<PAGE>   1
================================================================================

                       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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the transition period from ___ to ___

                        Commission File 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, 2001
   ---------------------                      -----------------------------
       No par value                               31,149,777 shares

================================================================================


<PAGE>   2




KANEB SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED MARCH 31, 2001


<TABLE>
<CAPTION>
                                                                                            Page No.
                                                                                            --------
<S>                                                                                         <C>
                   Part I. Financial Information

Item 1.   Financial Statements (Unaudited)

          Consolidated Statements of Income - Three Months Ended
             March 31, 2001 and 2000                                                           1

          Condensed Consolidated Balance Sheets - March 31, 2001
             and December 31, 2000                                                             2

          Condensed Consolidated Statements of Cash Flows - Three
             Months Ended March 31, 2001 and 2000                                              3

          Notes to Consolidated Financial Statements                                           4

Item 2.   Management's Discussion and Analysis of
             Financial Condition and Results of Operations                                    12

                   Part II. Other Information

Item 6.   Exhibits and Reports on Form 8-K                                                    17
</TABLE>





<PAGE>   3



KANEB SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)


<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                    MARCH 31,
                                                                         ------------------------------
                                                                             2001              2000
                                                                         -------------    -------------
<S>                                                                      <C>              <C>
Revenues:
     Services                                                            $      32,884    $      27,006
     Products                                                                    3,008            4,288
                                                                         -------------    -------------
           Total revenues                                                       35,892           31,294
                                                                         -------------    -------------

Costs and expenses:
     Operating costs                                                            29,280           23,993
     Cost of products sold                                                       2,677            3,903
     Depreciation and amortization                                               1,251            1,362
     General and administrative                                                  1,160            1,481
                                                                         -------------    -------------
           Total costs and expenses                                             34,368           30,739
                                                                         -------------    -------------

Operating income                                                                 1,524              555
Interest income                                                                    248              172
Other expense, net                                                                (255)             (43)
Interest expense                                                                  (885)            (976)
                                                                         -------------    -------------
Income (loss) from continuing operations before
    income taxes                                                                   632             (292)
Income tax benefit (expense)                                                      (259)              57
                                                                         -------------    -------------
Income (loss) from continuing operations                                           373             (235)
Income from discontinued operations - businesses
    to be distributed to common shareholders,
    net of income taxes                                                          6,770            2,160
                                                                         -------------    -------------
Net income                                                                       7,143            1,925

Dividends and redemption premium applicable
    to preferred stock                                                             493              130
                                                                         -------------    -------------
Net income applicable to common stock                                    $       6,650    $       1,795
                                                                         =============    =============

Earnings (loss) per common share - Basic and diluted:
    Continuing operations                                                $          --    $        (.01)
    Discontinued operations                                                        .21              .07
                                                                         -------------    -------------
                                                                         $         .21    $         .06
                                                                         =============    =============
</TABLE>


                See notes to consolidated financial statements.


                                        1

<PAGE>   4



KANEB SERVICES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                  MARCH 31,       DECEMBER 31,
                                                                    2001              2000
                                                               --------------    --------------
                                                                 (UNAUDITED)
<S>                                                            <C>               <C>
                   ASSETS
Current assets:
     Cash and cash equivalents                                 $       15,886    $       20,517
     Accounts receivable, trade                                        32,408            29,198
     Inventories                                                        7,560             7,641
     Prepaid expenses and other current assets                          6,675             6,749
     Current deferred taxes                                            36,070            36,489
                                                               --------------    --------------
        Total current assets                                           98,599           100,594
                                                               --------------    --------------

Property and equipment                                                 30,061            30,585
Less accumulated depreciation and amortization                         19,673            20,043
                                                               --------------    --------------
     Net property and equipment                                        10,388            10,542
                                                               --------------    --------------

Excess of cost over fair value of net assets
     of acquired businesses                                            61,943            62,470

Deferred income taxes and other assets                                 11,044            11,215

Net assets of discontinued operations - businesses to
    be distributed to common shareholders                              44,947            41,822
                                                               --------------    --------------
                                                               $      226,921    $      226,643
                                                               ==============    ==============
     LIABILITIES AND EQUITY
Current liabilities:
     Current portion of long-term debt                         $          567    $          595
     Accounts payable                                                   7,426             5,081
     Accrued expenses                                                  11,210            13,733
                                                               --------------    --------------
         Total current liabilities                                     19,203            19,409
                                                               --------------    --------------

Long-term debt, less current portion:
    Technical services                                                 18,529            18,197
    Parent company                                                     21,396            21,396
                                                               --------------    --------------
         Total long-term debt, less current portion                    39,925            39,593
                                                               --------------    --------------

Other liabilities                                                       1,711             1,602

Commitments and contingencies

Stockholders' equity:
     Preferred stock, without par value                                    --             5,792
     Common stock, without par value                                    4,250             4,250
     Additional paid-in-capital                                       204,034           203,989
     Treasury stock, at cost                                          (31,428)          (31,440)
     Accumulated deficit                                               (6,662)          (13,311)
     Accumulated other comprehensive income (loss) -
         foreign currency translation adjustment                       (4,112)           (3,241)
                                                               --------------    --------------
         Total stockholders' equity                                   166,082           166,039
                                                               --------------    --------------
                                                               $      226,921    $      226,643
                                                               ==============    ==============
</TABLE>



                See notes to consolidated financial statements.

                                        2



<PAGE>   5



KANEB SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                    MARCH 31,
                                                                         ------------------------------
                                                                             2001              2000
                                                                         -------------    -------------
<S>                                                                      <C>              <C>
Operating activities:
   Income (loss) from continuing operations                              $         373    $        (235)
   Adjustments to reconcile income (loss) from
     continuing operations to net cash provided
     by operating activities:
       Increase in estimated redemption value
         of Series F Preferred Stock                                                --              126
       Depreciation and amortization                                             1,251            1,362
       Deferred income taxes                                                        32              (73)
       Other                                                                       109               23
       Changes in current assets and liabilities                                (3,311)          (1,296)
                                                                         -------------    -------------
       Operating activities of continuing operations                            (1,546)             (93)
       Operating activities of discontinued operations                          32,677           20,224
                                                                         -------------    -------------
         Net cash provided by operating activities                              31,131           20,131
                                                                         -------------    -------------

Investing activities:
   Capital expenditures                                                           (864)            (643)
   Change in other assets, net                                                    (432)             359
   Investing activities of discontinued operations                            (109,483)          (4,908)
                                                                         -------------    -------------
       Net cash used in investing activities                                  (110,779)          (5,192)
                                                                         -------------    -------------

Financing activities:
   Issuance of debt                                                              1,198              158
   Payments on debt and capital leases                                            (894)            (877)
   Preferred stock dividends and redemption
     premium paid                                                                 (493)            (130)
   Common stock issued                                                              23              147
   Purchase of treasury stock                                                       --           (1,092)
   Redemption of Series A Preferred Stock                                       (5,680)              --
   Financing activities of discontinued operations                              80,863          (12,593)
                                                                         -------------    -------------
       Net cash provided by (used in) financing activities                      75,017          (14,387)
                                                                         -------------    -------------

Increase (decrease) in cash and cash equivalents                                (4,631)             552
Cash and cash equivalents at beginning of period                                20,517           14,516
                                                                         -------------    -------------

Cash and cash equivalents at end of period                               $      15,886    $      15,068
                                                                         =============    =============

Supplemental cash flow information:
   Cash paid for interest                                                $       1,268    $       1,471
                                                                         =============    =============

   Cash paid for income taxes                                            $         388    $         264
                                                                         =============    =============
</TABLE>

                See notes to consolidated financial statements.

                                        3


<PAGE>   6



KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




1.       SIGNIFICANT ACCOUNTING POLICIES

         The consolidated financial statements include the accounts of Kaneb
         Services, Inc. and its subsidiaries (the "Company"). On November 27,
         2000, the Board of Directors of the Company authorized the distribution
         of its pipeline, terminaling and product marketing businesses (the
         "Distribution") to its shareholders in the form of a new limited
         liability company, Kaneb Services LLC ("KSL"). The new entity will own
         an effective 2% general partner interest and a 25% limited partner
         interest in Kaneb Pipe Line Partners, L.P. ("KPP") and the Company's
         wholly-owned petroleum marketing subsidiary. As a result, the
         accompanying financial statements reflect the operations of the
         Pipeline, Terminaling and Product Marketing businesses of the Company
         as "discontinued operations - businesses to be distributed to common
         shareholders". All significant intercompany transactions and balances
         are eliminated in consolidation.

         The unaudited condensed consolidated financial statements of the
         Company for the three month periods ended March 31, 2001 and 2000, have
         been prepared in accordance with generally accepted accounting
         principles. 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, 2000. In the opinion of the Company's management, the
         accompanying condensed consolidated financial statements contain the
         adjustments, consisting of normal recurring accruals, necessary to
         present fairly the consolidated financial position of the Company and
         its consolidated subsidiaries at March 31, 2001 and the consolidated
         results of their operations and cash flows for the periods ended March
         31, 2001 and 2000. Operating results for the three months ended March
         31, 2001 are not necessarily indicative of the results that may be
         expected for the year ending December 31, 2001.


2        COMPREHENSIVE INCOME

         Comprehensive income for the three months ended March 31, 2001 and 2000
         is as follows:

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                                March 31,
                                                     ------------------------------
                                                         2001             2000
                                                     -------------    -------------
                                                            (in thousands)
<S>                                                  <C>              <C>
Net income                                           $       7,143    $       1,925
Other comprehensive income (loss) - foreign
   currency translation adjustment                            (871)             (43)
                                                     -------------    -------------

Comprehensive income                                 $       6,272    $       1,882
                                                     =============    =============
</TABLE>


                                       4

<PAGE>   7



KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



3.       EARNINGS PER SHARE

         The following is a reconciliation of Basic and Diluted earnings (loss)
         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 MARCH 31, 2001
    Income from continuing operations                          $         373
    Dividends and redemption premium
       applicable to preferred stock                                    (493)
                                                               -------------
    Basic earnings per share -
       Income (loss) applicable to common
         stock                                                          (120)          31,744   $          --
                                                                                                =============

    Effect of dilutive securities -
       Common stock options, Series F
       Preferred and DSUs                                                 --               --
                                                               -------------    -------------

    Diluted earnings per share -
       Income (loss) applicable to common
       stock, Series F Preferred, DSUs and
       assumed options exercised                               $        (120)          31,744   $          --
                                                               =============    =============   =============

THREE MONTHS ENDED MARCH 31, 2000
    Income (loss) from continuing operations                   $        (235)
    Dividends applicable to preferred stock                             (130)
                                                               -------------

    Basic earnings per share -
       Income (loss) applicable to common
         stock                                                          (365)          31,261   $        (.01)
                                                                                                =============

    Effect of dilutive securities -
       Common stock options, Series F
       Preferred and DSUs                                                 --               --
                                                               -------------    -------------

    Diluted earnings per share -
       Income (loss) applicable to common
       stock, Series F Preferred, DSUs and
       assumed options exercised                               $        (365)          31,261   $        (.01)
                                                               =============    =============   =============
</TABLE>

         As a result of the loss from continuing operations applicable to common
         stock, all options and the Company's 8.75% convertible subordinated
         debentures were excluded from the computation of diluted earnings per
         share because the effect would be anti-dilutive.



                                       5
<PAGE>   8


KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



4.       CONTINGENCIES

         The Company has 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.


5.       BUSINESS SEGMENT DATA

         The Company provides technical 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.
         Additionally, 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. General corporate includes
         compensation and benefits paid to officers and employees of the
         Company, insurance premiums, general and administrative costs, tax and
         financial reporting costs and legal and audit fees not reasonably
         allocable to specific business segments. General corporate assets
         include cash, deferred taxes and other assets not related to the
         Company's segments. Effective January 1, 2001, the compensation and
         benefit costs of certain officers of the technical services and
         information technology services segments were transferred from general
         corporate to their respective segments. Such costs approximated $0.1
         million for the first quarter for each of these segments.

         The Company measures segment profit as operating income. Total assets
         are those assets, including excess of cost over fair value of acquired
         businesses, controlled by each reportable segment.

<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                         March 31,
                                                          --------------------------------------
                                                                 2001                 2000
                                                          ----------------      ----------------
                                                                      (in thousands)
<S>                                                       <C>                  <C>
     Business segment revenues:
        Technical services                                $         24,561      $         22,959
        Information technology services                             11,331                 8,335
                                                          ----------------      ----------------
                                                          $         35,892      $         31,294
                                                          ================      ================
     Technical services segment revenues:
        Underpressure services                            $          9,544      $          9,374
        Turnaround services                                         12,502                10,868
        Other services                                               2,515                 2,717
                                                          ----------------      ----------------
                                                          $         24,561      $         22,959
                                                          ================      ================
</TABLE>



                                       6

<PAGE>   9

KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                    March 31,
                                                          ------------------------------
                                                              2001              2000
                                                          -------------    -------------
                                                                  (in thousands)
<S>                                                       <C>              <C>
Business segment profit:
   Technical services                                     $       1,313    $         924
   Information technology services                                1,371            1,112
   General corporate                                             (1,160)          (1,481)
                                                          -------------    -------------
      Operating income                                            1,524              555
   Interest income                                                  248              172
   Other expense, net                                              (255)             (43)
   Interest expense                                                (885)            (976)
                                                          -------------    -------------
   Income (loss) from continuing operations
      before income taxes                                 $         632    $        (292)
                                                          =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                             March 31,    December 31,
                                                               2001            2000
                                                          -------------   -------------
<S>                                                       <C>             <C>
Total assets:
   Technical services                                     $     103,121   $     103,817
   Information technology services                               21,919          20,086
   General corporate                                             56,934          60,918
   Discontinued operations, net                                  44,947          41,822
                                                          -------------   -------------
                                                          $     226,921   $     226,643
                                                          =============   =============
</TABLE>

6.       DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED TO COMMON
         SHAREHOLDERS

         The results of operations for the pipeline, terminaling and product
         marketing businesses are reflected in the accompanying consolidated
         statements of income as "discontinued operations - businesses to be
         distributed to common shareholders" (See Note 1). A summary of
         operating results of discontinued operations for the three months ended
         March 31, 2001 and 2000 is presented below:

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                     March 31,
                                                          ------------------------------
                                                              2001             2000
                                                          -------------    -------------
                                                                 (in thousands)
<S>                                                       <C>              <C>
Revenues:
  Pipeline and terminaling services                       $      48,069    $      36,680
  Product marketing services                                     88,352           80,389
                                                          -------------    -------------
                                                          $     136,421    $     117,069
                                                          =============    =============
Operating profit:
  Pipeline and terminaling services                       $      18,294    $      12,900
  Product marketing services                                       (775)             959
  Distribution expenses                                            (250)              --
                                                          -------------    -------------
                                                          $      17,269    $      13,859
                                                          =============    =============
</TABLE>



                                       7
<PAGE>   10

KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                                                          March 31,
                                                               -------------    -------------
                                                                   2001              2000
                                                               -------------    -------------
                                                                       (in thousands)
<S>                                                            <C>              <C>
Income before gain on issuance of units by
  KPP, income taxes, interest of outside
  non-controlling partners in KPP's net
  income and extraordinary item                                $      12,432    $      10,719

Gain on issuance of units by KPP                                       9,859               --
Income taxes                                                          (5,004)          (1,725)
Interest of outside non-controlling partners
  in KPP's net income                                                 (9,658)          (6,834)
Extraordinary loss on KPP debt extinguishment,
  net of income taxes and interest of outside
  non-controlling partners in KPP's net income                          (859)              --
                                                               -------------    -------------
Income from discontinued operations,
  net of income taxes                                          $       6,770    $       2,160
                                                               =============    =============
</TABLE>

         A summary balance sheet of the discontinued operations as of March 31,
         2001 and December 31, 2000 is presented below:

<TABLE>
<CAPTION>
                                                                  March 31,     December 31,
                                                                    2001            2000
                                                               -------------    -------------
                                                                       (in thousands)
<S>                                                            <C>              <C>
Current assets                                                 $      70,245    $      66,330
Property and equipment, net                                          484,235          321,448
Investment in affiliates                                              22,031           22,568
Other assets                                                           1,596            1,607
                                                               -------------    -------------
  Total assets                                                       578,107          411,953

Current liabilities                                                  (84,114)         (41,796)
Long-term debt                                                      (257,500)        (184,052)
Deferred taxes and other liabilities                                 (30,726)         (24,302)
Interest of outside non-controlling partners in KPP                 (160,820)        (119,981)
                                                               -------------    -------------

Net assets of discontinued operations - businesses to be
  distributed to common shareholders                           $      44,947    $      41,822
                                                               =============    =============
</TABLE>


         On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired
         Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
         KPP units. Financing for the cash portion of the purchase price was
         supplied under a new $275 million unsecured revolving credit agreement
         with a group of banks. The acquisition has been accounted for using the




                                       8
<PAGE>   11


KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


         purchase method of accounting. As a result of KPP issuing additional
         units to unrelated parties, the Company's pro-rata share of net assets
         of KPP increased by $9.9 million. Accordingly, the Company recognized a
         $9.9 million gain, before deferred income taxes of $3.8 million, in the
         first quarter of 2001.

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

         On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac
         Electric Power Company ("PEPCO") ruptured. The pipeline was operated by
         a partnership of which a subsidiary of KPP is general partner. PEPCO
         has reported that, through December 2000, it incurred approximately $66
         million in clean-up costs and expects to incur total cleanup costs of
         $70 million to $75 million. Since May 2000, KPP's subsidiary has
         participated provisionally in a minority share of the cleanup expense,
         which has been funded by KPP's insurance carriers. KPP cannot predict
         the amount, if any, that ultimately may be determined to be KPP's share
         of the remediation expense, but it believes that such amount will be
         covered by insurance and will not materially affect KPP's financial
         condition.

         As a result of the rupture, purported class actions have been filed in
         federal and state court in Maryland by property and/or business owners
         alleging damages in unspecified amounts against PEPCO and KPP's
         subsidiary under various theories, including the federal Oil Pollution
         Act. The court has ordered a consolidated complaint to be filed in this
         action. KPP's insurance carriers have assumed the defense of these
         actions. While KPP cannot predict the amount, if any, of any liability
         it may have in these suits, it believes that such amounts will be
         covered by insurance and that these actions will not have a material
         adverse effect on its financial condition.

         PEPCO and KPP's subsidiary have agreed with the State of Maryland to
         pay costs of assessing natural resource damages under the federal Oil
         Pollution Act, but they cannot predict at this time the amount of any
         damages that may be claimed by Maryland. KPP believes that both the
         assessment costs and such damages are covered by insurance and will not
         materially affect KPP's financial condition.

         The U.S. Department of Transportation has issued a Notice of Proposed
         Violation to PEPCO and KPP's subsidiary alleging violations over
         several years of pipeline safety regulations and proposing a civil
         penalty of $674,000. KPP's subsidiary and PEPCO have contested the
         allegations of violations and the proposed penalty. The ultimate amount
         of any penalty


                                       9
<PAGE>   12

KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


         attributable to KPP cannot be determined at this time, but KPP believes
         that this matter will not have a material effect on KPP's financial
         condition.

         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.

         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 Services 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 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 Services 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.

         On April 2, 2001, Grace filed a petition in bankruptcy, which created
         an automatic stay against actions against Grace. This automatic stay
         will affect the appeal of this matter. The Texas court of appeals has
         issued an order staying all proceedings of the appeal because of the
         bankruptcy. Once the stay is lifted, KPP's subsidiaries that are party
         to the law suit intend to resume vigorous prosecution of the appeal.



                                       10
<PAGE>   13

KANEB SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


         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.


7.       RECENT ACCOUNTING PRONOUNCEMENTS

         Effective January 1, 2001, the Company adopted the provisions of SFAS
         No. 133, "Accounting and 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, are
         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.
         As the Company is not a party to any derivative contracts, adoption did
         not have any effect on the Company's results of operations or financial
         position.



                                       11
<PAGE>   14



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:


         TECHNICAL 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
                                                                           March 31,
                                                               ------------------------------
                                                                   2001             2000
                                                               -------------    -------------
                                                                       (in thousands)
<S>                                                            <C>              <C>
Revenues:
    United States                                              $       9,734    $       7,844
    Europe                                                            11,732           12,563
    Asia-Pacific                                                       3,095            2,552
                                                               -------------    -------------
         Total Revenues                                        $      24,561    $      22,959
                                                               =============    =============

Operating income:
    United States                                              $         611    $         487
    Europe                                                             1,511              950
    Asia-Pacific                                                         157              263
    Headquarters                                                        (492)            (281)
    Amortization of excess of cost over fair value
      of net assets of acquired businesses                              (474)            (495)
                                                               -------------    -------------
         Total operating income                                $       1,313    $         924
                                                               =============    =============

Capital expenditures,
    excluding acquisitions                                     $         805    $         407
                                                               =============    =============
</TABLE>

         For the three months ended March 31, 2001, revenues for the technical
         services business increased by $1.6 million, or 7%, when compared to
         the same 2000 period, due to overall improvements in turnaround
         services, primarily in the United States and Europe, resulting from
         improved market conditions. In the United States, revenues increased by
         24%, compared to the same period in 2000, due to the increases in
         turnaround services and increases in leaksealing services. In Europe,
         revenues decreased by 7% due to devaluations of foreign currencies and
         declines in demand for leaksealing services. Asia-Pacific revenues
         increased by 21% in the first quarter of 2001, compared to the same
         period in 2000, due to an increase in product sales.

         Overall, technical services operating income increased by $0.4 million,
         or 42%, for the three months ended March 31, 2001, when compared to the
         same 2000 period, due to increases in


                                       12

<PAGE>   15


KANEB SERVICES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


         operating income in the United States and Europe resulting from
         higher-margin turnaround services and overall improved market
         conditions.


         INFORMATION TECHNOLOGY SERVICES

         The Company's information technology services business is conducted
         through several wholly-owned subsidiaries. The information technology
         services group provides network design, installation and maintenance
         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
                                                March 31,
                                      -----------------------------
                                          2001             2000
                                      -------------   -------------
                                              (in thousands)
<S>                                   <C>             <C>
Revenues                              $      11,331   $       8,335
                                      =============   =============

Operating income                      $       1,371   $       1,112
                                      =============   =============

Capital expenditures,
    excluding acquisitions            $          59   $         236
                                      =============   =============
</TABLE>


         In November 2000, the Company, through a wholly-owned subsidiary,
         acquired Double Eagle Communications and Cabling, Inc. ("Double
         Eagle"). Double Eagle is a full service provider of voice and data
         cabling and network support services.

         For the three months ended March 31, 2001, revenues increased by $3.0
         million, or 36%, as a result of increases in service revenues,
         primarily due to the Double Eagle acquisition, partially offset by
         declines in equipment sales. Revenues from equipment sales, furnished
         at the request of selected customers, declined in the first quarter of
         2001, when compared to 2000, due to fluctuations in customer needs. For
         the three months ended March 31, 2001, operating income increased by
         $0.3 million, or 23%, when compared to the same 2000 period, the result
         of the Double Eagle acquisition and increased consulting services
         provided to various national government agencies and the private
         sector, partially offset by the decreases in equipment sales.



                                       13
<PAGE>   16


KANEB SERVICES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


         DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED TO COMMON
         SHAREHOLDERS

         The pipeline and terminaling segment includes the operations of KPP.
         KPP provides transportation services of refined petroleum products
         through a pipeline system that extends throughout the Midwestern states
         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 an
         effective 2% general partner interest and a 25% limited partner
         interest in KPP. The products marketing business segment provides
         wholesale motor fuel marketing services throughout the Great Lakes and
         Rocky Mountain regions, as well as California.

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                           March 31,
                                                               ------------------------------
                                                                   2001             2000
                                                               -------------    -------------
                                                                       (in thousands)
<S>                                                            <C>              <C>
Revenues:
  Pipeline and terminaling services                            $      48,069    $      36,680
  Product marketing services                                          88,352           80,389
                                                               -------------    -------------
                                                               $     136,421    $     117,069
                                                               =============    =============
Operating income:
  Pipeline and terminaling services                            $      18,294    $      12,900
  Product marketing services                                            (775)             959
  Distribution expenses                                                 (250)              --
                                                               -------------    -------------
                                                               $      17,269    $      13,859
                                                               =============    =============
</TABLE>

         On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired
         Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
         KPP units. Financing for the cash portion of the purchase price was
         supplied under a new $275 million unsecured revolving credit agreement
         with a bank. See "Liquidity and Capital Resources". Shore owns seven
         terminals, located in four states, with a total tankage capacity of 7.8
         million barrels. All of the terminals handle petroleum products and,
         with the exception of one, have deep water access.

         For the three months ended March 31, 2001, revenues for the Pipeline
         and Terminaling business increased by $11.4 million when compared to
         2000, due to a $10.5 million increase in revenues in the terminaling
         business and $0.9 million increase in pipeline revenues. Terminaling
         revenue increases are a result of the Shore acquisition and overall
         increases in utilization at existing locations, the result of
         relatively favorable market conditions. Average annual tankage utilized
         for the three months ended March 31, 2001 increased to 30.0 million
         barrels from 21.0 million barrels for the comparable prior year period.
         Approximately 85% of the increase in both revenues and average annual
         tankage utilized was attributable to Shore. For the three months ended
         March 31, 2001, average annualized revenues per barrel of tankage
         utilized increased to $4.25 per barrel, compared to $4.09 per barrel
         for the same prior year period, the result of favorable market
         conditions, compared to the first quarter of


                                       14
<PAGE>   17


KANEB SERVICES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


         2000. Pipeline revenue increases are due to increases in barrel miles
         shipped and increases in terminaling charges. Pipeline barrel miles
         shipped totaled 4.1 billion and 4.0 billion for the three month periods
         ended March 31, 2001 and 2000, respectively.

         The $5.4 million increase in pipeline and terminaling operating income
         for the quarter ended March 31, 2001, compared to 2000, is due entirely
         to an increase in terminaling operating income, a result of the Shore
         acquisition and the increase in tank utilization.

         The interest of outside non-controlling partners in KPP's net income
         was $9.7 million and $6.8 million for the three months ended March 31,
         2001 and 2000, respectively. Distributions paid to the outside
         non-controlling unitholders of KPP aggregated approximately $10.6
         million and $9.3 million for the three month periods ended March 31,
         2001 and 2000, respectively.

         Capital expenditures of $3.0 million and $2.3 million for the three
         month periods ended March 31, 2001 and 2000 relate to the maintenance
         of KPP's existing operations. Routine maintenance capital expenditures
         for 2001 are currently estimated to be between $12 million and $15
         million.

         For the three months ended March 31, 2001, revenues for the product
         marketing business increased by $8.0 million, or 10%, when compared to
         the same 2000 period, primarily a result of an increase in both sales
         volumes and sales price. Total gallons sold increased to 97 million in
         the first quarter of 2001, compared to 95 million in the first quarter
         of 2000, due to a combination of increasing the number of terminals
         through which products are sold and increasing the volumes at existing
         locations. The average price realized per gallon of product sold
         increased to $0.91 in the first quarter of 2001, compared to $0.85 for
         the same period in 2000. Products marketing operating income decreased
         by $1.7 million in the first quarter of 2001, compared to the first
         quarter of 2000, due to sharp fluctuations in prices, which more than
         offset normal operating margins.



                                       15
<PAGE>   18

KANEB SERVICES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



         LIQUIDITY AND CAPITAL RESOURCES

         During the first three months of 2001, the Company's working capital
         requirements for operations and capital expenditures were funded
         through the use of internally generated funds.

         Cash provided by (used in) continuing operations was $(1.5) million and
         $(0.1) million for the three months ended March 31, 2001 and 2000,
         respectively. Capital expenditures from continuing operations were $0.9
         million for the three months ended March 31, 2001, compared to $0.6
         million in 2000. Routine maintenance capital expenditures in 2001 have
         been funded by internally generated funds.

         In December 2000, KPP entered into a credit agreement with a group of
         banks that provides for a $275 million unsecured revolving credit
         facility through December 2003. The credit facility, which is without
         recourse to the parent company, bears interest at variable rates and
         has a variable commitment fee on unutilized amounts. The credit
         facility contains financial and operational covenants, including
         limitations on KPP investments, sales of assets and transactions with
         affiliates. Absent an event of default, the covenants do not restrict
         distributions to KPP unitholders. In January 2001, proceeds from the
         facility were used to repay in full KPP's $128 million of mortgage
         notes and $15 million outstanding under its $25 million revolving
         credit facility. An additional $107 million was used to finance the
         cash portion of the Shore acquisition. Under the provisions of the
         mortgage notes, KPP incurred $6.5 million in prepayment penalties,
         which, net of interest of outside non-controlling partners in KPP's net
         income and income taxes, has been recognized in discontinued operations
         - businesses to be distributed to common shareholders in the first
         quarter of 2001. At March 31, 2001, $257.5 million was drawn on the
         facility, at an interest rate of 6.04%, which is due in December of
         2003.

         In connection with the planned distribution, the Company's Series A
         Preferred Stock was redeemed for cash on March 30, 2001 at the stated
         redemption price of $10.67 per share, plus accrued and unpaid
         dividends, for a total cost of approximately $6.1 million. The
         redemption cost includes a $0.4 million redemption premium, which is
         recognized as preferred dividends in the first quarter of 2001.
         Additionally, the Board of Directors has authorized the exchange, in
         non-cash transactions, of 1,356,777 shares of the Company's common
         stock for all Series C Preferred and Series F Preferred shares
         outstanding. The exchanges are expected to be completed in the first
         half of 2001.

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



                                       16
<PAGE>   19





                           PART II - OTHER INFORMATION


         Item 6.  Exhibits and Reports on Form 8-K

                  (a)      Exhibits.

                           None.


                  (b)      Reports on Form 8-K

                           Current Report on Form 8-K regarding Kaneb Pipe Line
                           Partners L.P.'s Acquisition of Shore Terminals LLC,
                           located in California, Washington, Oregon and Nevada,
                           filed January 18, 2001.

                           Current Report on Form 8-K/A updating Kaneb Pipe Line
                           Partners L.P.'s Acquisition of Shore Terminals LLC,
                           located in California, Washington, Oregon and Nevada,
                           filed March 19, 2001.


                                    Signature


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



                                         KANEB SERVICES, INC.
                                         (Registrant)


Date:  May 14, 2001                      /s/ MICHAEL R. BAKKE
                                         --------------------------------------
                                         Michael R. Bakke
                                         Controller





                                       17