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 March 31, 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 April 30, 1999
     No par value                                       31,430,675 shares

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED MARCH 31, 1999
--------------------------------------------------------------------------------

                                                                        Page No.
                           Part I. Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated Statements of Income - Three Months Ended
             March 31, 1999 and 1998                                       1

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

         Condensed Consolidated Statements of Cash Flows - Three
             Months Ended March 31, 1999 and 1998                          3

         Notes to Consolidated Financial Statements                        4

Item 2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations                 8

                           Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K                                 13





<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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

                                                            Three Months Ended
                                                                 March 31,
                                                           -------------------- 
                                                             1999        1998
                                                           --------    --------

Revenues                                                   $ 99,356    $ 59,501
                                                           --------    --------
Costs and expenses:
     Operating costs                                         43,842      39,933
     Cost of sales                                           34,676       1,848
     Depreciation and amortization                            4,502       4,047
     General and administrative                               1,124       1,066
                                                           --------    --------
           Total costs and expenses                          84,144      46,894
                                                           --------    --------

Operating income                                             15,212      12,607

Other income (expense)                                          284         (37)
Interest expense                                             (4,535)     (3,745)
Amortization of excess of cost over fair
     value of net assets of acquired business                  (511)       (475)
                                                           --------    --------

Income before interest of outside non-controlling partners
     in KPP's net income and income tax expense              10,450       8,350
Interest of outside non-controlling partners in KPP's
     net income                                              (7,364)     (6,055)
Income tax expense                                             (777)       (459)
                                                           --------    --------

Net income                                                    2,309       1,836
Dividends applicable to preferred stock                         114         150
                                                           --------    --------

Net income applicable to common stock                      $  2,195    $  1,686
                                                           ========    ========

Earnings per common share - Basic and Diluted              $    .07    $    .05
                                                           ========    ========



                 See notes to consolidated financial statements.
                                        1
<PAGE>


KANEB SERVICES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)


                                                          March 31, December 31,
                                                            1999         1998
                                                         ---------    ----------
                                                        (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                           $  22,750    $   9,134
     Accounts receivable, trade                             53,006       47,540
     Inventories                                            11,480       13,465
     Prepaid expenses and other current assets               7,984        6,615
                                                         ---------    ---------
        Total current assets                                95,220       76,754
                                                         ---------    ---------

Property and equipment                                     473,984      432,290
Less accumulated depreciation and amortization             133,502      130,759
                                                         ---------    ---------
     Net property and equipment                            340,482      301,531
                                                         ---------    ---------

Excess of cost over fair value of net assets
     of acquired businesses                                 64,270       62,521

Other assets                                                 7,120        7,239
                                                         ---------    ---------
                                                         $ 507,092    $ 448,045
                                                         =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Short-term and current portion of long-term debt    $  35,696    $  15,293
     Accounts payable                                       15,197       14,520
     Accrued expenses                                       44,326       41,309
                                                         ---------    ---------
         Total current liabilities                          95,219       71,122
                                                         ---------    ---------

Long-term debt, less current portion:
     Industrial field services                              21,176       20,292
     Pipeline, terminaling and product marketing services  182,210      153,000
     Parent company                                         23,666       23,666
                                                         ---------    ---------
         Total long-term debt, less current portion        227,052      196,958
                                                         ---------    ---------

Deferred income taxes and other liabilities                 19,326       15,626

Interest of outside non-controlling partners in KPP         76,376       76,894

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                      5,792        5,792
     Common stock, without par value                         4,240        4,239
     Additional paid-in-capital                            197,293      197,263
     Accumulated deficit                                   (86,228)     (88,423)
     Unamortized restricted stock                             (141)        (141)
     Treasury stock, at cost                               (29,767)     (29,775)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment            (2,070)      (1,510)
                                                         ---------    ---------
         Total stockholders' equity                         89,119       87,445
                                                         ---------    ---------
                                                         $ 507,092    $ 448,045
                                                         =========    =========

                See notes to consolidated financial statements.
                                        2

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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

                                                            Three Months Ended
                                                                 March 31,
                                                           -------------------- 
                                                             1999        1998
                                                           --------    --------
Operating activities:
   Net income                                              $  2,309    $  1,836
   Adjustments to reconcile net income to net
       cash provided by operating activities:
        Depreciation and amortization                         4,502       4,047
        Interest of outside non-controlling partners in KPP   7,364       6,055
        Amortization of excess of cost over fair
          value of net assets acquired                          511         475
        Deferred income taxes                                   404         187
        Changes in working capital components                   169      (2,712)
                                                           --------    --------

         Net cash provided by operating activities           15,259       9,888
                                                           --------    --------

Investing activities:
   Capital expenditures                                      (2,651)     (3,010)
   Acquisitions, net of cash acquired                       (41,807)     (6,591)
   Change in other assets, net                                   68      (2,136)
                                                           --------    --------

       Net cash used in investing activities                (44,390)    (11,737)
                                                           --------    --------

Financing activities:
   Issuance of short-term and long-term debt                 51,450       9,028
   Payments on long-term debt                                  (953)     (3,315)
   Preferred stock dividends                                   (114)       (150)
   Distributions to outside non-controlling partners in KPP  (7,675)     (7,129)
   Common stock issued                                           39         121
                                                           --------    --------

       Net cash provided by (used in) financing activities   42,747      (1,445)
                                                           --------    --------

Increase (decrease) in cash and cash equivalents             13,616      (3,294)
Cash and cash equivalents at beginning of period              9,134      23,025
                                                           --------    --------

Cash and cash equivalents at end of period                 $ 22,750    $ 19,731
                                                           ========    ========

Supplemental cash flow information:
   Cash paid for interest                                  $  2,934    $  2,836
                                                           ========    ========

   Cash paid for income taxes                              $    204    $  1,125
                                                           ========    ========

                 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 month
     periods  ended March 31, 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 March 31, 1999 and the consolidated results of
     their  operations  and cash flows for the periods  ended March 31, 1999 and
     1998.  Operating  results for the three months ended March 31, 1999 are not
     necessarily  indicative  of the results  that may be expected  for the year
     ending December 31, 1999.


2.   ACQUISITION

     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   certain
     liabilities.  The  acquisition,  which was financed  with term loans from a
     bank, has been accounted for using the purchase  method of accounting.  The
     pro forma  effect of the  acquisition  was not  material  to the results of
     operations.


3.   COMPREHENSIVE INCOME

     Comprehensive  income for the three months ended March 31, 1999 and 1998 is
     as follows:

                                                            Three Months Ended
                                                                 March 31,
                                                            -------------------
                                                              1999       1998
                                                            -------    --------
                                                               (in thousands)

     Net income                                             $ 2,309    $ 1,836
     Other comprehensive income (loss) - foreign
        currency translation adjustment                        (560)         1
                                                            -------    -------
     Comprehensive income                                   $ 1,749    $ 1,837
                                                            =======    =======


4.   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 March 31, 1999
    ---------------------------------
    Net income                                   $ 2,309
    Dividends applicable to preferred stock         (114)
                                                 -------

    Basic earnings per share -
       Income applicable to common stock           2,195     31,414   $   .07
                                                                      =======

    Effect of dilutive securities -
       Common stock options and DSUs                --        1,011
                                                 -------    -------

    Diluted earnings per share -
       Income applicable to common stock,
       DSUs and assumed options exercised        $ 2,195     32,425   $   .07
                                                 =======    =======   =======
<PAGE>
    Three Months Ended March 31, 1998
    ---------------------------------
    Net income                                   $ 1,836
    Dividends applicable to preferred stock         (150)
                                                 -------

    Basic earnings per share -
       Income applicable to common stock           1,686     32,189   $   .05
                                                                      =======

    Effect of dilutive securities -
       Common stock options and DSUs                --          771
                                                 -------    -------

    Diluted earnings per share -
       Income applicable to common stock,
       DSUs and assumed options exercised        $ 1,686     32,960   $   .05
                                                 =======    =======   =======

     Options to  purchase  106,232  and 682 shares of common  stock at  weighted
     average prices of $4.26 and $5.36,  were  outstanding at March 31, 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.


5.   DEBT

     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 and are due in June 1999 ($18.3 million) and in
     January 2002 ($25.9 million).


6.   CONTINGENCIES

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

     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 Company provides  industrial field services to an international  client
     base  that  includes  refineries,   chemical  plants,  pipelines,  offshore
     drilling and production  platforms,  steel mills, food and drink processing
     facilities,  power generation,  and other process industries. The Pipeline,
     Terminaling and Product Marketing  Segment  includes:  (i) the pipeline and
     terminaling  operations  of KPP  which  consist  of the  transportation  of
     refined petroleum products in the Midwestern states as a common carrier and
     the storage of petroleum  products,  specialty chemicals and other liquids,
     and (ii) the  Company's  products  marketing  business.  Additionally,  the
     Company  provides  information  services  to  governmental,  insurance  and
     financial institutions.

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

                                                            Three Months Ended
                                                                 March 31,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
                                                               (in thousands)
Business segment revenues:
   Industrial field services                               $ 24,116    $ 27,489 
   Pipeline, terminaling and product marketing services      68,212      29,997
   Information services                                       7,028       2,015
                                                           --------    --------
                                                           $ 99,356    $ 59,501
                                                           ========    ========
Industrial field services segment revenues:
   Underpressure services                                  $  9,725    $ 10,693
   Turnaround services                                       10,616      11,625
   Other services                                             3,775       5,171
                                                           --------    --------
                                                           $ 24,116    $ 27,489
                                                           ========    ========
Pipeline, terminaling and product marketing
  services segment revenues:
      Pipeline operations                                  $ 15,164    $ 14,101
      Terminaling operations                                 21,681      13,969
      Product marketing services                             31,367       1,927
                                                           --------    --------
                                                           $ 68,212    $ 29,997
                                                           ========    ========
Business segment profit:
   Industrial field services                               $    123    $  1,007
   Pipeline, terminaling and product marketing services      15,289      11,942
   Information services                                         924         724
   General corporate                                         (1,124)     (1,066)
                                                           --------    --------
      Operating income                                       15,212      12,607
   Other income (expense)                                       284         (37)
   Interest expense                                          (4,535)     (3,745)
   Amortization of excess of cost over fair
      value of net assets of acquired businesses               (511)       (475)
                                                           --------    --------
   Income before interest of outside
      non-controlling partners of KPP's
      net income and income tax expense                    $ 10,450    $  8,350
                                                           ========    ========

                                                           March 31  December 31
                                                             1999        1998
                                                           --------    --------
Total assets:
   Industrial field services                               $110,055    $110,603
   Pipeline, terminaling and product marketing services     374,101     323,058
   Information services                                      16,181      11,082
   General corporate                                          6,755       3,302
                                                           --------    --------
                                                           $507,092    $448,045
                                                           ========    ========

<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:

     Industrial Field Services
                                                            Three Months Ended
                                                                 March 31,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
                                                               (in thousands)

     Revenues:
        United States                                      $  7,469    $  8,936
        Europe                                               13,820      15,887
        Asia-Pacific                                          2,827       2,666
                                                           --------    --------
            Total revenues                                 $ 24,116    $ 27,489
                                                           ========    ========

     Operating income:
        United States                                      $     39    $    482
        Europe                                                  110         561
        Asia-Pacific                                            319         105
        Headquarters                                           (345)       (141)
                                                           --------    --------

            Total operating income                         $    123    $  1,007
                                                           ========    ========
     Capital expenditures, excluding acquisitions          $    357    $    622
                                                           ========    ========

     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.

     For the three  months ended March 31,  1999,  revenues  for the  Industrial
     Field Services segment decreased by $3.4 million,  or 12%, when compared to
     the same 1998 period,  due  primarily 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 16%,  compared  to the same
     period in 1998, due primarily to declines in on-site machining services. In
     Europe,  revenues  decreased  by 13%,  due to lower  turnaround  and  other
     process  plant  services  in  the  United  Kingdom.  Asia-Pacific  revenues
     increased  by 6% in the  first  quarter  of 1999,  compared  to  1998,  due
     primarily to increases in turnaround  services in Australia and  Singapore,
     partially offset by declines in underpressure services in Hong Kong.

     Overall,  Industrial  Field  Services  operating  income  decreased by $0.9
     million for the quarter  ended  March 31,  1999,  compared to the same 1998
     period,  due to decreases in revenues  and  operating  income in the United
     States and Europe, a result of adverse market conditions in these regions.



<PAGE>


     Pipeline, Terminaling and Product Marketing Services

                                                            Three Months Ended
                                                                 March 31,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
                                                               (in thousands)
     Revenues:
        Pipeline and terminaling                           $ 36,845    $ 28,070
        Product marketing                                    31,367       1,927
                                                           --------    --------
                                                           $ 68,212    $ 29,997
                                                           ========    ========

     Operating income                                      $ 15,289    $ 11,942
                                                           ========    ========

     Capital expenditures, excluding acquisitions          $  2,258    $  2,350
                                                           ========    ========


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

     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.

     For the three months  ended March 31,  1999,  revenues for the Pipeline and
     Terminaling  business  increased by $8.8 million,  or 31%, when compared to
     1998, due to a $1.1 million  increase in revenues in the pipeline  business
     and $7.7 million increase in terminaling revenues when compared to the same
     1998 period.  The increase in pipeline  revenues for the three months ended
     March 31, 1999 is due  primarily  to  increases  in volumes  shipped,  when
     compared to the same period in 1998. The increase in  terminaling  revenues
     for the three months ended March 31, 1999 is due to the Acquisitions and an
     increase in tank utilization resulting from favorable market conditions.

     The $3.3 million  increase in operating  income for the quarter ended March
     31, 1999,  compared to 1998, is due to a $0.6 million  increase in pipeline
     operating income, a $2.4 million increase in terminaling  operating income,
     primarily  resulting  from  the  Acquisitions  and  the  increase  in  tank
     utilization, and $0.3 million from the products marketing business acquired
     in March 1998.

     The  interest of outside  non-controlling  partners in KPP's net income was
     $7.4 million and $6.1 million for the three month  periods  ended March 31,
     1999  and   1998,   respectively.   Distributions   paid  to  the   outside
     non-controlling  unitholders of KPP aggregated  approximately  $7.7 million
     and $7.1 million for the three month periods ended March 31, 1999 and 1998,
     respectively.

     Capital  expenditures  of $2.3 million for the three months ended March 31,
     1999,  relate to the  maintenance of existing  operations.  Routine capital
     expenditures for 1999 are currently estimated to be between $12 million and
     $16 million.

<PAGE>
     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
                                                                 March 31,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
                                                               (in thousands)

     Revenues                                              $  7,028    $  2,015
                                                           ========    ======== 
     Operating income                                      $    924    $    724
                                                           ========    ========
     Capital expenditures, excluding acquisitions          $     36    $     38
                                                           ========    ========

     For the three months ended March 31, 1999, revenues increased $5.0 million,
     or 249%, and operating income increased $0.2 million, or 28%, when compared
     to 1998,  primarily from increased  computer  hardware sales and consulting
     services provided to various federal government agencies.

     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.


     Liquidity and Capital Resources

     During  the first  three  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 $15.3  million and $9.9  million for the
     three  months  ended  March  31,  1999  and  1998,  respectively.   Capital
     expenditures  (excluding  acquisitions)  were  $2.7  million  for the three
     months  ended March 31,  1999,  compared to $3.0  million in 1998.  Capital
     expenditures  in 1999 are  expected  to be funded by  internally  generated
     funds.

     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 and are due in June 1999 ($18.3 million) and in
     January 2002 ($25.9 million).

     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 has received
     information  from  its  critical   suppliers  and  service   providers  and
     anticipates  receiving additional  information in the near future that will
     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 March 31, 1999, the initial  assessment phase has been completed for the
     Company's  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
     assess Y2K compliance and evaluate the appropriate courses of action of its
     non-information  technology  systems,  including  embedded chips located in
     pipeline, terminaling and other hardware. The Company's expects to complete
     its  assessment  of  non-information  technology  systems by the end of the
     second  quarter of 1999 and 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 the end of the  second
     quarter of 1999.

     Through March 31, 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/A,  dated March 9,
                    1999, (SEC File No. 001-05083).



                                    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:  May 14, 1999                               //s//
                                           Michael R. Bakke
                                           Controller