terminaling
     revenues  for the three and six months  ended  June 30,  1999 is due to the
     Acquisitions and an increase in tank  utilization  resulting from favorable
     market  conditions,  partially  offset by a decrease in the overall average
     price realized for storage. For the six months ended June 30, 1999, average
     annualized  revenues  per barrel of tankage  utilized  decreased  to $4.00,
     compared to $4.40 per barrel for the same prior year period,  the result of
     the storage of a larger proportionate  volume of petroleum products,  which
     are  historically  at lower per  barrel  rates  than  specialty  chemicals.
     Average  annual  tankage  utilized  for the six months  ended June 30, 1999
     increased  to 22.3 million  barrels  from 13.3  barrels for the  comparable
     prior  year  period,   as  a  result  of  the  Acquisitions  and  increased
     utilization at KPP's largest petroleum storage facility.

     The $2.7 million  increase in operating  income for the quarter  ended June
     30, 1999,  compared to 1998, is due to a $0.8 million  increase in pipeline
     operating  income and a $1.9  million  increase  in  terminaling  operating
     income.  For the six month  period ended June 30,  1999,  operating  income
     increased $5.8 million, compared to 1998, due to a $1.3 million increase in
     pipeline  operating  income  and a $4.5  million  increase  in  terminaling
     operating income.  The increase in pipeline  operating income for the three
     and six  months  ended June 30,  1999,  is due to the  increase  in volumes
     shipped. The increase in terminaling operating income for the three and six
     months  ended  June  30,  1999,  compared  to  1998,  is a  result  of  the
     Acquisitions and the increase in tank utilization.

     The  interest of outside  non-controlling  partners in KPP's net income was
     $7.3  million and $6.8 million for the three month  periods  ended June 30,
     1999 and 1998,  respectively,  and $14.7  million and $12.8 million for the
     six month periods ended June 30, 1999 and 1998, respectively. Distributions
     paid  to  the  outside   non-controlling   unitholders  of  KPP  aggregated
     approximately  $15.4  million and $14.3  million for the six month  periods
     ended June 30, 1999 and 1998, respectively.

     Capital expenditures of $2.4 million and $4.1 million for the three and six
     months  ended  June  30,  1999,  relate  to  the  maintenance  of  existing
     operations. Routine maintenance capital expenditures for 1999 are currently
     estimated to be between $12 million and $16 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.

                                         Three Months Ended  Six Months Ended
                                              June 30,            June 30,
                                         -----------------   -----------------
                                           1999     1998      1999      1998
                                         -------   -------   -------   -------
                                                    (in thousands)

     Revenues                            $51,173   $37,699   $82,540   $39,626
                                         =======   =======   =======   =======
     Operating income                    $   327   $   260   $   692   $   318
                                         =======   =======   =======   =======


     For the three  months  ended June 30,  1999,  revenues  increased  by $13.5
     million,  or 36%, and operating income  increased by $0.1 million,  or 26%,
     when  compared to the same 1998  period.  For the six months ended June 30,
     1999,  revenues  increased by $42.9 million,  or 108%, and operating income
     increased by $0.4 million,  or 118%, when compared to 1998. The increase in
     revenues  and  operating  income for the three month  period is primarily a
     result of a 40% increase in sales  volumes  when  compared to the same 1998
     period.  The  incremental  increase for the six months ended June 30, 1999,
     when  compared to 1998,  is due to the products  marketing  business  being
     acquired in late March 1998.


     Information Services

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

                                         Three Months Ended  Six Months Ended
                                              June 30,            June 30,
                                         -----------------   -----------------
                                           1999     1998      1999      1998
                                         -------   -------   -------   -------
                                                    (in thousands)

     Revenues                            $ 7,542   $ 2,731   $14,570   $ 4,746
                                         =======   =======   =======   =======

     Operating income                    $ 1,154   $   956   $ 2,078   $ 1,680
                                         =======   =======   =======   =======

     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,  1999,  revenues  increased  by $4.8
     million,  or 176%, and operating income increased by $0.2 million,  or 21%,
     when  compared to the same 1998  period.  For the six months ended June 30,
     1999,  revenues  increased by $9.8 million,  or 207%, and operating  income
     increased by $0.4 million,  or 24%, when compared to 1998.  The increase in
     revenues  and  operating  income  for the three and six month  periods is a
     result of the  Ellsworth  acquisition  and  increases in computer  hardware
     sales and  consulting  services  provided  to  various  federal  government
     agencies.


     Industrial Field Services


     This business  segment  provides  specialized  industrial  field  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.

                                         Three Months Ended  Six Months Ended
                                              June 30,            June 30,
                                         -----------------   -----------------
                                           1999     1998      1999      1998
                                         -------   -------   -------   -------
                                                    (in thousands)
     Revenues:
         United States                  $  8,037   $  8,904  $ 15,506  $ 17,838
         Europe                           14,091     17,914    27,911    33,801
         Asia-Pacific                      2,937      2,691     5,764     5,359
                                        --------   --------  --------  --------
         Total Revenues                 $ 25,065   $ 29,509  $ 49,181  $ 56,998
                                        ========   ========  ========  ========
     Operating income:
         United States                  $    409   $    327  $    448  $    809
         Europe                            1,204      1,873     1,314     2,434
         Asia-Pacific                        100        242       419       347
         Headquarters                       (398)      (241)     (743)     (382)
                                        --------   --------  --------  --------
         Operating income before
            severance and other costs      1,315      2,201     1,438     3,208
         Severance and other costs        (1,058)      --      (1,058)     --
                                        --------   --------  --------  --------
         Total operating income         $    257   $  2,201  $    380  $  3,208
                                        ========   ========  ========  ========
     Capital expenditures,
         excluding acquisitions         $    616   $    725  $    971  $  1,347
                                        ========   ========  ========  ========

     For the  three  and six  months  ended  June  30,  1999,  revenues  for the
     Industrial Field Services segment  decreased by 15% and 14%,  respectively,
     when compared to the same 1998 periods, due to adverse market conditions in
     the  United  States  and  Europe,  partially  offset  by  modest  gains  in
     Asia-Pacific.  In the United  States,  revenues  decreased  by 10% and 13%,
     respectively,  for the three  and six month  period  ended  June 30,  1999,
     compared  to the  same  periods  in 1998,  due to  declines  in  turnaround
     services and other process plant services. In Europe, revenues decreased by
     21% and 17%,  respectively,  for the three and six month periods ended June
     30, 1999 due to lower  turnaround  and other process plant  services in the
     United Kingdom. Asia-Pacific revenues increased by 9% in the second quarter
     of 1999 and increased by 8% in the first half of 1999, compared to the same
     periods in 1998,  due to increases  in  turnaround  services in  Australia,
     partially offset by first quarter 1999 declines in  underpressure  services
     in Hong Kong.

     Overall,  Industrial Field Services operating income,  before severance and
     other  costs,  decreased by $0.9 million and $1.8 million for the three and
     six months ended June 30,  1999,  respectively,  when  compared to the same
     1998 periods, due to the adverse market conditions in the United States and
     Europe.  Severance  and other costs  result  from  matching  the  segment's
     workforce to the current market conditions in these regions.

     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 1999,  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 $24.1 million and $20.8 million for the six
     months  ended June 30, 1999 and 1998,  respectively.  Capital  expenditures
     (excluding  acquisitions)  were $5.2  million for the six months ended June
     30, 1999,  compared to $7.2 million in 1998.  Routine  maintenance  capital
     expenditures  in 1999 are  expected  to be funded by  internally  generated
     funds.

     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  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 $15.2 million. Accordingly, the Company will recognize a gain,
     before  deferred  income  taxes,  of $15.2  million in the third quarter of
     1999.

     In January  1999,  KPP  entered  into a credit  agreement  with a bank that
     provides 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.  The term  loans,  which  bear  interest  in varying
     amounts, are secured by the capital stock of the subsidiaries that acquired
     the United  Kingdom  terminals,  and pari passu with the existing  mortgage
     notes and credit  facility,  by a mortgage on the East  Pipeline.  The term
     loans, which are without recourse to the Company, contain certain financial
     and operational  covenants.  $18.3 million of the term loans were repaid in
     July  1999 with the  proceeds  from a public  offering  of KPP  units.  The
     remaining portion ($25.9 million) is due in January 2002.

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


     Year 2000 Issue

     The Company  recognizes  the  challenges  associated  with Year 2000 Issues
     ("Y2K") and has undertaken a review and testing of its computer  systems to
     identify  Y2K-related  issues  associated  with any  items of  software  or
     hardware used in its business operations. Most of the software systems used
     by the Company are  licensed  from third  parties and are Y2K  compliant or
     will be upgraded to Y2K  compliant  releases  before the end of 1999.  This
     issue is being  addressed  by the  Company in  multiple  phases,  including
     assessment,  remediation, testing and implementation, and progress is being
     monitored by the Company's senior  management.  All material systems,  on a
     world-wide basis,  including  non-information  technology  systems that may
     house non-compliant, embedded technology are being evaluated.

     In addition to addressing  the Company's own systems,  as described  above,
     the  Company  must  assess the state of  readiness  of the systems of other
     entities  with which it does  business.  With  respect  to its  third-party
     relationships,  the Company has contacted its primary suppliers and service
     providers to assess their state of Y2K readiness.  The Company continues to
     receive  information from its critical  suppliers and service  providers to
     assist the Company in assessing the Y2K readiness of these parties. Failure
     by these third parties to adequately  resolve their Y2K problems could have
     a material adverse effect on the Company's operations.

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

     At June 30, 1999, the initial  assessment  phase has been completed for the
     Company's  information  technology and non-information  technology systems.
     Most of the major  information  technology  systems on which the  Company's
     operations  depend  have  been  updated,  tested  and  certified  to be Y2K
     compliant.  The Company  continues to evaluate the  appropriate  courses of
     action of its non-information  technology systems, including embedded chips
     located in pipeline, terminaling and other hardware. The Company expects to
     complete all phases of its Y2K program prior to December 31, 1999.

     The Company  believes that it is not possible to determine  with  certainty
     that all Y2K  problems  affecting  the  Company  have  been  identified  or
     corrected.   The  number  of  devices   that  could  be  affected  and  the
     interactions among these devices are simply too numerous. In addition,  the
     Company  cannot  accurately  predict how many  failures  related to the Y2K
     problem will occur or the severity,  duration or financial  consequences of
     such  failures.  The Company has hired an outside Y2K  consultant to assist
     the Company in meeting  its goals and in  developing  contingency  plans to
     define  and  address  the  worst-case  scenario  likely  to be faced by the
     Company. The plan is expected to be in place by September 30, 1999.

     Through June 30, 1999, the Company has incurred  approximately $0.9 million
     of costs  related to  assessing,  remediating  and testing its  information
     technology and non-information technology systems. A portion of these costs
     would have been incurred as part of normal system and application upgrades.
     In certain cases, the timing of these expenditures has been accelerated due
     to Y2K considerations. The Company does not anticipate that future costs to
     become fully Y2K compliant will be material.

<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

                    Registrant's Current Report on Form 8-K, dated July 9, 1999.



                                    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 13, 1999                                //s//
                                                 Michael R. Bakke
                                                 Controller