SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 1-10311

                         KANEB PIPE LINE PARTNERS, L.P.

             (Exact name of Registrant as specified in its Charter)

              Delaware                                     75-2287571
     (State or other jurisdiction              (IRS Employer Identification No.)
     of incorporation or organization)

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

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

           Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange
     Title of each class                               on which registered
     ----------------------------                    --------------------------
     Senior Preference Units                         New York Stock Exchange
     Preference Units                                New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

         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 if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ ]

         Aggregate  market value of the voting units held by  non-affiliates  of
the registrant:  $372,155,103. This figure is estimated as of March 16, 1998, at
which date the closing price of the Registrant's  Senior Preference Units on the
New York  Stock  Exchange  was  $35.50  per unit  and the  closing  price of the
Registrant's  Preference  Units on the New York Stock  Exchange was $34.25,  and
assumes that only the General Partner of the Registrant (the "General Partner"),
officers and  directors  of the General  Partner and its parent and wholly owned
subsidiaries of the General Partner and its parent were affiliates.

         Number of Senior  Preference  Units of the  Registrant  outstanding  at
March  16,  1998:  7,250,000.  Number  of  Preference  Units  of the  Registrant
outstanding at March 16, 1998: 5,650,000.

<PAGE>

                                     PART I

ITEM I.    BUSINESS

GENERAL

         The pipeline system of Kaneb Pipe Line Company was initially created in
1953. In September  1989,  Kaneb Pipe Line  Partners,  L.P., a Delaware  limited
partnership  (the  "Partnership"),  was formed to  acquire,  own and operate the
refined petroleum  products  pipeline business (the "East Pipeline")  previously
conducted  by Kaneb  Pipe Line  Company,  a Delaware  corporation  ("KPL" or the
"Company"),  a wholly  owned  subsidiary  of Kaneb  Services,  Inc.,  a Delaware
corporation ("Kaneb"). KPL owns a combined 2% interest as general partner of the
Partnership  and of Kaneb  Pipe Line  Operating  Partnership,  L.P.,  a Delaware
limited  partnership  ("KPOP").  The pipeline  operations of the Partnership are
conducted through KPOP, of which the Partnership is the sole limited partner and
KPL is the sole general partner.  The terminaling business of the Partnership is
conducted through (i) Support Terminals  Operating  Partnership,  L.P. ("STOP"),
(ii) Support Terminal  Services,  Inc.,  (iii)  StanTrans,  Inc., (iv) StanTrans
Partners L.P. ("STPP"), and (v) StanTrans Holdings, Inc. KPOP, STOP and STPP are
collectively referred to as the "Operating Partnerships".

         The Partnership is engaged, through its Operating Partnerships,  in the
refined  petroleum  products  pipeline business and the terminaling of petroleum
products and specialty liquids.

PRODUCTS PIPELINE BUSINESS

Introduction

         The  Partnership's   pipeline   business  consists   primarily  of  the
transportation,  as a common carrier,  of refined petroleum  products in Kansas,
Nebraska,   Iowa,  South  Dakota,  North  Dakota,   Colorado  and  Wyoming.  The
Partnership owns and operates two common carrier  pipelines (the "Pipelines") as
shown on the map below:

                                [SYSTEM MAP]

East Pipeline

         Construction  of the East  Pipeline  commenced in the 1950s with a line
from southern Kansas to Geneva,  Nebraska.  During the 1960s,  the East Pipeline
was extended north to its present  terminus at Jamestown,  North Dakota.  In the
1980's,  the lines from Geneva,  Nebraska to North Platte,  Nebraska and the 16"
line from McPherson,  Kansas to Geneva,  Nebraska were built and the Partnership
acquired a 6" pipeline from Champlin Oil Company,  a portion of which runs south
from Shickley,  Nebraska through Superior,  Nebraska, to Hutchinson,  Kansas. In
1997, the Partnership  completed  construction of a new 6" pipeline from Conway,
Kansas to Windom,  Kansas  (approximately  22 miles  north of  Hutchinson)  that
allows the  Hutchinson  Terminal  to be  supplied  directly  from  McPherson;  a
significantly  shorter route than was  previously  used. As a result of this new
pipeline  becoming  operational,  the segment of the old  Champlin  line between
Windom and Shickley was shut down,  including the Superior  terminal.  The other
end of the  line  runs  northeast  approximately  175  miles  crossing  the main
pipeline at Osceola,  Nebraska,  through a terminal at Columbus,  Nebraska,  and
later crossing and interconnecting  with the Partnership's  Yankton/Milford line
to terminate at Rock Rapids, Iowa.

         The East  Pipeline  system  also  consists of 15 product  terminals  in
Kansas,  Nebraska,  Iowa,  South  Dakota and North  Dakota  (with total  storage
capacity of  approximately  3.1 million  barrels) and an  additional  23 product
tanks with total storage capacity of  approximately  922,000 barrels at its tank
farm  installations at McPherson and El Dorado,  Kansas. The system also has six
origin  pump  stations  at  refineries  in Kansas and 38 booster  pump  stations
situated  along the system in Kansas,  Nebraska,  Iowa,  South  Dakota and North
Dakota.  Additionally,   the  system  maintains  various  office  and  warehouse
facilities,  and an extensive quality control  laboratory.  KPOP owns the entire
2,075 mile East Pipeline,  except for the 203-mile  North Platte line,  which is
held  under a  capitalized  lease  that  expires  at the end of  1998.  KPOP has
exercised  its option to purchase  the North  Platte line for  approximately  $5
million at the end of the lease.  KPOP  leases  office  space for its  operating
headquarters in Wichita, Kansas.

         The East Pipeline  transports  refined  petroleum  products,  including
propane,  received  from  refineries  in southeast  Kansas and other  connecting
pipelines to terminals in Kansas,  Nebraska, Iowa, South Dakota and North Dakota
and to receiving pipeline  connections in Kansas.  Shippers on the East Pipeline
obtain refined petroleum products from refineries connected to the East Pipeline
directly or through other  pipelines.  These  refineries  obtain their crude oil
primarily from producing  areas in Kansas,  Oklahoma and Texas.  Five connecting
pipelines  can deliver  propane for shipment  through the East Pipeline from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas.

West Pipeline

         KPOP  acquired  the West  Pipeline  in February  1995  through an asset
purchase from WYCO Pipe Line Company for a purchase price of $27.1 million.  The
acquisition of the West Pipeline  increased the Partnership's  pipeline business
in South  Dakota and expanded it into Wyoming and  Colorado.  The West  Pipeline
system  includes  approximately  550 miles of  underground  pipeline in Wyoming,
Colorado and South  Dakota,  four truck  loading  terminals  and  numerous  pump
stations  situated along the system.  The system's four product terminals have a
total storage capacity of over 1.7 million barrels.

         The West Pipeline originates at Casper, Wyoming and travels east to the
Strouds station,  which is located in Evansville,  Wyoming, where it serves as a
connecting  point  with  Sinclair's  Little  America  refinery  and the  Seminoe
pipeline that transports  product from Billings,  Montana area refineries.  From
Strouds,  the West Pipeline  continues  easterly through its 8" line to Douglas,
Wyoming, where a 6" pipeline branches off to serve the Partnership's Rapid City,
South Dakota terminal  approximately 190 miles away. The Rapid City terminal has
a three bay bottom  loading  truck rack and  storage  tank  capacity  of 256,000
barrels.  The 6" pipeline also receives product from Wyoming Refining's pipeline
at a connection  located near the Wyoming/South  Dakota border  approximately 30
miles  south  of  Wyoming  Refining's  Newcastle  refinery.  From  Douglas,  the
Partnership's 8" pipeline  continues  southward  through a delivery point at the
Burlington Northern Junction to the Cheyenne terminal. The Cheyenne terminal has
a two bay bottom loading truck rack and storage tank capacity of 345,000 barrels
and serves as a receiving point for products from the Frontier refinery, as well
as product delivery point to the Cheyenne pipeline.  From the Cheyenne terminal,
the pipeline  extends south into Colorado to the Dupont terminal  located in the
Denver  metropolitan  area. The Dupont  terminal is the largest  terminal on the
West  Pipeline  system,  with a six bay bottom  loading  truck rack and  tankage
capacity of 692,000  barrels.  The 8" pipeline  continues to the  Commerce  City
station,  where the West  Pipeline can receive from and transfer  product to the
Total Petroleum (now Ultramar  Diamond  Shamrock) and Conoco  refineries and the
Phillips Petroleum terminal. From the Commerce City station, a 6" line continues
south 90 miles where the system  terminates at the Fountain,  Colorado  terminal
serving the Colorado  Springs area. The Fountain  terminal has a five bay bottom
loading truck rack and storage tank capacity of 366,000 barrels.

         The West Pipeline system parallels the  Partnership's  East Pipeline to
the west. The East Pipeline's North Platte line terminates in western  Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne,  Wyoming terminal.
The  small  Cheyenne  pipeline  moves  products  from west to east from the West
Pipeline's  Cheyenne terminal to near the East Pipeline's North Platte terminal,
although that line has been deactivated from Sidney, Nebraska (approximately 100
miles from Cheyenne) to North Platte.  The West Pipeline serves Denver and other
eastern  Colorado  markets and supplies jet fuel to Ellsworth  Air Force Base at
Rapid  City,  South  Dakota,   as  compared  to  the  East  Pipeline's   largely
agricultural  service area.  The West Pipeline has a relatively  small number of
shippers,  who, with a few  exceptions,  are also shippers on the  Partnership's
East Pipeline system.

Other Systems

         The  Partnership  also owns  three  single-use  pipelines,  located  in
Umatilla,  Oregon; Rawlins, Wyoming and Pasco, Washington.  Each system supplies
diesel  fuel to a railroad  fueling  facility  under  contracts.  The Oregon and
Washington  lines are fully  automated  and the Wyoming  line  requires  minimal
start-up  assistance,  which is  provided  by the  railroad.  For the year ended
December 31, 1997, the three systems combined transported a total of 3.5 million
barrels of diesel fuel, representing an aggregate of $1.3 million in revenues.

Pipelines Products and Activities

         The  Pipelines'  revenues are based on volumes and distances of product
shipped.  The  following  table  reflects  the total  volume and barrel miles of
refined  petroleum  products shipped and total operating  revenues earned by the
Pipelines for each of the periods indicated:

                                       YEAR ENDED DECEMBER 31,
                         -------------------------------------------------------
                           1997         1996       1995(4)     1994       1993
                         -------      -------     --------    -------    -------
Volume (1) ...........    69,984       73,839       74,965     54,546     56,234
Barrel miles(2).......    16,144       16,735       16,594     14,460     14,160
Revenues(3) ..........   $61,320      $63,441      $60,192    $46,117    $44,107

(1)      Volumes are  expressed  in  thousands  of barrels of refined  petroleum
         product.

(2)      Barrel  miles are shown in  millions.  A barrel mile is the movement of
         one barrel of refined petroleum product one mile.

(3)      Revenues are expressed in thousands of dollars.

(4)      Amounts  for  1995  and   subsequent   periods  also  include   amounts
         attributable  to the West  Pipeline,  acquired  by the  Partnership  in
         February 1995.

         The following  table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:

                                           YEAR ENDED DECEMBER 31,
                                           (THOUSANDS OF BARRELS)
                          ------------------------------------------------------
                           1997        1996        1995       1994        1993
                          ------      ------      ------      ------      ------
Gasoline ..............   32,237      36,063      37,348      23,958      25,407
Diesel and fuel oil....   33,541      32,934      33,411      26,340      25,308
Propane ...............    4,206       4,842       4,146       4,204       4,153
Other .................     --          --            60          44       1,366
                          ------      ------      ------      ------      ------
     Total ............   69,984      73,839      74,965      54,546      56,234
                          ======      ======      ======      ======      ======

         Diesel  and  fuel  oil  are  used  in  farm  machinery  and  equipment,
over-the-road  transportation,   railroad  fueling  and  residential  fuel  oil.
Gasoline is primarily used in over-the-road  transportation  and propane is used
for crop drying,  residential heating and to power irrigation equipment. The mix
of refined petroleum products delivered varies seasonally,  with gasoline demand
peaking in early summer,  diesel fuel demand  peaking in late summer and propane
demand higher in the fall. In addition,  weather  conditions in the areas served
by the East  Pipeline  affect  both the  demand  for and the mix of the  refined
petroleum  products delivered through the East Pipeline,  although  historically
any overall  impact on the total volumes  shipped has been  short-term.  Tariffs
charged shippers for transportation do not vary according to the type of product
delivered.

Maintenance and Monitoring

         The Pipelines have been constructed and are maintained  consistent with
applicable Federal,  state and local laws and regulations,  standards prescribed
by the American Petroleum Institute and accepted industry practice.  Further, to
prolong the useful  lives of the  Pipelines,  protective  measures are taken and
routine  preventive  maintenance  is performed on the  Pipelines.  Such measures
includes  cathodic  protection  to prevent  external  corrosion,  inhibitors  to
prevent   internal   corrosion  and  periodic   inspection  of  the   Pipelines.
Additionally,  the  Pipelines  are  patrolled  at regular  intervals to identify
equipment or activities by third parties that, if left  unchecked,  could result
in encroachment  upon the rights-of-way for the Pipelines and possible damage to
the Pipelines.

         The Partnership uses a  state-of-the-art  Supervisory  Control and Data
Acquisition remote supervisory control software program to continuously  monitor
and control the  Pipelines  from the Wichita,  Kansas  headquarters.  The system
monitors  quantities  of refined  petroleum  products  injected in and delivered
through the Pipelines and  automatically  signals the Wichita  headquarters upon
any deviation from normal operations that requires attention.

Pipeline Operations

         Both the East Pipeline and the West Pipeline are  interstate  pipelines
and thus  subject to Federal  regulation  by such  governmental  agencies as the
Federal   Energy   Regulatory   Commission   ("FERC")  and  the   Department  of
Transportation,  as well as the Environmental  Protection Agency.  Additionally,
the West Pipeline is subject to state regulation of certain  intrastate rates in
Colorado  and Wyoming and the East  Pipeline is subject to state  regulation  in
Kansas. See "Regulation."

         Except  for  the  three   single-use   pipelines  and  certain  ethanol
facilities,  all of the  Partnership's  pipeline  operations  constitute  common
carrier operations and are subject to Federal tariff  regulation.  Also, certain
of its  intrastate  common  carrier  operations  are  subject  to  state  tariff
regulation.  Common  carrier  activities  are those under  which  transportation
through the Pipelines is available at published  tariffs filed with the FERC, in
the case of interstate shipments,  or the relevant state authority,  in the case
of  intrastate  shipments in Kansas,  Colorado  and  Wyoming,  to any shipper of
refined  petroleum  products  who  requests  such  services  and  satisfies  the
conditions and specifications for transportation.

         In  general,  a  shipper  on  one  of the  Pipelines  acquires  refined
petroleum  products  from  refineries  connected  to such  Pipeline,  or, if the
shipper already owns the refined petroleum  products,  delivers such products to
the Pipeline  from those  refineries  or from  pipelines  that connect with such
Pipeline.  Tariffs  for  transportation  are  charged  to  shippers  based  upon
transportation  from the  origination  point  on the  Pipeline  to the  point of
delivery.  Such  tariffs  also include  charges for  terminaling  and storage of
product at the  Pipeline's  terminals.  Pipelines  are generally the lowest cost
method  for  intermediate  and  long-haul  overland  transportation  of  refined
petroleum products.

         Each shipper  transporting  product on a Pipeline is required to supply
KPOP with a notice of shipment  indicating sources of products and destinations.
All shipments are tested or receive refinery certifications to ensure compliance
with KPOP's specifications.  Shippers are generally invoiced by KPOP immediately
upon the product entering one of the Pipelines.  The operations of the Pipelines
also include 19 truck loading terminals through which refined petroleum products
are delivered to storage tanks and then loaded into petroleum transport trucks.

         The following table shows, with respect to each of such terminals,  its
location, the number of tanks owned by KPOP, its storage capacity in barrels and
truck capacity.  Except as indicated, each terminal is owned by KPOP at December
31, 1997.

    LOCATION OF                    NUMBER        TANKAGE           TRUCK
     TERMINALS                    OF TANKS       CAPACITY        CAPACITY(A)
   ----------------------------   --------       --------        -----------
    COLORADO:
      Dupont                         18          692,000              6
      Fountain                       13          366,000              5
    IOWA:
      LeMars                          9          103,000              2
      Milford(b)                     11          172,000              2
      Rock Rapids                    12          366,000              2
    KANSAS:
      Concordia(c)                    7           79,000              2
      Hutchinson                      9          162,000              1
    NEBRASKA:
      Columbus(d)                    12          191,000              2
      Geneva                         39          678,000              8
      Norfolk                        16          187,000              4
      North Platte                   22          198,000              5
      Osceola                         8           79,000              2
      Superior(e)                    11          192,000              1
    NORTH DAKOTA:
      Jamestown                      13          188,000              2
    SOUTH DAKOTA:
      Aberdeen                       12          181,000              2
      Mitchell                        8           72,000              2
      Rapid City                     13          256,000              3
      Wolsey                         21          149,000              4
      Yankton                        25          246,000              4
    WYOMING:
      Cheyenne                       15          345,000              2
                                  ------     -----------
    TOTALS                          294        4,902,000
                                  ======     ===========

(a)      Number of trucks that may be simultaneously loaded.
(b)      The Milford  terminal is situated on land leased through August 7, 2007
         at an annual  rental of  $2,400.  KPOP has the right to renew the lease
         upon  its  expiration  for an  additional  term of 20 years at the same
         annual rental rate.
(c)      The Concordia terminal is situated on land leased through the year 2060
         for a total rental of $2,000. (d) Also loads rail tank cars. (e) Out of
         service as of March 15, 1997.

         The East Pipeline also has intermediate  storage facilities  consisting
of 13 storage  tanks at El Dorado,  Kansas  and 10 storage  tanks at  McPherson,
Kansas with aggregate  capacities of approximately  388,000 and 534,000 barrels,
respectively.  During 1997,  approximately  63% and 89% of the deliveries of the
East  Pipeline and the West  Pipeline,  respectively,  were made  through  their
terminals,  and  approximately  37%  and  11% the  remainder  of the  respective
deliveries of such lines were made to other pipelines and customer owned storage
tanks.

         Storage of product at terminals  pending  delivery is considered by the
Partnership  to be an  integral  part of the  product  delivery  service  of the
Pipelines. Shippers generally store refined petroleum products for less than one
week. Ancillary services,  including injection of shipper-furnished  and generic
additives, are available at each terminal.


<PAGE>


Demand for and Sources of Refined Petroleum Products

         The  Partnership's  pipeline  business depends in large part on (i) the
level of demand for refined  petroleum  products  in the  markets  served by the
Pipelines and (ii) the ability and willingness of refiners and marketers  having
access  to the  Pipelines  to  supply  such  demand by  deliveries  through  the
Pipelines.

         Most of the  refined  petroleum  products  delivered  through  the East
Pipeline  are  ultimately   used  as  fuel  for  railroads  or  in  agricultural
operations,  including  fuel  for farm  equipment,  irrigation  systems,  trucks
transporting  crops and crop drying  facilities.  Demand for  refined  petroleum
products for  agricultural  use, and the relative mix of products  required,  is
affected by weather  conditions in the markets served by the East Pipeline.  The
agricultural  sector is also  affected by government  agricultural  policies and
crop prices.  Although periods of drought suppress  agricultural demand for some
refined petroleum products,  particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.

         While  there is some  agricultural  demand  for the  refined  petroleum
products  delivered  through the West  Pipeline,  as well as  military  jet fuel
volumes,   most  of  the  demand  is  centered   in  the  Denver  and   Colorado
Springs/Fountain  areas.  Because  demand on the West Pipeline is  significantly
weighted toward urban and suburban  areas,  the product mix on the West Pipeline
includes a substantially  higher  percentage of gasoline than the product mix on
the East Pipeline.

         The Pipelines are also dependent upon adequate  levels of production of
refined petroleum products by refineries connected to the Pipelines, directly or
through  connecting  pipelines.  The  refineries  are, in turn,  dependent  upon
adequate  supplies of suitable  grades of crude oil.  The  refineries  connected
directly to the East Pipeline  obtain crude oil from  producing  fields  located
primarily in Kansas,  Oklahoma  and Texas,  and, to a much lesser  extent,  from
other domestic or foreign sources.  Refineries in Kansas, Oklahoma and Texas are
connected to the East Pipeline through other pipelines.  These refineries obtain
their supplies of crude oil from a variety of sources.  The refineries connected
directly to the West  Pipeline are located in Casper and  Cheyenne,  Wyoming and
Denver,  Colorado.  Refineries in Billings and Laurel,  Montana are connected to
the West  Pipeline  through  other  pipelines.  These  refineries  obtain  their
supplies of crude oil primarily  from Rocky mountain  sources.  If operations at
any one refinery were discontinued, the Partnership believes (assuming unchanged
demand for refined  petroleum  products in markets served by the Pipelines) that
the  effects  thereof  would be  short-term  in  nature,  and the  Partnership's
business would not be materially  adversely  affected over the long term because
such  discontinued  production could be replaced by other refineries or by other
sources.

         The majority of the refined petroleum product  transported  through the
East Pipeline was produced at four  refineries  located at McPherson,  El Dorado
and Arkansas  City,  Kansas and Ponca City,  Oklahoma,  and operated by National
Cooperative  Refinery  Association  ("NCRA"),  Texaco,  Inc.  ("Texaco"),  Total
Petroleum (now Ultramar Diamond  Shamrock) and Conoco,  Inc.  respectively.  The
NCRA and Texaco  refineries are connected  directly to the East Pipeline,  as is
the Total Petroleum  refinery,  which was permanently  shut down on September 1,
1996. One of such refineries,  the McPherson,  Kansas refinery operated by NCRA,
accounted for  approximately 35% of the total amount of product shipped over the
East  Pipeline in 1997.  The East Pipeline also has direct access by third party
pipelines  to four other  refineries  in Kansas,  Oklahoma and Texas and to Gulf
Coast supplies of products  through  connecting  pipelines that receive products
from a pipeline  originating on the Gulf Coast.  Five  connecting  pipelines can
deliver propane from gas processing  plants in Texas,  New Mexico,  Oklahoma and
Kansas to the East Pipeline for shipment.

         The majority of the refined petroleum products  transported through the
West  Pipeline is  produced  at the  Frontier  Oil & Refining  Company  refinery
located  at  Cheyenne,  Wyoming,  the  Total  Petroleum  (now  Ultramar  Diamond
Shamrock) and Conoco Oil refineries  located at Denver,  Colorado and Sinclair's
Little America refinery located at Casper,  Wyoming,  all of which are connected
directly  to the West  Pipeline.  The West  Pipeline  also has  access  to three
Billings, Montana area refineries through a connecting pipeline.


<PAGE>


Principal Customers

         KPOP had a total of  approximately  50 shippers in 1997.  The principal
shippers include four integrated oil companies,  three refining  companies,  two
large farm cooperatives and one railroad.  Transportation  revenues attributable
to the top 10 shippers of the Pipelines  were $43.8  million,  $46.5 million and
$43.7 million,  which  accounted for 74%, 76% and 75% of total revenues  shipped
for each of the years 1997, 1996 and 1995, respectively.

Competition and Business Considerations

         The East Pipeline's major competitor is an independent regulated common
carrier  pipeline  system owned by The Williams  Companies,  Inc.  that operates
approximately 100 miles east of and parallel to the East Pipeline.  The Williams
system  is a  substantially  more  extensive  system  than  the  East  Pipeline.
Furthermore,  Williams and its affiliates  have capital and financial  resources
that are substantially  greater than those of the Partnership.  Competition with
Williams  is based  primarily  on  transportation  charges,  quality of customer
service and proximity to end users,  although  refined product pricing at either
the origin or terminal  point on a pipeline may outweigh  transportation  costs.
Fourteen of the East Pipeline's 15 delivery  terminals are in direct competition
with  Williams'  terminals,  as they are  located  within 2 to 145  miles of one
another.

         The West Pipeline competes with the truck loading racks of the Cheyenne
and Denver refineries and the Denver terminals of the Chase Pipeline Company and
Phillips Petroleum pipelines.  Diamond Shamrock terminals in Denver and Colorado
Springs,  connected to a Diamond  Shamrock  pipeline from their Texas  Panhandle
refinery,  are major  competitors  to the West  Pipeline's  Denver and  Fountain
terminals, respectively.

         Because pipelines are generally the lowest cost method for intermediate
and  long-haul  movement of refined  petroleum  products,  the  Pipelines'  more
significant  competitors are common carrier and proprietary  pipelines owned and
operated by major  integrated  and large  independent  oil  companies  and other
companies in the areas where the Pipelines deliver products. Competition between
common carrier pipelines is based primarily on transportation  charges,  quality
of customer  service and proximity to end users.  The Partnership  believes high
capital costs, tariff regulation,  environmental  considerations and problems in
acquiring  rights-of-way  make it unlikely that other competing pipeline systems
comparable in size and scope to the Pipelines  will be built in the near future,
provided the Pipelines have available capacity to satisfy demand and its tariffs
remain at reasonable levels.

         The costs associated with transporting products from a loading terminal
to end  users  limit  the  geographic  size of the  market  that  can be  served
economically  by any  terminal.  Transportation  to end users  from the  loading
terminals of the Partnership is conducted  principally by trucking operations of
unrelated third parties.  Trucks may  competitively  deliver products in some of
the areas served by the Pipelines.  However,  trucking costs render that mode of
transportation  not  competitive  for  longer  hauls  or  larger  volumes.   The
Partnership does not believe that trucks are, or will be, effective  competition
to its long-haul volumes over the long term.

LIQUIDS TERMINALING

Introduction

         The Partnership's  Support Terminal Services operation ("ST") is one of
the largest  independent  petroleum  products and specialty liquids  terminaling
companies  in the United  States.  For the year ended  December  31,  1997,  the
Partnership's  terminaling  business  accounted  for  approximately  49%  of the
Partnership's revenues. As of December 31, 1997, ST operated 31 facilities in 16
states  and  the  District  of  Columbia,  with  a  total  storage  capacity  of
approximately  17.2 million barrels.  ST and its  predecessors  have been in the
terminaling business for over 40 years and handle a wide variety of liquids from
petroleum products to specialty chemicals to edible liquids.

         ST's terminal  facilities  provide storage on a fee basis for petroleum
products,  specialty  chemicals and other  liquids.  ST's five largest  terminal
facilities are located in Piney Point,  Maryland;  Jacksonville,  Florida; Texas
City, Texas;  Baltimore,  Maryland; and, Westwego,  Louisiana.  These facilities
accounted for approximately 72% of ST's revenues and 65% of its tankage capacity
in 1997.


<PAGE>


Description of Terminals

         Piney Point,  Maryland.  The largest terminal  currently owned by ST is
located on  approximately  400 acres on the  Potomac  River.  The  facility  was
acquired as part of the  purchase of the liquids  terminaling  assets of Steuart
Petroleum  Company and certain of its  affiliates  (collectively  "Steuart")  in
December 1995. The Piney Point terminal has approximately 5.4 million barrels of
storage  capacity  in 28  tanks  and is  the  closest  deep  water  facility  to
Washington,  D.C. This terminal competes with other large petroleum terminals in
the East Coast  water-borne  market  extending  from New York Harbor to Norfolk,
Virginia. The terminal currently stores petroleum products, consisting primarily
of fuel oils, asphalt and caustic soda solution.  The terminal has a dock with a
36-foot draft for tankers and four berths for barges.  It also has truck loading
facilities,  product blending  capabilities and is connected to a pipeline which
supplies residual fuel oil to two power generating stations.

         Jacksonville, Florida. The Jacksonville terminal, also acquired as part
of the  Steuart  transaction,  is located on  approximately  86 acres on the St.
John's  River and  consists of a main  terminal  and two annexes  with  combined
storage capacity of approximately  2.1 million barrels in 30 tanks. The terminal
is currently used to store petroleum products including gasoline, No. 2 oil, No.
6 oil,  diesel and  kerosene.  This  terminal  has a tanker berth with a 38-foot
draft  and  four  barge  berths  and also  offers  truck  and  rail car  loading
facilities and facilities to blend residual fuels for ship bunkering.

         Texas City,  Texas.  The Texas City facility is situated on 39 acres of
land  leased  from the  Texas  City  Terminal  Railway  Company  ("TCTRC")  with
long-term renewal options.  It is located on Galveston Bay near the mouth of the
Houston Ship Channel,  approximately  sixteen miles from open water. The eastern
end of the Texas City site is adjacent to three deep-water  docking  facilities,
which are also owned by TCTRC.  The three  deep-water  docks include two 36-foot
draft docks and a 40-foot draft dock. The docking facilities can accommodate any
ship or barge  capable of  navigating  the  40-foot  draft of the  Houston  Ship
Channel.  ST is charged  dockage and wharfage  fees on a per vessel and per unit
basis, respectively, by TCTRC, which it passes on to its customers.

         The Texas City facility is designed to  accommodate  a diverse  product
mix,  including  specialty  chemicals,  such as  petrochemicals  and  has  tanks
equipped for the specific storage needs of the various products handled;  piping
and  pumping  equipment  for  moving  the  product  between  the  tanks  and the
transportation modes; and, an extensive infrastructure of support equipment. The
tankage at Texas City is  constructed  of either  mild carbon  steel,  stainless
steel or  aluminum.  Certain of the  tanks,  piping and  pumping  equipment  are
equipped for special product needs, including among other things, linings and/or
equipment that can control temperature,  air pressure,  air mixture or moisture.
ST receives or delivers the majority of the specialty  chemicals that it handles
via ship or barge at Texas City. ST also receives and delivers  liquids via rail
tank cars and transport trucks and has direct pipeline connections to refineries
in Texas City.

         The Texas City terminal  consists of 124 tanks with a total capacity of
approximately 2 million barrels. ST's facility has been designed with engineered
structural  measures to minimize the possibility of the occurrence and the level
of damage in the event of a spill or fire. All loading areas,  tanks,  pipes and
pumping  areas are  "contained"  to collect  any  spillage  and insure that only
properly treated water is discharged from the site.

         Baltimore,  Maryland. The Baltimore facility is situated on 18 acres of
owned  land,  located  just south of  Baltimore  near the  Harbor  Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft channel
and berth at the facility.  The dock gives ST the ability to receive and deliver
shipments of product from and to barge and ship. Additionally,  the terminal can
receive  products by  pipeline,  truck and rail and  deliver  them via truck and
rail.  Similar to the Texas City  facility,  Baltimore  is a  specialty  liquids
terminal. The primary products stored at the Baltimore facility include asphalt,
fructose,  caustic solutions,  military jet fuel, latex and other chemicals. The
Baltimore  tank  facility  consists  of  49  tanks  with  a  total  capacity  of
approximately  821,000  barrels.  All of the  utilized  tanks are  dedicated  to
specific  products  of  customers  under  contract.  The tanks are  specifically
equipped to handle the requirements of the products they store.

         Westwego,  Louisiana.  The Westwego facility is situated on 27 acres of
owned land on the west bank of the  Mississippi  River  across from New Orleans.
Its dock is capable of handling ocean-going vessels and barges. The terminal has
multiple  facilities for receiving and shipping by rail and tank truck,  as well
as vessels and barges.  The facility  consists of 54 tanks with a total capacity
of approximately  858,000  barrels.  The facility also includes a blending plant
for the formulation of certain molasses-based feeds which has additional smaller
tanks for blending and  formulation of the liquid feeds.  The Westwego  terminal
historically has been primarily a terminal for molasses and animal and vegetable
fats and oils.  In recent  years,  the terminal has broadened its product mix to
include fertilizer, herbicides, latex and caustic solutions. The former owner of
the  facility has  contracted  with ST until June 1999 for  terminaling  in five
large molasses tanks located at the facility.

         Other  Terminal  Sites.  In  addition  to  the  five  major  facilities
described  above,  ST has 26 other terminal  facilities  located  throughout the
United States.  The 26 facilities  represented  approximately  35% of ST's total
tankage capacity and  approximately  28% of its total revenue for 1997. With the
exception  of the  facilities  in  Columbus,  Georgia,  which  handles  aviation
gasoline and specialty  chemicals;  Winona,  Minnesota,  which handles  nitrogen
fertilizer  solutions;  and,  Savannah,  Georgia,  which  handles  chemicals and
caustic  solutions,  these facilities  primarily store petroleum  products for a
variety of customers.  These facilities provide ST with a geographically diverse
base of customers and revenue.

         The  storage  and  transport  of jet fuel for the  U.S.  Department  of
Defense is also an  important  part of ST's  business.  Eleven of ST's  terminal
sites are involved in the  terminaling  or transport  (via pipeline) of jet fuel
for the  Department  of  Defense  and seven of the  eleven  locations  have been
utilized  solely by the U.S.  Government.  Two of these  locations are presently
without  government  business.  Of the eleven  locations,  six include pipelines
which deliver jet fuel directly to nearby military bases, while another location
supplies  Andrews Air Force Base,  Maryland  and  consists of a barge  receiving
dock, an 11.3 mile pipeline,  three 24,000 barrel  double-bottomed  tanks and an
administration  building  located on the base. This facility  provides the barge
receipt,  pipeline  transportation  and  terminaling  services  for jet  fuel to
Andrews Air Force Base on a tariff basis for the Defense Fuel Supply  Center and
has served the base for the past 30 years.

         The following table outlines ST's terminal locations, capacities, tanks
and primary products handled:

                           TANKAGE     NO. OF          PRIMARY PRODUCTS
  FACILITY                 CAPACITY    TANKS               HANDLED
  ---------------------- ----------    ------     ------------------------------
  PRIMARY TERMINALS:

  Piney Point, MD        5,403,000      28        Petroleum
  Jacksonville, FL       2,066,000      30        Petroleum
  Texas City, TX         2,002,000     124        Chemicals and Petrochemicals
  Westwego, LA             858,000      54        Molasses, Fertilizer, Caustic
  Baltimore, MD            821,000      49        Chemicals, Asphalt, Jet Fuel

  OTHER TERMINALS:

  Montgomery, AL(a)        162,000       7        Petroleum, Jet Fuel
  Moundville, AL           310,000       6        Jet Fuel
  Tuscon, AZ(b)            181,000       7        Petroleum
  Imperial, CA             124,000       6        Petroleum
  Stockton, CA             314,000      18        Petroleum
  Farragut St., DC         176,000       5        Petroleum
  M Street, DC             133,000       3        Petroleum
  Homestead, FL(a)          72,000       2        Jet Fuel
  Augusta, GA              110,000       8        Petroleum
  Bremen, GA               180,000       8        Petroleum, Jet Fuel
  Brunswick, GA            302,000       3        Petroleum, Pulp Liquor
  Columbus, GA             180,000      25        Petroleum, Chemicals
  Macon, GA(a)             307,000      10        Petroleum, Jet Fuel
  Savannah, GA             699,000      17        Petroleum, Chemicals
  Chillicothe, IL          270,000       6        Petroleum
  Peru, IL                 221,000       8        Petroleum, Fertilizer
  Indianapolis, IN         410,000      18        Petroleum
  Salina, KS                98,000      10        Petroleum
  Andrews AFB Pipeline, MD  72,000       3        Jet Fuel
  Winona, MN               229,000       7        Fertilizer
  Alamogordo, NM(a)        120,000       5        Jet Fuel
  Drumright, OK            315,000       4        Jet Fuel
  San Antonio, TX          207,000       4        Jet Fuel
  Cockpit Point, VA        554,000      16        Petroleum, Asphalt
  Virginia Beach, VA(a)     40,000       2        Jet Fuel
  Milwaukee, WI            308,000       7        Petroleum
                       -----------    -----
                        17,244,000      500
                       ===========    =====


(a)      Facility  also  includes  pipelines to U.S.  government  military  base
         locations.
(b)      The terminal is 50% owned by ST.


<PAGE>


Competition and Business Considerations

         In addition to the terminals owned by independent  terminal  operators,
such as ST, many major  energy and chemical  companies  own  extensive  terminal
storage facilities.  Although such terminals often have the same capabilities as
terminals  owned  by  independent  operators,  they  generally  do  not  provide
terminaling  services to third  parties.  In many  instances,  major  energy and
chemical  companies  that  own  storage  and  terminaling  facilities  are  also
significant   customers  of  independent  terminal  operators.   Such  companies
typically have strong demand for terminals  owned by independent  operators when
independent terminals have more cost effective locations near key transportation
links, such as deep-water ports.  Major energy and chemical  companies also need
independent terminal storage when their owned storage facilities are inadequate,
either  because  of size  constraints,  the  nature of the  stored  material  or
specialized handling requirements.

         Independent  terminal  owners  generally  compete  on the  basis of the
location and  versatility of terminals,  service and price. A favorably  located
terminal will have access to various cost effective transportation modes both to
and  from  the  terminal.   Possible  transportation  modes  include  waterways,
railroads,  roadways  and  pipelines.  Terminals  located near  deep-water  port
facilities are referred to as "deep-water  terminals" and terminals without such
facilities are referred to as "inland terminals";  though some inland facilities
are served by barges on navigable rivers.

         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,  among other things, the
safe  storage  of the  product  at  specified  temperature,  moisture  and other
conditions,   as  well  as  receipt  at  and  delivery  from  the  terminal.  An
increasingly  important  aspect of  versatility  and the service  function is an
operator's  ability to offer  product  handling and storage in  compliance  with
environmental  regulations.  A terminal  operator's ability to obtain attractive
pricing is often  dependent on the quality,  versatility  and  reputation of the
facilities owned by the operator. Although many products require modest terminal
modification,  operators  with a greater  diversity of terminals  with versatile
storage  capabilities  typically  require  less  modification  prior  to  usage,
ultimately making the storage cost to the customer more attractive.

         Several   companies   offering  liquid   terminaling   facilities  have
significantly  more capacity than ST. However,  the majority of ST's tankage can
be  described  as  "niche"  facilities  that are  equipped  to  properly  handle
"specialty"  liquids or provide facilities or services where management believes
they  enjoy  an  advantage  over  competitors.  Most  of the  larger  operators,
including GATX Terminals  Corporation,  Williams Company,  Northville Industries
Corporation  and  Petroleum  Fuel  &  Terminal  Company,  have  facilities  used
primarily for petroleum  related products.  As a result,  many of ST's terminals
compete against other large petroleum products terminals,  rather than specialty
liquids  facilities.  Such specialty or "niche"  tankage is less abundant in the
U.S.  and  "specialty"  liquids  typically  command  higher  terminal  fees than
lower-price bulk terminaling for petroleum products.

CAPITAL EXPENDITURES

         Capital expenditures by the Pipelines,  were $4.5 million, $3.4 million
and $3.4 million for 1997,  1996 and 1995,  respectively.  During these periods,
adequate capacity existed on the Pipelines to accommodate  volume growth and the
expenditures  required  for  environmental  and  safety  improvements  were  not
material in amount.  Capital expenditures,  excluding  acquisitions,  by ST were
$6.1  million,  $3.6  million  and  $5.6  million,  for  1997,  1996  and  1995,
respectively.

         Capital  expenditures of the Partnership during 1998 are expected to be
approximately  $7 million  to $10  million.  See  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources."  Additional  expansion-related  capital  expenditures  will
depend on  future  opportunities  to expand  the  Partnership's  operation.  The
General  Partner  intends  to  finance  future  expansion  capital  expenditures
primarily through Partnership  borrowings.  Such future  expenditures,  however,
will depend on many factors beyond the Partnership's control, including, without
limitation,  demand for refined petroleum  products and terminaling  services in
the  Partnership's   market  areas,   local,  state  and  Federal   governmental
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 the
Partnership will have the ability to finance such expenditures through borrowing
or choose to do so. 

REGULATION

         Interstate   Regulation.   The  interstate   common  carrier   pipeline
operations of the  Partnership  are subject to rate regulation by FERC under the
Interstate  Commerce  Act. The  Interstate  Commerce Act  provides,  among other
things,  that to be lawful the rates of common carrier petroleum  pipelines must
be "just and  reasonable" and not unduly  discriminatory.  New and changed rates
must be filed with the FERC,  which may investigate  their lawfulness on protest
or its own motion.  The FERC may suspend the  effectiveness of such rates for up
to  seven  months.   If  the  suspension   expires  before   completion  of  the
investigation,  the rates go into  effect,  but the  pipeline can be required to
refund to shippers,  with interest,  any  difference  between the level the FERC
determines to be lawful and the filed rates under investigation. Rates that have
become final and  effective  may be  challenged  by complaint to FERC filed by a
shipper or on the FERC's own initiative and  reparations may be recovered by the
party filing the  complaint for the two year period prior to the  complaint,  if
FERC finds the rate to be unlawful.

         In general, petroleum product pipeline rates are cost-based. Such rates
are permitted to generate operating  revenues,  based on projected volumes,  not
greater than the total of the following components: (i) operating expenses, (ii)
depreciation and amortization,  (iii) Federal and state income taxes (determined
on a separate  company basis and adjusted or  "normalized" to avoid year to year
variations in rates due to the effect of timing differences between book and tax
accounting for certain  expenses,  primarily  depreciation)  and (iv) an overall
allowed rate of return on the pipeline's "rate base". Generally, the "rate base"
is a measure of the  investment  in, or value of, the common carrier assets of a
petroleum  products  pipeline which should be calculated by the net  depreciated
"trended original cost" ("TOC") methodology.  Under the TOC methodology, after a
starting  rate base has been  determined,  a  pipeline's  rate base is to be (i)
increased  by  property  additions  at cost plus an amount  equal to the  equity
portion of the rate base multiplied or "trended" by an inflation factor and (ii)
decreased by property  retirements,  depreciation  and amortization of rate base
write-ups reflecting inflation.

         The FERC allows for a rate of return for petroleum  products  pipelines
determined  by adding (i) the  product of a rate of return  equal to the nominal
cost of debt  multiplied  by the  portion  of the rate base that is deemed to be
financed  with debt and (ii) the  product of a rate of return  equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity.  The appropriate rate of return for a
petroleum  pipeline is determined on a case-by-case  basis,  taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.

         The  Partnership  has not  attempted to depart from  cost-based  rates.
Instead,   it  has  continued  to  rely  on  the  traditional,   cost-based  TOC
methodology. The TOC methodology has not been subject to judicial review.

         Under  Title  XVIII of the  Energy  Policy  Act of 1992 (the "EP Act"),
rates  that were in effect  on  October  24,  1991  that were not  subject  to a
protest,  investigation or complaint are deemed to be just and reasonable.  Such
rates are  subject  to  challenge  only for  limited  reasons,  relating  to (i)
substantially changed circumstances in either the economic  circumstances of the
subject  pipeline or the nature of the  services,  (ii) a  contractual  bar that
prevented the complainant from previously challenging the rates or (iii) a claim
that such rates are unduly  discriminatory  or preferential.  Any relief granted
pursuant to such challenges may be prospective  only.  Because the Partnership's
rates that were in effect on October 24, 1991, were subject to investigation and
protest  at that  time,  its rates  were not  deemed  to be just and  reasonable
pursuant  to the EP Act.  The  Partnership's  current  rates  became  final  and
effective  in April  1994,  and the  Partnership  believes  that  its  currently
effective  tariffs are just and reasonable and would  withstand  challenge under
the FERC's cost-based rate standards.  Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.

         On October 22, 1993, the FERC issued Order No. 561  implementing the EP
Act.  Order No. 561,  among other  things,  adopted a simplified  and  generally
acceptable  rate making  methodology for future oil pipeline rate changes in the
form of  indexation.  Indexation,  which is also known as price cap  regulation,
establishes  ceiling  prices on oil  pipeline  rates based on  application  of a
broad-based  measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for  such  rate  increases,  there  will be no need to file  cost-of-service  or
supporting data.  Moreover,  so long as the ceiling is not exceeded,  a pipeline
may make a limitless number of rate change filings.

         The pipeline rates in effect at December 31, 1994, which are determined
to be just and  reasonable,  become  the "Base  Rates"  for  application  of the
indexing  mechanism.  This indexing  mechanism  calculates a ceiling  rate.  The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal  cost based  justification  and with  limited  risk of shipper  protests.
Shippers  may still be  permitted to protest  pipeline  rates,  even if the rate
change does not exceed the index ceiling,  if the shipper can  demonstrate  that
the "increase is so substantially in excess of the actual cost increase incurred
by the pipeline"  that the proposed rate would be unjust and  unreasonable.  The
index is  cumulative,  attaching to the  applicable  ceiling rate and not to the
actual rate charged.  Thus, a rate that is not increased to the ceiling level in
a given year may still be increased to the ceiling level in the following  year.
The  pipeline  may be required to  decrease  the current  rate if the rate being
charged exceeds the ceiling level.

         The index  underlying  Order No. 561 is to serve as the principal basis
for the  establishment of oil pipeline rate changes in the future.  As explained
by the FERC in Order Nos.  561 and 561-A,  however,  there may be  circumstances
where the indexing mechanism will not apply.  Specifically,  the FERC determined
that  a  pipeline  may  utilize  any  one  of the  following  three  alternative
methodologies to indexing: (i) a cost-of-service  methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate  that its
increased  costs  are  prudently  incurred  and  that  there  is  a  substantial
divergence  between such increased  costs and the rate that would be produced by
application  of the index;  (ii) a pipeline  may file a rate change as part of a
settlement  when it secures the agreement of all of its existing  shippers;  and
(iii) a pipeline may base its rates upon a "light-handed"  market-based  form of
regulation if it is able to  demonstrate a lack of  significant  market power in
the relevant markets.

         On October 28, 1994, after hearings and public comment period, the FERC
issued Order Nos. 571 and 572,  intended as  procedural  follow-ups to Order No.
561. In Order No. 571, the FERC (i)  articulated  cost-of-service  and reporting
requirements to be applicable to pipeline  initial rates and to situations where
indexing  is  determined  to  be  inappropriate;  (ii)  adopted  rules  for  the
establishment of revised  depreciation  rates; and (iii) revised the information
required to be reported by pipelines in their Form No. 6, "Annual Report for Oil
Pipelines".  Order No. 572  establishes the filing  requirements  and procedures
that must be followed when a pipeline  seeks to charge  market-based  rates.  On
September  15,  1997,  the  Partnership  filed an  Application  for Market Power
Determination with the FERC seeking market based rates for approximately half of
its markets. The application is pending before the FERC.

         In the  FERC's  Lakehead  decision  issued  June  15,  1995,  the  FERC
partially  disallowed  Lakehead's  inclusion  of  income  taxes  in its  cost of
service.  Specifically,  the FERC held that  Lakehead was entitled to receive an
income tax  allowance  with  respect  to income  attributable  to its  corporate
partners,  but  was  not  entitled  to  receive  such an  allowance  for  income
attributable to the Partnership interests held by individuals. Lakehead's motion
for rehearing  was denied by the FERC and Lakehead  appealed the decision to the
U.S.  Court of Appeals.  Subsequently  the case was settled by Lakehead  and the
appeal was  withdrawn.  In another  FERC  proceeding  involving a different  oil
pipeline  limited  partnership,  various  shippers  challenged  such  pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the  disallowance of income taxes. The FERC recently decided this case
on the same basis as the Lakehead  case. If the FERC were to disallow the income
tax  allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's  ability
to pay  the  Minimum  Quarterly  Distribution  to  the  holders  of  the  Senior
Preference Units and Preference Units would not be impaired; however, in view of
the  uncertainties  involved in this issue,  there can be no  assurance  in this
regard.

         Intrastate  Regulation.  The intrastate operations of the East Pipeline
in Kansas are subject to regulation by the Kansas  Corporation  Commission,  and
the  intrastate  operations  of the West  Pipeline in  Colorado  and Wyoming are
subject to regulation by the Colorado Public Utility  Commission and the Wyoming
Public Service  Commission,  respectively.  Like the FERC, the state  regulatory
authorities  require  that  shippers be notified of proposed  intrastate  tariff
increases and have an  opportunity  to protest such  increases.  KPOP also files
with such state  authorities  copies of interstate tariff changes filed with the
FERC.  In  addition  to  challenges  to new or  proposed  rates,  challenges  to
intrastate  rates that have already become  effective are permitted by complaint
of an interested person or by independent  action of the appropriate  regulatory
authority.

ENVIRONMENTAL MATTERS

         General.  The  operations  of the  Partnership  are subject to Federal,
state  and  local  laws  and  regulations  relating  to  the  protection  of the
environment.  Although  the  Partnership  believes  that its  operations  are in
general  compliance  with  applicable   environmental   regulations,   risks  of
substantial  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 the  Partnership.  Moreover,  it is possible  that other
developments,  such as increasingly strict  environmental laws,  regulations and
enforcement policies  thereunder,  and claims for damages to property or persons
resulting from the operations of the Partnership, past and present, could result
in substantial costs and liabilities to the Partnership.

         Water.  The Oil  Pollution  Act  ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other statutes
as they  pertain to  prevention  and  response to oil spills.  The OPA  subjects
owners of facilities to strict,  joint and potentially  unlimited  liability for
removal costs and certain other  consequences of an oil spill,  where such spill
is into navigable waters, along shorelines or in the exclusive economic zone. In
the event of an oil spill into such  waters,  substantial  liabilities  could be
imposed  upon  the  Partnership.  Regulations  concerning  the  environment  are
continually  being  developed  and  revised in ways that may  impose  additional
regulatory burdens on the Partnership.

         Contamination  resulting  from spills or releases of refined  petroleum
products  are not  unusual  within the  petroleum  pipeline  industry.  The East
Pipeline has  experienced  limited  groundwater  contamination  at five terminal
sites (Milford, Iowa; Norfolk and Columbus,  Nebraska; and Aberdeen and Yankton,
South Dakota)  resulting from spills of refined petroleum  products.  Regulatory
authorities  have been notified of these findings and  remediation  projects are
underway  or  under  construction  using  various  remediation  techniques.  The
Partnership  estimates that $1,084,000 has been expended to date for remediation
at these five sites and that ongoing remediation  expenses at each site will not
have a material effect on the East Pipeline.  Groundwater  contamination is also
known to exist at East Pipeline sites in Augusta,  Kansas and in Potwin, Kansas,
but no  remediation  has been  required.  Although no assurances can be made, if
remediation is required,  the Partnership believes that the resulting cost would
not be material.

         During  January 1994,  the East Pipeline  experienced a seam rupture of
its 8" northbound  line in Nebraska and another similar rupture on the same line
in April 1994. As a result of these ruptures, KPOP reduced the maximum operating
pressure  on  this  line  to 60% of the  Maximum  Allowable  Operating  Pressure
("MAOP")  and, on May 24, 1994,  commenced a  hydrostatic  test to determine the
integrity of over 80 miles of that line. The test was completed on the entire 80
miles on May 29, 1994,  and the line was  authorized to return to  approximately
80% of MAOP pending  review by the Department of  Transportation  ("DOT") of the
hydrostatic test results.  On July 29, 1994, the DOT authorized most of the line
to  return  to the  historical  MAOP.  Approximately  30  miles  of the line was
authorized  to return  to  slightly  less than  historical  MAOP.  Although  the
Partnership has expended approximately $250,000 to date for remediation at these
rupture sites,  the total amount of  remediation  expenses that will be required
has not yet been determined.  These expenses are not expected to have a material
effect upon the results of the Partnership.

         ST has experienced  groundwater  contamination at its terminal sites at
Baltimore,  Maryland,  and Alamogordo,  New Mexico.  Regulatory authorities have
been notified of these findings and cleanup is underway using  extraction  wells
and air strippers. Groundwater contamination also exists at the ST terminal site
in Stockton,  California and in the areas  surrounding  this site as a result of
the past  operations  of five of the  facilities  operating in this area. ST has
entered  into an  agreement  with three of these  other  companies  to  allocate
responsibility  for the clean up of the  contaminated  area.  Under the  current
approach, clean up will not be required,  however based on risk assessment,  the
site will continue to be monitored and tested.  In addition,  ST is  responsible
for  up  to  two-thirds  of  the  costs  associated  with  existing  groundwater
contamination  at a formerly  owned terminal at Marcy,  New York,  which also is
being remediated through extraction wells and air strippers. The Partnership has
expended approximately $830,000 through 1997 for remediation at these four sites
and estimates that on-going  remediation  expenses will aggregate  approximately
$200,000 to $300,000 over the next three years.

         Groundwater  contamination  has been identified at ST terminal sites at
Montgomery,  Alabama and  Milwaukee,  Wisconsin,  but no  remediation  has taken
place.  Shell  Oil  Company  has  indemnified  ST for any  contamination  at the
Milwaukee site prior to ST's acquisition of the facility. Star Enterprises,  the
former owner of the Montgomery terminal, has indemnified ST for contamination at
a portion of the Montgomery  site where  contamination  was identified  prior to
ST's  acquisition of the facility.  A remediation  system is in place to address
groundwater  contamination at the ST terminal facility in Augusta, Georgia. Star
Enterprises,  the former owner of the Augusta  terminal,  has indemnified ST for
this contamination and has retained  responsibility for the remediation  system.
There is also a possibility  that groundwater  contamination  may exist at other
facilities.  Although no assurance in this regard can be given,  the Partnership
believes that such contamination,  if present, could be remedied with extraction
wells and air  strippers  similar  to those that are  currently  in use and that
resulting costs would not be material.

         In 1991, the Environmental  Protection  Agency (the "EPA")  implemented
regulations   expanding  the  definition  of  hazardous   waste.   The  Toxicity
Characteristic  Leaching  Procedure  ("TCLP") has  broadened  the  definition of
hazardous waste by including 25 constituents  that were not previously  included
in  determining  that a waste is  hazardous.  Water that  comes in contact  with
petroleum may fail the TCLP procedure and require additional  treatment prior to
its  disposal.   The  Partnership  has  installed  totally  enclosed  wastewater
treatment  systems at all East Pipeline  terminal  sites to treat such petroleum
contaminated water, especially tank bottom water.

         The  EPA  has  also  promulgated   regulations  that  may  require  the
Partnership  to apply for permits to discharge  storm water runoff.  Storm water
discharge  permits  also  may  be  required  in  certain  states  in  which  the
Partnership  operates.  Where such requirements are applicable,  the Partnership
has applied for such  permits  and,  after the  permits  are  received,  will be
required to sample storm water  effluent  before  releasing it. The  Partnership
believes  that  effluent  limitations  could be met,  if  necessary,  with minor
modifications  to existing  facilities and operations.  Although no assurance in
this regard can be given,  the  Partnership  believes  that the changes will not
have a material effect on the  Partnership's  financial  condition or results of
operations.

         Groundwater  remediation  efforts  are  ongoing at the West  Pipeline's
Dupont and Fountain,  Colorado  terminals and at the Cheyenne,  Wyoming terminal
and Bear Creek,  Wyoming station and will be required at one other West Pipeline
terminal.  Regulatory  officials  have  been  consulted  in the  development  of
remediation plans. In the course of acquisition  negotiations for this terminal,
KPOP's regulatory group and its outside  environmental  consultants  agreed upon
the expense and costs of these  required  remediations.  In connection  with the
purchase of the West Pipeline,  KPOP agreed to implement the agreed  remediation
plans at these  specific  sites over the  succeeding  five years  following  the
acquisition in return for the payment by the seller,  Wyco Pipe Line Company, of
$1,312,000  to KPOP to cover  the  discounted  estimated  future  costs of these
remediations.  In conjunction with the acquisition, the Partnership accrued $1.8
million for these future remediation expenses.

         Groundwater  contamination  has been  experienced  at ST's Piney Point,
Maryland,  Jacksonville,  Florida and each of the Washington,  D.C.  facilities.
Foreseeable  remediation  expenses are estimated not to exceed $1.6 million.  In
connection  with  its  acquisition  of  these   facilities  from  Steuart,   the
Partnership  agreed to assume the existing  remediation and the costs thereof up
to $1.8  million and the Asset  Purchase  Agreements  provided,  with respect to
unknown  environmental  damages  that are  discovered  after the  closing of the
transaction  and that were caused by  operations  conducted  by the former owner
prior to the closing, that the Partnership and Steuart will share those expenses
at a ratio of 20% for the  Partnership and 80% for Steuart until a total of $2.5
million has been expended.  Thereafter,  such expenses will be the Partnership's
responsibility.  This  indemnity  will expire in December,  1998. In conjunction
with the  acquisition,  the  Partnership  accrued  $2.3  million  for  potential
environmental liabilities arising from the Steuart acquisition.

         Aboveground  Storage  Tank  Acts.  A number of the  states in which the
Partnership   operates  have  passed  statutes   regulating   aboveground  tanks
containing liquid substances.  Generally, these statutes require that such tanks
include  secondary  containment  systems  or that  the  operators  take  certain
alternative  precautions to ensure that no contamination  results from any leaks
or spills from the tanks.  Although  there is not  currently  a Federal  statute
regulating these above ground tanks, there is a possibility that such a law will
be passed within the next couple of years.  The  Partnership  is in  substantial
compliance with all above ground storage tank laws in the states with such laws.
Although no assurance  can be given,  the  Partnership  believes that the future
implementation  of above ground storage tank laws by either additional states or
by the  Federal  government  will  not have a  material  adverse  effect  on the
Partnership's financial condition or results of operations.

         Air  Emissions.  The operations of the  Partnership  are subject to the
Federal Clean Air Act and comparable  state and local statutes.  The Partnership
believes that the operations of the Pipelines are in substantial compliance with
such statues in all states in which they operate.

         Amendments  to the Federal  Clean Air Act enacted in 1990 will  require
most  industrial  operations  in the  United  States  to  incur  future  capital
expenditures in order to meet the air emission control  standards that have been
and are to be  developed  and  implemented  by the EPA and  state  environmental
agencies.  Pursuant  to  these  Clean  Air  Act  Amendments,  those  Partnership
facilities that emit volatile organic  compounds ("VOC") or nitrogen oxides will
be subject to increasingly  stringent  regulations,  including requirements that
certain sources install maximum or reasonably available control technology.  The
EPA is also required to promulgate  new  regulations  governing the emissions of
hazardous air  pollutants.  Some of the  Partnership's  facilities  are included
within the  categories of hazardous air pollutant  sources that will be affected
by these  regulations.  Additionally,  new dockside loading  facilities owned or
operated  by the  Partnership  will be  subject  to the New  Source  Performance
Standards  that were proposed in May 1994.  These  regulations  will control VOC
emissions from the loading and unloading of tank vessels.

         Although the  Partnership is in substantial  compliance with applicable
air  pollution  laws,  in  anticipation  of the  implementation  of stricter air
control  regulations,  the Partnership is taking actions to substantially reduce
its air  emissions.  The  Partnership  plans to install bottom loading and vapor
recovery  equipment on the loading  racks at selected  terminal  sites along the
East Pipeline that do not already have such emissions control  equipment.  These
modifications  will  substantially  reduce the total air emissions  from each of
these  facilities.  Having begun in 1993, this project is being phased in over a
period of years.

         Solid Waste. The Partnership  generates  non-hazardous solid waste that
is subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes.  The EPA is considering the adoption
of stricter disposal standards for non-hazardous  wastes.  RCRA also governs the
disposal of hazardous  wastes.  At present,  the  Partnership is not required to
comply  with  a  substantial  portion  of  the  RCRA  requirements  because  the
Partnership's  operations  generate  minimal  quantities  of  hazardous  wastes.
However,  it is anticipated that additional  wastes,  which could include wastes
currently generated during pipeline operations, will in the future be designated
as "hazardous wastes".  Hazardous wastes are subject to more rigorous and costly
disposal  requirements  than  are  non-hazardous  wastes.  Such  changes  in the
regulations may result in additional capital  expenditures or operating expenses
by the Partnership.

         At the terminal sites at which  groundwater  contamination  is present,
there is also  limited  soil  contamination  as a result  of the  aforementioned
spills.  The  Partnership  is under no  present  requirements  to  remove  these
contaminated  soils, but the Partnership may be required to do so in the future.
Soil contamination also may be present at other Partnership  facilities at which
spills or releases have occurred.  Under certain circumstances,  the Partnership
may be required to clean up such contaminated soils. Although these costs should
not have a material adverse effect on the Partnership, no assurance can be given
in this regard.

         Superfund. The Comprehensive  Environmental Response,  Compensation and
Liability Act ("CERCLA" or  "Superfund")  imposes  liability,  without regard to
fault or the  legality of the original  act, on certain  classes of persons that
contributed  to the release of a  "hazardous  substance"  into the  environment.
These  persons  include  the owner or operator  of the site and  companies  that
disposed or arranged for the disposal of the hazardous  substances  found at the
site.  CERCLA also authorizes the EPA and, in some  instances,  third parties to
act in response to threats to the public health or the  environment  and to seek
to recover from the responsible  classes of persons the costs they incur. In the
course of its ordinary  operations,  the Partnership may generate waste that may
fall within CERCLA's definition of a "hazardous substance".  The Partnership may
be  responsible  under CERCLA for all or part of the costs  required to clean up
sites at which such wastes have been disposed.

         ST has been named a potentially responsible party for a site located at
Elkton,  Maryland,  operated by Spectron,  Inc. until August 1988.  This site is
presently under the oversight of the EPA and is listed as a Federal  "Superfund"
site. A small amount of material  handled by Spectron was  attributed to ST. The
Partnership  believes that ST will be able to settle its potential obligation in
connection  with this matter for an  aggregate  cost of  approximately  $10,000.
However,  until a final settlement  agreement is signed with the EPA, there is a
possibility that the EPA could bring additional claims against ST.

         Environmental Impact Statement.  The National  Environmental Policy Act
of 1969 (the "NEPA")  applies to certain  extensions  or additions to a pipeline
system.  Under NEPA, if any project that would significantly  affect the quality
of the  environment  requires a permit or approval  from any Federal  agency,  a
detailed environmental impact statement must be prepared. The effect of the NEPA
may be to delay or prevent  construction  of new  facilities  or to alter  their
location, design or method of construction.

         Indemnification.  KPL has agreed to indemnify the  Partnership  against
liabilities for damage to the environment  resulting from operations of the East
Pipeline prior to October 3, 1989. Such  indemnification  does not extend to any
liabilities  that arise  after such date to the extent such  liabilities  result
from change in environmental laws or regulations.  Under such indemnity,  KPL is
presently liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and storage
site referred to under  "Water" to the standards  that are in effect at the time
such remediation  operations are concluded.  In addition,  ST's former owner has
agreed to  indemnify  the  Partnership  against  liabilities  for damages to the
environment  from  operations  conducted by such former owners prior to March 2,
1993. The indemnity, which expired March 1, 1998, is limited in amount to 60% of
any claim exceeding  $100,000 until an aggregate  amount of $10 million has been
paid by ST's former owner.  In addition,  with respect to unknown  environmental
expenses  from  operations  conducted  by Wyco  Pipe Line  Company  prior to the
closing of the Partnership's  acquisition of the West Pipeline,  KPOP has agreed
to pay the first $150,000 of such expenses, KPOP and Wyco Pipe Line Company will
share, on an equal basis,  the next $900,000 of such expenses and Wyco Pipe Line
Company will  indemnify  KPOP for up to $2,950,000 of such expenses  thereafter.
The  indemnity  expires  in  August  1999.  To  the  extent  that  environmental
liabilities exceed the amount of such indemnity,  KPOP has affirmatively assumed
the excess environmental liabilities. Also, the Steuart terminals Asset Purchase
Agreements  provide,  with  respect to unknown  environmental  damages  that are
discovered after the closing of the Steuart terminals  acquisition and that were
caused  by  operations  conducted  by  Steuart  prior to the  closing,  that the
Partnership and Steuart will share expenses  associated with such  environmental
damages at a ratio of 20% for the  Partnership and 80% for Steuart until a total
of $2.5  million  has  been  expended.  Thereafter,  such  expenses  will be the
Partnership's responsibility. This indemnity will expire in December 1998.

SAFETY REGULATION

         The  Pipelines   are  subject  to  regulation  by  the   Department  of
Transportation  under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA")
relating  to  the  design,  installation,   testing,  construction,   operation,
replacement  and  management  of their  pipeline  facilities.  The HLPSA  covers
petroleum and petroleum  products pipelines and requires any entity that owns or
operates  pipeline  facilities  to comply  with such safety  regulations  and to
permit access to and copying of records and to make certain  reports and provide
information as required by the Secretary to Transportation. The Federal Pipeline
Safety Act of 1992 amended the HLPSA to include  requirements  of the future use
of internal inspection devices. The Partnership does not believe that it will be
required  to make  any  substantial  capital  expenditures  to  comply  with the
requirements of HLPSA as so amended.

         The  Partnership  is  subject  to  the   requirements  of  the  Federal
Occupational  Safety and Health Act ("OSHA") and comparable state statutes.  The
Partnership  believes that it is in general  compliance with OSHA  requirements,
including general industry standards, record keeping requirements and monitoring
of occupational exposure to benzene.

         The OSHA hazard communication standard, the EPA community right-to-know
regulations   under  Title  III  of  the   Federal   Superfund   Amendment   and
Reauthorization  Act, and comparable  state statutes  require the Partnership to
organize  information  about the  hazardous  materials  used in its  operations.
Certain parts of this information must be reported to employees, state and local
governmental  authorities,  and local  citizens  upon request.  In general,  the
Partnership  expects to  increase  its  expenditures  during the next  decade to
comply  with higher  industry  and  regulatory  safety  standards  such as those
described above. Such expenditures cannot be accurately  estimated at this time,
although  they  are  not  expected  to have a  material  adverse  impact  on the
Partnership.

EMPLOYEES

         The  Partnership  has no employees.  The business of the Partnership is
conducted by the General Partner,  KPL, which at December 31, 1997, employed 427
persons.  Approximately  151 of the  persons  employed  by KPL were  subject  to
representation by unions for collective  bargaining purposes;  however,  only 53
persons  employed by the terminal  division of KPL were  represented by the Oil,
Chemical and Atomic Workers  International Union AFL-CIO ("OCAW").  The terminal
division has agreements  with OCAW for 35 and 17 of the above  employees,  which
are in effect  through  June 28, 1999 and  November 1, 2000,  respectively.  The
agreements  are subject to automatic  renewal for  successive  one-year  periods
unless one of the parties serves written notice to terminate such agreement in a
timely manner.

ITEM 2.    PROPERTIES

         Descriptions  of properties  owned or utilized by the  Partnership  are
contained in Item 1 of this report and such descriptions are hereby incorporated
by reference into this Item 2. Under the caption "Commitments and Contingencies"
in Note 6 to the Partnership's  financial  statements  included in Item 8 herein
below,  additional information is presented concerning obligations for lease and
rental  commitments.  Said  additional  information  is hereby  incorporated  by
reference into this Item 2.

ITEM 3.    LEGAL PROCEEDINGS

         The Partnership is a party to several  lawsuits arising in the ordinary
course  of  business.   Subject  to  certain   deductibles  and   self-insurance
retentions,  substantially  all the claims made in these lawsuits are covered by
insurance policies.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The  Partnership  did not hold a meeting of  unitholders  or  otherwise
submit any matter to a vote of security holders in the fourth quarter of 1997.


<PAGE>


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S  SENIOR  PREFERENCE UNITS AND PREFERENCE
         UNITS AND RELATED UNITHOLDER MATTERS

         The Partnership's  senior preference limited partner interests ("Senior
Preference  Units") and  Preference  Units are listed and traded on the New York
Stock  Exchange.  At  March  16,  1998,  there  were  approximately  900  Senior
Preference Unitholders of record and approximately 200 Preference Unitholders of
record.  Set forth below are prices and cash distributions for Senior Preference
Units and Preference Units, respectively, on the New York Stock Exchange.


<TABLE>
<CAPTION>
                               SENIOR PREFERENCE                  PREFERENCE           
                                  UNIT PRICES                     UNIT PRICES            CASH
                            ------------------------       ------------------------   DISTRIBUTION
YEAR                           HIGH           LOW            HIGH            LOW        DECLARED
-----------------------     ----------     ---------       ---------      ---------   ------------
1996:
     <S>                    <C>             <C>            <C>             <C>          <C>  
     First Quarter          26 1/2          23 7/8         24 5/8          22 1/4       $  .55
     Second Quarter         26 5/8          24 1/4         24 5/8          23 1/8          .55
     Third Quarter          26 5/8          24 3/4         25 7/8          22 7/8          .60
     Fourth Quarter         30              25 5/8         28 1/8          25              .60

1997:
     First Quarter          31 1/4          28             28 5/8          26 1/2          .60
     Second Quarter         30 1/4          27 1/8         28 3/8          26 1/4          .60
     Third Quarter          31 13/16        29             30 7/8          27 7/8          .65
     Fourth Quarter         36 11/16        29 13/16       36 1/2          29 5/8          .65

1998:
     First Quarter          37 1/2          34 11/16       35 1/2          33 1/4
        (through March 16, 1998)
</TABLE>

         The  Partnership  has paid the Minimum  Quarterly  Distribution on each
outstanding  Senior  Preference  Unit for each quarter  since the  Partnership's
inception.  The Partnership has also paid the Minimum Quarterly  Distribution on
Preference   Units  with  respect  to  all  quarters  since   inception  of  the
Partnership,  except for distributions in the second,  third and fourth quarters
of 1991 totaling  $9,323,000  which have since been  satisfied and no arrearages
remain as of December 31, 1997. Prior to 1994, no distributions were paid on the
outstanding Common Units, which are not entitled to arrearages in the payment of
the Minimum Quarterly Distribution.  Distributions paid on the Common Units were
$7,742,000;  $7,110,000;  and $4,582,000 for 1997, 1996 and 1995,  respectively.
Assuming that  distributions  of at least $.55 for every Unit are made on May 15
and August 14, 1998, the preference period will end on August 14, 1998 and there
will be no distinction thereafter between the Units.

         Under  the  terms  of its  financing  agreements,  the  Partnership  is
prohibited  from  declaring  or paying  any  distribution  if a  default  exists
thereunder.


<PAGE>


ITEM 6.    SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

         The  following  table  sets  forth,  for the  periods  and at the dates
indicated,  selected historical financial and operating data for Kaneb Pipe Line
Partners,  L.P. and Subsidiaries (the "Partnership").  The data in the table (in
thousands,  except per unit  amounts) is derived from the  historical  financial
statements  of the  Partnership  and  should  be read in  conjunction  with  the
Partnership's  audited financial statements.  See also "Management's  Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                         --------------------------------------------------------------------
                                             1997          1996          1995(a)        1994          1993(b)
                                         ----------    ----------      ----------    ----------    ----------
<S>                                      <C>           <C>             <C>           <C>           <C>    
INCOME STATEMENT DATA:

Revenues............................     $  121,156    $  117,554      $  96,928     $   78,745    $   69,235
                                         ----------    ----------      ---------     ----------    ----------

Operating costs.....................        50,183         49,925         40,617         33,586        29,012
Depreciation and amortization.......        11,711         10,981          8,261          7,257         6,135
General and administrative..........         5,793          5,259          5,472          4,924         4,673
                                         ---------     ----------      ---------     ----------    ----------

    Total costs and expenses........        67,687         66,165         54,350         45,767        39,820
                                         ---------     ----------      ---------     ----------    ----------

Operating income....................        53,469         51,389         42,578         32,978        29,415
Interest and other income...........           562            776            894          1,299         1,331
Interest expense....................       (11,332)       (11,033)        (6,437)        (3,706)       (3,376)
Minority interest...................          (420)          (403)          (360)          (295)         (266)
                                         ----------    -----------     ----------    -----------   -----------
Income before income taxes..........        42,279         40,729         36,675         30,276        27,104
Income taxes (c)....................          (718)          (822)          (627)          (818)         (450)
                                         ----------    -----------     ----------    -----------   -----------
Net income..........................     $   41,561    $   39,907      $  36,048     $   29,458    $   26,654
                                         ==========    ==========      =========     ==========    ==========

Allocation of net income(d) per:
    Senior Preference Unit .........     $     2.55    $     2.46      $    2.20      $    2.20    $     2.20
                                         ==========    ==========      =========      =========    ==========
    Preference Unit.................     $     2.55    $     2.46      $    2.20      $    2.20    $     2.20
                                         ==========    ==========      =========      =========    ==========
    Preference Unit arrearages......     $      -      $    -          $    -         $    -       $     1.20
                                         ==========    ==========      =========      =========    ==========

Cash Distributions declared per:
    Senior Preference Unit..........     $     2.50    $     2.30      $    2.20      $    2.20    $     2.20
                                         ==========    ==========      =========      =========    ==========
    Preference Unit.................     $     2.50    $     2.30      $    2.20      $    2.20    $     2.20
                                         ==========    ==========      =========      =========    ==========
    Preference Unit arrearages......     $     -       $     -         $    -         $    -       $     1.20
                                         ==========    ==========      =========      =========    ==========

BALANCE SHEET DATA (AT PERIOD END):

Property and equipment, net.........     $ 247,132     $  249,733      $ 246,471     $  145,646    $  133,436
Total assets........................       269,032        274,765        267,787        163,105       162,407
Long-term debt......................       132,118        139,453        136,489         43,265        41,814
Partners' capital...................       104,196        103,340        100,748         99,754       100,598

<FN>
(a)      Includes the  operations of the West Pipeline  since its  acquisition  
         in February  1995 and the  operations of Steuart  since its acquisition
         in December 1995.
(b)      Includes the operations of ST since its acquisition on March 2, 1993.
(c)      Subsequent to the acquisition of ST in March 1993,  certain  operations
         are conducted in taxable  entities.  (d) Net income is allocated to the
         limited  partnership units in an amount equal to the cash distributions
         declared for each reporting  period and any remaining income or loss is
         allocated to any class of units that did not receive the same amount of
         cash  distributions  per unit (if any). If the same cash  distributions
         per unit are  declared  for all  classes  of  units,  income or loss is
         allocated  pro rata  based on the  aggregate  amount  of  distributions
         declared.
</FN>
</TABLE>

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         This  discussion  should be read in conjunction  with the  consolidated
financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the
summary  historical  financial  and operating  data  included  elsewhere in this
report.

GENERAL

         In September  1989,  Kaneb Pipe Line Company  ("KPL"),  a  wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"),  formed the Partnership to own and
operate  its refined  petroleum  products  pipeline  business.  The  Partnership
operates  through KPOP, a limited  partnership in which the Partnership  holds a
99% interest as limited partner and KPL owns a 1% interest as general partner in
both the  Partnership  and KPOP. The  Partnership is engaged  through  operating
subsidiaries  in the refined  petroleum  products  pipeline  business and, since
1993, terminaling and storage of petroleum products and specialty liquids.

         The  Partnership's   pipeline   business  consists   primarily  of  the
transportation  through  the East  Pipeline  and the West  Pipeline,  as  common
carriers,  of refined petroleum  products.  The East Pipeline was constructed by
KPL  commencing  in the 1950s.  The  Partnership  acquired the West  Pipeline in
February  1995  from Wyco Pipe Line  Company,  a company  jointly  owned by GATX
Terminals  Corporation  and  Amoco  Pipeline  Company,  for $27.1  million  plus
transaction costs and the assumption of certain environmental  liabilities.  The
acquisition  was financed by the issuance of $27 million of first mortgage notes
to a group of insurance  companies due February 24, 2002, which bear interest at
the  rate of 8.37%  per  annum.  The East  Pipeline  and the West  Pipeline  are
collectively  referred to as the "Pipelines." The Pipelines  primarily transport
gasoline,  diesel oil, fuel oil and propane.  The products are transported  from
refineries  connected to the Pipeline,  directly or through other pipelines,  to
agricultural users, railroads and wholesale customers in the states in which the
Pipelines are located and in portions of other states.  Substantially all of the
Pipelines'  operations  constitute common carrier operations that are subject to
Federal or state tariff regulations.  The Partnership has not engaged,  nor does
it currently  intend to engage,  in the merchant  function of buying and selling
refined petroleum products.

         The  Partnership's  business  of  terminaling  petroleum  products  and
specialty  liquids is conducted under the name ST Services  ("ST").  ST acquired
the liquids  terminaling  assets of Steuart Petroleum Company and certain of its
affiliates  (collectively,  "Steuart")  in December  1995 for $68  million  plus
transaction costs and the assumption of certain environmental  liabilities.  The
acquisition  was initially  financed with a $68 million bridge loan from a bank.
The Partnership  refinanced this bridge loan in June 1996 with a series of first
mortgage notes (the "Steuart Notes") to a group of insurance  companies  bearing
interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in
June 2001, 2003, 2006 and 2016. The Steuart  terminaling assets consist of seven
petroleum  product  terminal  facilities  located in the  District of  Columbia,
Florida,  Georgia,  Maryland  and  Virginia  and the  pipeline  and  terminaling
facilities serving Andrews Air Force Base in Maryland.

         The Partnership is the third largest  independent  liquids  terminaling
company in the United States.  With the  acquisition of Steuart,  ST operates 31
facilities in 16 states and the District of Columbia  with an aggregate  tankage
capacity of approximately 17.2 million barrels.


<PAGE>


PIPELINE OPERATIONS

                                             Year Ended December 31,
                                 -----------------------------------------------
                                    1997              1996                1995
                                 ---------          --------           ---------
                                                  (in millions)
Revenues.......................   $61,320           $63,441              $60,192
Operating costs................    21,696            23,692               22,564
Depreciation and amortization..     4,885             4,817                4,843
General and administrative.....     2,912             2,711                3,038
                                  -------           -------              -------
Operating income...............   $31,827           $32,221              $29,747
                                  =======           =======              =======

         Pipelines  revenues are based on volumes shipped and the distances over
which such  volumes are  transported.  Revenues  decreased  $2.1 million in 1997
primarily as a result of adverse  effects on product  demand  caused by abnormal
weather  patterns  in the  Midwest  and  shifts in the  distribution  of product
supplies in the Rocky Mountain area. The increase in revenues of $3.2 million in
1996 is primarily due to the  acquisition of the West Pipeline in February 1995.
Because tariff rates are regulated by the FERC, the Pipelines  compete primarily
on the basis of quality of service,  including delivering products at convenient
locations  on a timely  basis to meet the needs of its  customers.  Barrel miles
totaled 16.1 billion in 1997 compared to 16.7 billion in 1996.

         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,  decreased $2.0 million in 1997 and increased $1.1
million in 1996.  The  changes in both years were  primarily  in  materials  and
supplies,  including additives, that are volume related and in outside services.
General  and   administrative   costs   include   managerial,   accounting   and
administrative   personnel   costs,   office  rental  and  expense,   legal  and
professional  costs and other  non-operating  costs.  Legal and professional and
other non-operating costs were abnormally low in 1996.

TERMINALING OPERATIONS

                                               Year Ended December 31,
                                   ---------------------------------------------
                                       1997              1996            1995
                                   ----------         ----------      ----------
                                                     (in millions)
Revenues.......................    $59,836             $54,113          $36,736
Operating costs ...............     28,487              26,233           18,053
Depreciation and amortization .      6,826               6,164            3,418
General and administrative ....      2,881               2,548            2,434
                                   -------             -------          -------
Operating income...............    $21,642             $19,168          $12,831
                                   =======             =======          =======

         Revenues  increased  11% in  1997  due  to  terminal  acquisitions  and
increased utilization of existing terminals. The revenue increase of 47% in 1996
was primarily as a result of the  acquisition  of the former  Steuart  Petroleum
terminals by the Partnership in December 1995.  Average annual tankage  utilized
increased .5 million barrels in 1997 to 12.4 million  barrels,  compared to 11.9
million barrels in 1996.  Average annual revenues per barrel of tankage utilized
was $4.83 per barrel in 1997,  compared to $4.55 per barrel in 1996. The average
revenue per barrel in 1995 was $5.46 per barrel,  which was higher than 1996 due
to the large  proportionate  volumes of petroleum  products  being stored at the
former  Steuart  terminals  in 1996 with lower rates per barrel  than  specialty
chemicals with higher rates per barrel that are stored at other terminals.

         Total tankage  capacity (17.2 million barrels at December 31, 1997) has
been,  and is expected to remain,  adequate to meet  existing  customer  storage
requirements.  Customers  consider  factors  such as  location,  access  to cost
effective  transportation  and quality of service in  addition  to pricing  when
selecting  terminal  storage.  Operating  costs  increased $2.3 million and $8.2
million  and  depreciation  and  amortization  increased  $ .7 million  and $2.7
million  in 1997 and  1996,  respectively,  primarily  as a result  of  terminal
acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

         The ratio of  current  assets to  current  liabilities  was 0.9 to 1 at
December 31, 1997 and 1.0 to 1 at December 31, 1996.  Cash provided by operating
activities  was $54.8  million,  $49.2  million and $44.5  million for the years
1997, 1996 and 1995,  respectively.  The increase in cash provided by operations
in 1997 resulted  primarily from overall  improvements in revenues and operating
income in the  terminaling  operations.  The  increase  in 1996 was  primarily a
result of the acquisition of the Steuart terminaling assets.

<PAGE>
         Capital expenditures,  excluding expansion capital  expenditures,  were
$10.6  million,  $7.1  million  and  $8.9  million  for  1997,  1996  and  1995,
respectively.   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  in the  future  to be,
material.  Environmental damages caused by sudden and accidental occurrences are
included under the Partnership's  insurance  coverages.  Capital expenditures of
the Partnership  during 1998 are expected to be  approximately $7 million to $10
million.

         The Partnership  makes  distributions  of 100% of its Available Cash to
Unitholders and the General  Partner.  Available Cash consists  generally of all
the cash receipts less all cash  disbursements  and reserves.  Distributions  of
$2.50 per unit were declared to Senior  Preference  Unitholders  and  Preference
Unitholders in 1997,  $2.30 per unit was declared in 1996 and $2.20 per unit was
declared  in  1995.  During  1997,  1996  and  1995,  the  Partnership  declared
distributions  of $7.9 million ($2.50 per unit);  $7.3 million ($2.30 per unit);
and $6.3 million ($2.00 per unit), respectively, to the holders of Common Units.

         Most of the software  systems used by the Partnership are licensed from
third party vendors and are Year 2000 compliant or will be upgraded to Year 2000
compliant  releases over the next year. The Partnership does not anticipate that
the incremental costs to become fully Year 2000 compliant will be material.

         The  Partnership   expects  to  fund  future  cash   distributions  and
maintenance  capital  expenditures  with  existing  cash  and  cash  flows  from
operating  activities.  Expansionary  capital  expenditures  are  expected to be
funded through additional Partnership borrowings.

         The  Partnership  has a Credit  Agreement with two banks that currently
provides a $25 million  revolving  credit facility for working capital and other
partnership  purposes.  Borrowings  under the Credit  Agreement bear interest at
variable rates and are due and payable in January 2001. The Credit Agreement has
a commitment  fee of 0.15% per annum of the unused credit  facility.  No amounts
were drawn under this credit  facility at December  31, 1997 and $5 million that
was outstanding at December 31, 1996 was repaid during 1997.

         The  Partnership  acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company,  a company  jointly owned by GATX Terminals  Corporation  and
Amoco Pipeline Company,  for $27.1 million.  The acquisition was financed by the
issuance of $27 million of notes due February 24, 2002,  which bear  interest at
the rate of 8.37% per annum (the  "Notes").  The Notes and credit  facility  are
secured by a mortgage on the East Pipeline.

         The  acquisition  of  the  Steuart  terminaling  assets  was  initially
financed by a $68 million  bank bridge loan.  The  Partnership  refinanced  this
bridge  loan in June 1996 with a series of first  mortgage  notes (the  "Steuart
Notes")  bearing  interest at rates  ranging from 7.08% to 7.98% and maturing in
varying  amounts  in June  2001,  2003,  2006 and 2016.  The  Steuart  Notes are
secured,  pari passu with the Notes and credit  facility,  by a mortgage  on the
East Pipeline.

         In the  FERC's  Lakehead  decision  issued  June  15,  1995,  the  FERC
partially  disallowed  Lakehead's  inclusion  of  income  taxes  in its  cost of
service.  Specifically,  the FERC held that  Lakehead was entitled to receive an
income tax  allowance  with  respect  to income  attributable  to its  corporate
partners,  but  was  not  entitled  to  receive  such an  allowance  for  income
attributable to the partnership interests held by individuals. Lakehead's motion
for rehearing  was denied by the FERC and Lakehead  appealed the decision to the
U. S. Court of Appeals.  Subsequently,  the case was settled by Lakehead and the
appeal was  withdrawn.  In another  FERC  proceeding  involving a different  oil
pipeline  limited  partnership,  various  shippers  challenged  such  pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the  disallowance of income taxes.  The FERC recently decided the case
on the same basis as the Lakehead  case. If the FERC were to disallow the income
tax  allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's  ability
to pay  the  Minimum  Quarterly  Distribution  to  the  holders  of  the  Senior
Preference  Units ("SPU"s) and  Preference  Units ("PU"s) would not be impaired;
however,  in view of the uncertainties  involved in this issue,  there can be no
assurance in this regard.

<PAGE>
ALLOCATION OF NET INCOME AND EARNINGS

         Net income is allocated to the limited  partnership  units in an amount
equal to the cash  distributions  declared  for each  reporting  period  and any
remaining income or loss is allocated to any class of units that did not receive
the same  amount  of cash  distributions  per unit (if  any).  If the same  cash
distributions per unit are declared for all classes of units,  income or loss is
allocated pro rata on the aggregate amount of distributions declared.

         In 1997, distributions by the Partnership of Available Cash reached the
Second  Target  Distribution,  as defined in the  Partnership  Agreement,  which
entitled  the  general  partner  to  receive  certain  incentive  distributions.
Earnings  per SPU and PU shown on the  consolidated  statements  of  income  are
calculated  by dividing  the amount of net income,  allocated on the above basis
with incentives calculated on distributions declared to the SPUs and PUs, by the
weighted  average  number  of SPUs  and PUs  outstanding,  respectively.  If the
allocation  of income  had been made as if all income  had been  distributed  in
cash,  earnings per SPU and PU would have been $2.53 for the year ended December
31, 1997.

ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting   Standards   ("SFAS")   130,   "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of  comprehensive  income and its  components  in a full set of general  purpose
financial statements.  The provisions of SFAS 130 must be adopted in fiscal year
1998. The  Partnership  expects to comply with the provisions of SFAS 130 in the
Consolidated Statements of Partners' Capital, when adopted.

         Also,  in June  1997,  the FASB  issued  SFAS  131,  "Disclosure  About
Segments  of an  Enterprise  and  Other  Information,"  which  requires  segment
information to be reported on a basis  consistent  with that used internally for
evaluating  segment  performance  and  deciding  how to  allocate  resources  to
segments.  The  provisions of SFAS 131 must be adopted in fiscal year 1998.  The
Partnership  is  evaluating  the  impact of  adopting  SFAS 131 on the method it
currently uses to report segment information.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial  statements  and  supplementary  data of the  Partnership
begin on page F-1 of this report.  Such  information is hereby  incorporated  by
reference into this item 8.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
           AND FINANCIAL DISCLOSURE.

         Not applicable.


<PAGE>


                                                     PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  Partnership  is a limited  partnership  and has no directors.  The
Partnership  is managed by the  Company as general  partner.  Set forth below is
certain  information  concerning  the directors  and  executive  officers of the
Company. All directors of the Company are elected annually by Kaneb, as its sole
stockholder.

All officers serve at the discretion of the Board of Directors of the Company.

<TABLE>
<CAPTION>
                                                 YEARS OF            UNITS BENEFICIALLY OWNED AT MARCH 16, 1998(m)
                                                 SERVICE   -------------------------------------------------------------
                              POSITION WITH      WITH THE     SENIOR      % OF   PREFERENCE    % OF     COMMON     % OF
NAME                  AGE      THE COMPANY       COMPANY     PREFERENCE   CLASS      UNITS     CLASS     UNITS     CLASS
-------------------- ------- ----------------- ----------- ------------ ------- ------------ ------- ----------- -------
<S>                    <C>   <C>                  <C>        <C>          <C>      <C>        <C>      <C>       <C> 
Edward D. Doherty      62    Chairman of           8 (a)      8,326       *         1,300      *        75,000   2.4%
                               the Board and
                               Chief
                               Executive
                               Officer

Leon E. Hutchens       63    President            38 (b)        500       *           -0-      *           -0-    *
Ronald D. Scoggins     43    Senior Vice           1 (c)        -0-       *           454      *           -0-    *
                               President
Howard C. Wadsworth    53    Vice President        4 (d)        -0-       *           -0-      *           -0-    *
                               Treasurer and
                               Secretary
Jimmy L. Harrison      44    Controller            6 (e)        -0-       *           -0-      *           -0-    *
John R. Barnes         53    Directr              11 (f)     76,600      1%        60,500     1%         79,000  2.5%
Charles R. Cox         55    Director              3 (g)        500       *           -0-      *           -0-    *
Sangwoo Ahn            59    Director              9 (h)     33,000       *           -0-      *           -0-    *
Frank M. Burke, Jr.    58    Director              1 (i)        -0-       *           -0-      *           -0-    *
James R. Whatley       71    Director              9 (j)     22,400       *           -0-      *           -0-    *
Hans Kessler           48    Director              1 (k)        -0-       *           -0-      *           -0-    *
Murray A. Biles        67    Director             44 (l)        500       *           -0-      *           -0-    *
All Officers and Directors as a group (12 persons)          141,826      2.0%      62,254     1.1%      154,000  4.9%

*Less than one percent

<FN>
(a)      Mr. Doherty, Chairman of the Board of the Company since September 1989,
         is also Senior Vice President of Kaneb.
(b)      Mr. Hutchens assumed his current position in January 1994,  having been
         with KPL since January 1960. Mr. Hutchens had been Vice President since
         January 1981.  Mr.  Hutchens was Manager of Product  Movement from July
         1976 to January 1981.
(c)      Mr. Scoggins became an executive officer of the Company in August 1997,
         prior to which he served in senior level  positions for the Company for
         more than 10 years.
(d)      Mr.  Wadsworth also serves as Vice  President,  Treasurer and Secretary
         for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.
(e)      Mr. Harrison  assumed his present  position in November 1992,  prior to
         which he served in a variety of financial positions including Assistant
         Secretary and Treasurer  with ARCO Pipe Line Company for  approximately
         19 years.
(f)      Mr. Barnes,  a director of the Company,  is also Chairman of the Board,
         President and Chief Executive Officer of Kaneb.
(g)      Mr. Cox, a director  of the Company  since  September  1995,  is also a
         director of Kaneb. Mr. Cox has been a private business consultant since
         retiring in January  1998 from Fluor  Daniel,  Inc.,  an  international
         services  company,  where he served in senior executive level positions
         during a 27 year career with that organization.
(h)      Mr. Ahn, a director of the Company  since July 1989, is also a director
         of Kaneb.  Mr. Ahn has been a general partner of Morgan Lewis Githens &
         Ahn, an investment  banking firm,  since 1982 and currently serves as a
         director of Gradall  Industries,  Inc.,  ITI  Technologies,  Inc.,  PAR
         Technology   Corporation,   Quaker  Fabric   Corporation,   and  Stuart
         Entertainment, Inc.
(i)      Mr.  Burke,  elected as a director of the Company in January  1997,  is
         also a director of Kaneb.  Mr.  Burke has been  Chairman  and  Managing
         General Partner of Burke,  Mayborn Company,  Ltd., a private investment
         company,  for  more  than  the  past  five  years.  He  was  previously
         associated with Peat,  Marwick,  Mitchell & Co. (now KPMG Peat Marwick,
         LLP),  an  international  firm of  certified  public  accountants,  for
         twenty-four years.
(j)      Mr.  Whatley,  a director  of the  Company  since July 1989,  is also a
         director of Kaneb and served as Chairman of the Board of  Directors  of
         Kaneb from February 1981 until April 1989.
(k)      Mr.  Kessler was  elected to the Board on  February  19, 1998 to fill a
         vacancy.  Mr.  Kessler has served as Chairman and Managing  Director of
         KMB Kessler + Partner  GmbH since 1992.  He was  previously  a Managing
         Director   and  Vice   President   of  a  European   Division  of  Tyco
         International Ltd., the largest contractor in the world for the design,
         manufacturing  and  installation  of fire  detection,  suppression  and
         sprinkler  systems and  manufacturer  and  distributor  of flow control
         products in North America,  Europe and Asia-Pacific  from 1990 to 1992.
         He was Managing  Director and Executive Vice President of a division of
         ABB Asea  Brown  Boveri  Ltd.,  a  Zurich,  Switzerland  based  company
         involved in power generation, power transmission and distribution,  and
         industrial and building systems around the world prior to 1990.
(l)      Mr. Biles  joined the Company in November  1953 and served as President
         from January 1985 until his  retirement at the close of 1993.
(m)      Units of the  Partnership  listed are those  beneficially  owned by the
         person  indicated,  his  spouse or  children  living at home and do not
         include  Units  in which  the  person  has  disclaimed  any  beneficial
         interest.
</FN>
</TABLE>


AUDIT COMMITTEE

         Messrs. Sangwoo Ahn and Frank M. Burke, Jr. serve as the members of the
Audit Committee of the Company. Such Committee will, on an annual basis, or more
frequently as such Committee may determine to be  appropriate,  review  policies
and practices of the Company and the  Partnership  and deal with various matters
as to which conflicts of interest may arise.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Company's Board of Directors does not have a compensation committee
or any other committee that performs the equivalent functions. During the fiscal
year ended  December  31,  1997,  none of the  Company's  officers or  employees
participated in the deliberations of the Company's Board of Directors concerning
executive officer compensation.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE STATEMENT

         Section  16(a) of the  Securities  and Exchange Act of 1934, as amended
("Section 16(a)") requires the Company's  officers and directors,  among others,
to file  reports of  ownership  and changes of  ownership  in the  Partnership's
equity  securities with the Securities and Exchange  Commission and the New York
Stock Exchange. Such persons are also required by related regulations to furnish
the Company with copies of all Section 16(a) forms that they file.

         Based solely on its review of the copies of such forms  received by it,
the Company  believes  that,  since January 1, 1997,  its officers and directors
have  complied  with all  applicable  filing  requirements  with  respect to the
Partnership's equity securities.

<PAGE>

ITEM 11.   EXECUTIVE COMPENSATION

         The  Partnership  has  no  executive  officers,  but  is  obligated  to
reimburse the Company for compensation paid to the Company's  executive officers
in connection with their operation of the Partnership's business.

         The  following  table  sets  forth  information  with  respect  to  the
aggregate  compensation  paid or accrued by the Company  during the fiscal years
1997, 1996 and 1995, to the Chief  Executive  Officer and each of the other most
highly compensated executive officers of the Company.

<TABLE>
<CAPTION>
                                              SUMMARY COMPENSATION TABLE

              Name and Principal                          Annual Compensation                  All Other
                Position               Year         Salary               Bonus(a)          Compensation(b)
           ------------------------  --------   --------------       ---------------       ---------------
           <S>                         <C>       <C>                  <C>                       <C>

           Edward D. Doherty(c)        1997      $  208,350           $    18,420(f)            $  6,541
             Chairman of the           1996         200,333(d)             93,040                  6,832
             Board and Chief           1995         190,833               133,100                  6,096
             Executive Officer

           Leon E. Hutchens            1997         180,617                  -0-                   7,338
             President                 1996         173,700                15,000                  7,051
                                       1995         164,644                30,000                  7,278

           Ronald D. Scoggins(c)       1997         139,899(e)              9,210(g)               5,003
             Senior Vice President

           Jimmy L. Harrison           1997         110,532                  -0-                   2,854
             Controller                1996         105,532                 4,000                  3,775
                                       1995         100,670                 8,500                  5,450

<FN>
(a)      Amounts earned in year shown and paid the following year.
(b)      Represents the Company's  contributions  to Kaneb's Savings  Investment
         Plan (a 401(k) plan) and the imputed value of  Company-paid  group term
         life insurance.
(c)      The  Compensation  for these  individuals  is paid by  Kaneb,  which is
         reimbursed for all or  substantially  all of such  compensation  by the
         Company.
(d)      Includes deferred compensation of $14,901.
(e)      Includes  $13,608 paid in the form of 454 Partnership  Preference Units
         and 1,566 shares of Kaneb Services, Inc. common stock.
(f)      Includes  deferred  compensation  of  $18,420.  
(g)      Includes  deferred  compensation of $9,210.
</FN>
</TABLE>

Retirement Plan

         Effective April 1, 1991, Kaneb established the Savings Investment Plan,
a defined  contribution 401(k) plan, that permits all full-time employees of the
Company who have  completed  one year of service to contribute 2% to 12% of base
compensation,  on a pre-tax basis,  into  participant  accounts.  In addition to
mandatory  contribution  equal to 2% of base compensation per year for each plan
participant,  the Company makes matching  contributions from 25% to 50% of up to
the  first  6%  of  base  pay  contributed  by  a  plan  participant.   Employee
contributions,  together with earnings  thereon,  are not subject to forfeiture.
That  portion  of  a  participant's  account  balance  attributable  to  Company
contributions, together with earnings thereon, is vested over a five year period
at 20% per year. Participants are credited with their prior years of service for
vesting  purposes,   however,  no  amounts  are  accrued  for  the  accounts  of
participants,  including the Company's executive officers,  for years of service
previous to the plan commencement  date.  Participants may direct the investment
of their  contributions  into a variety of  investments,  including Kaneb common
stock.  Plan assets are held and  distributed  pursuant to a trust  arrangement.
Because levels of future compensation,  participant contributions and investment
yields cannot be reliably predicted over the span of time contemplated by a plan
of this nature,  it is  impractical to estimate the annual  benefits  payable at
retirement  to the  individuals  listed in the Summary Cash  Compensation  Table
above.


<PAGE>


Director's Fees

         During 1997,  each member of the  Company's  Board of Directors who was
not also an  employee  of the  Company or Kaneb was paid an annual  retainer  of
$10,000 in lieu of all attendance fees.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         At March 16,  1998,  the Company  owned a combined  2% General  Partner
interest in the Partnership and the Operating Partnership and, together with its
affiliates,  owned Preference  Units and Common Units  representing an aggregate
limited partner interest of approximately 31%.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company is entitled to certain reimbursements under the Partnership
Agreement.  For additional  information  regarding the nature and amount of such
reimbursements,   see  Note  7  to  the  Partnership's   consolidated  financial
statements.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (A) (1)FINANCIAL STATEMENTS

         Set forth below is a list of  financial  statements  appearing  in this
         report.
                                                                           
         Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements:
                                                                           Page
           Consolidated Statements of Income
               - Three Years Ended December 31, 1997...................    F - 1
           Consolidated Balance Sheets - December 31, 1997 and 1996....    F - 2
           Consolidated Statements of Cash Flows
               - Three Years Ended December 31, 1997...................    F - 3
           Consolidated Statements of Partners' Capital
              Three Years ended December 31, 1997......................    F - 4
         Notes to Consolidated Financial Statements....................    F - 5
         Report of Independent Accountants.............................    F -13

    (A) (2)FINANCIAL STATEMENT SCHEDULES

         All schedules for which provision is made in the applicable  accounting
         regulation of the Securities  and Exchange  Commission are not required
         under the related instructions or are inapplicable,  and therefore have
         been omitted.

<PAGE>
    (A) (3)LIST OF EXHIBITS

3.1      Amended and Restated  Agreement of Limited  Partnership dated September
         27, 1989,  filed as Appendix A to the  Registrant's  Prospectus,  dated
         September 25, 1989, in connection  with the  Registrant's  Registration
         Statement  on Form S-1  (S.E.C.  File No.  33-30330)  which  exhibit is
         hereby incorporated by reference.

10.1     ST Agreement  and Plan of Merger date  December 21, 1992 by and between
         Grace Energy  Corporation,  Support Terminal Services,  Inc.,  Standard
         Transpipe Corp., and Kaneb Pipe Line Operating Partnership,  NSTS, Inc.
         and NSTI,  Inc. as amended by Amendment of STS Merger  Agreement  dated
         March 2, 1993,  filed as Exhibit 10.1 of the  exhibits to  Registrant's
         Current  Report on Form 8-K,  dated March 16,  1993,  which  exhibit is
         hereby incorporated by reference.

10.2     Restated Credit  Agreement  between Kaneb Operating  Partnership,  L.P.
         ("KPOP"),  Texas  Commerce  Bank,  N.A.,  ("TCB"),  and  certain  other
         Lenders,  dated December 22, 1994 (the "TCB Loan Agreement"),  filed as
         Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
         10-K for the year ended  December  31,  1994,  which  exhibit is hereby
         incorporated by reference.

10.3     Amendment to the TCB Loan  Agreement,  dated  January 30,  1998,  filed
         herewith.

10.4     Pledge and Security  Agreement  between Kaneb Pipe Line Company ("KPL")
         and TCB, dated October 11, 1993,  filed as Exhibit 10.3 of the exhibits
         to the  Registrant's  Annual  Report  on Form  10-K for the year  ended
         December 31, 1993, which exhibit is hereby incorporated by reference.

10.5     Note Purchase Agreement, dated December 22, 1994, filed as Exhibit 10.2
         of the exhibits to Registrant's Current Report on Form 8-K, dated March
         13,  1995  (the  "March  1995  Form  8-K"),  which  exhibit  is  hereby
         incorporated by reference.

10.6     Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
         the  exhibits to the  Registrant's  Annual  Report on Form 10-K for the
         year ended December 31, 1996,  which exhibit is hereby  incorporated by
         reference.

10.7     Agreement  for Sale and  Purchase  of  Assets  between  Wyco  Pipe Line
         Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
         exhibits  to the  Registrant's  March 1995 Form 8-K,  which  exhibit is
         hereby incorporated by reference.

10.8     Asset Purchase  Agreements between and among Steuart Petroleum Company,
         SPC Terminals,  Inc., Piney Point Industries,  Inc., Steuart Investment
         Company,  Support Terminals  Operating  Partnership,  L.P. and KPOP, as
         amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
         10.4 of the exhibits to  Registrant's  Current Report on Form 8-K dated
         January 3, 1996, which exhibits are hereby incorporated by reference.

21       List of Subsidiaries, filed herewith.
27       Financial Data Schedule, filed herewith.

    (B) REPORTS ON FORM 8-K - NONE.


<PAGE>
                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                            -----------------------------------------------
                                                                 1997             1996             1995
                                                            -------------    -------------    -------------
<S>                                                         <C>              <C>              <C>          
Revenues ................................................   $ 121,156,000    $ 117,554,000    $  96,928,000
                                                            -------------    -------------    -------------
Costs and expenses:
   Operating costs ......................................      50,183,000       49,925,000       40,617,000
   Depreciation and amortization ........................      11,711,000       10,981,000        8,261,000
   General and administrative ...........................       5,793,000        5,259,000        5,472,000
                                                            -------------    -------------    -------------
      Total costs and expenses ..........................      67,687,000       66,165,000       54,350,000
                                                            -------------    -------------    -------------
Operating income ........................................      53,469,000       51,389,000       42,578,000
Interest and other income ...............................         562,000          776,000          894,000
Interest expense ........................................     (11,332,000)     (11,033,000)      (6,437,000)
                                                            -------------    -------------    -------------
Income before minority
   interest and income taxes ............................      42,699,000       41,132,000       37,035,000
Minority interest in net income .........................        (420,000)        (403,000)        (360,000)
Income tax provision ....................................        (718,000)        (822,000)        (627,000)
                                                            -------------    -------------    -------------

Net income ..............................................      41,561,000       39,907,000       36,048,000

General partner's interest
   in net income ........................................        (560,000)        (403,000)        (360,000)
                                                            -------------    -------------    -------------
Limited partners' interest
   in net income ........................................   $  41,001,000    $  39,504,000    $  35,688,000
                                                            =============    =============    =============
Allocation of net income per
   Senior Preference Unit and
   Preference Unit as described in Note 2 ...............   $        2.55    $        2.46    $        2.20
                                                            =============    =============    =============

Weighted average number of Partnership units outstanding:
   Senior Preference Units ..............................       7,250,000        7,250,000        7,250,000
   Preference Units .....................................       5,650,000        4,650,000        5,400,000
</TABLE>

                 See notes to consolidated financial statements.

                                      F - 1


<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                -----------------------------------
                                                                                    1997                  1996
                                                                                -------------        --------------
                                                      ASSETS
<S>                                                                             <C>                  <C>       
Current assets:
   Cash and cash equivalents...............................................     $   6,376,000        $    8,196,000
   Accounts receivable.....................................................        11,503,000            11,540,000
   Current portion of receivable from general partner......................              -                  975,000
   Prepaid expenses........................................................         4,021,000             4,321,000
                                                                                -------------        --------------
      Total current assets.................................................        21,900,000            25,032,000
                                                                                -------------        --------------

Property and equipment.....................................................       345,802,000           337,202,000
Less accumulated depreciation..............................................        98,670,000            87,469,000
                                                                                -------------        --------------
      Net property and equipment...........................................       247,132,000           249,733,000
                                                                                -------------        --------------
                                                                                $ 269,032,000        $  274,765,000
                                                                                =============        ==============

                                         LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Current portion of long-term debt.......................................     $   2,335,000        $    2,036,000
   Accounts payable........................................................         2,400,000             2,764,000
   Accrued expenses........................................................         3,297,000             4,355,000
   Accrued distributions payable...........................................        10,725,000             9,833,000
   Accrued taxes, other than income taxes..................................         1,957,000             1,763,000
   Deferred terminaling fees...............................................         2,892,000             2,874,000
   Payable to general partner..............................................         1,143,000               711,000
                                                                                -------------        --------------
      Total current liabilities............................................        24,749,000            24,336,000
                                                                                -------------        --------------
Long-term debt, less current portion.......................................       132,118,000           139,453,000

Other liabilities and deferred taxes.......................................         6,935,000             6,612,000

Minority interest..........................................................         1,034,000             1,024,000

Commitments and Contingencies

Partners' capital:
   Senior preference unitholders...........................................        48,830,000            48,446,000
   Preference unitholders..................................................        46,449,000            37,982,000
   Preference B unitholders................................................            -                  8,168,000
   Common unitholders......................................................         7,888,000             7,720,000
   General partner.........................................................         1,029,000             1,024,000
                                                                                -------------        --------------
      Total partners' capital..............................................       104,196,000           103,340,000
                                                                                -------------        --------------
                                                                                $ 269,032,000        $  274,765,000
                                                                                =============        ==============
</TABLE>


                 See notes to consolidated financial statements.

                                      F - 2



<PAGE>

                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                          ---------------------------------------------------------
                                                              1997                  1996                  1995
                                                          -------------         -------------         -------------
<S>                                                       <C>                   <C>                   <C>
Operating activities:
   Net income ........................................    $  41,561,000         $  39,907,000         $  36,048,000
   Adjustments to reconcile net income to net
     cash  provided  by  operating activities:
      Depreciation and amortization...................       11,711,000            10,981,000             8,261,000
      Minority interest in net income.................          420,000               403,000               360,000
      Deferred income taxes...........................          651,000               601,000               624,000
      Changes in working capital components:
        Accounts receivable...........................           37,000            (1,330,000)           (4,605,000)
        Prepaid expenses..............................          300,000            (3,067,000)              670,000
        Accounts payable and accrued expenses.........         (336,000)            1,697,000             1,943,000
        Deferred terminaling fees.....................           18,000               240,000               993,000
        Payable to general partner....................          432,000              (252,000)              177,000
                                                          -------------         --------------       --------------
           Net cash provided by operating activities..       54,794,000            49,180,000            44,471,000
                                                          -------------         -------------        --------------

Investing activities:
   Capital expenditures...............................      (10,641,000)           (7,075,000)           (8,946,000)
   Acquisitions of pipelines and terminals............          -                  (8,507,000)          (97,850,000)
   Other..............................................          313,000              (630,000)            2,429,000
                                                          -------------         -------------        --------------
           Net cash used in investing activities......      (10,328,000)          (16,212,000)         (104,367,000)
                                                          -------------         -------------        --------------

Financing activities:
   Changes in receivable from general partner.........          975,000             2,570,000             2,240,000
   Issuance of long-term debt.........................          -                  73,000,000            96,500,000
   Payments of long-term debt.........................       (7,036,000)          (69,777,000)           (3,047,000)
   Distributions:
      Senior preference unitholders...................      (17,763,000)          (16,313,000)          (15,950,000)
      Preference unitholders..........................      (13,842,000)          (12,712,000)          (12,430,000)
      Common unitholders..............................       (7,742,000)           (7,110,000)           (4,582,000)
      General partner and minority interest...........         (878,000)             (737,000)             (673,000)
                                                          -------------         -------------         -------------
           Net cash provided by (used in) financing
              activities..............................      (46,286,000)          (31,079,000)           62,058,000
                                                          -------------         -------------        --------------
Increase (decrease) in cash and cash equivalents......       (1,820,000)            1,889,000             2,162,000
Cash and cash equivalents at beginning of period......        8,196,000             6,307,000             4,145,000
                                                          -------------         -------------        --------------
Cash and cash equivalents at end of period............    $   6,376,000         $   8,196,000        $    6,307,000
                                                          =============         =============        ==============
Supplemental information - Cash paid for interest.....    $  11,346,000         $  10,368,000        $    5,479,000
                                                          =============         =============        ==============
</TABLE>

                 See notes to consolidated financial statements.

                                      F - 3


<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                               SENIOR
                              PREFERENCE         PREFERENCE       PREFERENCE B        COMMON             GENERAL
                             UNITHOLDERS        UNITHOLDERS       UNITHOLDERS       UNITHOLDERS          PARTNER            TOTAL
                           -------------       --------------     ------------      ------------       ----------     --------------
<S>                        <C>                 <C>                <C>               <C>                <C>            <C>
Partners' capital at
  January 1, 1995..........$  47,288,000       $  45,247,000      $     -           $  6,227,000       $   992,000    $  99,754,000

Unit Conversion............      -                (8,008,000)       8,008,000               -                 -             -

1995 income allocation.....   15,950,000          11,880,000          550,000          7,308,000           360,000       36,048,000

Distributions declared.....  (15,950,000)        (11,880,000)        (550,000)        (6,320,000)         (354,000)     (35,054,000)
                           -------------       -------------      -----------       ------------       -----------    -------------

Partners' capital at
  December 31, 1995........   47,288,000          37,239,000        8,008,000          7,215,000           998,000      100,748,000

1996 income allocation.....   17,833,000          11,438,000        2,460,000          7,773,000           403,000       39,907,000

Distributions declared.....  (16,675,000)        (10,695,000)      (2,300,000)        (7,268,000)         (377,000)     (37,315,000)
                           -------------       -------------      -----------       ------------       -----------    -------------

Partners' capital at
  December 31, 1996........   48,446,000          37,982,000        8,168,000          7,720,000         1,024,000      103,340,000

1997 income allocation.....   18,509,000          12,587,000        1,837,000          8,068,000           560,000       41,561,000

Distributions declared.....  (18,125,000)        (12,275,000)      (1,850,000)        (7,900,000)         (555,000)     (40,705,000)

Unit Conversion............         -              8,155,000       (8,155,000)              -                -                 -
                           -------------       -------------      ------------      ------------       -----------     ------------

Partners' capital at
  December 31, 1997........$  48,830,000       $  46,449,000      $     -           $  7,888,000       $ 1,029,000    $ 104,196,000
                           =============       =============      ============      ============       ===========    =============


Limited Partnership
  Units outstanding at
  January 1, 1995..........    7,250,000           5,650,000             -             3,160,000               (a)       16,060,000

Unit Conversion in 1995....      -                (1,000,000)       1,000,000               -                 -               -
                           -------------       --------------     -----------        -----------       --------------   -----------

Limited Partnership
  Units outstanding at
  December 31, 1995
  and 1996.................    7,250,000           4,650,000        1,000,000          3,160,000               (a)       16,060,000

Unit Conversion in 1997....      -                 1,000,000       (1,000,000)              -                 -               -
                           -------------       -------------      ------------       -----------       --------------  ------------

Limited Partnership
  Units outstanding at
  December 31, 1997........    7,250,000(b)        5,650,000             -             3,160,000               (a)       16,060,000
                           ================    =============      ============       ===========       ==============   ===========

<FN>
(a)      Kaneb Pipe Line  Company owns a combined 2% interest in Kaneb Pipe Line
         Partners, L.P. as General Partner.

(b)      The Partnership  Agreement  allows for an additional  issuance of up to
         7.75 million senior preference units.
</FN>
</TABLE>

                                       F-4

<PAGE>

                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    PARTNERSHIP ORGANIZATION

               Kaneb Pipe Line  Partners,  L.P.  (the  "Partnership"),  a master
      limited  partnership,  owns and  operates  a  refined  petroleum  products
      pipeline  business and a petroleum  products and specialty liquids storage
      and terminaling business. The Partnership operates through Kaneb Pipe Line
      Operating  Partnership,  L.P. ("KPOP"), a limited partnership in which the
      Partnership  holds a 99%  interest  as  limited  partner.  Kaneb Pipe Line
      Company (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc.
      ("Kaneb"),  as general partner holds a 1% general partner interest in both
      the  Partnership  and KPOP. The Company's 1% interest in KPOP is reflected
      as the minority interest in the financial statements.

               In September  1995, a subsidiary  of the Company sold 3.5 million
      of the Preference  Units ("PU") it held in a public offering and exchanged
      1.0 million of its PU's for 1.0  million  Preference  B Units,  which were
      subordinate  to the PU's until  September 30, 1997.  Effective  October 1,
      1997,  the 1.0  million  Preference  B Units were  exchanged  for an equal
      number of PUs.  At December  31,  1997,  the  Company,  together  with its
      affiliates,  owns an approximate  31% interest as a limited partner in the
      form of PU's and Common  Units  ("CU"),  and as a general  partner  owns a
      combined 2% interest.  The Senior  Preference  Units ("SPU")  represent an
      approximate 44% interest in the  Partnership and the 3.5 million  publicly
      held PU's represent an approximate 21% interest.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

               The following significant accounting policies are followed by the
      Partnership in the preparation of the consolidated  financial  statements.
      The preparation of the  Partnership's  financial  statements in conformity
      with generally accepted accounting  principles requires management to make
      estimates and assumptions  that effect 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.

      CASH AND CASH EQUIVALENTS

               The  Partnership's  policy  is to invest  cash in  highly  liquid
      investments  with  maturities  of three  months  or less,  upon  purchase.
      Accordingly,  uninvested  cash balances are kept at minimum  levels.  Such
      investments  are  valued  at  cost,  which  approximates  market,  and are
      classified  as  cash  equivalents.  The  Partnership  does  not  have  any
      derivative financial instruments.

      PROPERTY AND EQUIPMENT

               Property and equipment are carried at  historical  cost.  Certain
      leases have been  capitalized  and the leased assets have been included in
      property and equipment.  Additions of new equipment and major renewals and
      replacements  of existing  equipment  are  capitalized.  Repairs and minor
      replacements that do not materially increase values or extend useful lives
      are  expensed.  Depreciation  of property  and  equipment is provided on a
      straight-line  basis at rates based upon expected  useful lives of various
      classes of assets, as disclosed in Note 4. The rates used for pipeline and
      storage  facilities  of  KPOP  are the  same  as  those  which  have  been
      promulgated by the Federal Energy Regulatory Commission.

      REVENUE AND INCOME RECOGNITION

               KPOP  provides  pipeline   transportation  of  refined  petroleum
      products and liquified petroleum gases. Revenue is recognized upon receipt
      of the products into the pipeline system.

               ST provides  terminaling  and other ancillary  services.  Storage
      fees are billed one month in advance and are reported as deferred  income.
      Revenue is recognized in the month services are provided.

                                      F-5
<PAGE>

                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      ENVIRONMENTAL MATTERS

               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  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
      the Partnership's commitment to a formal plan of action.

      INCOME TAX CONSIDERATIONS

      Income before income tax expense is made up of the following components:

                                           Year Ended December 31,
                                   ---------------------------------------
                                       1997          1996          1995
                                   -----------   -----------   -----------
     Partnership operations.....   $40,317,000   $37,950,000   $35,269,000
     Corporate operations.......     1,962,000     2,779,000     1,406,000
                                   -----------   -----------   -----------
                                   $42,279,000   $40,729,000   $36,675,000
                                   ===========   ===========   ===========

               Partnership operations are not subject to Federal or state income
      taxes.   However,   certain   operations  of  ST  are  conducted   through
      wholly-owned  corporate  subsidiaries  which  are  taxable  entities.  The
      provision for income taxes for the periods ended  December 31, 1997,  1996
      and 1995  consists of deferred U.S.  Federal  income taxes of $.7 million,
      $.6 million and $.6  million,  respectively,  and current  Federal  income
      taxes of $.2  million in 1996.  The net  deferred  tax  liability  of $3.1
      million  and $2.3  million at December  31,  1997 and 1996,  respectively,
      consists of deferred tax  liabilities  of $8.2  million and $7.4  million,
      respectively,  and deferred  tax assets of $5.2 million and $5.1  million,
      respectively.  The  deferred  tax  liabilities  consist  primarily  of tax
      depreciation  in excess of book  depreciation  and the deferred tax assets
      consist primarily of net operating losses.  The corporate  operations have
      net operating losses for tax purposes totaling approximately $13.8 million
      which expire in years 2008 through 2012.

               Since the income or loss of the  operations  which are  conducted
      through  limited  partnerships  will be included in the tax returns of the
      individual partners of the Partnership,  no provision for income taxes has
      been recorded in the accompanying  financial statements on these earnings.
      The tax returns of the  Partnership  are subject to examination by Federal
      and  state  taxing  authorities.   If  any  such  examination  results  in
      adjustments  to  distributive  shares of taxable  income or loss,  the tax
      liability of the partners would be adjusted accordingly.

                                      F-6
<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               The tax attributes of the  Partnership's net assets flow directly
      to each  individual  partner.  Individual  partners  will  have  different
      investment  bases  depending  upon the timing and prices of acquisition of
      partnership  units.  Further,  each  partner's  tax  accounting,  which is
      partially  dependent upon their  individual tax position,  may differ from
      the accounting followed in the financial  statements.  Accordingly,  there
      could be significant  differences  between each  individual  partner's tax
      basis and their  proportionate  share of the net  assets  reported  in the
      financial statements. Statement of Financial Accounting Standards No. 109,
      "Accounting  for Income  Taxes,"  requires  disclosure  by a publicly held
      partnership of the aggregate difference in the basis of its net assets for
      financial and tax reporting purposes. Management does not believe that, in
      the  Partnership's  circumstances,   the  aggregate  difference  would  be
      meaningful information.


      ALLOCATION OF NET INCOME AND EARNINGS

               Net income is  allocated to the limited  partnership  units in an
      amount equal to the cash distributions  declared for each reporting period
      and any  remaining  income or loss is allocated to any class of units that
      did not receive the same amount of cash  distributions  per unit (if any).
      If the same cash  distributions  per unit are  declared for all classes of
      units,  income or loss is allocated pro rata based on the aggregate amount
      of distributions declared.

               In 1997,  distributions  by the  Partnership  of  Available  Cash
      reached  the Second  Target  Distribution,  as defined in the  Partnership
      Agreement,  which  entitled  the  general  partner  to  certain  incentive
      distributions at different levels of cash distributions.  Earnings per SPU
      and PU shown on the  consolidated  statements of income are  calculated by
      dividing  the  amount of net  income,  allocated  on the above  basis with
      incentives calculated on distributions  declared to the SPU's and PU's, by
      the weighted average number of SPU's and PU's  outstanding,  respectively.
      If the  allocation  of  income  had been  made as if all  income  had been
      distributed in cash, earnings per SPU and PU would have been $2.53 for the
      year ended December 31, 1997.

      CASH DISTRIBUTIONS

               The  Partnership  makes  quarterly  distributions  of 100% of its
      Available  Cash, as defined in the  Partnership  Agreement,  to holders of
      limited partnership units ("Unitholders") and the Company.  Available Cash
      consists  generally of all the cash receipts of the  Partnership  plus the
      beginning  cash balance less all of its cash  disbursements  and reserves.
      The Partnership  expects to make  distributions of Available Cash for each
      quarter  of  not  less  than  $.55  per  Unit  (the   "Minimum   Quarterly
      Distribution"),  or  $2.20  per  Unit  on an  annualized  basis,  for  the
      foreseeable  future,   although  no  assurance  is  given  regarding  such
      distributions.  The  Partnership  expects  to  make  distributions  of all
      Available  Cash within 45 days after the end of each quarter to holders of
      record on the applicable  record date.  Distributions of $2.50,  $2.30 and
      $2.20  per  unit  were  declared  to  Senior   Preference  and  Preference
      Unitholders in 1997,  1996 and 1995,  respectively.  During 1997, 1996 and
      1995, the Partnership  declared  distributions of $2.50,  $2.30 and $1.45,
      respectively, per unit to the Common Unitholders. As of December 31, 1997,
      no arrearages existed on any class of partnership interest.

               Distributions  by the  Partnership of its Available Cash are made
      99% to  Unitholders  and 1% to the  Company,  subject  to the  payment  of
      incentive distributions to the General Partner if certain target levels of
      cash  distributions  to the Unitholders are achieved.  The distribution of
      Available Cash for each quarter during the Preference  Period, as defined,
      is  subject  to the  preferential  rights of the  holders  of the SPU's to
      receive the Minimum  Quarterly  Distribution  for such  quarter,  plus any
      arrearages in the payment of the Minimum Quarterly  Distribution for prior
      quarters,  before any distribution of Available Cash is made to holders of
      PU's or CU's for such quarter.  In addition,  for each quarter  within the
      Preference  Period, the distribution of any amounts to holders of CU's was
      subject to the  preferential  rights of the  holders of the  Preference  B
      Units, to the extent outstanding, if any, to receive the Minimum Quarterly
      Distribution  for such quarter,  plus any arrearages in the payment of the
      Minimum  Quarterly  Distribution  for  prior  quarters.  The  CU's are not
      entitled  to   arrearages   in  the  payment  of  the  Minimum   Quarterly
      Distribution. In general, the Preference Period will continue indefinitely
      until the Minimum  Distribution has been paid to the holders of the SPU's,
      the PU's, the Preference B Units, to the extent outstanding,  and the CU's
      for twelve consecutive  quarters.  The Minimum Quarterly  Distribution has
      been paid to all classes of Unitholders  for all four quarters in 1997 and
      1996 and for the quarters ended September 30 and December 31, 1995.  Prior
      to the end of the  Preference  Period,  up to 2,650,000 of the PU's may be
      converted  into  SPU's  on  a  one-for-one   basis  if  the  Third  Target
      Distribution,  as  defined,  is  paid to all  Unitholders  for  four  full
      consecutive  quarters.  The Third  Target  distribution  is  reached  when
      distributions  of Available  Cash equals $2.80 per Limited  Partner ("LP")
      Unit on an  annualized  basis.  After  the  Preference  Period  ends,  all
      differences and distinctions between the classes of units for the purposes
      of cash  distributions  will cease. It is anticipated  that the Preference
      Period  will end upon the  payment of the  twelfth  consecutive  quarterly
      distribution on August 14, 1998.

                                      F-7
<PAGE>

                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      CHANGE IN PRESENTATION

               Certain  financial  statement items have been  reclassified to
      conform with 1997 presentation.

3.    ACQUISITIONS

               In February 1995,  the  Partnership  acquired,  through KPOP, the
      refined  petroleum  product  pipeline assets (the "West Pipeline") of Wyco
      Pipe  Line  Company  for  $27.1  million  plus  transaction  costs and the
      assumption  of certain  environmental  liabilities.  The West Pipeline was
      owned  60% by a  subsidiary  of GATX  Terminals  Corporation  and 40% by a
      subsidiary of Amoco Pipe Line Company. The acquisition was financed by the
      issuance of $27 million of first mortgage notes.

               In  December   1995,   the   Partnership   acquired  the  liquids
      terminaling  assets  of  Steuart  Petroleum  Company  and  certain  of its
      affiliates  (collectively,  "Steuart")  for $68 million  plus  transaction
      costs  and  the  assumption  of  certain  environmental  liabilities.  The
      acquisition price was initially  financed by the issuance of a $68 million
      bank bridge loan which was refinanced during 1996 for $68 million of first
      mortgage notes. The asset purchase  agreement  includes a provision for an
      earn-out  payment based upon revenues of one of the terminals  exceeding a
      specified  amount for a seven-year  period  beginning in January  1996. No
      amount was  payable  under the  earn-out  provision  in 1997 or 1996.  The
      contracts  also  included  a  provision  for  the   continuation   of  all
      terminaling  contracts in place at the time of the acquisition,  including
      those contracts with Steuart.

               The  acquisitions  have been  accounted  for  using the  purchase
      method of  accounting.  The total purchase price has been allocated to the
      assets and  liabilities  based on their  respective  fair values  based on
      valuations  and other  studies.  Assuming the above  acquisitions  in 1995
      occurred as of the  beginning of the year ended  December  31,  1995,  the
      summarized unaudited pro forma revenues,  net income and allocation of net
      income per SPU and PU for 1995 would be $117.9 million,  $35.7 million and
      $2.20, respectively.


4.    PROPERTY AND EQUIPMENT

      The cost of property and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                             Estimated
                                              Useful             December 31,
                                               Life    ------------------------------
                                             (Years)        1997            1996
                                            ---------  -------------   --------------
      <S>                                   <C>        <C>              <C>    
      Land ...............................      --     $  18,663,000    $  18,514,000
      Buildings ..........................        35       6,728,000        6,493,000
      Furniture and fixtures .............        16       2,509,000        2,281,000
      Transportation equipment ...........         6       3,687,000        3,452,000
      Machinery and equipment ............   20 - 40      28,507,000       28,113,000
      Pipeline and terminaling equipment..   20 - 40     259,467,000      252,319,000
      Pipeline equipment under
        capitalized lease ................   20 - 40      22,513,000       22,270,000
      Construction work-in-progress ......      --         3,728,000        3,760,000
                                                       -------------    -------------
      Total property and equipment .......               345,802,000      337,202,000
      Accumulated depreciation ...........               (98,670,000)     (87,469,000)
                                                       -------------    -------------
      Net property and equipment .........             $ 247,132,000    $ 249,733,000
                                                       =============    =============
</TABLE>

                                      F-8

<PAGE>

                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.    LONG-TERM DEBT

      Long term debt is summarized as follows:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                          -----------------------------
                                                               1997            1996
                                                          -------------   -------------
      <S>                                                 <C>             <C>
      First mortgage notes due 2001 and 2002 ...........  $  60,000,000   $  60,000,000
      First mortgage notes due 2001 through 2016 .......     68,000,000      68,000,000
      Obligation under capital lease ...................      6,453,000       8,489,000
      Revolving credit facility ........................          --          5,000,000
                                                          -------------   -------------
      Total long-term debt .............................    134,453,000     141,489,000
      Less current portion .............................      2,335,000       2,036,000
                                                          -------------   -------------
      Long-term debt, less current portion .............  $ 132,118,000   $ 139,453,000
                                                          =============   =============
</TABLE>

               In 1994, a wholly-owned  subsidiary of the Partnership issued $33
      million  of  first  mortgage  notes  ("Notes")  to a  group  of  insurance
      companies.  The Notes bear interest at the rate of 8.05% per annum and are
      due on December 22, 2001. Also in 1994,  another  wholly-owned  subsidiary
      entered into a Restated  Credit  Agreement  with a group of banks that, as
      subsequently  amended,  provides a $25 million  revolving  credit facility
      through  January 31, 2001. The credit  facility bears interest at variable
      interest  rates and has a commitment  fee of 0.15% per annum of the unused
      credit  facility.  At December 31,  1997,  no amounts were drawn under the
      credit facility.  In 1995, the Partnership financed the acquisition of the
      West  Pipeline  with the issuance of $27 million of Notes due February 24,
      2002 which bear interest at the rate of 8.37% per annum. The Notes and the
      credit facility are secured by a mortgage on the East Pipeline and contain
      certain financial and operational covenants.

               The acquisition of the Steuart  terminaling  assets was initially
      financed  by a $68  million  bridge  loan from a bank.  In June 1996,  the
      Partnership  refinanced  this  obligation  with $68.0 million of new first
      mortgage  notes (the "Steuart  notes")  bearing  interest at rates ranging
      from 7.08% to 7.98%.  $35 million of the  Steuart  notes is due June 2001,
      $8.0  million is due June 2003,  $10.0  million is due June 2006 and $15.0
      million  is due  June  2016.  The loan is  secured,  pari  passu  with the
      existing Notes and credit facility, by a mortgage on the East Pipeline.

6.     COMMITMENTS AND CONTINGENCIES

               The  following  is a schedule  by years of future  minimum  lease
      payments  under  capital and  operating  leases  together with the present
      value of net minimum lease  payments for capital leases as of December 31,
      1997:

                                                       Capital     Operating
      Year ending December 31:                        Lease (a)      Leases
      -----------------------                        ----------    ----------
        1998 .....................................   $3,080,000    $1,578,000
        1999 .....................................    4,118,000     1,017,000
        2000 .....................................         --         940,000
        2001 .....................................         --         824,000
        2002 .....................................         --         785,000
        Thereafter ...............................         --       2,576,000
                                                     ----------    ----------
      Total minimum lease payments ................   7,198,000    $7,720,000
                                                                   ==========
      Less amount representing interest ...........     745,000
                                                     ----------
      Present value of net minimum lease payments..  $6,453,000
                                                     ==========

      (a)  The capital  lease is secured by certain  pipeline  equipment and the
           Partnership has accrued its obligation to purchase this equipment for
           approximately $4.1 million at the termination of the lease.

                                      F-9
<PAGE>

                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                  Total rent expense  under  operating  leases  amounted to $1.3
         million, $1.2  million  and $.9  million  for each of the years  ended
         December 31, 1997, 1996 and 1995,  respectively.

                  The  operations  of the  Partnership  are  subject to Federal,
         state and local laws and  regulations  relating  to  protection  of the
         environment.  Although the  Partnership  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  significant  costs  and
         liabilities  will not be incurred by the Partnership.  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 the  Partnership,  could result in substantial  costs and
         liabilities to the Partnership.  The Partnership has recorded a reserve
         in other  liabilities  for  environmental  claims in the amount of $3.1
         million at December 31, 1997,  including  $2.2 million  relating to the
         acquisitions of the West Pipeline and Steuart.

                  The   Company  has   indemnified   the   Partnership   against
         liabilities for damage to the environment  resulting from operations of
         the  pipeline  prior to  October  3,  1989  (date of  formation  of the
         Partnership).  The  indemnification  does not extend to any liabilities
         that arise  after such date to the extent that the  liabilities  result
         from changes in environmental laws and regulations.  In addition,  ST's
         former  owner  has  agreed  to  indemnify   the   Partnership   against
         liabilities for damages to the environment from operations conducted by
         the former owner prior to March 2, 1993. The  indemnity,  which expires
         March 1, 1998, is limited in amount to 60% of any claim  exceeding $0.1
         million, up to a maximum of $10 million.

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


7.      RELATED PARTY TRANSACTIONS

                  The Partnership has no employees and is managed and controlled
         by the Company.  The Company and Kaneb are entitled to reimbursement of
         all direct and indirect costs related to the business activities of the
         Partnership.  These costs,  which totaled $10.8 million,  $10.5 million
         and $9.5 million for the years ended December 31, 1997,  1996 and 1995,
         respectively,  include  compensation  and benefits paid to officers and
         employees  of the Company and Kaneb,  insurance  premiums,  general and
         administrative  costs, tax information and reporting  costs,  legal and
         audit fees.  Included in this amount is $9.0 million,  $8.4 million and
         $7.7  million  of  compensation  and  benefits,  paid to  officers  and
         employees of the Company for the periods ended December 31, 1997,  1996
         and 1995, respectively,  which represent the actual amounts paid by the
         Company or Kaneb. In addition,  the Partnership paid $.2 million during
         each of  these  respective  periods  for an  allocable  portion  of the
         Company's  overhead  expenses.  At  December  31,  1997 and  1996,  the
         Partnership   owed  the  Company   $1.1   million   and  $.7   million,
         respectively,  for these  expenses  which are due under normal  invoice
         terms.


                                      F-10
<PAGE>

                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



8.    BUSINESS SEGMENT DATA

      Selected  financial data pertaining to the operations of the Partnership's
      business segments is as follows:
<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                ------------------------------------------------------
                                                                       1997                1996              1995
                                                                ----------------    ---------------     --------------
     <S>                                                        <C>                 <C>                 <C>    
     Revenues:
       Pipeline operations....................................  $     61,320,000    $    63,441,000     $   60,192,000
       Terminaling operations.................................        59,836,000         54,113,000         36,736,000
                                                                ----------------    ---------------     --------------
                                                                $    121,156,000    $   117,554,000     $   96,928,000
                                                                ================    ===============     ==============
     Operating Income:
       Pipeline operations....................................  $     31,827,000    $    32,221,000     $   29,747,000
       Terminaling operations.................................        21,642,000         19,168,000         12,831,000
                                                                ----------------    ---------------     --------------
                                                                $     53,469,000    $    51,389,000     $   42,578,000
                                                                ================    ===============     ==============
     Depreciation and Amortization:
       Pipeline operations....................................  $      4,885,000    $     4,817,000     $    4,843,000
       Terminaling operations.................................         6,826,000          6,164,000          3,418,000
                                                                ----------------    ---------------     --------------
                                                                $     11,711,000    $    10,981,000     $    8,261,000
                                                                ================    ===============     ==============

     Capital Expenditures (including capitalized leases  
       and excluding acquisitions):
       Pipeline operations....................................  $      4,496,000    $     3,446,000     $    3,381,000
       Terminaling operations.................................         6,145,000          3,629,000          5,565,000
                                                                ----------------    ---------------     --------------
                                                                $     10,641,000    $     7,075,000     $    8,946,000
                                                                ================    ===============     ==============
     Identifiable Assets:
       Pipeline operations....................................  $     97,666,000    $   102,391,000     $  105,464,000
       Terminaling operations.................................       171,366,000        172,374,000        162,323,000
                                                                ----------------    ---------------     --------------
                                                                $    269,032,000    $   274,765,000     $  267,787,000
                                                                ================    ===============     ==============
</TABLE>


 9.   FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

              The estimated fair value of all long term debt (excluding  capital
      leases) as of December 31, 1997 was approximately $134 million as compared
      to the carrying  value of $128 million.  These fair values were  estimated
      using discounted cash flow analysis,  based on the  Partnership's  current
      incremental  borrowing rates for similar types of borrowing  arrangements.
      The Partnership has not determined the fair value of its capital leases as
      it is not practicable.  These estimates are not necessarily  indicative of
      the  amounts  that would be  realized in a current  market  exchange.  The
      Partnership has no derivative financial instruments.

           The  Partnership  markets  and sells its  services to a broad base of
      customers and performs  ongoing credit  evaluations of its customers.  The
      Partnership does not believe it has a significant  concentration of credit
      risk at December 31, 1997. No customer  constituted  10 percent or more of
      consolidated revenues in 1997, 1996 or 1995.


                                      F-11
<PAGE>


                KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.   QUARTERLY FINANCIAL DATA (UNAUDITED)

      Quarterly operating results for 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                            --------------------------------------------------------------------------
                                                March 31,           June 30,          September 30,       December 31,
                                            ----------------    ----------------   ----------------    ---------------
      1997:
        <S>                                 <C>                 <C>                 <C>                 <C> 
        Revenues......................      $     28,579,000    $     29,793,000    $    31,465,000     $   31,319,000
                                            ================    ================    ===============     ==============
        Operating income..............      $     12,029,000    $     12,919,000    $    13,956,000     $   14,565,000
                                            ================    ================    ===============     ==============
        Net income....................      $      8,907,000    $      9,949,000    $    10,975,000     $   11,730,000
                                            ================    ================    ===============     ==============
        Allocation of net income
          per SPU and PU..............      $            .55    $            .61    $           .68     $          .71
                                            ================    ================    ===============     ==============

      1996:
        Revenues......................      $     27,826,000    $     28,795,000    $    29,963,000     $   30,970,000
                                            ================    ================    ===============     ==============
        Operating income..............      $     11,600,000    $     12,841,000    $    12,832,000     $   14,116,000
                                            ================    ================    ===============     ==============
        Net income....................      $      8,677,000    $     10,007,000    $     9,872,000     $   11,351,000
                                            ================    ================    ===============     ==============
        Allocation of net income
          per SPU and PU..............      $            .55    $            .62    $           .61     $          .70
                                            ================    ================    ===============     ==============
</TABLE>




                                      F-12

<PAGE>




                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Kaneb Pipe Line Partners, L.P.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1) and (2) on page 29 present fairly, in all material
respects,  the  financial  position of Kaneb Pipe Line  Partners,  L.P.  and its
subsidiaries (the  "Partnership") at December 31, 1997 and 1996, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.   These  financial   statements  are  the   responsibility   of  the
Partnership's  management;  our responsibility is to express an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Dallas, Texas
February 19, 1998






                                      F-13
<PAGE>
                                                               
                                   SIGNATURES

         Pursuant to the  requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                           KANEB PIPE LINE PARTNERS, L.P.
                                           By:      Kaneb Pipe Line Company
                                                    General Partner

                                           By:      EDWARD D. DOHERTY
                                                    Chairman of the Board and
                                                    Chief  Executive Officer
                                                    Date:    March 23, 1998

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
Kaneb  Pipe Line  Partners,  L.P.  and in the  capacities  with  Kaneb Pipe Line
Company and on the date indicated.

      SIGNATURE                      TITLE                            DATE
---------------------------- ---------------------------         -------------
Principal Executive Officer  Chairman of the Board               March 23 1998
  EDWARD D. DOHERTY          and Chief Executive Officer

Principal Accounting Officer
  JIMMY L. HARRISON          Controller                          March 23, 1998

Directors

  SANGWOO AHN                Director                            March 23, 1998

  JOHN R. BARNES             Director                            March 23, 1998

  M.R. BILES                 Director                            March 23, 1998

  FRANK M. BURKE, JR.        Director                            March 23, 1998

  CHARLES R. COX             Director                            March 23, 1998

  HANS KESSLER               Director                            March 23, 1998

  JAMES R. WHATLEY           Director                            March 23, 1998

<PAGE>
                                   EXHIBIT INDEX
EXHIBIT
NUMBER                              DESCRIPTION
-------  -----------------------------------------------------------------------
3.1      Amended and Restated  Agreement of Limited  Partnership dated September
         27, 1989,  filed as Appendix A to the  Registrant's  Prospectus,  dated
         September 25, 1989, in connection  with the  Registrant's  Registration
         Statement  on Form S-1  (S.E.C.  File No.  33-30330)  which  exhibit is
         hereby incorporated by reference.

10.1     ST Agreement  and Plan of Merger date  December 21, 1992 by and between
         Grace Energy  Corporation,  Support Terminal Services,  Inc.,  Standard
         Transpipe Corp., and Kaneb Pipe Line Operating Partnership,  NSTS, Inc.
         and NSTI,  Inc. as amended by Amendment of STS Merger  Agreement  dated
         March 2, 1993,  filed as Exhibit 10.1 of the  exhibits to  Registrant's
         Current  Report on Form 8-K,  dated March 16,  1993,  which  exhibit is
         hereby incorporated by reference.

10.2     Restated Credit  Agreement  between Kaneb Operating  Partnership,  L.P.
         ("KPOP"),  Texas  Commerce  Bank,  N.A.,  ("TCB"),  and  certain  other
         Lenders,  dated December 22, 1994 (the "TCB Loan Agreement"),  filed as
         Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
         10-K for the year ended  December  31,  1994,  which  exhibit is hereby
         incorporated by reference.

10.3     Amendment to the TCB Loan  Agreement,  dated  January 30,  1998,  filed
         herewith.

10.4     Pledge and Security  Agreement  between Kaneb Pipe Line Company ("KPL")
         and TCB, dated October 11, 1993,  filed as Exhibit 10.3 of the exhibits
         to the  Registrant's  Annual  Report  on Form  10-K for the year  ended
         December 31, 1993, which exhibit is hereby incorporated by reference.

10.5     Note Purchase Agreement, dated December 22, 1994, filed as Exhibit 10.2
         of the exhibits to Registrant's Current Report on Form 8-K, dated March
         13,  1995  (the  "March  1995  Form  8-K"),  which  exhibit  is  hereby
         incorporated by reference.

10.6     Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
         the  exhibits to the  Registrant's  Annual  Report on Form 10-K for the
         year ended December 31, 1996,  which exhibit is hereby  incorporated by
         reference.

10.7     Agreement  for Sale and  Purchase  of  Assets  between  Wyco  Pipe Line
         Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
         exhibits  to the  Registrant's  March 1995 Form 8-K,  which  exhibit is
         hereby incorporated by reference.

10.8     Asset Purchase  Agreements between and among Steuart Petroleum Company,
         SPC Terminals,  Inc., Piney Point Industries,  Inc., Steuart Investment
         Company,  Support Terminals  Operating  Partnership,  L.P. and KPOP, as
         amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
         10.4 of the exhibits to  Registrant's  Current Report on Form 8-K dated
         January 3, 1996, which exhibits are hereby incorporated by reference.

21       List of Subsidiaries, filed herewith.
27       Financial Data Schedule, filed herewith.