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, 1999                                       Number 001-05083

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

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

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

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

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

         Yes    X                                             No

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

Class of Common Stock                           Outstanding at November 1, 1999
     No par value                                    31,501,193 shares

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES


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

                                                                       Page No.
                           Part I. Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated Statements of Income - Three and Nine Months Ended
           September 30, 1999 and 1998                                    1

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

         Condensed Consolidated Statements of Cash Flows - Nine
           Months Ended September 30, 1999 and 1998                       3

         Notes to Consolidated Financial Statements                       4

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

                           Part II. Other Information

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





<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   Three Months Ended       Nine Months Ended
                                                      September 30,            September 30,
                                                ----------------------    ----------------------
                                                   1999         1998         1999         1998
                                                ---------    ---------    ---------    ---------

<S>                                             <C>          <C>          <C>          <C>
Revenues                                        $ 134,280    $ 105,476    $ 356,587    $ 265,469
                                                ---------    ---------    ---------    ---------
Costs and expenses:
     Operating costs                               45,786       42,412      137,840      123,687
     Cost of sales                                 63,158       39,499      150,632       79,954
     Depreciation and amortization                  4,682        4,192       13,745       12,441
     General and administrative                     1,403        1,466        3,788        3,892
                                                ---------    ---------    ---------    ---------
         Total costs and expenses                 115,029       87,569      306,005      219,974
                                                ---------    ---------    ---------    ---------

Operating income                                   19,251       17,907       50,582       45,495

Other income                                          225           30          672           55
Interest expense                                   (4,214)      (3,918)     (13,538)     (11,554)
Amortization of excess of cost over fair
   value of net assets of acquired businesses        (551)        (500)      (1,617)      (1,470)
                                                ---------    ---------    ---------    ---------
Income before interest of outside
   non-controlling  partners in KPP's
   net income, gain on issuance of units
   by KPP and income tax expense                   14,711       13,519       36,099       32,526
Interest of outside non-controlling
  partners in KPP's net income                     (9,608)      (8,101)     (24,310)     (20,918)
Gain on issuance of units by KPP                   16,764         --         16,764         --
Income tax expense                                 (6,320)        (984)      (6,685)      (1,973)
                                                ---------    ---------    ---------    ---------
Net income                                         15,547        4,434       21,868        9,635
Dividends applicable to preferred stock               124          131          346          439
                                                ---------    ---------    ---------    ---------
Net income applicable to common stock           $  15,423    $   4,303    $  21,522    $   9,196
                                                =========    =========    =========    =========
Earnings per common share -
   Basic                                        $     .49    $     .14    $     .68    $     .29
                                                =========    =========    =========    =========
   Diluted                                      $     .47    $     .13    $     .66    $     .28
                                                =========    =========    =========    =========
</TABLE>





                 See notes to consolidated financial statements.
                                        1

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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

                                                       September 30  December 31
                                                           1999          1998
                                                       ------------  -----------
                                                        (Unaudited)
                   ASSETS
Current assets:
     Cash and cash equivalents                          $  22,829    $   9,134
     Accounts receivable, trade                            59,396       47,540
     Inventories                                           15,900       13,465
     Prepaid expenses and other current assets              7,928        6,615
                                                        ---------    ---------
        Total current assets                              106,053       76,754
                                                        ---------    ---------

Property and equipment                                    470,136      411,285
Less accumulated depreciation and amortization            141,411      130,759
                                                        ---------    ---------
     Net property and equipment                           328,725      280,526
                                                        ---------    ---------

Investment in affiliate                                    23,466       21,005

Excess of cost over fair value of net assets
     of acquired businesses                                63,212       62,521

Other assets                                                7,464        7,239
                                                        ---------    ---------
                                                        $ 528,920    $ 448,045
                                                        =========    =========
     LIABILITIES AND EQUITY
Current liabilities:
     Short-term and current portion of long-term debt   $   2,392    $  15,293
     Accounts payable                                      17,516       14,520
     Accrued expenses                                      44,120       41,309
                                                        ---------    ---------
         Total current liabilities                         64,028       71,122
                                                        ---------    ---------

Long-term debt, less current portion:
    Pipeline and terminaling services                     156,472      153,000
    Product marketing services                              6,575         --
    Industrial services                                    21,135       20,292
    Parent company                                         23,666       23,666
                                                        ---------    ---------
         Total long-term debt, less current portion       207,848      196,958
                                                        ---------    ---------

Deferred income taxes and other liabilities                23,051       15,626

Interest of outside non-controlling partners in KPP       125,315       76,894

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                     5,792        5,792
     Common stock, without par value                        4,247        4,239
     Additional paid-in-capital                           197,246      197,122
     Accumulated deficit                                  (66,901)     (88,423)
     Treasury stock, at cost                              (29,674)     (29,775)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment           (2,032)      (1,510)
                                                        ---------    ---------
         Total stockholders' equity                       108,678       87,445
                                                        ---------    ---------
                                                        $ 528,920    $ 448,045
                                                        =========    =========


                 See notes to consolidated financial statements.
                                        2

<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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


                                                            Nine Months Ended
                                                               September 30
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
Operating activities:
   Net income                                              $ 21,868    $  9,635
   Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation and amortization                        13,745      12,441
        Equity in earnings of affiliate                      (2,515)       --
        Interest of outside non-controlling
          partners in KPP                                    24,310      20,918
        Amortization of excess of cost over fair
          value of net assets of acquired businesses          1,617       1,470
        Gain on issuance of units by KPP                    (16,764)       --
        Deferred income taxes                                 7,480         491
        Changes in working capital components                (8,817)     (5,652)
                                                           --------    --------

         Net cash provided by operating activities           40,924      39,303
                                                           --------    --------

Investing activities:
   Capital expenditures                                     (13,183)    (10,207)
   Acquisitions, net of cash acquired                       (48,439)    (16,174)
   Change in other assets, net                               (2,882)     (2,623)
                                                           --------    --------

         Net cash used in investing activities              (64,504)    (29,004)
                                                           --------    --------

Financing activities:
   Issuance of short-term and long-term debt                 55,480      21,547
   Payments on long-term debt                               (57,491)    (10,203)
   Preferred stock dividends                                   (346)       (439)
   Distributions to outside non-controlling
     partners in KPP                                        (26,175)    (21,382)
   Common stock issued                                          233         133
   Purchase of treasury stock                                  --        (4,736)
   Net proceeds from issuance of units by KPP                65,574        --
                                                           --------    --------

         Net cash provided by (used in)
           financing activities                              37,275     (15,080)
                                                           --------    --------

Increase (decrease) in cash and cash equivalents             13,695      (4,781)
Cash and cash equivalents at beginning of period              9,134      23,025
                                                           --------    --------
Cash and cash equivalents at end of period                 $ 22,829    $ 18,244
                                                           ========    ========

Supplemental cash flow information:
   Cash paid for interest                                  $ 12,401    $ 10,503
                                                           ========    ========
   Cash paid for income taxes                              $    956    $  2,041
                                                           ========    ========



                 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, 1999 and 1998,  have been prepared in
     accordance  with  generally  accepted  accounting  principles  applied on a
     consistent basis.  Significant  accounting policies followed by the Company
     and  its  subsidiaries  are  disclosed  in the  notes  to the  consolidated
     financial  statements  included in the Company's Annual Report on Form 10-K
     for the year ended  December  31,  1998.  In the  opinion of the  Company's
     management,  the accompanying  condensed  consolidated financial statements
     contain the adjustments, consisting of normal recurring accruals, necessary
     to present fairly the  consolidated  financial  position of the Company and
     its  consolidated  subsidiaries at September 30, 1999 and the  consolidated
     results of their  operations and cash flows for the periods ended September
     30, 1999 and 1998.  Operating  results for the three and nine months  ended
     September 30, 1999 are not  necessarily  indicative of the results that may
     be expected for the year ending December 31, 1999.


2.   ACQUISITION BY KPP

     On February 1, 1999,  Kaneb Pipe Line Partners,  L.P.  ("KPP") acquired six
     terminals in the United Kingdom from GATX Terminals Limited for (pound)22.6
     million  (approximately  $37.2  million)  plus the  assumption  of  certain
     liabilities. The acquisition, which was financed by KPP's term loans from a
     bank, has been accounted for using the purchase  method of accounting.  The
     term  loans,  which bear  interest in varying  amounts,  are secured by the
     capital  stock  of  the  subsidiaries  that  acquired  the  United  Kingdom
     terminals,  and pari  passu  with the  existing  mortgage  notes and credit
     facility,  by a mortgage on the East  Pipeline.  The term loans,  which are
     without recourse to the Company,  contain certain financial and operational
     covenants.  $13.3  million of the term loans were  repaid in July 1999 with
     the  proceeds  from a public  offering  of KPP  units  (see  Note  3).  The
     remaining  portion  ($25.9  million) is due in January 2002.  The pro forma
     effect of the acquisition was not material to the results of operations.


3.   PUBLIC OFFERING OF KPP UNITS

     In July 1999, KPP issued 2.25 million limited partnership units in a public
     offering at $30.75 per unit, generating  approximately $65.6 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,  the Company  recognized a $16.8 million gain before
     deferred income taxes of $6.4 million.


4.   COMPREHENSIVE INCOME

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

                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                    -------------------   --------------------
                                       1999      1998       1999        1998
                                    --------   --------   --------    --------
                                                  (in thousands)

     Net income                     $ 15,547   $  4,434   $ 21,868    $  9,635
     Other comprehensive
       income(loss)
       - foreign currency
         translation adjustment            3        750       (522)        777
                                    --------   --------   --------    --------
     Comprehensive income           $ 15,550   $  5,184   $ 21,346    $ 10,412
                                    ========   ========   ========    ========

<PAGE>
5.   EARNINGS PER SHARE

     The following is a  reconciliation  of Basic and Diluted earnings per share
     (in thousands, except for per share amounts):
                                                           Weighted
                                                             Average
                                                   Net       Common  Per-Share
                                                  Income     Shares    Amount
                                                 --------   -------- ---------
     Three Months Ended 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
                                                 =======    =======   =======

     Three Months Ended September 30, 1998
     -------------------------------------
       Net income                                $ 4,434
       Dividends applicable to preferred stock      (131)
                                                 -------
       Basic earnings per share -
          Income applicable to common stock        4,303     31,443   $   .14
                                                                      =======
       Effect of dilutive securities -
          Common stock options and DSUs             --          841
                                                 -------    -------
       Diluted earnings per share -
          Income applicable to common stock,
          DSUs and assumed options exercised     $ 4,303     32,284   $   .13
                                                 =======    =======   =======

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

       Basic earnings per share -
         Income available to common stock         21,522     31,439   $    .68
                                                                      ========
       Effect of dilutive securities -
         Common stock options                       --        1,101
                                                 -------   --------
       Diluted earnings per share -
         Income available to common stock
         and assumed options exercised           $21,522     32,540   $    .66
                                                 =======    =======   ========

     Nine Months Ended September 30, 1998
     ------------------------------------
       Net income                                $ 9,635
       Dividends applicable to preferred stock      (439)
                                                 -------
       Basic earnings per share -
         Income available to common stock          9,196     31,856   $   0.29
                                                                      ========
       Effect of dilutive securities -
          Common stock options                      --          904
                                                 -------   --------
       Diluted earnings per share -
          Income available to common stock
          and assumed options exercised          $ 9,196     32,760   $   0.28
                                                 =======    =======   ========

     Options to  purchase  68,501 and 5,521  shares of common  stock at weighted
     average prices of $5.14 and $5.58,  were  outstanding at September 30, 1999
     and 1998, respectively, but were not included in the computation of diluted
     earnings per share because the options' exercise price was greater than the
     average market price of the common stock. Additionally, the Company's 8.75%
     convertible  subordinated  debentures were excluded from the computation of
     diluted  earnings  per share  because the effect of assumed  conversion  is
     anti-dilutive.

<PAGE>
6.   CONTINGENCIES

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

     Certain  subsidiaries  of KPP are  defendants in a lawsuit filed in a Texas
     state court in 1997 by Grace Energy  Corporation,  the entity from whom KPP
     acquired ST Services in 1993. The lawsuit involves  environmental  response
     and remediation allegedly resulting from jet fuel leaks in the early 1970's
     from a pipeline. The pipeline, which connected a former Grace terminal with
     Otis Air Force Base, was abandoned in 1973, and the connecting terminal was
     sold to an  unrelated  entity in 1976.  Grace  alleges that it has incurred
     since  1996  expenses  of   approximately   $3  million  for  response  and
     remediation  required by the State of Massachusetts  and that it expects to
     incur additional expenses in the future.  Future expenses could potentially
     include claims by the United States  Government,  as described below. Grace
     alleges that KPP acquired the abandoned pipeline as part of the acquisition
     of ST Services in 1993 and assumed responsibility for environmental damages
     caused by the jet fuel leaks from the  pipeline.  Grace is seeking a ruling
     that  KPP's  subsidiaries  are  responsible  for  all  present  and  future
     remediation  expenses for these leaks and that Grace has no  obligation  to
     indemnify  KPP for these  expenses.  The case is set for  trial in  January
     2000.

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

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

     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.

<PAGE>
7.   BUSINESS SEGMENT DATA

     The Pipeline and Terminaling  Segment includes the pipeline and terminaling
     operations of KPP which consist of the  transportation of refined petroleum
     products in the  Midwestern  states as a common  carrier and the storage of
     petroleum products,  specialty  chemicals and other liquids.  The Company's
     Product Marketing Segment provides  wholesale motor fuel marketing services
     throughout the Midwest and Rocky Mountain  regions,  as well as California.
     The Company's  Information  Services Segment provides consulting  services,
     hardware  sales and other related  information  management  and  processing
     services   to   governmental,   insurance   and   financial   institutions.
     Additionally,  the Company provides Industrial 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. Effective July
     1,  1999,  the  responsibilities  of  certain  officers  of the  Industrial
     Services  and  Information   Services  segments  were  expanded  and  their
     compensation  and benefit costs (which totaled  approximately  $0.1 million
     for the third  quarter  for each of these  segments)  were  transferred  to
     General  Corporate and no longer considered by the Company in assessing the
     measurement of such segment's results.

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

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

<TABLE>
<CAPTION>
                                                           Three Months Ended     Nine Months Ended
                                                              September 30,         September 30,
                                                           -------------------   -------------------
                                                             1999       1998       1999       1998
                                                           --------   --------   --------   --------
                                                                         (in thousands)
     <S>                                                   <C>        <C>        <C>        <C>
     Business segment revenues:
        Pipeline and terminaling services                  $ 41,573   $ 33,709   $117,589   $ 92,332
        Product marketing services                           59,776     36,027    142,316     75,653
        Information services                                  9,488      7,436     24,058     12,182
        Industrial services                                  23,443     28,304     72,624     85,302
                                                           --------   --------   --------   --------
                                                           $134,280   $105,476   $356,587   $265,469
                                                           ========   ========   ========   ========
     Pipeline and terminaling services segment revenues:
        Pipeline operations                                $ 18,708   $ 17,406   $ 50,054   $ 46,858
        Terminaling operations                               22,865     16,303     67,535     45,474
                                                           --------   --------   --------   --------
                                                           $ 41,573   $ 33,709   $117,589   $ 92,332
                                                           ========   ========   ========   ========
     Industrial services segment revenues:
        Underpressure services                             $  9,230   $ 10,253   $ 28,455   $ 30,901
        Turnaround services                                  11,265     13,791     34,790     39,364
        Other services                                        2,948      4,260      9,379     15,037
                                                           --------   --------   --------   --------
                                                           $ 23,443   $ 28,304   $ 72,624   $ 85,302
                                                           ========   ========   ========   ========
     Business segment profit:
        Pipeline and terminaling services                  $ 17,429   $ 15,686   $ 47,995   $ 40,494
        Product marketing services                              559        210      1,251        528
        Information services                                  2,065      1,176      4,143      2,856
        Industrial services                                     601      2,301        981      5,509
        General corporate                                    (1,403)    (1,466)    (3,788)    (3,892)
                                                           --------   --------    --------  --------
           Operating income                                  19,251     17,907     50,582     45,495
        Other income                                            225         30        672         55
        Interest expense                                     (4,214)    (3,918)    13,538)   (11,554)
        Amortization of excess of cost
           over fair value of net assets
           of acquired businesses                              (551)      (500)    (1,617)    (1,470)
                                                           --------   --------    -------   --------
        Income before interest of outside
           non-controlling partners of
           KPP's net income, gain on
           issuance of units by KPP and
           income tax expense                              $ 14,711   $ 13,519    $ 36,099  $ 32,526
                                                           ========   ========    ========  ========

<PAGE>
                                                                                  Sept. 30, Dec. 31,
                                                                                    1999      1998
                                                                                  --------  --------
     Total assets:
        Pipeline and terminaling services                                         $371,505  $310,825
        Product marketing services                                                  21,572    12,233
        Information services                                                        15,939    11,082
        Industrial services                                                        108,240   110,603
        General corporate                                                           11,664     3,302
                                                                                  --------  --------
                                                                                  $528,920  $448,045
                                                                                  ========  ========
</TABLE>


<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

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

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

     Operating Results:


     Pipeline and Terminaling Services

     This business  segment includes the operations of Kaneb Pipe Line Partners,
     L.P.  ("KPP").  KPP provides  transportation  services of refined petroleum
     products  through a pipeline  system that  extends  through the  Midwestern
     states as a common carrier and provides  terminaling  and storage  services
     for petroleum products,  specialty chemicals and other liquids. The Company
     operates,  manages and controls the pipeline and terminaling  operations of
     KPP  through its 2% general  partner  interest  and a 31%  limited  partner
     interest (28% after KPP's July 1999 public unit  offering - See  "Liquidity
     and Capital Resources") in the partnership.

                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                    -------------------   --------------------
                                       1999      1998       1999        1998
                                    --------   --------   --------    --------
                                                  (in thousands)

     Revenues                       $ 41,573   $ 33,709   $117,589    $ 92,332
                                    ========   ========   ========    ========
     Operating income               $ 17,429   $ 15,686   $ 47,995    $ 40,494
                                    ========   ========   ========    ========
     Capital expenditures,
         excluding acquisitions     $  7,169   $  2,274   $ 11,243    $  8,048
                                    ========   ========   ========    ========

     On October 30, 1998, KPP, through a wholly-owned  subsidiary,  entered into
     acquisition and joint venture  agreements with Northville  Industries Corp.
     to acquire and manage the former Northville terminal located in Linden, New
     Jersey.  Under the  agreements,  KPP  acquired a 50%  interest in the newly
     formed ST Linden  Terminal LLC for $20.5  million plus  transaction  costs.
     During the year ended  December 31, 1998,  the  Partnership  acquired other
     terminals  for aggregate  consideration  of $15.9  million.  On February 1,
     1999,  KPP acquired six terminals in the United Kingdom from GATX Terminals
     Limited for  approximately  $37.2  million plus the  assumption  of certain
     liabilities.  The acquisitions (the "Acquisitions") were funded by KPP with
     bank financing,  a portion of which were paid off using proceeds from KPP's
     public unit offering in July 1999 (see "Liquidity and Capital Resources").

     For the three months ended  September  30, 1999,  revenues for the Pipeline
     and Terminaling business increased by $7.9 million, or 23% when compared to
     1998, due to a $1.3 million  increase in revenues in the pipeline  business
     and $6.6 million  increase in  terminaling  revenues,  when compared to the
     same 1998  period.  The $25.3  million,  or 27%,  increase in Pipeline  and
     Terminaling  revenues for the nine month period ended September 30, 1999 is
     due to a $3.2 million  increase in revenues in the pipeline  business and a
     $22.1 million  increase in the terminaling  revenues,  when compared to the
     same 1998 period.  The increase in pipeline revenues for the three and nine
     months  ended  September  30, 1999 is due to overall  increases  in volumes
     shipped  when  compared  to the  same  periods  in  1998.  Over  90% of the
     year-to-date  increase in volumes shipped was on the East Pipeline.  Barrel
     miles  totaled  5.1 billion  and 4.8  billion  for the three  months  ended
     September  30,  1999 and  1998,  respectively,  and 13.7  billion  and 12.5
     billion  for  the  nine  months   ended   September   30,  1999  and  1998,
     respectively.  The increase in terminaling  revenues for the three and nine
     months ended September 30, 1999 is due to the  Acquisitions and an increase
     in tank utilization  resulting from favorable market conditions,  partially
     offset by a decrease in the overall average price realized for storage. For
     the nine months ended September 30, 1999, average  annualized  revenues per
     barrel of tankage utilized decreased to $4.00, compared to $4.23 per barrel
     for the same  prior  year  period,  the  result of the  storage of a larger
     proportionate volume of petroleum products, which are historically at lower
     per barrel rates than specialty chemicals.  Average annual tankage utilized
     for the nine months  ended  September  30, 1999  increased  to 22.5 million
     barrels from 14.3 barrels for the comparable prior year period, as a result
     of the  Acquisitions and increased  utilization at KPP's largest  petroleum
     storage facility.

     The $1.7  million  increase  in  operating  income  for the  quarter  ended
     September 30, 1999,  compared to 1998, is due to a $0.7 million increase in
     pipeline  operating  income  and a $1.0  million  increase  in  terminaling
     operating  income.  For the nine month  period  ended  September  30, 1999,
     operating  income  increased $7.5 million,  compared to 1998, due to a $2.0
     million  increase in pipeline  operating income and a $5.5 million increase
     in terminaling  operating income. The increase in pipeline operating income
     for the three and nine  months  ended  September  30,  1999,  is due to the
     increase in volumes shipped.  The increase in terminaling  operating income
     for the three and nine months ended  September 30, 1999,  compared to 1998,
     is a result of the Acquisitions and the increase in tank utilization.

     The  interest of outside  non-controlling  partners in KPP's net income was
     $9.6 million and $8.1 million for the three month periods  ended  September
     30, 1999 and 1998,  respectively,  and $24.3  million and $20.9 million for
     the nine month  periods ended  September  30, 1999 and 1998,  respectively.
     Distributions  paid  to  the  outside  non-controlling  unitholders  of KPP
     aggregated approximately $26.2 million and $21.4 million for the nine month
     periods ended September 30, 1999 and 1998, respectively.

     Capital  expenditures  of $7.2 million and $11.2  million for the three and
     nine months ended September 30, 1999, relate to the maintenance of existing
     operations. Routine maintenance capital expenditures for 1999 are currently
     estimated to be between $12 million and $16 million.


     Product Marketing Services

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

                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                    -------------------   --------------------
                                       1999      1998       1999        1998
                                    --------   --------   --------    --------
                                                  (in thousands)

     Revenues                       $ 59,776   $ 36,027   $142,316    $ 75,653
                                    ========   ========   ========    ========
     Operating income               $    559   $    210   $  1,251    $    528
                                    ========   ========   ========    ========

     For the three months ended September 30, 1999,  revenues increased by $23.7
     million,  or 66% and operating income  increased by $0.3 million,  or 166%,
     when compared to the same 1998 period.  For the nine months ended September
     30, 1999, revenues increased by $66.7 million, or 88%, and operating income
     increased by $0.7 million,  or 137%, when compared to 1998. The increase in
     revenues  and  operating  income for the three month  period is primarily a
     result of an increase in both sales  volumes and sales price when  compared
     to the same 1998 period. The incremental increase for the nine months ended
     September 30, 1999, when compared to 1998, is due to the products marketing
     business being acquired in late March 1998.


     Information Services

     The Company's  information services business is conducted through a variety
     of  wholly-owned  subsidiaries.  The  information  services  group provides
     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  primarily for  governmental,  insurance and financial
     institutions.


                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                    -------------------   --------------------
                                       1999      1998       1999        1998
                                    --------   --------   --------    --------
                                                  (in thousands)

     Revenues                       $  9,488   $  7,436   $ 24,058    $ 12,182
                                    ========   ========   ========    ========
     Operating income               $  2,065   $  1,176   $  4,143    $  2,856
                                    ========   ========   ========    ========

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

     For the three months ended September 30, 1999,  revenues  increased by $2.1
     million,  or 28%, and operating income  increased by $0.9 million,  or 76%,
     when compared to the same 1998 period.  For the nine months ended September
     30, 1999, revenues increased by $11.9 million, or 97%, and operating income
     increased by $1.3 million,  or 45%, when compared to 1998.  The increase in
     revenues  and  operating  income  for the three and nine  month  periods is
     primarily the result of the Ellsworth acquisition and increases in computer
     hardware  sales  and  consulting   services  provided  to  various  federal
     government agencies.


     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.


                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                    -------------------   --------------------
                                       1999      1998       1999        1998
                                    --------   --------   --------    --------
                                                  (in thousands)
     Revenues:
         United States              $  6,506   $  9,070   $ 22,012    $ 26,910
         Europe                       14,262     16,338     42,173      50,139
         Asia-Pacific                  2,675      2,896      8,439       8,253
                                    --------   --------   --------    --------
         Total Revenues             $ 23,443   $ 28,304   $ 72,624    $ 85,302
                                    ========   ========   ========    ========

     Operating income:
         United States              $    144   $   775    $    592    $  1,584
         Europe                        1,347     1,551       2,661       3,956
         Asia-Pacific                    151       442         570         815
         Headquarters                   (292      (467)     (1,035)       (846)
                                    --------   -------    --------    --------
         Operating income before
           severance and other costs   1,350     2,301       2,788       5,509
         Severance and other costs      (749)       -       (1,807)        -
                                     -------   -------    --------    --------
         Total operating income      $   601   $ 2,301    $    981    $  5,509
                                     =======   =======    ========    ========

     Capital expenditures,
         excluding acquisitions      $   694   $   602    $  1,665    $  1,950
                                     =======   =======    ========    ========

     For the three and nine months ended  September  30, 1999,  revenues for the
     Industrial  Services segment decreased by 17% and 15%,  respectively,  when
     compared to the same 1998 periods,  due to adverse market conditions in the
     United States and Europe. In the United States,  revenues  decreased by 28%
     and 18%, respectively,  for the three and nine month period ended September
     30,  1999,  compared  to the same  periods  in  1998,  due to  declines  in
     turnaround  services and other process plant  services  resulting  from the
     adverse market  conditions.  In Europe,  revenues decreased by 13% and 16%,
     respectively, for the three and nine month periods ended September 30, 1999
     due to lower  turnaround  and other  process  plant  services in the United
     Kingdom,  also  the  result  of  adverse  market  conditions.  Asia-Pacific
     revenues  decreased by 8% in the third  quarter of 1999 and increased by 2%
     for the nine month  period of 1999,  compared to the same  periods in 1998.
     The third quarter 1999 decrease is due to a decline in turnaround  services
     and product sales in most of the Asia-Pacific  region,  partially offset by
     increases in Australia turnaround services.

     Overall,  Industrial Services operating income,  before severance and other
     costs,  decreased  by $1.0  million and $2.7 million for the three and nine
     months ended  September 30, 1999,  respectively,  when compared to the same
     1998 periods, due to the adverse market conditions in the United States and
     Europe.  Severance  and other costs  result  from  matching  the  segment's
     workforce  to  the  current  market  conditions  in  these  regions.  As of
     September 30, 1999, substantially all of such costs had been paid.

     The  Company's  income  tax  expense  for the three and nine  months  ended
     September  30, 1999  includes  benefits of $1.0  million and $1.9  million,
     respectively, related to favorable developments pertaining to certain state
     and foreign income tax issues.


     Liquidity and Capital Resources

     During  the  first  nine  months of 1999,  the  Company's  working  capital
     requirements   for   operations   and   capital   expenditures   (excluding
     acquisitions) were funded through the use of internally generated funds.

     Cash  provided by  operations  was $40.9  million and $39.3 million for the
     nine  months  ended  September  30,  1999 and 1998,  respectively.  Capital
     expenditures  (excluding  acquisitions)  were  $13.2  million  for the nine
     months ended September 30, 1999, compared to $10.2 million in 1998. Routine
     maintenance  capital  expenditures  in 1999 have been funded by  internally
     generated funds.

     In January  1999,  KPP  entered  into a credit  agreement  with a bank that
     provides for the issuance of $39.2 million of term loans in connection with
     the United  Kingdom  terminal  acquisition  and $5.0  million  for  general
     partnership  purposes.  The term  loans,  which  bear  interest  in varying
     amounts, are secured by the capital stock of the subsidiaries that acquired
     the United  Kingdom  terminals,  and pari passu with the existing  mortgage
     notes and credit  facility,  by a mortgage on the East  Pipeline.  The term
     loans, which are without recourse to the Company, contain certain financial
     and operational  covenants.  $18.3 million of the term loans were repaid in
     July  1999 with the  proceeds  from a public  offering  of KPP  units.  The
     remaining portion ($25.9 million) is due in January 2002.

     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). 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,  the
     Company  recognized a $16.8  million gain before  deferred  income taxes of
     $6.4 million.

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


     Year 2000 Issue

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

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

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

     At September 30, 1999, the major information technology and non-information
     technology  systems  on which the  Company's  operations  depend  have been
     evaluated  and  updated,  where  necessary,  and  are  believed  to be  Y2K
     compliant.  The Company  continues to evaluate and remediate certain of its
     less  significant  information  technology and  non-information  technology
     systems.  The  Company  expects to  complete  all phases of its Y2K program
     prior to December 31, 1999.

     The Company  believes that it is not possible to determine  with  certainty
     that all Y2K  problems  affecting  the  Company  have  been  identified  or
     corrected.   The  number  of  devices   that  could  be  affected  and  the
     interactions among these devices are simply too numerous. In addition,  the
     Company  cannot  accurately  predict how many  failures  related to the Y2K
     problem will occur or the severity,  duration or financial  consequences of
     such  failures.  The Company has hired an outside Y2K  consultant to assist
     the Company in meeting  its goals and in  developing  contingency  plans to
     define  and  address  the  worst-case  scenario  likely  to be faced by the
     Company.  At September 30, 1999, Y2K contingency  plans were  substantially
     complete and in place for the Company's  pipeline and terminaling,  product
     marketing and information  services  divisions.  A comprehensive  worldwide
     contingency plan for the industrial  services division is expected to be in
     place by December 31, 1999.

     Through  September 30, 1999,  the Company has incurred  approximately  $1.0
     million  of  costs  related  to  assessing,  remediating  and  testing  its
     information technology and non-information technology systems. A portion of
     these  costs  would  have  been  incurred  as part  of  normal  system  and
     application  upgrades.  In certain cases, the timing of these  expenditures
     has  been  accelerated  due to Y2K  considerations.  The  Company  does not
     anticipate  that  future  costs  to  become  fully  Y2K  compliant  will be
     material.



<PAGE>




                           PART II - Other Information

     Item 6.    Exhibits and Reports on Form 8-K

               (a)  Exhibits.

                    27. Financial Data Schedule


               (b)  Reports on Form 8-K

                    [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 15, 1999                          //s//
                                         ----------------------------------
                                         Michael R. Bakke
                                         Controller