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 September 30, 2000                                        Number 001-05083

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

         Yes    X                                             No

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

Class of Common Stock                            Outstanding at November 1, 2000
   No par value                                         31,146,660 shares

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
                                                                        Page No.
                           Part I. Financial Information

Item 1.   Financial Statements (Unaudited)

          Consolidated Statements of Income - Three and Nine Months
             Ended September 30, 2000 and 1999                            1

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

          Condensed Consolidated Statements of Cash Flows - Nine
             Months Ended September 30, 2000 and 1999                     3

          Notes to Consolidated Financial Statements                      4

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

                           Part II. Other Information

Item 6.   Exhibits and Reports on Form 8-K                               18





<PAGE>


KANEB SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          Three Months Ended                 Nine Months Ended
                                                             September 30,                    September 30,
                                                     -----------------------------    -----------------------------
                                                          2000           1999              2000           1999
                                                     -------------  --------------    -------------  --------------
<S>                                                  <C>            <C>               <C>            <C>
Revenues:
     Services                                        $      69,373  $       69,409    $     200,230  $      201,679
     Products                                               99,448          64,871          285,869         154,908
                                                     -------------   -------------    -------------  --------------
                                                           168,821         134,280          486,099         356,587
                                                     -------------   -------------    -------------  --------------
Costs and expenses:
     Operating costs                                        44,242          45,786          133,367         137,840
     Cost of sales                                          98,254          63,158          280,367         150,632
     Depreciation and amortization                           4,775           4,682           14,122          13,745
     General and administrative                              1,013           1,403            3,779           3,788
                                                     -------------   -------------    -------------  --------------
         Total costs and expenses                          148,284         115,029          431,635         306,005
                                                     -------------   -------------    -------------  --------------
Operating income                                            20,537          19,251           54,464          50,582

Other income                                                   463             225              908             672
Interest expense                                            (4,308)         (4,214)         (12,660)        (13,538)
Amortization of excess of cost over fair
   value of net assets of acquired businesses                 (548)           (551)          (1,644)         (1,617)
                                                     -------------   -------------    -------------  --------------

Income before  gain on issuance of units by KPP,
   income  taxes and  interest of outside
   non-controlling partners in KPP's net income             16,144          14,711           41,068          36,099
Gain on issuance of units by KPP                              -             16,764             -             16,764
Income tax expense                                          (1,688)         (6,320)          (5,577)         (6,685)
Interest of outside non-controlling
   partners in KPP's net income                             (9,871)         (9,608)         (25,195)        (24,310)
                                                     -------------   -------------    -------------  --------------

Net income                                                  4,585           15,547           10,296          21,868
Dividends applicable to preferred stock                       127              124              393             346
                                                     -------------   -------------    -------------  --------------
Net income applicable to common stock                $       4,458   $      15,423    $       9,903  $       21,522
                                                     =============   =============    =============  ==============

Earnings per common share:
   Basic                                             $         .14   $         .49    $         .32  $          .68
                                                     =============   =============    =============  ==============
   Diluted                                           $         .14   $         .47    $         .31  $          .66
                                                     =============   =============    =============  ==============
</TABLE>




                 See notes to consolidated financial statements.
                                        1

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------

                                                     September 30,  December 31,
                                                          2000         1999
                                                       ----------   ---------
                                                      (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                         $  29,777    $  20,766
     Accounts receivable, trade                           75,925       66,991
     Inventories                                          19,909       18,063
     Prepaid expenses and other current assets            12,555       14,957
                                                       ---------    ---------
        Total current assets                             138,166      120,777
                                                       ---------    ---------

Property and equipment                                   485,796      470,351
Less accumulated depreciation and amortization           153,339      142,207
                                                       ---------    ---------
     Net property and equipment                          332,457      328,144
                                                       ---------    ---------
Investment in affiliate                                   22,168       21,978

Excess of cost over fair value of net assets
     of acquired businesses                               61,288       62,657

Deferred tax assets                                       18,143       22,754
Other assets                                               3,423        4,005
                                                       ---------    ---------
                                                       $ 575,645    $ 560,315
                                                       =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Current portion of long-term debt (including
         $48,000 of KPP debt at September 30, 2000)    $  49,991    $   2,471
     Accounts payable                                     22,092       20,146
     Accrued expenses                                     39,913       41,170
                                                       ---------    ---------
         Total current liabilities                       111,996       63,787
                                                       ---------    ---------

Long-term debt, less current portion:
    Pipeline and terminaling services                    117,101      155,987
    Product marketing services                            16,347       11,041
    Industrial services                                   17,704       20,557
     Parent company                                       23,666       23,666
                                                       ---------    ---------
         Total long-term debt, less current portion      174,818      211,251
                                                       ---------    ---------

Deferred income taxes and other liabilities                9,999       10,791

Interest of outside non-controlling partners in KPP      121,642      124,820

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                    5,792        5,792
     Common stock, without par value                       4,250        4,249
     Additional paid-in-capital                          197,187      197,313
     Treasury stock, at cost                             (31,440)     (30,278)
     Accumulated deficit                                 (15,235)     (25,138)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment          (3,364)      (2,272)
                                                       ---------    ---------
         Total stockholders' equity                      157,190      149,666
                                                       ---------    ---------
                                                       $ 575,645    $ 560,315
                                                       =========    =========

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                 Nine Months Ended
                                                                   September 30,
                                                               --------------------
                                                                 2000        1999
                                                               --------    --------
<S>                                                            <C>         <C>
Operating activities:
   Net income                                                  $ 10,296    $ 21,868
   Adjustments to reconcile net income to net
     cash provided by operating activities:
        Equity in earnings of affiliate, net of distributions      (285)     (2,515)
        Interest of outside non-controlling partners in KPP      25,195      24,310
        Gain on issuance of units by KPP                           --       (16,764)
        Amortization of excess of cost over fair
          value of net assets of acquired businesses              1,644       1,617
        Deferred income taxes                                     5,066       7,480
        Depreciation and amortization                            14,122      13,745
        Changes in other liabilities                             (1,525)       --
        Changes in working capital components                    (7,689)     (8,817)

         Net cash provided by operating activities               46,824      40,924
                                                               --------    --------

Investing activities:
   Capital expenditures                                          (8,509)    (13,183)
   Acquisitions, net of cash acquired                           (12,332)    (48,439)
   Change in other assets, net                                   (1,137)     (2,882)
                                                               --------    --------
         Net cash used in investing activities                  (21,978)    (64,504)
                                                               --------    --------

Financing activities:
   Issuance of debt                                              22,619      55,480
   Payments on debt                                              (9,024)    (57,491)
   Distributions to outside non-controlling partners in KPP     (27,750)    (26,175)
   Preferred stock dividends                                       (393)       (346)
   Common stock issued                                              243         233
   Purchase of treasury stock                                    (1,530)       --
   Net proceeds from issuance of units by KPP                      --        65,574
                                                               --------    --------
         Net cash provided by (used in) financing activities    (15,835)     37,275
                                                               --------    --------

Increase in cash and cash equivalents                             9,011      13,695
Cash and cash equivalents at beginning of period                 20,766       9,134
                                                               --------    --------
Cash and cash equivalents at end of period                     $ 29,777    $ 22,829
                                                               ========    ========

Supplemental cash flow information:
   Cash paid for interest                                      $ 14,185    $ 12,401
                                                               ========    ========
   Cash paid for income taxes                                  $  1,624    $    956
                                                               ========    ========

</TABLE>


                 See notes to consolidated financial statements.
                                        3
<PAGE>


KANEB SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)
--------------------------------------------------------------------------------


1.   SIGNIFICANT ACCOUNTING POLICIES

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


2.   ACQUISITION BY KPP

     On February 1, 1999,  Kaneb Pipe Line Partners,  L.P.  ("KPP") acquired six
     terminals in the United Kingdom from GATX Terminals Limited for (pound)22.6
     million  (approximately  $37.2  million)  plus  transaction  costs  and the
     assumption of certain  liabilities.  The  acquisition,  which was initially
     financed  by term  loans  from a bank,  has been  accounted  for  using the
     purchase method of accounting.  $13.3 million of the term loans were repaid
     in July 1999 with the  proceeds  from a public  offering  of KPP units (see
     Note 3). The remaining portion ($24.1 million) is due in January 2002.


3.   PUBLIC OFFERING OF KPP UNITS

     In July 1999, KPP issued 2.25 million limited partnership units in a public
     offering at $30.75 per unit, generating  approximately $65.6 million in net
     proceeds.  A portion of the  proceeds was used to repay in full KPP's $15.0
     million  promissory note, KPP's $25.0 million revolving credit facility and
     $18.3  million of KPP's term loans  (including  $13.3 million in term loans
     resulting from the United Kingdom terminal  acquisition referred to in Note
     2.) As a result of KPP issuing additional units to unrelated  parties,  the
     Company's  pro-rata  share  of the net  assets  of KPP  increased  by $16.8
     million.  Accordingly, in the third quarter of 1999, the Company recognized
     a $16.8  million gain before  deferred  income taxes of $6.4  million.  The
     transaction  reduced the Company's limited partner interest in KPP from 31%
     to 28%.


4.   COMPREHENSIVE INCOME

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

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

     <S>                                             <C>             <C>              <C>            <C>
     Net income                                      $       4,585   $      15,547    $      10,296  $       21,868
     Other comprehensive income (loss)
        - foreign currency translation
        adjustment                                            (509)              3           (1,092)           (522)
                                                     -------------   -------------    -------------  --------------
     Comprehensive income                            $       4,076   $      15,550    $       9,204  $       21,346
                                                     =============   =============    =============  ==============

</TABLE>
<PAGE>
5.   EARNINGS PER SHARE

     The following is a  reconciliation  of Basic and Diluted earnings per share
     (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
                                                                           Weighted
                                                                            Average
                                                           Net              Common             Per-Share
                                                         Income             Shares              Amount
                                                     ------------       --------------      -------------
       <S>                                           <C>                <C>                 <C>
       Three Months Ended September 30, 2000
           Net income                                $      4,585
           Dividends applicable to preferred stock           (127)
                                                     ------------

           Basic earnings per share -
              Income applicable to common stock             4,458               31,138      $         .14
                                                                                            =============

           Effect of dilutive securities -
              Common stock options and DSUs                  -                   1,108
                                                     -------------      --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised     $       4,458               32,246     $         .14
                                                     =============      ===============     =============

       Three Months Ended September 30, 1999
           Net income                                $      15,547
           Dividends applicable to preferred stock            (124)
                                                     -------------

           Basic earnings per share -
              Income applicable to common stock             15,423               31,465     $         .49
                                                                                            =============

           Effect of dilutive securities -
              Common stock options and DSUs                   -                   1,135
                                                      -------------      --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised     $       15,423              32,600     $         .47
                                                     ==============      ==============     =============

       Nine Months Ended September 30, 2000
           Net income                                $       10,296
           Dividends applicable to preferred stock             (393)
                                                     --------------

           Basic earnings per share -
              Income applicable to common stock               9,903              31,183     $         .32
                                                                                            =============

           Effect of dilutive securities -
              Common stock options and DSUs                    -                  1,202
                                                     --------------      --------------
           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised     $       9,903               32,385     $         .31
                                                     =============       ==============     =============

       Nine Months Ended September 30, 1999
           Net income                                $      21,868
           Dividends applicable to preferred stock            (346)
                                                     -------------

           Basic earnings per share -
              Income applicable to common stock             21,522               31,439     $         .68
                                                                                            =============

           Effect of dilutive securities -
              Common stock options and DSUs                   -                   1,101
                                                     -------------       --------------

           Diluted earnings per share -
              Income applicable to common stock,
              DSUs and assumed options exercised     $       21,522              32,540     $         .66
                                                     ==============      ==============     =============
</TABLE>


     Options to purchase  237,597 and 68,501  shares of common stock at weighted
     average prices of $5.27 and $5.14,  were  outstanding at September 30, 2000
     and 1999, respectively, but were not included in the computation of diluted
     earnings per share because the options' exercise price was greater than the
     average market price of the common stock. Additionally, the Company's 8.75%
     convertible  subordinated  debentures were excluded from the computation of
     diluted  earnings  per share  because the effect of assumed  conversion  is
     anti-dilutive.


6.   CONTINGENCIES

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

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

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

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

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

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

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

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

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


7.   BUSINESS SEGMENT DATA

     The Pipeline and Terminaling  Segment includes the pipeline and terminaling
     operations of KPP which consist of the  transportation of refined petroleum
     products in the  Midwestern  states as a common  carrier and the storage of
     petroleum products,  specialty  chemicals and other liquids.  The Company's
     Product Marketing Segment provides  wholesale motor fuel marketing services
     throughout the Midwest and Rocky Mountain  regions,  as well as California.
     The Company's  Information  Technology Services Segment provides consulting
     services,  hardware  sales and other  related  information  management  and
     processing services to governmental,  insurance and financial institutions.
     Additionally,  the Company provides Industrial Services to an international
     client base that includes refineries,  chemical plants, pipelines, offshore
     drilling and production  platforms,  steel mills, food and drink processing
     facilities,  power  generation,  and  other  process  industries.   General
     Corporate includes compensation and benefits paid to officers and employees
     of the Parent  Company,  insurance  premiums,  general  and  administrative
     costs,  tax and  financial  reporting  costs,  legal  and  audit  fees  not
     reasonably allocable to specific business segments.

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

                                                           Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                     -----------------------------    ------------------------------
                                                          2000            1999             2000           1999
                                                     -------------   -------------    -------------  ---------------
                                                                             (in thousands)
     <S>                                             <C>             <C>              <C>            <C>
     Business segment revenues:
        Pipeline and terminaling services            $      41,051   $      41,573    $     116,169  $      117,589
        Product marketing services                          94,007          59,776          271,493         142,316
        Information technology services                     10,025           9,488           27,389          24,058
        Industrial services                                 23,738          23,443           71,048          72,624
                                                     -------------   -------------    -------------  --------------
                                                     $     168,821   $     134,280    $     486,099  $      356,587
                                                     =============   =============    =============  ==============
     Pipeline and terminaling services segment
      revenues:
        Pipeline operations                          $      19,567   $      18,708    $      52,298  $       50,054
        Terminaling operations                              21,484          22,865           63,871          67,535
                                                     -------------   -------------    -------------  --------------
                                                     $      41,051   $      41,573    $     116,169  $      117,589
                                                     =============   =============    =============  ==============
     Industrial services segment
       revenues:
        Underpressure services                       $       9,929   $       9,230    $      29,546  $       28,455
        Turnaround services                                 11,478          11,265           34,269          34,790
        Other services                                       2,331           2,948            7,233           9,379
                                                     -------------   -------------    -------------  --------------
                                                     $      23,738   $      23,443    $      71,048  $       72,624
                                                     =============   =============    =============  ==============
<PAGE>
                                                           Three Months Ended               Nine Months Ended
                                                              September 30,                   September 30,
                                                     -----------------------------    ------------------------------
                                                          2000            1999             2000           1999
                                                     -------------   -------------    -------------  ---------------
                                                                             (in thousands)
     Business segment profit:
        Pipeline and terminaling services            $      17,438   $      17,429    $      45,268  $       47,995
        Product marketing services                             428             559            3,067           1,251
        Information technology services                      1,192           2,065            3,530           4,143
        Industrial services                                  2,493             601            6,379             981
        General corporate                                   (1,014)         (1,403)          (3,780)         (3,788)
                                                     -------------   -------------    -------------  --------------
           Operating income                                 20,537          19,251           54,464          50,582
        Other income                                           463             225              908             672
        Interest expense                                    (4,308)         (4,214)         (12,660)        (13,538)
        Amortization of excess of cost
           over fair value of net assets
           of acquired businesses                             (548)           (551)          (1,644)         (1,617)
                                                     -------------   -------------    -------------  --------------
        Income before gain on issuance of
           units by KPP, income taxes and
           interest of outside non-controlling
           partners in KPP's net income              $      16,144   $      14,711    $      41,068  $       36,099
                                                     =============   =============    =============  ==============

                                                                                       September 30,   December 31,
                                                                                           2000           1999
                                                                                      -------------  --------------
     Total assets:
        Pipeline and terminaling services                                             $     375,096  $      366,935
        Product marketing services                                                           38,141          28,101
        Information technology services                                                      16,678          17,911
        Industrial services                                                                 104,716         108,094
        General corporate                                                                    41,014          39,274
                                                                                      -------------  --------------
                                                                                      $     575,645  $      560,315
                                                                                      =============  ==============
</TABLE>

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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

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

     Operating Results:


     Pipeline and Terminaling Services

     This business  segment includes the operations of Kaneb Pipe Line Partners,
     L.P.  ("KPP").  KPP provides  transportation  services of refined petroleum
     products  through a pipeline  system that  extends  through the  Midwestern
     states as a common carrier and provides  terminaling  and storage  services
     for petroleum products,  specialty chemicals and other liquids. The Company
     operates,  manages and controls the pipeline and terminaling  operations of
     KPP  through its 2% general  partner  interest  and a 28%  limited  partner
     interest in the partnership.

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

     <S>                                             <C>             <C>              <C>            <C>
     Revenues                                        $      41,051   $      41,573    $     116,169  $      117,589
                                                     =============   =============    =============  ==============
     Operating income                                $      17,438   $      17,429    $      45,268  $       47,995
                                                     =============   =============    =============  ==============
     Capital expenditures,
         excluding acquisitions                      $       3,551   $       7,169    $       6,434  $       11,243
                                                     =============   =============    =============  ==============
</TABLE>


     On February 1, 1999,  KPP acquired six terminals in the United Kingdom from
     GATX Terminals  Limited for  approximately  $37.2 million plus  transaction
     costs and the assumption of certain liabilities. The acquisition of the six
     locations, which have an aggregate tankage capacity of 5.4 million barrels,
     was initially financed by term loans from a bank. $13.3 million of the term
     loans  were  repaid  in July  1999  with the  proceeds  from a public  unit
     offering (See  Liquidity and Capital  Resources).  Three of the  terminals,
     handling  petroleum  products,  chemical and molten  sulfur,  respectively,
     operate in England. The remaining three facilities, two in Scotland and one
     in Northern Ireland, are primarily petroleum  terminals.  All six terminals
     are served by deepwater marine docks.

     For the three months ended  September  30, 2000,  revenues for the Pipeline
     and Terminaling business decreased by $0.5 million,  when compared to 1999,
     due to a $1.4  million  decrease in revenues in the  terminaling  business,
     partially  offset by a $0.9  million  increase in pipeline  revenues,  when
     compared to the same 1999 period. The $1.4 million decrease in Pipeline and
     Terminaling revenues for the nine months ended September 30, 2000 is due to
     a $3.7 million decrease in revenues in the terminaling business,  partially
     offset by a $2.3 million increase in the pipeline  revenues,  when compared
     to 1999.  For the three and nine month  periods  ended  September 30, 2000,
     terminaling  revenue increases  resulting from the United Kingdom and other
     1999  acquisitions  were more than offset by decreases in tank  utilization
     due to  unfavorable  domestic  market  conditions.  Average  annual tankage
     utilized for the nine months  ended  September  30, 2000  decreased to 20.8
     million  barrels,  down from 22.5 million barrels for the comparable  prior
     year period,  primarily the result of unusually  high  utilization at KPP's
     largest  petroleum  storage  facility in 1999.  For the nine  months  ended
     September  30,  2000,  average  annualized  revenues  per barrel of tankage
     utilized  increased  to $4.09 per barrel,  compared to $4.00 per barrel for
     the  same  prior  year  period,  the  result  of the  storage  of a  higher
     proportionate  volume of specialty  chemicals,  which are  historically  at
     higher per barrel rates than petroleum products. Pipeline revenue increases
     for the three and nine month periods ended September 30, 2000 are due to an
     overall increase in short-haul  volumes  shipped.  Barrel miles totaled 4.7
     billion and 5.1 billion for the three months ended  September  30, 2000 and
     1999,  respectively,  and 13.1 billion and 13.7 billion for the nine months
     ended September 30, 2000 and 1999, respectively.

     Pipeline and  Terminaling  operating  income  remained flat for the quarter
     ended September 30, 2000,  compared to 1999, due to a $0.2 million increase
     in  pipeline  operating  income,  offset  by a  $0.2  million  decrease  in
     terminaling operating income. For the nine month period ended September 30,
     2000, operating income decreased by $2.7 million,  compared to 1999, due to
     a $3.3 million decrease in terminaling  operating income and a $0.6 million
     increase  in  pipeline   operating  income.  The  decrease  in  terminaling
     operating  income for the three and nine  month  periods is a result of the
     decrease in tank utilization. The increase in pipeline operating income for
     the three and nine  month  periods  is due to the  increase  in  short-haul
     volumes shipped.

     The  interest of outside  non-controlling  partners in KPP's net income was
     $9.9 million and $9.6 million for the three month periods  ended  September
     30, 2000 and 1999,  and $25.2  million and $24.3 million for the nine month
     periods ended September 30, 2000 and 1999, respectively. Distributions paid
     to the outside non-controlling  unitholders of KPP aggregated approximately
     $27.8 million and $26.2 million for the nine month periods ended  September
     30, 2000 and 1999, respectively.

     Capital  expenditures  of $3.6  million and $6.4  million for the three and
     nine months ended September 30, 2000, relate to the maintenance of existing
     operations. Routine maintenance capital expenditures for 2000 are currently
     estimated to be between $8 million and $12 million.



<PAGE>


     Product Marketing Services

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

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

     <S>                                           <C>             <C>              <C>             <C>
     Revenues                                      $    94,007     $    59,776      $   271,493     $     142,316
                                                   ===========     ===========      ===========     =============

     Operating income                              $       428     $       559      $     3,067     $       1,251
                                                   ===========     ===========      ===========     =============
</TABLE>


     For the three and nine month  periods ended  September  30, 2000,  revenues
     increased  by  $34.2   million,   or  57%,  and  $129.2   million  or  91%,
     respectively, when compared to the same 1999 periods, due to an increase in
     both sales  volumes and sales price.  Total  gallons  sold  increased to 99
     million for the three  months  ended  September  30,  2000,  compared to 90
     million in 1999, and to 296 million for the nine months ended September 30,
     2000,  compared to 250 million in 1999,  due to a combination of increasing
     the number of terminals  through  which  products  are sold and  increasing
     volumes at existing  locations.  The average  price  realized per gallon of
     product sold totaled  $0.95 and $0.66 for the three months ended  September
     30,  2000 and 1999,  respectively,  and $0.92 and $0.57 for the nine months
     ended September 30, 2000 and 1999,  respectively,  due to changes in market
     conditions  resulting from sharp price  fluctuations  over short periods of
     time in the segment's operating area.

     For the three months ended September 30, 2000,  operating  income decreased
     by $0.1 million,  or 23%, when compared to 1999, due to an overall decrease
     in  the  gross  margin  also   resulting  from  third  quarter  2000  price
     fluctuations.  For the nine months  ended  September  30,  2000,  operating
     income  increased $1.8 million,  or 145%,  when compared to 1999, due to an
     overall  increase  in the gross  margin  also  resulting  from sharp  price
     fluctuations, primarily in the second quarter of 2000.


<PAGE>
     Information Technology Services

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

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

     <S>                                           <C>             <C>              <C>             <C>
     Revenues                                      $    10,025     $     9,488      $    27,389     $      24,058
                                                   ===========     ===========      ===========     =============

     Operating income                              $     1,192     $     2,065      $     3,530     $       4,143
                                                   ===========     ===========      ===========     =============
</TABLE>

     On March 23, 1999, the Company, through a wholly-owned subsidiary, acquired
     the capital stock of Ellsworth Associates,  Inc.  ("Ellsworth").  Ellsworth
     provides information technology services,  including network,  database and
     systems  design,  and  application  programming,  primarily  to  government
     agencies.

     For the three and nine month  periods ended  September  30, 2000,  revenues
     increased by $0.5 million, or 6%, and $3.3 million,  or 14%,  respectively,
     when  compared  to the same 1999  periods,  due to  increases  in  services
     revenues and computer  hardware  sales to  government  agencies.  Operating
     income for the three and nine month periods  decreased by $0.9 million,  or
     42%, and $0.6 million,  or 15%,  respectively,  when compared to 1999,  due
     primarily to the recognition of $0.8 million of non-recurring income in the
     third quarter of 1999  resulting  from the favorable  resolution of certain
     contract issues.



<PAGE>
     Industrial Services


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

<TABLE>
<CAPTION>
                                                      Three Months Ended               Nine Months Ended
                                                          September 30,                    September 30,
                                                   ---------------------------      ------------------------------
                                                      2000             1999            2000              1999
                                                   -----------     -----------      -----------     --------------
                                                                          (in thousands)
     <S>                                           <C>             <C>              <C>             <C>
     Revenues:
         United States                             $     8,102     $     6,506      $    24,834     $       22,012
         Europe                                         13,534          14,262           39,156             42,173
         Asia-Pacific                                    2,102           2,675            7,058              8,439
                                                   -----------     -----------      -----------     --------------
         Total revenues                            $    23,738     $    23,443      $    71,048     $       72,624
                                                   ===========     ===========      ===========     ==============

     Operating income:
         United States                             $       448     $      144       $     1,932     $          592
         Europe                                          2,299          1,347             4,796              2,661
         Asia-Pacific                                       91            151               586                570
         Headquarters                                     (345)          (292)             (935)            (1,035)
                                                   -----------     ----------       -----------     --------------
         Operating income before
              severance and other costs                  2,493          1,350             6,379              2,788
         Severance and other costs                         -             (749)              -               (1,807)
                                                   -----------     ----------       -----------     --------------
         Total operating income                    $     2,493     $      601       $     6,379     $          981
                                                   ===========     ==========       ===========     ==============
     Capital expenditures,
         excluding acquisitions                    $       700     $      694       $     1,643     $        1,665
                                                   ===========     ==========       ===========     ==============
</TABLE>

     For the three and nine month periods ended September 30, 2000, revenues for
     the Industrial  Services segment increased by $0.3 million and decreased by
     $1.6 million,  respectively,  when  compared to the same 1999 periods.  The
     increase in revenues for the three months ended  September  30, 2000 is due
     to increases in underpressure and turnaround services in the United States,
     partially offset by an overall  decrease in revenues in Continental  Europe
     and the Asia-Pacific  region.  The decrease in revenues for the nine months
     ended  September 30, 2000 is the result of decreases in Continental  Europe
     and Asia-Pacific more than offsetting  overall gains achieved in the United
     States.  In  the  United  States,   revenues  increased  by  25%  and  13%,
     respectively,  for the three and nine month  periods  ended  September  30,
     2000,  compared  to the  same  periods  in  1999,  due to  improvements  in
     underpressure and turnaround services. In Europe,  revenues decreased by 5%
     and 7%, respectively,  for the three and nine month periods ended September
     30,  2000,  due  primarily  to  devaluations  of  European  currencies  and
     decreases in turnaround  and other services in  Continental  Europe,  which
     more  than  offset  increased   business  levels  in  the  United  Kingdom.
     Asia-Pacific revenues decreased by 21% and 16%, respectively, for the three
     and nine month periods ended September 30, 2000, when compared to 1999, due
     also to decreases in turnaround and other services.

     Overall,  Industrial Services operating income,  before severance and other
     costs,  increased  by $1.1  million and $3.6 million for the three and nine
     months ended  September 30, 2000,  respectively,  when compared to the same
     1999  periods,  due to improved  general  market  conditions  in the United
     States and Europe and overall operating  efficiencies  realized as a result
     of  streamlining  the  segment's  workforce  in 1999 to  match  the  market
     conditions  in each of the  operating  regions.  Severance  and other costs
     incurred and paid in 1999 were the result of the streamlining effort.


     Income Taxes

     In the fourth  quarter of 1999,  the Company  recognized  $37.1  million in
     expected  benefits  from  prior  years' tax  losses  (change  in  valuation
     allowance) that are available to offset future taxable income.  The Company
     reduced the  valuation  allowance  as a result of its  reevaluation  of the
     realizability  of income tax benefits from future  operations.  The Company
     considered  positive  evidence  supported  by recent  historical  levels of
     taxable income,  the scheduled  reversal of deferred tax  liabilities,  tax
     planning strategies, revised estimates of future taxable income growth, and
     expiration  periods of NOLs ($67.4  million  expires in 2002),  among other
     things,  in making this  evaluation and  concluding  that it is more likely
     than not that the Company  will realize the benefit of its net deferred tax
     assets.  Ultimate  realization of the deferred tax asset is dependent upon,
     among other factors,  the Company's ability to generate  sufficient taxable
     income  within the  carryforward  periods  (2000 to 2007) and is subject to
     change  depending  on the tax laws in  effect  in the  years  in which  the
     carryforwards  are used.  As a result of the 1999  recognition  of expected
     future  income tax benefits,  the results of  operations  for the three and
     nine month  periods  ended  September  30, 2000  reflects  (and  subsequent
     periods will reflect) a full effective tax rate provision.

     Income tax expense for the three and nine months ended  September  30, 2000
     include benefits of $0.6 million and $0.7 million,  respectively,  compared
     to $0.9  million  and $1.9  million,  respectively,  for the three and nine
     months  ended  September  30,  1999,  relating  to  favorable  developments
     pertaining  to the  resolution  of  certain  state and  foreign  income tax
     issues.


     Liquidity and Capital Resources

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

     Cash  provided by  operations  was $46.8  million and $40.9 million for the
     nine  months  ended  September  30,  2000 and 1999,  respectively.  Capital
     expenditures (excluding acquisitions) were $8.5 million for the nine months
     ended  September  30,  2000,  compared  to $13.2  million in 1999.  Routine
     maintenance  capital  expenditures  in 2000 are  expected  to be  funded by
     internally  generated  funds.  At September 30, 2000,  current  liabilities
     include $35.0  million of KPP mortgage  notes due in June 2001 and $13.0 of
     bank debt due in January  2001.  KPP  management  expects to refinance  the
     mortgage  notes  and  bank  debt  prior to  maturity  with  long-term  bank
     financing or through a public debt or unit offering.

     On September 22, 2000,  KPP entered into a definitive  agreement to acquire
     Shore  Terminals  LLC, the owner of seven  terminals  with a total  tankage
     capacity of approximately 7.8 million barrels, for $106 million in cash and
     2 million partnership units. The cash portion of the purchase price will be
     funded with long-term KPP bank financing. Four of the terminals are located
     in California, with the remaining three being located in Washington, Oregon
     and  Nevada.  The closing of the  acquisition,  which is subject to certain
     regulatory  approvals,  is  expected  to  occur in late  December  or early
     January 2001.

     In July 1999, KPP issued 2.25 million limited partnership units in a public
     offering at $30.75 per Unit, generating  approximately $65.6 million in net
     proceeds.  A portion of the  proceeds was used to repay in full KPP's $15.0
     million  promissory note, KPP's $25.0 million revolving credit facility and
     $18.3  million of KPP's term loans  (including  $13.3 million in term loans
     resulting from the United Kingdom terminal acquisition).

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


     Recent Accounting Pronouncement

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


<PAGE>




                           PART II - Other Information

     Item 6.      Exhibits and Reports on Form 8-K

          (a)     Exhibits.

27.      Financial Data Schedule


          (b)     Reports on Form 8-K
                  None.



                                    Signature


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



                                             KANEB SERVICES, INC.
                                             (Registrant)


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