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, 1998                                            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 Identification No.)
Incorporation or Organization)

                          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, 1998
     No par value                                       32,180,564 shares


<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
--------------------------------------------------------------------------------

                                                                        Page No.
                           Part I. Financial Information

Item 1.   Financial Statements (Unaudited)

          Consolidated Statements of Income - Three Months Ended
             March 31, 1998 and 1997                                       1

          Condensed Consolidated Balance Sheets - March 31, 1998
             and December 31, 1997                                         2

          Condensed Consolidated Statements of Cash Flows - Three
             Months Ended March 31, 1998 and 1997                          3

          Notes to Consolidated Financial Statements                       4

Item 2.   Management's Discussion and Analysis of
             Financial Condition and Results of Operations                 6

                           Part II. Other Information

Item 6.   Exhibits and Reports on Form 8-K                                 9

Signature                     

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------

                                                             Three Months Ended
                                                                 March 31,
                                                             1998        1997
                                                           --------    --------

Revenues                                                   $ 59,501    $ 53,154
                                                           --------    --------

Costs and expenses:
     Operating costs                                         41,781      35,459
     Depreciation and amortization                            4,047       4,213
     General and administrative                               1,066       1,038
                                                           --------    --------

      Total costs and expenses                               46,894      40,710
                                                           --------    --------

Operating income                                             12,607      12,444
Other income (expense), net                                     (37)        (20)
Interest expense                                             (3,745)     (3,862)
Amortization of excess of cost over fair value
     of net assets of acquired business                        (475)       (461)
                                                           --------    --------

Income before interest of outside non-controlling
     partners in KPP's net income and income tax expense      8,350       8,101
Interest of outside non-controlling partners in KPP's
     net income                                              (6,055)     (6,020)
Income tax expense                                             (459)       (552)
                                                           --------    --------

Net income                                                    1,836       1,529
Dividends applicable to preferred stock                         150         123
                                                           --------    --------

Net income applicable to common stock                      $  1,686    $  1,406
                                                           ========    ========

Earnings per common share - Basic and Diluted              $    .05    $    .04
                                                           ========    ========





<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------

                                                          March 31,   Dec. 31,
                                                           1998         1997
                                                         ---------    ---------
                                                        (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                           $  19,731    $  23,025
     Accounts receivable, trade                             39,163       35,268
     Inventories                                            10,138        7,079
     Prepaid expenses and other current assets               5,541        5,693
                                                         ---------    ---------
        Total current assets                                74,573       71,065
                                                         ---------    ---------

Property and equipment                                     391,331      383,078
Less accumulated depreciation and amortization             125,273      121,717
                                                         ---------    ---------
     Net property and equipment                            266,058      261,361
                                                         ---------    ---------

Excess of cost over fair value of net assets
     of acquired business                                   63,744       62,719

Other assets                                                 7,586        7,128
                                                         ---------    ---------
                                                         $ 411,961    $ 402,273
                                                         =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Current portion of long-term debt                   $  11,193    $   5,394
     Accounts payable                                       11,340        9,569
     Accrued expenses                                       37,998       35,679
                                                         ---------    ---------
         Total current liabilities                          60,531       50,642
                                                         ---------    ---------

Long-term debt, less current portion:
     Industrial field services                              24,504       25,268
     Pipeline, terminaling and product
         marketing services                                133,000      132,118
     Parent company                                         23,666       23,666
                                                         ---------    ---------
         Total long-term debt, less current portion        181,170      181,052
                                                         ---------    ---------

Deferred income taxes and other liabilities                 14,850       15,903

Interest of outside non-controlling partners in KPP         75,155       76,229

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                      5,792        5,792
     Common stock, without par value                         4,239        4,234
     Additional paid-in-capital                            197,346      197,242
     Accumulated deficit                                   (99,805)    (101,491)
     Treasury stock, at cost                               (25,204)     (25,216)
     Accumulated other comprehensive income (loss)
         - foreign currency translation adjustment          (2,113)      (2,114)
                                                         ---------    ---------
         Total stockholders' equity                         80,255       78,447
                                                         ---------    ---------
                                                         $ 411,961    $ 402,273
                                                         =========    =========


<PAGE>


KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
                                                            Three Months Ended
                                                                March 31,
                                                             1998        1997
                                                           --------    ---------
Operating activities:
   Net income                                              $  1,836    $  1,529
   Adjustments to reconcile net income to net
       cash provided by operating activities:
        Depreciation and amortization                         4,047       4,213
        Interest of outside non-controlling partners in
          KPP                                                 6,055       6,020
        Amortization of excess of cost over fair
          value of net assets acquired                          475         461
        Deferred income taxes                                   187         273
        Changes in working capital components                (2,712)      1,044
                                                           --------    --------

         Net cash provided by operating activities            9,888      13,540
                                                           --------    --------

Investing activities:
   Capital expenditures                                      (3,010)     (2,621)
   Acquisitions                                              (6,591)       --
   Other, net                                                (2,136)       (563)
                                                           --------    --------

          Net cash used in investing activities             (11,737)     (3,184)
                                                           --------    --------

Financing activities:
   Issuance of long-term debt                                 9,028         101
   Payments on long-term debt                                (3,315)     (1,376)
   Preferred stock dividends                                   (150)       (123)
   Distributions to outside non-controlling partners
       in KPP                                                (7,129)     (6,579)
   Common stock issued                                          121        --
   Purchase of treasury stock                                  --        (1,480)
                                                           --------    --------
       Net cash used in financing activities                 (1,445)     (9,457)
                                                           --------    --------

Increase (decrease) in cash and cash equivalents             (3,294)        899
Cash and cash equivalents at beginning of period             23,025      23,693
                                                           --------    --------

Cash and cash equivalents at end of period                 $ 19,731    $ 24,592
                                                           ========    ========



<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
--------------------------------------------------------------------------------

1.   SIGNIFICANT ACCOUNTING POLICIES

     The unaudited consolidated financial statements of Kaneb Services, Inc. and
     its  subsidiaries  (the  "Company") for the three month periods ended March
     31, 1998 and 1997 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 were 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,  1997.  In the
     opinion  of  the  Company's  management,   the  accompanying   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, 1998
     and the  consolidated  results of their  operations  and cash flows for the
     periods  ended  March 31,  1998 and 1997.  Operating  results for the three
     months ended March 31, 1998 are not  necessarily  indicative of the results
     that may be expected for the year ending December 31, 1998.

2.   COMPREHENSIVE INCOME

     The Company has adopted the provisions of Statement of Financial Accounting
     Standards No. 130,  "Reporting  Comprehensive  Income,"  which  establishes
     standards  for the reporting  and display of  comprehensive  income and its
     components in a full set of general purpose financial statements.

     Comprehensive  income for the three months ended March 31, 1998 and 1997 is
     as follows:

                                                       Three Months Ended
                                                           March 31,
                                                         1998      1997
                                                       -------   -------
                                                         (in thousands)

       Net income                                      $ 1,836   $ 1,529
       Other comprehensive income - foreign currency
          translation adjustment                             1    (1,355)
                                                       -------   -------

       Comprehensive income (loss)                     $ 1,837   $   174
                                                       =======   =======

     Accumulated other  comprehensive  income at March 31, 1998 and December 31,
     1997 consists of cumulative foreign translation adjustments.

<PAGE>
3.   EARNINGS PER SHARE

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

                                                 Net        Common     Per-Share
                                               Income       Shares       Amount
                                              -------       -------    ---------
Three Months Ended March 31, 1998
    Net income                                $ 1,836
    Dividends applicable to preferred stock      (150)
                                              -------

    Basic earnings per share:
       Income available to common stock         1,686        32,189     $   0.05
                                                                        ========

    Effect of dilutive securities:
       Common stock options                      --             771
                                              -------       -------

    Diluted earnings per share:
       Income available to common stock
        and assumed options exercised         $ 1,686        32,960     $   0.05
                                              =======       =======     ========

Three Months Ended March 31, 1997
    Net income                                $ 1,529
    Dividends applicable to preferred stock      (123)
                                              -------

    Basic earnings per share:
       Income available to common stock         1,406        33,121     $   0.04
                                                                        ========

    Effect of dilutive securities:
       Common stock options                      --             450
                                              -------       -------

    Diluted earnings per share:
       Income available to common stock
       and assumed options exercised          $ 1,406        33,571     $   0.04
                                              =======       =======     ========


<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,
                                             1998     1997
                                           -------  -------
                                             (in millions)
               Revenues:
                  United States            $   8.9  $   7.7
                  Europe                      15.9     14.3
                  Asia-Pacific                 2.7      0.6
                                           -------  -------
               
                  Total revenues           $  27.5  $  22.6
                                           =======  =======

               Operating income:
                  United States            $   0.5  $   0.3
                  Europe                       0.5      0.8
                  Asia-Pacific                 0.1     (0.1)
                  Headquarters                (0.1)    (0.1)
                                           -------  -------

               Total operating income      $   1.0  $   0.9
                                           =======  =======
     
               Capital expenditures        $   0.6  $   0.7
                                           =======  =======

     This business  segment  provides  specialized  industrial  field  services,
     including under-pressure 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  quarter  ended  March 31,  1998,  revenues  for the United  States
     increased  16%,  compared to the same 1997 period,  due primarily to higher
     on-site  machining,  valve repair and other  turnaround  services.  The 11%
     increase in first  quarter  1998  revenues  for Europe is due  primarily to
     increases in passive fire  protection  work,  on-site  machining  and valve
     repair   services.   The  $2.1  million  increase  in  first  quarter  1998
     Asia-Pacific  revenues is due primarily to the  operations of Australia and
     New Zealand acquired effective July 1, 1997.

     Overall,  operating  income  increased $0.1 million in the first quarter of
     1998,  compared to the same prior year period,  due to the  improvements in
     revenues and operating income for the United States and Asia-Pacific, which
     were partially offset by high margin,  nonrecurring  sales in Europe in the
     first quarter of 1997.



<PAGE>

     Pipeline, Terminaling and Product Marketing Services

                                           Three Months Ended
                                               March 31,
                                             1998     1997
                                           -------  -------
                                             (in millions)
            Revenues:
               Pipeline and terminaling    $  28.1  $  28.6
               Product marketing               1.9     --
                                           -------  -------
                                           $  30.0  $  28.6
                                           =======  =======

            Operating income               $  11.9  $  11.9
                                           =======  =======

            Capital expenditures, 
               excluding acquisitions      $   2.4  $   1.9
                                           =======  =======

     This business  segment includes the operations of Kaneb Pipe Line Partners,
     L.P. ("KPP") and the Company's product 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 liquids. The Company operates, manages
     and controls the pipeline and terminaling  operations of KPP through its 2%
     general  partner  interest  and a  31%  limited  partner  interest  in  the
     partnership.  The product marketing  business provides motor fuel wholesale
     marketing  services  throughout the Midwest and Rocky Mountain regions,  as
     well as California.

     For the quarter  ended March 31, 1998,  pipeline and  terminaling  revenues
     decreased  $0.5  million,  compared to the same 1997 period,  due to a $0.7
     million  decrease  in  terminaling  revenues,  partially  offset  by a $0.2
     million increase in pipeline  revenues.  The decrease in first quarter 1998
     terminaling  revenues  resulted  primarily  from lower rates  realized  for
     storage,  due to a larger proportionate volume of lower-rate products being
     stored in the first  quarter of 1998,  compared to the same period in 1997.
     The increase in the first quarter 1998  pipeline  revenues is due to an 11%
     increase in volumes shipped, when compared to the same period in 1997.

     Capital  expenditures  of $2.4 million for the first quarter of 1998 relate
     to the maintenance of existing operations.

     Other Operations

     The Company recorded  revenues of $2.0 million and operating income of $0.7
     million  in each of the  first  quarters  ended  March  31,  1998 and 1997,
     related to subsidiaries that provide  information  processing,  payment and
     collection services primarily to financial institutions.

     Financial Condition

     During  the first  three  months of 1998,  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 $9.9  million and $13.5  million for the
     periods ended March 31, 1998 and 1997,  respectively.  Capital expenditures
     were $3.0 million in the 1998 period compared to $2.6 million in 1997.

     Consolidated capital expenditures have been estimated at $10 million to $15
     million,  depending  upon the  economic  environment  and the  needs of the
     business.  Capital  expenditures  in 1998  are  expected  to be  funded  by
     internally generated funds.

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



<PAGE>
KANEB SERIVCES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------

                           Part II - Other Information

     Item 6.      Exhibits and reports on Form 8-K

         (a)      Exhibits.
                     27.        Financial Data Schedule

         (b)      Reports on Form 8-K - Registrant's Current Report on Form 8-K,
                  dated  April 9, 1998 (SEC  File No.  001-05083),  was filed to
                  report, in Item 5, the declaration of a dividend in connection
                  with the adoption of a replacement Stockholder's Rights Plan.


                                    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.

DATED:  May 12, 1998

                                             KANEB SERVICES, INC.
                                             (Registrant)
                                                  //s//
                                             Michael R. Bakke
                                             Controller