<SUBMISSION>
<ACCESSION-NUMBER>0001137154-04-000015
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>1
<PERIOD>20040630
<FILING-DATE>20040809
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>KANEB SERVICES LLC
<CIK>0001137154
<ASSIGNED-SIC>5172
<IRS-NUMBER>752931295
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>001-16405
<FILM-NUMBER>04959088
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
<PHONE>9726994019
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>ksl2q04.txt
<DESCRIPTION>KSL FORM 10-Q 6/30/2004
<TEXT>

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

                                  UNITED STATES
                       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 June 30, 2004

                                       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 001-16405

                               KANEB SERVICES LLC
             (Exact name of registrant as specified in its charter)

           DELAWARE                                     75-2931295
(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) 699-4062
              (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  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).

     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 Shares                              Outstanding at July 30, 2004
----------------------                              ----------------------------
     No par value                                         11,632,328 shares


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

<PAGE>
KANEB SERVICES LLC  AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                             Page No.
                         Part I. Financial Information

Item 1   (a) (1). Financial Statements (Unaudited)

<S>               <C>                                                                         <C>
                  Consolidated Statements of Income - Three and Six Months Ended
                     June 30, 2004 and 2003                                                       1

                  Condensed Consolidated Balance Sheets - June 30, 2004
                     and December 31, 2003                                                        3

                  Condensed Consolidated Statements of Cash Flows - Six
                     Months Ended June 30, 2004 and 2003                                          4

                  Notes to Consolidated Financial Statements                                      5

         (a) (2). Financial Statement Schedules (Unaudited)

                  Schedule I - Kaneb Services LLC (Parent Company)
                      Condensed Financial Statements:

                         Statements of Income - Three and Six Months
                             Ended June 30, 2004 and 2003                                       15

                         Balance Sheets - June 30, 2004 and December 31, 2003                   16

                         Statements of Cash Flows - Six Months Ended June 30, 2004              17
                             and 2003

Item 2.           Management's Discussion and Analysis of
                     Financial Condition and Results of Operations                              18

Item 3.           Quantitative and Qualitative Disclosure About Market Risk                     30

Item 4.           Controls and Procedures                                                       30

                           Part II. Other Information

Item 6.           Exhibits and Reports on Form 8-K                                              31

</TABLE>

<PAGE>
KANEB SERVICES LLC 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,
                                                       -----------------------------  -----------------------------
                                                            2004           2003            2004           2003
                                                       --------------  -------------  -------------  --------------
<S>                                                    <C>             <C>            <C>            <C>
Revenues:
   Services                                            $       94,058  $      89,461  $     184,756  $      176,155
   Products                                                   160,144        129,193        302,625         260,968
                                                       --------------  -------------  -------------  --------------
      Total revenues                                          254,202        218,654        487,381         437,123
                                                       --------------  -------------  -------------  --------------

Costs and expenses:
   Cost of products sold                                      153,364        122,437        289,795         246,764
   Operating costs                                             43,371         42,939         86,795          83,613
   Depreciation and amortization                               13,738         13,615         27,645          26,647
   General and administrative                                   7,195          6,958         13,697          13,670
                                                       --------------  -------------  -------------  --------------
      Total costs and expenses                                217,668        185,949        417,932         370,694
                                                       --------------  -------------  -------------  --------------

Operating income                                               36,534         32,705         69,449          66,429
Interest and other income                                          61             30             93             139
Interest expense                                              (10,720)        (9,117)       (21,349)        (17,961)
                                                       --------------  -------------  -------------  --------------

Income before gain on issuance of units by KPP,
   income taxes, interest of outside non-controlling
   partners in KPP's net income and cumulative effect
   of change in accounting principle                           25,875         23,618         48,193          48,607

Gain on issuance of units by KPP                                -               -              -             10,898

Income tax expense                                               (606)        (1,199)        (1,769)         (2,628)
Interest of outside non-controlling
   partners in KPP's net income                               (17,874)       (16,931)       (33,034)        (34,517)
                                                       --------------  -------------  -------------  --------------
Income before cumulative effect of change
   in accounting principle                                      7,395          5,488         13,390          22,360

Cumulative effect of change in accounting
   principle - adoption of new accounting
   standard for asset retirement obligations                    -               -              -               (313)
                                                       --------------  -------------  -------------  --------------
Net income                                             $        7,395  $       5,488  $      13,390  $       22,047
                                                       ==============  =============  =============  ==============
</TABLE>


                 See notes to consolidated financial statements.
                                        1

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - Continued
(In Thousands -- Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             Three Months Ended             Six Months Ended
                                                                  June 30,                      June 30,
                                                       -----------------------------  -----------------------------
                                                            2004           2003            2004           2003
                                                       --------------  -------------  -------------  --------------
<S>                                                    <C>             <C>            <C>            <C>
Earnings per share:
   Basic:
      Before cumulative effect of change
        in accounting principle                        $          .63  $         .48  $        1.15  $         1.95
      Cumulative effect of change in
        accounting principle                                    -               -              -               (.03)
                                                       --------------  -------------  -------------  --------------
                                                       $          .63  $         .48  $        1.15  $         1.92
                                                       ==============  =============  =============  ==============
   Diluted:
      Before cumulative effect of change
        in accounting principle                        $          .62  $         .47  $        1.12  $         1.91
      Cumulative effect of change in
        accounting principle                                    -               -              -               (.03)
                                                       --------------  -------------  -------------  --------------
                                                       $          .62  $         .47  $        1.12  $         1.88
                                                       ==============  =============  =============  ==============

</TABLE>

                 See notes to consolidated financial statements.
                                        2

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                               June 30,              December 31,
                                                                                 2004                   2003
                                                                           ---------------       ------------------
                                                                              (Unaudited)
            ASSETS
<S>                                                                        <C>                   <C>
Current assets:
    Cash and cash equivalents                                              $        43,712       $        43,457
    Accounts receivable                                                             74,791                60,684
    Inventories                                                                     24,742                18,637
    Prepaid expenses and other                                                      12,325                 9,650
                                                                           ---------------       ---------------
        Total current assets                                                       155,570               132,428
                                                                           ---------------       ---------------

Property and equipment                                                           1,385,519             1,360,523
Less accumulated depreciation                                                      272,659               247,503
                                                                           ---------------       ---------------
    Net property and equipment                                                   1,112,860             1,113,020
                                                                           ---------------       ---------------

Investment in affiliates                                                            25,953                25,456

Excess of cost over fair value of net assets of
    acquired business and other assets                                              20,669                20,663
                                                                           ---------------       ---------------
                                                                           $     1,315,052       $     1,291,567
                                                                           ===============       ===============


     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                       $        49,439       $        36,916
    Accrued expenses                                                                41,881                39,307
    Accrued interest payable                                                         8,414                 9,303
    Accrued distributions payable to shareholders                                    5,801                 5,567
    Accrued distributions payable to outside non-controlling
        partners in KPP                                                             19,854                19,507
    Deferred terminaling fees                                                        8,067                 7,061
                                                                           ---------------       ---------------
        Total current liabilities                                                  133,456               117,661
                                                                           ---------------       ---------------

Long-term debt                                                                     649,922               636,308

Other liabilities and deferred taxes                                                52,761                52,242

Interest of outside non-controlling partners in KPP                                399,533               407,635

Commitments and contingencies

Shareholders' equity                                                                79,380                77,721
                                                                           ---------------       ---------------
                                                                           $     1,315,052       $     1,291,567
                                                                           ===============       ===============
</TABLE>



                 See notes to consolidated financial statements.
                                        3
<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                         Six Months Ended
                                                                                              June 30,
                                                                           ----------------------------------------
                                                                                2004                      2003
                                                                           -------------             --------------
<S>                                                                        <C>                       <C>
Operating activities:
   Net income                                                              $      13,390             $       22,047
   Adjustments to reconcile net income to net cash
      provided by operating activities:
        Gain on issuance of units by KPP                                            -                       (10,898)
        Depreciation and amortization                                             27,645                     26,647
        Equity in earnings of affiliates, net of distributions                      (497)                      (343)
        Interest of outside non-controlling partners
           in KPP's net income                                                    33,034                     34,517
        Deferred income taxes                                                       (230)                     1,916
        Gain on sale of assets                                                      (792)                     -
        Cumulative effect of change in accounting principle                         -                           313
        Changes in working capital components                                     (7,617)                     2,003
                                                                           -------------             --------------
           Net cash provided by operating activities                              64,933                     76,202
                                                                           -------------             --------------

Investing activities:
   Capital expenditures, primarily KPP                                           (17,340)                   (22,516)
   Acquisitions by KPP                                                           (12,478)                     -
   Other                                                                            (722)                       (71)
                                                                           -------------             --------------
        Net cash used in investing activities                                    (30,540)                   (22,587)
                                                                           -------------             --------------
Financing activities:
   Issuance of debt, primarily KPP                                                17,923                    286,377
   Payments on debt                                                               (2,000)                  (384,163)
   Distributions to shareholders                                                 (11,134)                    (9,773)
   Distributions to outside non-controlling
      partners in KPP                                                            (39,014)                   (34,688)
   Net of proceeds from issuance of units by KPP                                    -                       109,056
   Other                                                                              87                        145
                                                                           -------------             --------------
        Net cash used in financing activities                                    (34,138)                   (33,046)
                                                                           -------------             --------------

Increase in cash and cash equivalents                                                255                     20,569
Cash and cash equivalents at beginning of period                                  43,457                     24,477
                                                                           -------------             --------------
Cash and cash equivalents at end of period                                 $      43,712             $       45,046
                                                                           =============             ==============
Supplemental cash flow information - cash paid for interest                $      20,899             $       14,703
                                                                           =============             ==============

</TABLE>


                 See notes to consolidated financial statements.
                                        4


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

1.   SIGNIFICANT ACCOUNTING POLICIES

     The consolidated  financial statements reflect the results of operations of
     Kaneb Services LLC (the "Company"), its wholly-owned subsidiaries and Kaneb
     Pipe Line Partners,  L.P.  ("KPP").  The Company controls the operations of
     KPP  through  its 2%  general  partner  interest  and 18%  limited  partner
     interest as of June 30, 2004. All significant intercompany transactions and
     balances have been eliminated.

     The unaudited condensed  consolidated  financial  statements of the Company
     for the three and six month periods ended June 30, 2004 and 2003, have been
     prepared in accordance with accounting principles generally accepted in the
     United States of America.  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,  2003.  In the  opinion  of  the  Company's  management,  the
     accompanying condensed consolidated financial statements contain all of 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, 2004, and the consolidated results of
     their  operations  and cash flows for the  periods  ended June 30, 2004 and
     2003.  Operating  results for the three and six months  ended June 30, 2004
     are not necessarily  indicative of the results that may be expected for the
     year ending December 31, 2004. Certain prior year financial statement items
     have been reclassified to conform with the 2004 presentation.

     In December of 2002,  the Financial  Accounting  Standards  Board  ("FASB")
     issued  Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  148
     "Accounting for Stock-Based  Compensation-Transition  and Disclosure." SFAS
     No. 148,  which amends SFAS No. 123,  provides for  alternative  methods of
     transition  for a  voluntary  change  to the fair  value  based  method  of
     accounting for stock-based  employee  compensation and requires  additional
     disclosures in annual and interim financial statements regarding the method
     of accounting for stock-based  employee  compensation and the effect of the
     method used on financial results. In accordance with the provisions of SFAS
     No. 123, the Company applies APB Opinion 25 and related  interpretations in
     accounting for its share option plans and, accordingly,  does not recognize
     compensation  cost based on the fair value of the options  granted at grant
     date as prescribed by SFAS 123. The Black-Scholes  option pricing model has
     been used to estimate the fair value of share options issued.

     The  following  illustrates  the effect on net income and basic and diluted
     earnings per share if the fair value based method had been applied:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Six Months Ended
                                                                  June 30,                      June 30,
                                                     -------------------------------  -----------------------------
                                                           2004            2003            2004           2003
                                                     ----------------  -------------  -------------  --------------
                                                                  (in thousands - except per share data)

<S>                                                  <C>                <C>           <C>            <C>
      Reported net income                            $          7,395   $      5,488  $      13,390  $       22,047

      Share-based employee compensation
        expense determined under the fair
        value based method                                        (13)           (30)           (34)            (42)
                                                     ----------------   ------------  -------------  --------------
      Pro forma net income                           $          7,382   $      5,458  $      13,356  $       22,005
                                                     ================   ============  =============  ==============

      Earning per share:
        Basic - as reported                          $            .63   $        .48  $        1.15  $         1.92
                                                     ================   ============  =============  ==============
        Basic - pro forma                            $            .63   $        .48  $        1.14  $         1.92
                                                     ================   ============  =============  ==============

        Diluted - as reported                        $            .62   $        .47  $        1.12  $         1.88
                                                     ================   ============  =============  ==============
        Diluted - pro forma                          $            .62   $        .46  $        1.12  $         1.88
                                                     ================   ============  =============  ==============
</TABLE>


2.   KPP FINANCINGS

     In March of 2003,  KPP  issued  3,122,500  limited  partnership  units in a
     public offering at $36.54 per unit, generating approximately $109.1 million
     in  net  proceeds.   The  proceeds  were  used  to  reduce  the  amount  of
     indebtedness  under  KPP's  bridge  facility.  As a result  of KPP  issuing
     additional units to unrelated parties, the Company's share of net assets of
     KPP increased by $10.9 million. Accordingly, the Company recognized a $10.9
     million gain in the first quarter of 2003.

     In April of 2003, KPP entered into a credit agreement with a group of banks
     that  provides  for a $400  million  unsecured  revolving  credit  facility
     through April of 2006. The credit facility,  which provides for an increase
     in the  commitment  up to an aggregate of $450 million by mutual  agreement
     between  KPP and the banks,  bears  interest  at  variable  rates and has a
     variable  commitment fee on unused amounts.  The credit facility is without
     recourse  to the Company  and  contains  certain  financial  and  operating
     covenants,  including  limitations  on  investments,  sales of  assets  and
     transactions  with  affiliates  and,  absent an event of default,  does not
     restrict  distributions  to the Company or to other  partners.  At June 30,
     2004, KPP was in compliance with all covenants.  Initial  borrowings on the
     credit   agreement   ($324.2  million)  were  used  to  repay  all  amounts
     outstanding  under KPP's $275  million  credit  agreement  and $175 million
     bridge loan  agreement.  At June 30, 2004,  $68.7  million was  outstanding
     under the credit agreement.

     On May 19, 2003, KPP issued $250 million of 5.875% senior  unsecured  notes
     due June 1,  2013.  The net  proceeds  from  the  public  offering,  $247.6
     million,  were used to reduce  amounts  due under  KPP's  revolving  credit
     agreement.  Under the note indenture,  interest is payable semi-annually in
     arrears on June 1 and December 1 of each year. The notes are redeemable, as
     a whole or in part,  at the  option of KPP,  at any time,  at a  redemption
     price equal to the greater of 100% of the principal amount of the notes, or
     the  sum of the  present  value  of the  remaining  scheduled  payments  of
     principal and interest, discounted to the redemption date at the applicable
     U.S. Treasury rate, as defined in the indenture,  plus 30 basis points. The
     note  indenture  contains  certain  financial  and  operational  covenants,
     including  certain   limitations  on  investments,   sales  of  assets  and
     transactions  with  affiliates  and,  absent  an  event  of  default,  such
     covenants do not restrict  distributions  to the Company or other partners.
     At June 30, 2004, KPP was in compliance  with all covenants.  In connection
     with the  offering,  on May 8,  2003,  KPP  entered  into a  treasury  lock
     contract  for the  purpose  of  locking in the US  Treasury  interest  rate
     component on $100 million of the debt.  The treasury lock  contract,  which
     qualified as a cash flow hedging instrument under SFAS No. 133, was settled
     on May 19, 2003 with a cash payment by KPP of $1.8 million.  The settlement
     cost of the contract has been recorded as a component of accumulated  other
     comprehensive income and is being amortized,  as interest expense, over the
     life of the debt.


3.   COMPREHENSIVE INCOME

     Comprehensive  income for the three and six months  ended June 30, 2004 and
     2003, is as follows:
<TABLE>
<CAPTION>

                                                             Three Months Ended             Six Months Ended
                                                                  June 30,                      June 30,
                                                     -------------------------------  -----------------------------
                                                           2004            2003            2004           2003
                                                     ----------------  -------------  -------------  --------------
                                                                              (in thousands)

<S>                                                  <C>               <C>            <C>            <C>
     Net income                                      $          7,395  $       5,488  $      13,390  $       22,047
     Foreign currency translation
       adjustment                                                (402)           810           (451)          1,332
     Unamortized loss on interest rate
       hedging transaction (Note 2)                                 8           (351)            17            (351)
                                                     ----------------  -------------  -------------  --------------
     Comprehensive income                            $          7,001  $       5,947  $      12,956  $       23,028
                                                     ================  =============  =============  ==============

</TABLE>

     Accumulated other comprehensive  income aggregated $2.0 million at June 30,
     2004 and $2.4 million at December 31, 2003, respectively.


4.   CASH DISTRIBUTIONS

     The Company makes quarterly distributions of 100% of its available cash, as
     defined in the limited liability company agreement,  to common shareholders
     of record on the  applicable  record date,  within 45 days after the end of
     each quarter. Available cash consists generally of all the cash receipts of
     the Company, less all cash disbursements and reserves.  Excess cash flow of
     the  Company's  wholly-owned  marketing  operations is being used to reduce
     working capital  borrowings.  A cash  distribution of $0.475 per share with
     respect  to the  first  quarter  of 2004 was paid on May 14,  2004.  A cash
     distribution of $0.495 per share with respect to the second quarter of 2004
     was  declared  to  holders  of record on July 30,  2004 and will be paid on
     August 13, 2004.


5.   EARNINGS PER SHARE

     Earnings  per share for the three and six months  ended  June 30,  2004 and
     2003, is calculated  using the Company's basic and diluted weighted average
     shares outstanding for the period. For the three months ended June 30, 2004
     and 2003,  basic weighted  average shares  outstanding  were 11,693,000 and
     11,469,000,  respectively,  and diluted weighted average shares outstanding
     were 11,911,000 and 11,747,000, respectively. For the six months ended June
     30,  2004  and  2003,  basic  weighted  average  shares   outstanding  were
     11,680,000  and  11,466,000,  respectively,  and diluted  weighted  average
     shares outstanding were 11,907,000 and 11,716,000, respectively.


6.   CONTINGENCIES

     The  operations  of KPP are  subject to  Federal,  state and local laws and
     regulations in the United States and various foreign locations  relating to
     protection of the environment.  Although KPP believes its operations are in
     general  compliance with  applicable  environmental  regulations,  risks of
     additional  costs and  liabilities  are  inherent in pipeline  and terminal
     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 and 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.

     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  costs  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  (the "Otis pipeline" or
     the "pipeline"),  ceased  operations in 1973 and was abandoned before 1978,
     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 from the Texas court that these  subsidiaries  are responsible for
     all  liabilities,  including all present and future  remediation  expenses,
     associated  with these leaks and that Grace has no  obligation to indemnify
     these  subsidiaries for these expenses.  In the lawsuit,  Grace also sought
     indemnification  for  expenses of  approximately  $3.5  million that it had
     incurred since 1996 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 has been 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,  the jury  returned a verdict  including  findings
     that (1) Grace had breached a provision of the 1993  acquisition  agreement
     by  failing  to  disclose  matters  related  to the  pipeline,  and (2) the
     pipeline was  abandoned  before 1978 -- 15 years before KPP's  subsidiaries
     acquired ST Services.  On August 30, 2000, the Judge entered final judgment
     in the case that Grace take  nothing  from the  subsidiaries  on its claims
     seeking recovery of remediation costs. 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
     indemnification  from  Grace  if any such  expenses  were  incurred  in the
     future.  Moreover, the Judge let stand a prior summary judgment ruling that
     the pipeline  was an asset  acquired by KPP's  subsidiaries  as part of the
     1993 ST Services  transaction and that any liabilities  associated with the
     pipeline would have become  liabilities of the subsidiaries.  Based on that
     ruling, the Massachusetts Department of Environmental Protection and Samson
     Hydrocarbons  Company  (successor to Grace Petroleum Company) wrote letters
     to ST Services  alleging its  responsibility  for the  remediation,  and ST
     Services  responded  denying any liability in connection  with this matter.
     The Judge also awarded  attorney  fees to Grace of more than $1.5  million.
     Both KPP's  subsidiaries  and Grace have  appealed the trial  court's final
     judgment  to the Texas  Court of  Appeals  in Dallas.  In  particular,  the
     subsidiaries  have filed an appeal of the  judgment  finding  that the Otis
     pipeline and any liabilities  associated with the pipeline were transferred
     to them as well as the award of attorney fees to Grace.

     On April 2, 2001,  Grace filed a petition in  bankruptcy,  which created an
     automatic  stay of actions  against  Grace.  This automatic stay covers the
     appeal of the Dallas litigation,  and the Texas Court of Appeals has issued
     an order staying all  proceedings of the appeal because of the  bankruptcy.
     Once that stay is lifted,  KPP's subsidiaries that are party to the lawsuit
     intend to resume vigorous prosecution of the appeal.

     The Otis Air Force Base is a part of the Massachusetts Military Reservation
     ("MMR Site"),  which has been declared a Superfund Site pursuant to CERCLA.
     The MMR Site contains a number of groundwater  contamination plumes, two of
     which are allegedly  associated  with the Otis pipeline,  and various other
     waste  management  areas of concern,  such as landfills.  The United States
     Department of Defense, pursuant to a Federal Facilities Agreement, has been
     responding  to  the   Government   remediation   demand  for  most  of  the
     contamination problems at the MMR Site. Grace and others have also received
     and  responded to formal  inquiries  from the United  States  Government in
     connection with the environmental  damages allegedly resulting from the jet
     fuel leaks. KPP's subsidiaries  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
     KPP's  subsidiaries,  the Government advised the parties in April 1999 that
     it has  identified  two spill  areas that it  believes to be related to the
     pipeline that is the subject of the Grace suit. The Government at that time
     advised the parties that it believed it had incurred costs of approximately
     $34 million, and expected 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.

     By letter  dated July 26, 2001,  the United  States  Department  of Justice
     ("DOJ")   advised  ST  Services  that  the   Government   intends  to  seek
     reimbursement  from ST Services under the  Massachusetts  Oil and Hazardous
     Material Release  Prevention and Response Act and the Declaratory  Judgment
     Act for the  Government's  response costs at the two spill areas  discussed
     above.  The DOJ relied in part on the Texas state court judgment,  which in
     the DOJ's view, held that ST Services was the current owner of the pipeline
     and  the  successor-in-interest  of  the  prior  owner  and  operator.  The
     Government  advised ST  Services  that it believes  it has  incurred  costs
     exceeding  $40  million,  and expects to incur  future  costs  exceeding an
     additional  $22  million,  for  remediation  of the two  spill  areas.  KPP
     believes  that its  subsidiaries  have  substantial  defenses.  ST Services
     responded  to the DOJ on  September 6, 2001,  contesting  the  Government's
     positions and declining to reimburse  any response  costs.  The DOJ has not
     filed  a  lawsuit  against  ST  Services  seeking  cost  recovery  for  its
     environmental  investigation  and  response  costs.  Representatives  of ST
     Services  have  met  with  representatives  of the  Government  on  several
     occasions since September 6, 2001 to discuss the Government's claims and to
     exchange  information  related  to such  claims.  Additional  exchanges  of
     information are expected to occur in the future and additional meetings may
     be held to discuss possible  resolution of the Government's  claims without
     litigation. KPP does not believe this matter will have a materially adverse
     effect on its financial  condition,  although there can be no assurances as
     to the ultimate outcome.

     On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
     Power  Company  ("PEPCO")  ruptured.  Work  performed  with  regard  to the
     pipeline  was  conducted by a  partnership  of which ST Services is general
     partner. PEPCO has reported that it has incurred total cleanup costs of $70
     million to $75 million.  PEPCO probably will continue to incur some cleanup
     related costs for the foreseeable future,  primarily in connection with EPA
     requirements  for monitoring  the condition of some of the impacted  areas.
     Since May 2000, ST Services has provisionally  contributed a minority share
     of the cleanup  expense,  which has been funded by ST  Services'  insurance
     carriers.  ST  Services  and  PEPCO  have  not,  however,  reached  a final
     agreement  regarding ST  Services'  proportionate  responsibility  for this
     cleanup  effort,  if any,  and cannot  predict  the  amount,  if any,  that
     ultimately  may be determined to be ST Services'  share of the  remediation
     expense,  but ST  Services  believes  that such  amount  will be covered by
     insurance  and  therefore  will  not  materially   adversely  affect  KPP's
     financial condition.

     As a result of the rupture,  purported  class  actions  were filed  against
     PEPCO and ST  Services  in federal  and state court in Maryland by property
     and business owners alleging  damages in unspecified  amounts under various
     theories, including under the Oil Pollution Act ("OPA") and Maryland common
     law.  The federal  court  consolidated  all of the federal  cases in a case
     styled as In re Swanson  Creek Oil Spill  Litigation.  A settlement  of the
     consolidated  class action,  and a companion  state-court class action, was
     reached and approved by the federal judge. The settlement involved creation
     and funding by PEPCO and ST Services of a $2,250,000 class settlement fund,
     from  which  all  participating  claimants  would  be paid  according  to a
     court-approved  formula, as well as a court-approved payment to plaintiffs'
     attorneys. The settlement has been consummated and the fund, to which PEPCO
     and  ST  Services   contributed   equal  amounts,   has  been  distributed.
     Participating  claimants'  claims  have been  settled  and  dismissed  with
     prejudice.  A number of class  members  elected not to  participate  in the
     settlement,  i.e., to "opt out," thereby  preserving  their claims  against
     PEPCO and ST  Services.  All  non-participant  claims have been settled for
     immaterial  amounts with ST Services' portion of such settlements  provided
     by its insurance carrier.

     PEPCO and ST Services  agreed with the federal  government and the State of
     Maryland to pay costs of assessing  natural  resource  damages arising from
     the  Swanson  Creek  oil  spill  under  OPA  and of  selecting  restoration
     projects.  This process was completed in mid-2002. ST Services' insurer has
     paid ST Services'  agreed 50 percent share of these  assessment  costs.  In
     late November  2002,  PEPCO and ST Services  entered into a Consent  Decree
     resolving  the federal  and state  trustees'  claims for  natural  resource
     damages.  The decree required  payments by ST Services and PEPCO of a total
     of  approximately  $3  million  to fund the  restoration  projects  and for
     remaining  damage  assessment  costs. The federal court entered the Consent
     Decree as a final judgment on December 31, 2002. PEPCO and ST Services have
     each  paid  their  50%  share  and  thus  fully   performed  their  payment
     obligations under the Consent Decree. ST Services' insurance carrier funded
     ST Services' payment.

     The U.S.  Department  of  Transportation  ("DOT")  has  issued a Notice  of
     Proposed  Violation  to PEPCO  and ST  Services  alleging  violations  over
     several years of pipeline safety  regulations and proposing a civil penalty
     of $647,000  jointly against the two companies.  ST Services and PEPCO have
     contested the DOT allegations and the proposed penalty.  A hearing was held
     before the Office of  Pipeline  Safety at the DOT in late 2001.  In June of
     2004, the DOT issued a final order reducing the penalty to $256,250 jointly
     against ST Services  and PEPCO and  $74,000  against ST  Services.  The DOT
     granted  ST  Services'  request  to  extend  the time to file a  motion  to
     reconsider the final order.  ST Services has moved for  reconsideration  of
     the order based on facts which were not previously available to the DOT and
     ST Services.

     By letter  dated  January 4, 2002,  the Attorney  General's  Office for the
     State of Maryland  advised ST Services  that it intended to seek  penalties
     from ST Services in connection  with the April 7, 2000 spill.  The State of
     Maryland  subsequently  asserted  that it would seek  penalties  against ST
     Services and PEPCO  totaling up to $12 million.  A settlement of this claim
     was reached in mid-2002  under which ST Services'  insurer will pay a total
     of slightly more than $1 million in  installments  over a five year period.
     PEPCO  has also  reached a  settlement  of these  claims  with the State of
     Maryland.  Accordingly,  KPP  believes  that  this  matter  will not have a
     material adverse effect on its financial condition.

     On  December  13,  2002,  ST  Services  sued PEPCO in the  Superior  Court,
     District of Columbia,  seeking,  among things, a declaratory judgment as to
     ST Services' legal obligations, if any, to reimburse PEPCO for costs of the
     oil spill.  On  December  16,  2002,  PEPCO sued ST  Services in the United
     States District Court for the District of Maryland, seeking recovery of all
     its costs for remediation of and response to the oil spill.  Pursuant to an
     agreement  between ST Services and PEPCO,  ST Services' suit was dismissed,
     subject to refiling.  ST Services  has moved to dismiss  PEPCO's  suit.  ST
     Services is vigorously defending against PEPCO's claims and is pursuing its
     own  counterclaims  for return of monies ST Services  has advanced to PEPCO
     for settlements  and cleanup costs.  KPP believes that any costs or damages
     resulting  from these  lawsuits  will be covered by insurance and therefore
     will not materially adversely affect KPP's financial condition. The amounts
     claimed by PEPCO, if recovered,  would trigger an excess  insurance  policy
     which  has a  $600,000  retention,  but KPP  does  not  believe  that  such
     retention,  if incurred,  would materially adversely affect KPP's financial
     condition.

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


7.   BUSINESS SEGMENT DATA

     The Company  conducts  business  through three  principal  operations:  the
     "Pipeline   Operations"   of  KPP,   which   consists   primarily   of  the
     transportation  of  refined  petroleum   products  and  fertilizer  in  the
     Midwestern states as a common carrier; the "Terminaling Operations" of KPP,
     which  provides  storage for petroleum  products,  specialty  chemicals and
     other  liquids;  and  the  "Product  Marketing  Services,"  which  provides
     wholesale  motor fuel marketing  services  throughout the Midwest and Rocky
     Mountain regions,  delivers bunker fuels to ships in the Caribbean and Nova
     Scotia,  Canada,  and sells bulk petroleum  products to various  commercial
     interests.  General corporate  includes  accounting,  tax, finance,  legal,
     investor  relations  and  other  corporate  expenses  not  related  to  the
     segments. General corporate assets include cash, receivable from affiliates
     of the Company and other assets not related to the segments.

     The Company measures segment profit as operating  income.  Total assets are
     those assets controlled by each reportable  segment.  Business segment data
     is as follows:
<TABLE>
<CAPTION>
                                                          Three Months  Ended               Six Months Ended
                                                               June 30,                         June 30,
                                                    ------------------------------   ------------------------------
                                                         2004            2003             2004            2003
                                                    -------------    -------------   -------------   --------------
                                                                           (in thousands)

<S>                                                 <C>              <C>             <C>             <C>
     Business segment revenues:
       Pipeline operations                          $      30,610    $      29,350   $      58,513   $       57,358
       Terminaling operations                              63,448           60,111         126,243          118,797
       Product marketing operations                       160,144          129,193         302,625          260,968
                                                    -------------    -------------   -------------   --------------
                                                    $     254,202    $     218,654   $     487,381   $      437,123
                                                    =============    =============   =============   ==============
     Business segment profit:
       Pipeline operations                          $      12,024    $      12,220   $      23,234   $       24,197
       Terminaling operations                              20,876           17,795          39,360           35,835
       Product marketing operations                         4,156            3,210           7,910            7,415
       General corporate                                     (522)            (520)         (1,055)          (1,018)
                                                    -------------    -------------   -------------     ------------
       Operating income                                    36,534           32,705          69,449           66,429
       Interest and other income                               61               30              93              139
       Interest expense                                   (10,720)          (9,117)        (21,349)         (17,961)
                                                    -------------    -------------   -------------   --------------
       Income before gain on issuance of
         units by KPP, income taxes, interest
         of outside non-controlling partners in
         KPP's net income and cumulative effect
         of change in accounting principle          $      25,875    $      23,618   $      48,193   $       48,607
                                                    =============    =============   =============   ==============

</TABLE>

<TABLE>
<CAPTION>
                                                                                      June 30,         December 31,
                                                                                        2004               2003
                                                                                    -------------    -----------------
                                                                                            (in thousands)
<S>                                                                                 <C>              <C>
     Total assets:
       Pipeline operations                                                          $     351,553    $      352,901
       Terminaling operations                                                             871,785           874,185
       Product marketing operations                                                        85,941            58,161
       General corporate                                                                    5,773             6,320
                                                                                    -------------    --------------
                                                                                    $   1,315,052    $    1,291,567
                                                                                    =============    ==============
</TABLE>


8.   ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
     Asset  Retirement  Obligations",  which  establishes  requirements  for the
     removal-type  costs  associated  with  asset  retirements.  At the  initial
     adoption  date of SFAS No. 143,  the Company  recorded an asset  retirement
     obligation of approximately $5.5 million and recognized a cumulative effect
     of change in  accounting  principle  of $0.3  million,  after  interest  of
     outside  non-controlling  partners  in  KPP's  net  income,  for its  legal
     obligations  to  dismantle,  dispose  of, and  restore  certain  leased KPP
     pipeline  and  terminaling  facilities,  including  petroleum  and chemical
     storage  tanks,  terminaling  facilities  and  barges.  The Company did not
     record  a  retirement   obligation   for  certain  of  KPP's  pipeline  and
     terminaling  assets  because   sufficient   information  is  presently  not
     available  to  estimate  a range  of  potential  settlement  dates  for the
     obligation.  In these cases, the obligation will be initially recognized in
     the  period  in  which  sufficient   information  exists  to  estimate  the
     obligation.  At June 30, 2004, the Company had no assets which were legally
     restricted  for  purposes of settling  asset  retirement  obligations.  The
     application  of SFAS No. 143 did not have a material  impact on the results
     of  operations  of the Company for the three and six months  ended June 30,
     2004 or 2003.

     In December 2003, the FASB issued  Interpretation  No. 46 (revised December
     2003), "Consolidation of Variable Interest Entities (FIN 46R), primarily to
     clarify the required accounting for interests in variable interest entities
     (VIEs). This standard replaces FASB Interpretation No. 46, Consolidation of
     Variable  Interest  Entities,  which was issued in January  2003 to address
     certain  situations  in which a company  should  include  in its  financial
     statements the assets,  liabilities and activities of another  entity.  For
     the Company,  application  of FIN 46R is required for  interests in certain
     VIEs that are commonly referred to as special-purpose entities, or SPEs, as
     of December  31, 2003,  and for  interests in all other types of VIEs as of
     March 31, 2004. The  application of FIN 46R did not have a material  impact
     on the consolidated financial statements of the Company.



<PAGE>
                                                                      Schedule I

KANEB SERVICES LLC (PARENT COMPANY)

CONDENSED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                             Three Months Ended             Six Months Ended
                                                                  June 30,                      June 30,
                                                       -----------------------------  -----------------------------
                                                            2004           2003            2004           2003
                                                       --------------  -------------  -------------  --------------

<S>                                                    <C>             <C>            <C>            <C>
General and administrative expenses                    $         (500) $        (491) $        (941) $         (953)
Interest expense                                                 (137)          (159)          (274)           (327)
Interest and other income                                       -                 17              1              19
Equity in earnings of subsidiaries                              8,032          6,121         14,604          12,723
Equity in earnings of subsidiaries - gain
    on issuance of units by KPP                                 -               -              -             10,898
                                                       --------------  -------------  -------------  --------------
Income before cumulative effect of change
   in accounting principle                                      7,395          5,488         13,390          22,360

Cumulative effect of change in accounting
   principle - adoption of new accounting
   standard for asset retirement obligations                    -               -              -               (313)
                                                       --------------  -------------  -------------  --------------
Net income                                             $        7,395  $       5,488  $      13,390  $       22,047
                                                       ==============  =============  =============  ==============

Earnings per share:
   Basic:
      Before cumulative effect of change
        in accounting principle                        $          .63  $        .48   $        1.15  $         1.95
      Cumulative effect of change in
        accounting principle                                     -              -               -              (.03)
                                                       --------------  ------------   -------------  --------------
                                                       $          .63  $        .48   $        1.15  $         1.92
                                                       ==============  ============   =============  ==============
   Diluted:
      Before cumulative effect of change
        in accounting principle                        $          .62  $        .47   $        1.12  $         1.91
      Cumulative effect of change in
        accounting principle                                      -             -               -              (.03)
                                                       --------------  ------------   -------------  --------------
                                                       $          .62  $        .47   $        1.12  $         1.88
                                                       ==============  ============   =============  ==============

</TABLE>

               See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       15

<PAGE>
                                                                      Schedule I
                                                                     (Continued)
KANEB SERVICES LLC (PARENT COMPANY)


CONDENSED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                              June 30,              December 31,
                                                                                2004                    2003
                                                                          ---------------          -------------
                                                                             (Unaudited)
            ASSETS
<S>                                                                        <C>                     <C>
Current assets:
    Cash and cash equivalents                                              $          867          $       1,544
    Prepaid expenses and other                                                        216                    149
                                                                           --------------          -------------
        Total current assets                                                        1,083                  1,693
                                                                           --------------          -------------

Investments in and advances to subsidiaries                                       106,296                106,068

Other assets                                                                          442                    498
                                                                           --------------          -------------
                                                                           $      107,821          $     108,259
                                                                           ==============          =============


     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accrued expenses                                                       $          615          $       1,112
    Accrued distributions payable to shareholders                                   5,801                  5,567
                                                                           --------------          -------------
        Total current liabilities                                                   6,416                  6,679
                                                                           --------------          -------------

Long-term debt                                                                     14,500                 16,500

Long-term payables and other liabilities                                            7,525                  7,359

Commitments and contingencies

Shareholders' equity                                                               79,380                 77,721
                                                                           --------------          -------------
                                                                           $      107,821          $     108,259
                                                                           ==============          =============

</TABLE>



               See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       16

<PAGE>
                                                                      Schedule I
                                                                     (Continued)

KANEB SERVICES LLC (PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>

                                                                                         Six Months Ended
                                                                                              June 30,
                                                                           ----------------------------------------
                                                                                2004                      2003
                                                                           -------------             --------------

<S>                                                                        <C>                       <C>
Operating activities:
    Net income                                                             $      13,390             $       22,047
    Adjustments to reconcile net income to net cash
        provided by operating activities:
           Equity in earnings of subsidiaries, net of
               distributions                                                        (678)                   (12,277)
           Cumulative effect of change in accounting
               principle                                                            -                           313
           Changes in current assets and liabilities                                (564)                       338
                                                                           -------------             --------------
               Net cash provided by operating activities                          12,148                     10,421
                                                                           -------------             --------------

Investing activities:
    Changes in other assets                                                           56                         55
                                                                           -------------             --------------
               Net cash provided by investing activities                              56                         55
                                                                           -------------             --------------

Financing activities:
    Payments on debt                                                              (2,000)                      (625)
    Distributions to shareholders                                                (11,134)                    (9,773)
    Changes in long-term payables and other liabilities                              166                        221
    Other                                                                             87                        145
                                                                           -------------             --------------
               Net cash used in financing activities                             (12,881)                   (10,032)
                                                                           -------------             --------------

Increase (decrease) in cash and cash equivalents                                    (677)                       444

Cash and cash equivalents at beginning of period                                   1,544                      1,695
                                                                           -------------             --------------
Cash and cash equivalents at end of period                                 $         867             $        2,139
                                                                           =============             ==============

</TABLE>

               See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       17


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

     This  discussion   should  be  read  in  conjunction   with  the  condensed
     consolidated financial statements of Kaneb Services LLC (the "Company") and
     notes thereto included elsewhere in this report. The consolidated financial
     information  reflects the results of operations of the Company,  its wholly
     owned subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP").

     Overview

     In September 1989, Kaneb Pipe Line Company LLC ("KPL"),  now a wholly owned
     subsidiary  of the  Company,  formed  KPP to own and  operate  its  refined
     petroleum  products  pipeline  business.   KPL  manages  and  controls  the
     operations of KPP through its general partner interests and an 18% (at June
     30, 2004) limited partner  interest.  KPP operates  through Kaneb Pipe Line
     Operating  Partnership,  L.P. ("KPOP"),  a limited partnership in which KPP
     holds a 99% interest as limited partner.  KPL owns a 1% interest as general
     partner of KPP and a 1% interest as general partner of KPOP.

     KPP's petroleum pipeline business consists primarily of the transportation,
     as a common carrier,  of refined  petroleum  products in Kansas,  Nebraska,
     Iowa, South Dakota, North Dakota, Colorado,  Wyoming and Minnesota.  Common
     carrier  activities  are  those  under  which  transportation  through  the
     pipelines  is  available  at  published  tariffs  filed,  in  the  case  of
     interstate  shipments,  with the Federal Energy Regulatory  Commission (the
     "FERC"),  or in the case of intrastate  shipments  with the relevant  state
     authority,  to any shipper of refined petroleum  products who requests such
     services   and   satisfies   the   conditions   and    specifications   for
     transportation.  The  petroleum  pipelines  primarily  transport  gasoline,
     diesel  oil,  fuel  oil and  propane.  Substantially  all of the  petroleum
     pipeline  operations  constitute common carrier operations that are subject
     to  federal or state  tariff  regulations.  KPP also owns an  approximately
     2,000-mile  anhydrous  ammonia  pipeline system acquired from Koch Pipeline
     Company,  L.P. in November of 2002. The fertilizer  pipeline  originates in
     southern Louisiana,  proceeds north through Arkansas and Missouri, and then
     branches  east into  Illinois  and Indiana and north and west into Iowa and
     Nebraska.  KPP's petroleum pipeline business depends on the level of demand
     for refined  petroleum  products in the markets served by the pipelines and
     the ability and  willingness of refineries  and marketers  having access to
     the  pipelines to supply such demand by deliveries  through the  pipelines.
     KPP's pipeline  revenues are based on volumes shipped and the distance over
     which such volumes are transported.

     KPP's  terminaling  business  is one of the largest  independent  petroleum
     products and specialty liquids terminaling businesses in the United States.
     In the United  States,  KPP operates 37 facilities  in 20 states.  KPP also
     owns and  operates  six  terminals  located  in the United  Kingdom,  eight
     terminals  in Australia  and New  Zealand,  a terminal on the Island of St.
     Eustatius,  Netherlands  Antilles,  and a terminal  at Point  Tupper,  Nova
     Scotia, Canada.  Independent terminal owners generally compete on the basis
     of the  location  and  versatility  of the  terminals,  service  and price.
     Terminal  versatility  is a  function  of the  operator's  ability to offer
     handling for diverse  products  with  complex  handling  requirements.  The
     service  function  typically  provided by the  terminal  includes  the safe
     storage of product at specified temperatures and other conditions,  as well
     as receipt and delivery from the terminal. The ability to obtain attractive
     pricing is dependent largely on the quality,  versatility and reputation of
     the facility. Terminaling revenues are earned based on fees for the storage
     and handling of products.

     KPL owns a petroleum  product marketing  business which provides  wholesale
     motor  fuel  marketing  services  in the Great  Lakes  and  Rocky  Mountain
     regions. KPP's product sales business delivers bunker fuels to ships in the
     Caribbean and Nova Scotia,  Canada,  and sells bulk  petroleum  products to
     various commercial customers at those locations. In the bunkering business,
     KPP  competes  with  ports  offering  bunker  fuels  along the route of the
     vessel. Vessel owners or charterers are charged berthing and other fees for
     associated services such as pilotage, tug assistance, line handling, launch
     service and emergency response services.

     Consolidated Results of Operations
<TABLE>
<CAPTION>

                                                         Three Months  Ended                 Six Months Ended
                                                              June 30,                           June 30,
                                                     ---------------------------        ---------------------------
                                                         2004           2003                2004           2003
                                                     -----------     -----------        -----------     -----------
                                                                (in thousands - except per share amounts)
<S>                                                  <C>             <C>                <C>             <C>
       Consolidated revenues                         $   254,202     $   218,654        $   487,381     $   437,123
                                                     ===========     ===========        ===========     ===========
       Consolidated operating income                 $    36,534     $    32,705        $    69,449     $    66,429
                                                     ===========     ===========        ===========     ===========

       Consolidated income before gain
            on issuance of units by KPP and
            cumulative effect of change in
            accounting principle                     $     7,395     $     5,488        $    13,390     $    11,462
                                                     ===========     ===========        ===========     ===========
       Consolidated net income                       $     7,395     $     5,488        $    13,390     $    22,047
                                                     ===========     ===========        ===========     ===========

       Earnings per share:
            Basic:
                Before cumulative effect of
                    change in accounting
                    principle                        $      0.63     $      0.48         $      1.15    $      1.95
                Cumulative effect of change
                    in accounting principle                 -               -                  -              (0.03)
                                                     -----------     -----------         -----------    -----------
                                                     $      0.63     $      0.48         $      1.15    $      1.92
                                                     ===========     ===========         ===========    ===========
            Diluted:
                Before cumulative effect of
                    change in accounting
                    principle                        $      0.62     $      0.47         $      1.12    $      1.91
                Cumulative effect of change
                    in accounting principle                 -               -                   -             (0.03)
                                                     -----------     -----------         -----------    -----------
                                                     $      0.62     $      0.47         $      1.12    $      1.88
                                                     ===========     ===========         ===========    ===========

       Cash distributions declared per share         $     0.495     $    0.4375         $     0.970    $     0.875
                                                     ===========     ===========         ===========    ===========
       Consolidated capital expenditures,
             excluding acquisitions                  $     9,993     $    10,778         $    17,340    $    22,516
                                                     ===========     ===========         ===========    ===========
</TABLE>

     For the three months ended June 30, 2004,  consolidated  revenues increased
     by $35.5 million,  or 16%, when compared to the second quarter of 2003, due
     to a $31.0 million increase in product marketing  revenues,  a $3.3 million
     increase in terminaling  business  revenues and a $1.3 million  increase in
     pipeline revenues. Consolidated operating income for the three months ended
     June 30, 2004 increased by $3.8 million,  or 12%, when compared to the same
     period in 2003,  due to a $3.1 million  increase in  terminaling  operating
     income and a $0.9 million increase in product  marketing  operating income,
     partially offset by a $0.2 million decrease in pipeline  operating  income.
     For the three months ended June 30, 2004, interest expense increase by $1.6
     million,  when compared to the same period in 2003. Overall, net income for
     the three months ended June 30, 2004  increased  by $1.9  million,  or 35%,
     when compared to the three month period ended June 30, 2003.

     For the six months ended June 30, 2004,  consolidated revenues increased by
     $50.3  million,  or 11%,  when  compared to the same 2003 period,  due to a
     $41.7  million  increase  in product  marketing  revenues,  a $7.4  million
     increase in terminaling  business  revenues and a $1.2 million  increase in
     pipeline revenues.  Consolidated  operating income for the six months ended
     June 30, 2004  increased by $3.0 million,  or 5%, when compared to the same
     period in 2003,  due to a $3.5 million  increase in  terminaling  operating
     income and a $0.5 million increase in product  marketing  operating income,
     partially offset by a $1.0 million decrease in pipeline  operating  income.
     Interest  expense for the six months ended June 30, 2004  increased by $3.4
     million,  when  compared to the six months ended June 30, 2003.  Income for
     the six months ended June 30, 2004, before gain on issuance of units by KPP
     and cumulative effect of change in accounting principle,  increased by $1.9
     million,  or 17%,  when  compared  to the six  months  end June  30,  2003.
     Overall,  net income for the six months  ended June 30, 2004  decreased  by
     $8.7  million,  when  compared to the six month period ended June 30, 2003,
     which  includes  a $10.9  million  gain on  issuance  of  units by KPP (see
     "Liquidity and Capital Resources").

     Pipeline Operations
<TABLE>
<CAPTION>
                                                         Three Months  Ended                 Six Months Ended
                                                              June 30,                           June 30,
                                                     ---------------------------        ---------------------------
                                                         2004           2003                2004           2003
                                                     -----------     -----------        -----------     -----------
                                                                             (in thousands)

<S>                                                  <C>             <C>                <C>             <C>
     Revenues                                        $    30,610     $    29,350        $    58,513     $    57,358
     Operating costs                                      13,180          12,066             24,667          23,307
     Depreciation and amortization                         3,624           3,511              7,223           7,008
     General and administrative                            1,782           1,553              3,389           2,846
                                                     -----------     -----------        -----------     -----------
     Operating income                                $    12,024     $    12,220        $    23,234     $    24,197
                                                     ===========     ===========        ===========     ===========
</TABLE>

     Pipeline revenues are based on volumes shipped and the distances over which
     such volumes are  transported.  Because  tariff rates are  regulated by the
     FERC or the Surface  Transportation  Board, the pipelines compete primarily
     on the basis of quality of  service,  including  delivery  of  products  at
     convenient  locations  on a  timely  basis  to  meet  the  needs  of  their
     customers.  For the  three  and six  month  periods  ended  June 30,  2004,
     revenues  increased by $1.3 million and $1.2  million,  respectively,  when
     compared to the same 2003  periods,  due to  increases  in barrel  miles of
     petroleum  products shipped,  partially offset by a decrease in the volumes
     shipped  on the  anhydrous  ammonia  pipeline.  Barrel  miles on  petroleum
     pipelines  totaled 5.7 billion and 5.2 billion for the three  months  ended
     June 30, 2004 and 2003, respectively, and 10.8 billion and 10.4 billion for
     the six months ended June 30, 2004 and 2003,  respectively.  Total  volumes
     shipped on the anhydrous  ammonia pipeline  aggregated  279,000 and 284,000
     tons for the three months ended June 30, 2004 and 2003,  respectively,  and
     576,000 and 588,000  tons for the six months  ended June 30, 2004 and 2003,
     respectively.

     Operating  costs,  which  include  fuel  and  power  costs,  materials  and
     supplies,  maintenance  and  repair  costs,  salaries,  wages and  employee
     benefits,  and property and other taxes, increased by $1.1 million and $1.4
     million,  respectively,  for the three and six month periods ended June 30,
     2004,  when  compared  to the same  2003  periods,  due to  unusually  high
     expenses   relating  to  preventive  and  other  maintenance  and  repairs,
     including those required by government  regulation,  and increases in power
     and  fuel  costs.  For the  three  and six  months  ended  June  30,  2004,
     depreciation and  amortization  increased by $0.1 million and $0.2 million,
     respectively,  when  compared to the same 2003  periods,  due  primarily to
     routine maintenance capital expenditures. General and administrative costs,
     which include  managerial,  accounting and administrative  personnel costs,
     office  rent  and  expense,   legal  and   professional   costs  and  other
     non-operating  costs,  increased  by $0.2  million and $0.5 million for the
     three  and six  month  periods  ended  June 30,  2004,  respectively,  when
     compared  to  the  same  2003  periods,   due  primarily  to  increases  in
     personnel-related costs.

     Terminaling Operations
<TABLE>
<CAPTION>

                                                         Three Months  Ended                 Six Months Ended
                                                              June 30,                           June 30,
                                                     ---------------------------        ---------------------------
                                                         2004           2003                2004           2003
                                                     -----------     -----------        -----------     -----------
                                                                             (in thousands)
<S>                                                  <C>             <C>                <C>             <C>
     Revenues                                        $    63,448     $    60,111        $   126,243     $   118,797
     Operating costs                                      28,598          28,058             58,941          55,335
     Depreciation and amortization                         9,896           9,856             19,980          19,100
     General and administrative                            4,078           4,402              7,962           8,527
                                                     -----------     -----------        -----------     -----------
     Operating income                                $    20,876     $    17,795        $    39,360     $    35,835
                                                     ===========     ===========        ===========     ===========
</TABLE>

     For the  three and six  month  periods  ended  June 30,  2004,  terminaling
     revenues  increased  by $3.3  million,  or 6%,  and  $7.4  million,  or 6%,
     respectively,  when compared to the same 2003 periods,  due to increases in
     the average price realized per barrel of tankage utilized.  Average tankage
     utilized for the three and six month  periods  ended June 30, 2004 was 48.1
     million and 48.1 million,  respectively,  compared to 47.9 million and 47.7
     million,  respectively,  for the same prior year periods. For the three and
     six month  periods  ended June 30, 2004,  average  annualized  revenues per
     barrel of  tankage  utilized  increased  to $5.31 per  barrel and $5.28 per
     barrel,  respectively,  compared  to $5.04 per barrel and $5.02 per barrel,
     respectively,  for the same prior year periods,  due primarily to favorable
     market conditions domestically and in Australia and New Zealand.

     For the three and six month  periods ended June 30, 2004,  operating  costs
     increased by $0.5 million and $3.6 million, respectively,  when compared to
     the same 2003 periods,  a result of overall  increases in planned  terminal
     maintenance.  For the six months  ended  June 30,  2004,  depreciation  and
     amortization  increased  by $0.9  million,  when  compared to the same 2003
     period,  due to expansion  and routine  maintenance  capital  expenditures.
     General and administrative  costs for the three and six month periods ended
     June 30, 2004,  decreased by $0.3 million and $0.6  million,  respectively,
     when compared to the same 2003 periods.


     Product Marketing Services
<TABLE>
<CAPTION>

                                                         Three Months  Ended                 Six Months Ended
                                                              June 30,                           June 30,
                                                     ---------------------------        ---------------------------
                                                         2004           2003                2004           2003
                                                     -----------     -----------        -----------     -----------
                                                                             (in thousands)

<S>                                                  <C>             <C>                <C>             <C>
     Revenues                                        $   160,144     $   129,193        $   302,625     $   260,968
     Cost of products sold                               153,364         122,437            289,795         246,764
                                                     -----------     -----------        -----------     -----------
     Gross margin                                    $     6,780     $     6,756        $    12,830     $    14,204
                                                     ===========     ===========        ===========     ===========
     Operating income                                $     4,156     $     3,210        $     7,910     $     7,415
                                                     ===========     ===========        ===========     ===========

</TABLE>
     For the three and six month periods  ended June 30, 2004,  revenues for the
     product marketing  business  increased by $31.0 million,  or 24%, and $41.7
     million, or 16%, respectively,  when compared to the same 2003 periods. The
     increase in revenues for the three and six months ended June 30, 2004, when
     compared  to the same 2003  periods,  was the result of  increases  in both
     volumes sold and the overall increase in sales price realized. Gallons sold
     totaled 164 million and 160  million,  respectively,  for the three  months
     ended  June  30,  2004  and  2003,   and  331  million  and  312   million,
     respectively,  for the six  months  ended June 30,  2004 and 2003.  For the
     three and six month periods ended June 30, 2004, the average price realized
     per  gallon of  product  sold  increased  to $0.97  and  $0.92 per  gallon,
     compared  to $0.81 and $0.84 per  gallon,  respectively,  for the same 2003
     periods.  Gross margin  increased  slightly for the three months ended June
     30, 2004 and  decreased  by $1.4  million for the six months ended June 30,
     2004,  when compared to the same 2003 periods,  due to variations in prices
     resulting  from the timing of  purchases  and sales.  For the three and six
     months ended June 30, 2004,  operating income increased by $0.9 million and
     $0.5 million, respectively,  when compared to the same 2003 periods, due to
     higher volumes and overall  decreases in operating costs,  partially offset
     by the  per-unit  decrease in operating  margin.  Product  inventories  are
     maintained at minimum  levels to meet  customers'  needs;  however,  market
     prices for petroleum products can fluctuate  significantly in short periods
     of time.

     Interest Expense

     For the three  months ended June 30, 2004,  interest  expense  increased by
     $1.6 million, when compared to the same 2003 period, due primarily to KPP's
     May 2003 refinancing of variable rate bank debt with $250 million of 5.875%
     senior unsecured notes (see "Liquidity and Capital Resources").

     For the six months ended June 30, 2004,  interest expense increased by $3.4
     million,  when  compared  to the same  2003  period,  due to KPP's May 2003
     refinancing  of variable  rate bank debt with $250 million of 5.875% senior
     unsecured  notes,  partially  offset by  overall  declines  in debt  levels
     outstanding due to KPP's March 2003 issuance of limited  partnership  units
     (see "Liquidity and Capital Resources").

     Income Taxes

     KPP's  partnership  operations  are not subject to federal or state  income
     taxes.  However,  certain KPP  operations  are conducted  through  separate
     taxable  wholly-owned U.S. and foreign corporate  subsidiaries.  The income
     tax expense for these  subsidiaries  was $0.6  million and $1.3 million for
     the three month periods ended June 30, 2004 and 2003, respectively and $1.8
     million and $2.7  million for the six months  ended June 30, 2004 and 2003,
     respectively.

     On June 1,  1989,  the  governments  of the  Netherlands  Antilles  and St.
     Eustatius  approved  a Free Zone and Profit Tax  Agreement  retroactive  to
     January 1, 1989,  which  expired  on  December  31,  2000.  This  agreement
     requires a subsidiary  of KPP,  which was acquired on February 28, 2002, to
     pay a 2% rate on taxable income,  as defined therein,  or a minimum payment
     of 500,000  Netherlands  Antilles  guilders  ($0.3  million) per year.  The
     agreement  further  provides  that  any  amounts  paid in order to meet the
     minimum annual  payment will be available to offset future tax  liabilities
     under the  agreement  to the  extent  that the  minimum  annual  payment is
     greater than 2% of taxable income.  The subsidiary is currently  engaged in
     discussions with  representatives  appointed by the Island Territory of St.
     Eustatius  regarding the renewal or modification of the agreement,  but the
     ultimate  outcome  cannot be predicted  at this time.  The  subsidiary  has
     accrued amounts assuming a new agreement becomes  effective,  and continues
     to make payments, as required, under the previous agreement.

     Liquidity and Capital Resources

     Cash provided by  operations,  including  the  operations of KPP, was $64.9
     million and $76.2  million for the six months ended June 30, 2004 and 2003,
     respectively.  The  decrease in operating  cash flows was due  primarily to
     changes in working  capital  components  resulting  from the timing of cash
     receipts and  disbursements,  primarily in the Company's  product marketing
     business.

     Capital expenditures  (related primarily to KPP) were $17.3 million for the
     six months ended June 30, 2004,  compared to $22.5 million  during the same
     2003 period. Such expenditures  included $11.6 million and $12.1 million in
     maintenance  and  environmental  expenditures  and $5.7  million  and $10.4
     million in  expansion  expenditures  for the six months ended June 30, 2004
     and 2003, respectively.  The decrease in capital expenditures for the first
     six months of 2004, when compared to the same 2003 period, is the result of
     decreases in planned maintenance and expansion capital expenditures related
     to KPP's  terminaling  business.  During  all  periods,  adequate  pipeline
     capacity  existed  to  accommodate  volume  growth,  and  the  expenditures
     required for  environmental  and safety  improvements were not, and are not
     expected to be,  significant.  KPP  anticipates  that capital  expenditures
     (including routine  maintenance and expansion  expenditures,  but excluding
     acquisitions) will total  approximately $28 million to $32 million in 2004.
     Future capital  expenditures of KPP,  however,  will depend on many factors
     beyond KPP's control,  including,  without  limitation,  demand for refined
     petroleum products and terminaling  services in KPP's market areas,  local,
     state and federal government regulations, fuel conservation efforts and the
     availability  of financing on acceptable  terms.  No assurance can be given
     that required  capital  expenditures  will not exceed  anticipated  amounts
     during  the  year,  or  thereafter,  or that KPP will have the  ability  to
     finance such expenditures through borrowings, or will choose to do so.

     The Company makes quarterly distributions of 100% of its available cash, as
     defined in the limited liability company agreement,  to common shareholders
     of record on the  applicable  record date,  within 45 days after the end of
     each quarter. Available cash consists generally of all the cash receipts of
     the Company, less all cash disbursements and reserves.  Excess cash flow of
     the  Company's  wholly-owned  marketing  operations is being used to reduce
     working capital  borrowings.  A cash  distribution of $0.475 per share with
     respect  to the  first  quarter  of 2004 was paid on May 14,  2004.  A cash
     distribution of $0.495 per share with respect to the second quarter of 2004
     was  declared  to  holders  of record on July 30,  2004 and will be paid on
     August 13, 2004.

     The Company expects to fund future cash distributions with anticipated cash
     flows from KPP distributions. KPP expects to fund future cash distributions
     and  maintenance  capital  expenditures  with existing cash and anticipated
     cash flows from operations.  Expansionary capital expenditures are expected
     to be funded  through  additional  KPP bank  borrowings  and/or  future KPP
     public equity or debt offerings.

     The  Company has a credit  agreement  with a bank that  provides  for a $50
     million  revolving  credit  facility  through  July  1,  2008.  The  credit
     facility,  which  bears  interest at variable  rates,  has a variable  rate
     commitment  fee on  unused  amounts  and  contains  certain  financial  and
     operational covenants. At June 30, 2004, the Company was in compliance with
     all  covenants.  The credit  facility is secured by 4.6 million KPP limited
     partnership  units. At June 30, 2004, $14.5 million was drawn on the credit
     facility.

     In March of 2003,  KPP  issued  3,122,500  limited  partnership  units in a
     public offering at $36.54 per unit, generating approximately $109.1 million
     in  net  proceeds.   The  proceeds  were  used  to  reduce  the  amount  of
     indebtedness  under  KPP's  bridge  facility.  As a result  of KPP  issuing
     additional units to unrelated parties, the Company's share of net assets of
     KPP increased by $10.9 million. Accordingly, the Company recognized a $10.9
     million gain in the first quarter of 2003.

     In April of 2003, KPP entered into a credit agreement with a group of banks
     that  provides  for a $400  million  unsecured  revolving  credit  facility
     through April of 2006. The credit facility,  which provides for an increase
     in the  commitment  up to an aggregate of $450 million by mutual  agreement
     between  KPP and the banks,  bears  interest  at  variable  rates and has a
     variable  commitment fee on unused amounts.  The credit facility is without
     recourse  to the Company  and  contains  certain  financial  and  operating
     covenants,  including  limitations  on  investments,  sales of  assets  and
     transactions  with  affiliates  and,  absent an event of default,  does not
     restrict  distributions  to the Company or to other  partners.  At June 30,
     2004, KPP was in compliance with all covenants.  Initial  borrowings on the
     credit   agreement   ($324.2  million)  were  used  to  repay  all  amounts
     outstanding  under KPP's $275  million  credit  agreement  and $175 million
     bridge loan  agreement.  At June 30, 2004,  $68.7  million was  outstanding
     under the credit agreement.

     On May 19 2003,  KPP issued $250 million of 5.875% senior  unsecured  notes
     due June 1,  2013.  The net  proceeds  from  the  public  offering,  $247.6
     million,  were used to reduce  amounts  due under  KPP's  revolving  credit
     agreement.  Under the note indenture,  interest is payable semi-annually in
     arrears on June 1 and December 1 of each year. The notes are redeemable, as
     a whole or in part,  at the  option of KPP,  at any time,  at a  redemption
     price equal to the greater of 100% of the principal amount of the notes, or
     the  sum of the  present  value  of the  remaining  scheduled  payments  of
     principal and interest, discounted to the redemption date at the applicable
     U.S. Treasury rate, as defined in the indenture,  plus 30 basis points. The
     note  indenture  contains  certain  financial  and  operational  covenants,
     including  certain   limitations  on  investments,   sales  of  assets  and
     transactions  with  affiliates  and,  absent  an  event  of  default,  such
     covenants do not restrict  distributions to the Company and other partners.
     At June 30, 2004, KPP was in compliance  with all covenants.  In connection
     with the  offering,  on May 8,  2003,  KPP  entered  into a  treasury  lock
     contract  for the  purpose  of  locking in the US  Treasury  interest  rate
     component on $100 million of the debt.  The treasury lock  contract,  which
     qualified as a cash flow hedging  instrument  under  Statement of Financial
     Accounting  Standards  ("SFAS") No. 133, was settled on May 19, 2003 with a
     cash payment by KPP of $1.8 million.  The  settlement  cost of the contract
     has been recorded as a component of accumulated other comprehensive  income
     and is being amortized, as interest expense, over the life of the debt.

     The  following is a schedule by period of the Company's  (including  KPP's)
     debt repayment obligations and material contractual  commitments as of June
     30, 2004:

<TABLE>
<CAPTION>
                                                         Less than                                        After
                                           Total          1 year       1 -3 years    4 -5 years          5 years
                                         ----------    ----------      ----------    -----------     --------------
                                                                    (in thousands)
<S>                                       <C>          <C>              <C>          <C>             <C>
     Debt:
       Revolving credit facility          $   14,500   $      -         $    -       $     14,500    $      -
       Revolving credit facility
          of subsidiary                        5,535          -               5,535         -               -
       KPP revolving credit facility          68,669          -              68,669         -               -
       KPP 7.75% senior unsecured
          notes                              250,000          -              -              -               250,000
       KPP 5.875% senior unsecured
          notes                              250,000          -              -              -               250,000
       Other KPP bank debt                    61,218          -              61,218         -               -
                                          ----------   ------------     -----------  ------------    --------------
          Debt subtotal                      649,922          -             135,422        14,500           500,000
                                          ----------   ------------     -----------  ------------    --------------
     Contractual commitments:
       Operating leases, primarily KPP        23,691          8,430          13,929         1,332           -
                                          ----------   ------------     -----------  ------------    --------------
          Contractual commitments
              subtotal                        23,691          8,430          13,929         1,332           -
                                          ----------   ------------     -----------  ------------    --------------
          Total                           $  673,613   $      8,430     $   149,351  $     15,832    $      500,000
                                          ==========   ============     ===========  ============    ==============

</TABLE>

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

     Off-Balance Sheet Transactions

     The Company was not a party of any off-balance  sheet  transactions at June
     30, 2004.

     Critical Accounting Policies and Estimates

     The  preparation of the Company's  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and disclosures of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those  estimates.  Significant  accounting
     policies  are  presented  in  the  Notes  to  the  Consolidated   Financial
     Statements of the  Company's  Annual Report on Form 10-K for the year ended
     December 31,  2003.  Critical  accounting  policies are those that are most
     important to the portrayal of the Company's  financial position and results
     of  operations.   These  policies  require   management's  most  difficult,
     subjective or complex judgments, often employing the use of estimates about
     the effect of matters that are  inherently  uncertain.  The Company's  most
     critical  accounting  policies  pertain to impairment of KPP's property and
     equipment and environmental costs.

     The  carrying  value  of  KPP's  property  and  equipment  is  periodically
     evaluated using management's  estimates of undiscounted  future cash flows,
     or, in some cases, third-party appraisals,  as the basis for determining if
     impairment exists under the provisions of SFAS No. 144, "Accounting for the
     Impairment  or the  Disposal  of  Long-Lived  Assets",  which  was  adopted
     effective  January 1, 2002.  To the extent that  impairment is indicated to
     exist,  an impairment loss is recognized by KPP under SFAS No. 144 based on
     fair value.  The application of SFAS No. 144 did not have a material impact
     on the  results of  operations  of KPP for the three and six month  periods
     ended June 30, 2004 and 2003. However, future evaluations of carrying value
     are dependent on many factors,  several of which are out of KPP's  control,
     including demand for refined petroleum products and terminaling services in
     KPP's market areas, and local, state and federal governmental  regulations.
     To the extent that such factors or conditions  change,  it is possible that
     future  impairments might occur,  which could have a material effect on the
     results of operations of KPP.

     KPP  environmental  expenditures  that  relate to  current  operations  are
     expensed or  capitalized,  as appropriate.  Expenditures  that relate to an
     existing  condition caused by past operations,  and which do not contribute
     to current or future  revenue  generation,  are expensed.  Liabilities  are
     recorded by KPP when environmental  assessments and/or remedial efforts are
     probable, and the costs can be reasonably estimated.  Generally, the timing
     of these accruals  coincides with the completion of a feasibility  study or
     KPP's  commitment  to a formal  plan of action.  The  application  of KPP's
     environmental  accounting  policies  did not have a material  impact on the
     results of operations of KPP for the three and six month periods ended June
     30, 2004 and 2003. Although KPP believes that its operations are in general
     compliance with applicable environmental regulations,  risks of substantial
     costs and liabilities are inherent in pipeline and terminaling  operations.
     Moreover,  it is possible  that other  developments,  such as  increasingly
     strict environmental laws, regulations and enforcement policies thereunder,
     and legal  claims for  damages to property  or persons  resulting  from the
     operations of KPP could result in substantial costs and liabilities, any of
     which could have a material effect on the results of operations of KPP.

     Recent Accounting Pronouncement

     In December 2003, the Financial  Accounting Standards Board ("FASB") issued
     Interpretation  No. 46 (revised December 2003),  "Consolidation of Variable
     Interest Entities (FIN 46R),  primarily to clarify the required  accounting
     for interests in variable interest entities (VIEs).  This standard replaces
     FASB  Interpretation  No. 46,  Consolidation of Variable Interest Entities,
     which was issued in January 2003 to address  certain  situations in which a
     company should include in its financial statements the assets,  liabilities
     and activities of another entity.  For the Company,  application of FIN 46R
     is required for interests in certain VIEs that are commonly  referred to as
     special-purpose  entities,  or  SPEs,  as of  December  31,  2003,  and for
     interests in all other types of VIEs as of March 31, 2004. The  application
     of FIN 46R did not have a  material  impact on the  consolidated  financial
     statements of the Company.





<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

The principal market risks pursuant to this Item (i.e., the risk of loss arising
from adverse changes in market rates and prices) to which the Company is exposed
are interest  rates on the Company's and KPP's debt and  investment  portfolios,
fluctuations  in petroleum  product  prices on  inventories  held for sale,  and
fluctuations in foreign currency.

The Company's  investment  portfolio consists of cash equivalents;  accordingly,
the carrying amounts  approximate fair value. The Company's  investments are not
material to its financial  position or performance.  Assuming variable rate debt
of  $149.9  million  (including  KPP's  debt) at June 30,  2004,  a one  percent
increase  in  interest  rates  would  increase  annual net  interest  expense by
approximately $1.5 million.

The product marketing  business  purchases refined petroleum products for resale
as  motor  fuel,  bunker  fuel  and  sales to  commercial  interests.  Petroleum
inventories are generally held for short periods of time, not exceeding 90 days.
As the Company  and KPP do not engage in  derivative  transactions  to hedge the
value of the  inventory,  they are subject to market risk from changes in global
oil markets.

A portion of KPP's  terminaling  business is exposed to  fluctuations in foreign
currency  exchange rates.  Such  fluctuations were not significant for the three
and six months ended June 30, 2004 or 2003.


Item 4.  Controls and Procedures

The Company's principal executive officer and principal financial officer, after
evaluating,  as of June 30, 2004, the effectiveness of the Company's  disclosure
controls and  procedures  (as defined in Rules  13a-15(e)  and  15d-15(e) of the
Securities  Exchange Act of 1934),  have  concluded  that, as of such date,  the
Company's  disclosure  controls and  procedures  are  adequate and  effective to
ensure that material  information  relating to the Company and its  consolidated
subsidiaries would be made known to them by others within those entities.

During  the  quarter  ended  June 30,  2004,  there  have been no changes in the
Company's  internal  controls  over  financial  reporting  that have  materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the  evaluation.  As a result,  no corrective  actions
were required or undertaken.


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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


                           Part II - Other Information


Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits.

          3.1  Amended and  Restated  Limited  Liability  Company  Agreement  of
               Registrant,  filed as Exhibit 3.1 to the exhibits to Registrant's
               Form 10-Q,  for the period ended June 30, 2001,  which exhibit is
               hereby incorporated by reference.

          31.1 Certification of Chief Executive Officer, Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.

          31.2 Certification of Chief Financial Officer, Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.

          32.1 Certification  of Chief  Executive  Officer,  Pursuant to Section
               906(a) of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.

          32.2 Certification  of Chief  Financial  Officer,  Pursuant to Section
               906(a) of the Sarbanes-Oxley Act of 2002, dated August 9, 2004.

     (b)  Reports on Form 8-K

          Current Report on Form 8-K, filed May 3, 2004.

                                    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, thereunto duly authorized.

                                         KANEB SERVICES LLC
                                         (Registrant)


Date:   August 9, 2004                       //s//  HOWARD C. WADSWORTH
                                         ---------------------------------------
                                         Howard C. Wadsworth
                                         Vice President, Treasurer and Secretary
                                         (Principal Financial Officer and
                                         Duly Authorized Officer)


<PAGE>
                                                                    Exhibit 31.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, John R. Barnes, Chief Executive Officer of Kaneb Services LLC certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

     d)   disclosed  in this  quarterly  report any  change in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial  reporting to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Date:  August 9, 2004



                                               //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer


<PAGE>
                                                                    Exhibit 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Howard C. Wadsworth,  Chief  Financial  Officer of Kaneb Services LLC certify
that:

1.   I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

     d)   disclosed  in this  quarterly  report any  change in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial  reporting to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Date: August 9, 2004



                                             //s//  HOWARD C. WADSWORTH
                                            ------------------------------------
                                            Howard C. Wadsworth
                                            Chief Financial Officer




<PAGE>
                                                                    Exhibit 32.1



                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002


The  undersigned,  being the Chief Executive  Officer of Kaneb Services LLC (the
"Company"),  hereby  certifies that, to his knowledge,  the Company's  Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the
United States  Securities and Exchange  Commission  pursuant to Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully
complies  with the  requirements  of  Section  13(a) or 15(d) of the  Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

This  written  statement  is being  furnished  to the  Securities  and  Exchange
Commission  as an exhibit to such Form 10-Q.  A signed  original of this written
statement  required by Section 906 has been  provided to Kaneb  Services LLC and
will be retained by Kaneb  Services  LLC and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.

Date:  August 9, 2004



                                               //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer



<PAGE>
                                                                    Exhibit 32.2


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002


The  undersigned,  being the Chief Financial  Officer of Kaneb Services LLC (the
"Company"),  hereby  certifies that, to his knowledge,  the Company's  Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the
United States  Securities and Exchange  Commission  pursuant to Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully
complies  with the  requirements  of  Section  13(a) or 15(d) of the  Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

This  written  statement  is being  furnished  to the  Securities  and  Exchange
Commission  as an exhibit to such Form 10-Q.  A signed  original of this written
statement  required by Section 906 has been  provided to Kaneb  Services LLC and
will be retained by Kaneb  Services  LLC and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.

Date: August 9, 2004



                                             //s//  HOWARD C. WADSWORTH
                                            ------------------------------------
                                            Howard C. Wadsworth
                                            Chief Financial Officer



</TEXT>
</DOCUMENT>
</SUBMISSION>
