--------------------------------------------------------------------------------

                       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 June 30, 1998                                              Number 001-5083

                              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 principal executive offices, including zip code)

                                 (214) 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 August 7, 1998
  no par value                                            31,438,129 shares

--------------------------------------------------------------------------------


<PAGE>

KANEB SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED JUNE 30, 1998
--------------------------------------------------------------------------------

                                                                        Page No.
                           Part I. Financial Information

Item 1.    Financial Statements (Unaudited)

           Consolidated Statements of Income - Three and Six Months
              Ended June 30, 1998 and 1997                                    1

           Condensed Consolidated Balance Sheets - June 30, 1998
              and December 31, 1997                                           2

           Condensed Consolidated Statements of Cash Flows - Six
              Months Ended June 30, 1998 and 1997                             3

           Notes to Consolidated Financial Statements                         4

Item 2.    Management's Discussion and Analysis of
              Financial Condition and Results of Operations                   7

                           Part II. Other Information

Item 6.    Exhibits and Reports on Form 8-K                                   10

Signature                                                                     10




<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                Three Months Ended         Six Months Ended
                                                     June 30,                  June 30,
                                              ----------------------    ----------------------
                                                 1998         1997        1998          1997
                                              ---------    ---------    ---------    ---------
<S>                                           <C>          <C>          <C>          <C>      
Revenues                                      $ 100,492    $  58,388    $ 159,993    $ 111,542
                                              ---------    ---------    ---------    ---------

Costs and expenses:
     Operating costs                             79,949       38,598      121,730       74,057
     Depreciation and amortization                4,202        4,176        8,249        8,389
     General and administrative                   1,360        1,369        2,426        2,407
                                              ---------    ---------    ---------    ---------

         Total costs and expenses                85,511       44,143      132,405       84,853
                                              ---------    ---------    ---------    ---------

Operating income                                 14,981       14,245       27,588       26,689

Other income (expense), net                          62          (75)          25          (95)
Interest expense                                 (3,891)      (3,828)      (7,636)      (7,690)
Amortization of excess of cost over fair
   value of net assets of acquired business        (495)        (462)        (970)        (923)
                                              ---------    ---------    ---------    ---------

Income before interest of outside non-
   controlling partners in KPP's net
   income and income tax expense                 10,657        9,880       19,007       17,981
Interest of outside non-controlling
   partners in KPP's net income                  (6,762)      (6,724)     (12,817)     (12,744)
Income tax expense                                 (530)        (449)        (989)      (1,001)
                                              ---------    ---------    ---------    ---------

Net income                                        3,365        2,707        5,201        4,236
Dividends applicable to preferred stock             158          129          308          252
                                              ---------    ---------    ---------    ---------

Net income applicable to common stock         $   3,207    $   2,578    $   4,893    $   3,984
                                              =========    =========    =========    =========

Earnings per common share -
   Basic and Diluted                          $     .10    $     .08    $     .15    $     .12
                                              =========    =========    =========    =========
</TABLE>




                 See notes to consolidated financial statements
                                       1

<PAGE>

KANEB SERVICES, INC. AND SUBSIDIARIES

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

                                                          June 30,  December 31,
                                                            1998        1997
                                                        ----------- ------------
       ASSETS                                           (Unaudited)
Current assets:
   Cash and cash equivalents                           $  11,878      $  23,025
   Accounts receivable, trade                             48,118         35,268
   Inventories                                            11,082          7,079
   Prepaid expenses and other current assets               5,183          5,693
                                                       ---------      ---------
     Total current assets                                 76,261         71,065
                                                       ---------      ---------

Property and equipment                                   395,805        383,078
Less accumulated depreciation and amortization           128,280        121,717
                                                       ---------      ---------
     Net property and equipment                          267,525        261,361
                                                       ---------      ---------

Excess of cost over fair value of net assets
 of acquired business                                     63,500         62,719

Other assets                                               7,485          7,128
                                                       ---------      ---------
                                                       $ 414,771      $ 402,273
                                                       =========      =========
       LIABILITIES AND EQUITY

Current liabilities:
   Current portion of long-term debt                   $  10,396      $   5,394
   Accounts payable                                       15,817          9,569
   Accrued expenses                                       39,026         35,679
                                                       ---------      ---------
     Total current liabilities                            65,239         50,642
                                                       ---------      ---------

Long-term debt, less current portion:
   Industrial field services                              22,766         25,268
   Pipeline, terminaling and 
     product marketing services                          134,000        132,118
   Parent company                                         23,666         23,666
                                                       ---------      ---------
     Total long-term debt, less current portion          180,432        181,052
                                                       ---------      ---------

Deferred income taxes and other liabilities               15,541         15,903

Interest of outside non-controlling partners in KPP       74,791         76,229

Commitments and contingencies

Stockholders' equity:
   Preferred stock, without par value                      5,792          5,792
   Common stock, without par value                         4,239          4,234
   Additional paid-in-capital                            197,300        197,242
   Accumulated deficit                                   (96,598)      (101,491)
   Unamortized restricted stock compensation                (141)          --
   Treasury stock, at cost                               (29,737)       (25,216)
   Accumulated other comprehensive income (loss)
     - foreign currency translation adjustment            (2,087)        (2,114)
                                                       ---------      ---------
       Total stockholders' equity                         78,768         78,447
                                                       ---------      ---------
                                                       $ 414,771      $ 402,273
                                                       =========      =========
                 See notes to consolidated financial statements
                                       2

<PAGE>

KANEB SERVICES, INC. AND SUBSIDIARIES

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

                                                       Six Months Ended June 30,
                                                       -------------------------
                                                         1998             1997
                                                       --------        ---------
Operating activities:
   Net income                                          $  5,201        $  4,236
   Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation and amortization                     8,249           8,389
        Interest of outside non-controlling 
          partners in KPP                                12,817          12,744
        Amortization of excess of cost over fair
          value of net assets acquired                      970             923
        Deferred income taxes                               292             435
        Changes in working capital components            (6,748)         (2,284)
                                                       --------        --------

         Net cash provided by operating activities       20,781          24,443
                                                       --------        --------

Investing activities:
   Capital expenditures                                  (7,192)         (6,774)
   Acquisitions of pipelines, terminals and
     product marketing services                          (7,829)           --
   Other, net                                            (2,417)            559
                                                       --------        --------

         Net cash used in investing activities          (17,438)         (6,215)
                                                       --------        --------

Financing activities:
   Issuance of long-term debt                            10,247           4,939
   Payments on long-term debt                            (5,655)         (6,613)
   Preferred stock dividends paid                          (228)           (252)
   Distributions to outside non-controlling 
     partners in KPP                                    (14,255)        (13,157)
   Common stock issued                                      137            --
   Purchase of treasury stock                            (4,736)         (3,471)
                                                       --------        --------

         Net cash used in financing activities          (14,490)        (18,554)
                                                       --------        --------

Decrease in cash and cash equivalents                   (11,147)           (326)
Cash and cash equivalents at beginning of period         23,025          23,693
                                                       --------        --------

Cash and cash equivalents at end of period             $ 11,878        $ 23,367
                                                       ========        ========


                 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 consolidated financial statements of Kaneb Services, Inc. and
     its subsidiaries  (the "Company") for the three and six month periods ended
     June 30, 1998 and 1997 have been  prepared  in  accordance  with  generally
     accepted accounting  principles applied on a consistent basis.  Significant
     accounting  policies  followed  by the Company  and its  subsidiaries  were
     disclosed in the notes to the consolidated financial statements included in
     the Company's  Annual  Report on Form 10-K for the year ended  December 31,
     1997.  In  the  opinion  of  the  Company's  management,  the  accompanying
     consolidated  financial  statements contain the adjustments,  consisting of
     normal  recurring  accruals,  necessary to present fairly the  consolidated
     financial position of the Company and its consolidated subsidiaries at June
     30, 1998 and the  consolidated  results of their  operations and cash flows
     for the  periods  ended June 30, 1998 and 1997.  Operating  results for the
     three and six months ended June 30, 1998 are not necessarily  indicative of
     the results that may be expected for the year ending December 31, 1998.

2.   COMPREHENSIVE INCOME

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

     Comprehensive  income for the three and six months  ended June 30, 1998 and
     1997 is as follows:

                                         Three Months Ended     Six Months Ended
                                               June 30,             June 30,
                                         ------------------    -----------------
                                           1998      1997       1998      1997
                                         --------   -------    -------  --------
                                                      (in thousands)

     Net income                          $ 3,365   $ 2,707    $ 5,201   $ 4,236
     Other comprehensive income - foreign
        currency translation adjustment       26      (713)        27    (2,068)
                                         -------   -------    -------   -------

     Comprehensive income                $ 3,391   $ 1,994    $ 5,228   $ 2,168
                                         =======   =======    =======   =======




<PAGE>


3.   EARNINGS PER SHARE

     The following is a  reconciliation  of Basic and Diluted earnings per share
     (in thousands, except for per share amounts):
                                                 Net         Common    Per-Share
                                               Income        Shares      Amount
                                               -------      -------     --------
     Three Months Ended June 30, 1998
     --------------------------------
     Net income                                $ 3,365
     Dividends applicable to preferred stock      (158)
                                               -------

     Basic earnings per share:
       Income available to common stock         3,207        31,944     $   0.10
                                                                        ========

     Effect of dilutive securities:
       Common stock options                      --             800
                                             --------       -------
     Diluted earnings per share:
       Income available to common stock
       and assumed options exercised          $ 3,207        32,744     $   0.10
                                              =======       =======     ========

     Three Months Ended June 30, 1997
     --------------------------------
     Net income                               $ 2,707
     Dividends applicable to preferred stock     (129)
                                              -------

     Basic earnings per share:
       Income available to common stock         2,578        32,615     $   0.08
                                                                        ========

     Effect of dilutive securities:
       Common stock options                      --             495
                                             --------       -------
     Diluted earnings per share:
       Income available to common stock
       and assumed options exercised          $ 2,578        33,110     $   0.08
                                              =======       =======     ========

     Six Months Ended June 30, 1998
     ------------------------------
     Net income                               $ 5,201
     Dividends applicable to preferred stock     (308)
                                              -------

     Basic earnings per share:
       Income available to common stock         4,893        32,066     $   0.15
                                                                        ========

     Effect of dilutive securities:
       Common stock options                      --             777
                                             --------       -------

     Diluted earnings per share:
       Income available to common stock
       and assumed options exercised          $ 4,893        32,843     $   0.15
                                              =======       =======     ========



<PAGE>



                                                 Net         Common    Per-Share
                                               Income        Shares      Amount
                                              -------      -------     ---------
     Six Months Ended June 30, 1997
     ------------------------------
     Net income                               $ 4,236
     Dividends applicable to preferred stock     (252)
                                              -------

     Basic earnings per share:
       Income available to common stock         3,984        32,866     $   0.12
                                                                        ========

     Effect of dilutive securities:
       Common stock options                      --             474
                                             --------       -------
     Diluted earnings per share:
       Income available to common stock
       and assumed options exercised          $ 3,984        33,340     $   0.12
                                              =======       =======     ========





<PAGE>


KANEB SERVICES, INC. AND SUBSIDIARIES

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

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

     Operating Results:

     Industrial Field Services

                                         Three Months Ended    Six Months Ended
                                               June 30,           June 30,
                                         ------------------   ------------------
                                           1998       1997     1998       1997
                                         --------   -------   -------   --------
                                                      (in millions)
     Revenues:
        United States                    $   8.9    $   8.9   $  17.8   $  16.6
        Europe                              17.9       17.0      33.8      31.3
        Asia-Pacific                         2.7        0.9       5.4       1.5
                                         -------    -------   -------    ------
        Total Revenues                   $  29.5    $  26.8   $  57.0   $  49.4
                                         =======    =======   =======   =======

     Operating income:
       United States                    $    .3    $    .6    $    .8   $    .9
       Europe                               1.9        1.6        2.4       2.4
       Asia-Pacific                          .3         .1         .4      --
       Headquarters                         (.3)       (.3)       (.4)      (.4)
                                        -------    -------    -------    ------
       Total operating income           $   2.2    $   2.0    $   3.2   $   2.9
                                        =======    =======    =======   =======

     Capital expenditures               $    .7    $    .5    $   1.3   $   1.2
                                        =======    =======    =======   =======

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

     For the  three  and six  months  ended  June  30,  1998,  revenues  for the
     Industrial  Field  Services  segment  increased 10% and 15%,  respectively,
     compared to the same 1997 periods,  due to overall  improvements in each of
     the three  geographical  areas.  For the six months  ended  June 30,  1998,
     revenues  for the United  States  increased  7%,  compared to the same 1997
     period,  due  primarily  to  higher  on-site  machining  and  valve  repair
     services.  Revenues  in  Europe  increased  5% and 8% for the three and six
     months ended June 30,  1998,  respectively,  due  primarily to increases in
     passive fire  protection  and leak sealing  services.  The $1.8 million and
     $3.9 million increase in Asia-Pacific  revenues for the three and six month
     periods ended June 30, 1998, respectively, is primarily attributable to the
     operations of Australia acquired effective July 1, 1997.

     Overall,  Industrial Field Services operating income increased $0.2 million
     for the three months  ended June 30, 1998,  compared to the same prior year
     period,  primarily due to improvements in revenues and operating income for
     Europe and  Asia-Pacific,  partially  offset by a decrease in United States
     operating income due principally to customer-delayed plant turnarounds. For
     the six  months  ended  June 30,  1998,  operating  income  increased  $0.3
     million,  compared to 1997,  due  primarily  to  increases  in revenues and
     operating income in the Asia-Pacific area.


<PAGE>


     Pipeline, Terminaling and Product Marketing Services

                                         Three Months Ended    Six Months Ended
                                               June 30,           June 30,
                                         ------------------   ------------------
                                           1998       1997     1998       1997
                                         --------   -------   -------   --------
                                                      (in millions)

     Revenues:
        Pipeline and terminaling         $  30.6    $  29.8   $  58.6   $  58.4
        Product marketing                   37.7        --       39.6       --
                                         -------    -------   -------   -------
                                         $  68.3    $  29.8   $  98.2   $  58.4
                                         =======    =======   =======   =======

     Operating income                    $  13.2    $  12.9   $  25.1   $  24.8
                                         =======    =======   =======   =======

     Capital expenditures,
        excluding acquisitions           $   3.4    $   3.4   $   5.8   $   5.2
                                         =======    =======   =======   =======

     This business  segment includes the operations of Kaneb Pipe Line Partners,
     L.P. ("KPP") and the Company's product marketing  business acquired in late
     March 1998.  KPP  provides  transportation  services  of refined  petroleum
     products  through a pipeline  system that  extends  through the Midwest and
     Eastern Rocky Mountain areas and provides  terminaling and storage services
     for  petroleum  products and  specialty  chemicals.  The Company  operates,
     manages and controls the pipeline and terminaling operations of KPP through
     its 2% general partner  interest and a 31% limited partner  interest in the
     partnership.  The product marketing  business provides motor fuel wholesale
     marketing  services  throughout the Midwest and Rocky Mountain regions,  as
     well as California.

     The $0.8  million  increase in pipeline  and  terminaling  revenues for the
     quarter  ended  June 30,  1998 is due to a $0.4  million  increase  in both
     pipeline and terminaling revenues, when compared to 1997. For the six month
     period ended June 30, 1998, pipeline and terminaling  revenues increased by
     $0.2 million,  compared to 1997, due to a $0.5 million increase in pipeline
     revenues,  partially  offset  by a $0.3  million  decrease  in  terminaling
     revenues.  The  increase in pipeline  revenues for the three and six months
     ended June 30, 1998 is due to increases in volumes  shipped,  when compared
     to 1997.  The increase in  terminaling  revenues for the three months ended
     June 30, 1998 is due to an increase in tank  utilization  due to  favorable
     market conditions.  The decrease in terminaling revenues for the six months
     ended June 30, 1998 resulted  primarily  from overall lower rates  realized
     for  storage,  due to the  storage  of a  larger  proportionate  volume  of
     lower-rate products, when compared to the same period in 1997.

     Capital expenditures of $3.4 million and $5.8 million for the three and six
     months  ended June 30, 1998,  respectively,  relate to the  maintenance  of
     existing operations.


<PAGE>


     Other Operations

     The  Company  recorded  revenues of $2.7  million and $4.7  million for the
     three and six months  ended June 30, 1998,  respectively,  compared to $1.8
     and $3.7 million for the three and six months ended June 30, 1997,  related
     to subsidiaries that provide information processing, payment and collection
     services primarily to financial institutions.  Related operating income for
     the three and six months  ended  June 30,  1998 was $1.0  million  and $1.7
     million,  respectively,  compared to $0.7  million and $1.4 million for the
     three and six months ended June 30, 1997

     Financial Condition

     During  the  first  six  months  of 1998,  the  Company's  working  capital
     requirements   for   operations   and   capital   expenditures   (excluding
     acquisitions) were funded through the use of internally generated funds.

     Cash provided by operations was $20.8 million and $24.4 million for the six
     months  ended June 30, 1998 and 1997,  respectively.  Capital  expenditures
     (excluding  acquisitions)  were $7.2  million for the six months ended June
     30, 1998, compared to $6.8 million in 1997.

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

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

     Although the Company  believes that most of its  activities  and operations
     are not  materially  impacted by Year 2000  concerns,  it has  undertaken a
     review and testing of its computer  systems to identify  Year  2000-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 Year 2000 compliant or will be upgraded
     to Year 2000  compliant  releases  over the next year.  At this  time,  the
     Company cannot assess the extent to which further actions will be required,
     or assess  whether  this  issue  will have a material  effect  upon  future
     operations.  The Company does not anticipate that the  incremental  cost to
     become fully Year 2000 compliant will be material.



<PAGE>

                           PART II - Other Information

     Item 6.      Exhibits and Reports on Form 8-K

          (a)     Exhibits.

                  10.1   Amended Deferred Stock Unit Plan
                  10.2   Amended 1996 Supplemental Deferred Compensation Plan
                  10.3   Amended Non-Employee Directors Deferred Stock Unit Plan
                  10.4   Amended 1996 Directors Stock Incentive Plan
                  27.    Financial Data Schedule


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


                                    Signature


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



                                             KANEB SERVICES, INC.
                                             (Registrant)


Date:  August 13, 1998                       Michael R. Bakke
                                             Controller