<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
                                        

                                   FORM 10-Q
                                        
                                   (Mark One)

       [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended March 31, 1998
                                                --------------
                                        
                                       OR

       [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

              For the transition period from _________ to _________

                       Commission File Number:   33-98490
                                                 --------
                                        

                            STAR GAS PARTNERS, L.P.
                            -----------------------

             (Exact name of registrant as specified in its charter)



Delaware                                             06-1437793
------------------------------------                 --------------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification No.)

2187 Atlantic Street, Stamford, Connecticut          06902
-------------------------------------------------------------------------------
(Address of principal executive office)              (Zip Code)

(203) 328-7300
-------------------------------------------------------------------------------
(Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)



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

                                 Yes   X    No
                                     -----     -----
                                        


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 6, 1998:

Star Gas Partners, L.P.  3,831,727 Common Units
                         2,396,078 Subordinated Units
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                               INDEX TO FORM 10-Q
                                        

                                                                            PAGE
                                                                            ----

PART I  FINANCIAL INFORMATION:
 
        Item 1 - Financial Statements
 
          Consolidated Balance Sheets as of September 30, 1997
          and March 31, 1998                                                   3
 
          Consolidated Statements of Operations for the three
          months ended March 31, 1997 and for the three months
          ended March 31, 1998                                                 4
 
          Consolidated Statements of Operations for the six
          months ended March 31, 1997 and for the six months
          ended March 31, 1998                                                 5
 
          Consolidated Statements of Cash Flows for the six
          months ended March 31, 1997 and for the six months
          ended March 31, 1998                                                 6
  
          Consolidated Statement of Partners' Capital for the
          six months ended March 31, 1998                                      7
  
          Notes to Consolidated Financial Statements                        8-10

          Item 2 - Management's Discussion and Analysis of
                   Financial Conditions and Results of
                   Operations                                              11-16


PART II  OTHER INFORMATION:

          Item 6 - Exhibits and Reports on Form 8-K                           17

          Signature                                                           18

                                       2
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                                        
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                               MARCH 31,
                                                        SEPTEMBER 30,            1998
                                                            1997              (UNAUDITED)
                                                     -------------------  ------------------
<S>                                                  <C>                  <C>
ASSETS
Current assets:
 Cash and cash equivalents                                     $    889             $  8,250
 Receivables, net of allowance of $273 and
    $330, respectively                                            5,720                9,698
 Inventories                                                      6,597                3,659
 Prepaid expenses and other current assets                          959                  707
                                                               --------             --------
      Total current assets                                       14,165               22,314
                                                               --------             --------
 
Property and equipment, net                                      95,282              107,626
 
Intangibles and other assets, net                                38,022               48,368
                                                               --------             --------
      Total assets                                             $147,469             $178,308
                                                               ========             ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
 Accounts payable                                              $  3,178             $  2,608
 Accrued expenses                                                 3,004                3,229
 Accrued interest                                                   321                  313
 Customer credit balances                                         4,343                1,323
                                                               --------             --------
      Total current liabilities                                  10,846                7,473
                                                               --------             --------
 
Long-term debt                                                   85,000               96,000
Other long-term liabilities                                          45                   84
 
Partners' Capital:
 Common unitholders                                              47,573               68,952
 Subordinated unitholder                                          4,034                5,344
 General partner                                                    (29)                 455
                                                               --------             --------
      Total Partners' Capital                                    51,578               74,751
                                                               --------             --------
      Total Liabilities and Partners' Capital                  $147,469             $178,308
                                                               ========             ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                                     MARCH 31,
                                                   -------------------------------------------
                                                           1997                     1998
                                                   -------------------     -------------------
<S>                                                  <C>                     <C>
Sales                                                          $46,442                 $37,884
Cost of sales                                                   24,919                  15,558
                                                               -------                 -------
 Gross profit                                                   21,523                  22,326
 
Delivery and branch                                              9,504                   9,590
Depreciation and amortization                                    2,630                   2,906
General and administrative                                       2,294                   1,449
Net gain (loss) on sales of assets                                   8                    (136)
                                                               -------                 -------
 Operating income                                                7,103                   8,245
Interest expense, net                                            1,771                   1,875
                                                               -------                 -------
 Income before income taxes                                      5,332                   6,370
Income tax expense                                                   7                       7
                                                               -------                 -------
 Net income                                                    $ 5,325                 $ 6,363
                                                               =======                 =======

General Partner's interest in net income                        $  107                  $  127
                                                                ------                  ------
 
Limited Partners' interest in net income                        $5,218                  $6,236
                                                                ======                  ======
 
Basic and diluted net income per Limited
 Partner unit                                                   $ 0.99                  $ 1.00
                                                                ======                  ======
 
Weighted average number of Limited Partner
 units outstanding                                               5,271                   6,228
                                                                ======                  ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                                        
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                                      MARCH 31,
                                                   --------------------------------------------
                                                            1997                     1998
                                                   -------------------      -------------------
<S>                                                  <C>                      <C>
 
Sales                                                          $97,318                  $79,728
Cost of sales                                                   53,946                   37,208
                                                               -------                  -------
 Gross profit                                                   43,372                   42,520
 
Delivery and branch                                             19,352                   19,743
Depreciation and amortization                                    5,216                    5,731
General and administrative                                       3,893                    2,818
Net loss on sales of assets                                        (62)                    (184)
                                                               -------                  -------
 Operating income                                               14,849                   14,044
Interest expense, net                                            3,619                    3,961
                                                               -------                  -------
 Income before income taxes                                     11,230                   10,083
Income tax expense                                                  13                       13
                                                               -------                  -------
 Net income                                                    $11,217                  $10,070
                                                               =======                  =======

General Partner's interest in net income                       $   225                  $   201
                                                               -------                  -------
 
Limited Partners' interest in net income                       $10,992                  $ 9,869
                                                               =======                  =======
 
Basic and diluted net income per Limited
 Partner unit                                                  $  2.09                  $  1.69
                                                               =======                  =======
 
Weighted average number of Limited Partner
 units outstanding                                               5,271                    5,834
                                                               =======                  =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

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

                                        
<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                           MARCH 31,
                                                          ------------------------------------------
                                                                 1997                     1998
                                                          -----------------      -------------------
<S>                                                       <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                          $11,217                 $ 10,070
Adjustments to reconcile net income to net cash
  provided by operating activities:
Depreciation and amortization                                         5,216                    5,731
Provision for losses on accounts receivable                             204                      126
Loss on sales of assets                                                  62                      184
Changes in operating assets and liabilities:
  Increase in receivables                                            (4,961)                  (3,964)
  Decrease in inventories                                             4,942                    3,244
  Decrease (increase) in other assets                                  (309)                     174
  Increase (decrease) in accounts payable                               687                     (673)
  Decrease in other current and long-term liabilities                (1,873)                  (3,024)
                                                                    -------                 --------
       Net cash provided by operating activities                     15,185                   11,868
                                                                    -------                 --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                 (3,788)                  (3,028)
Proceeds from sales of fixed assets                                     176                      159
Cash acquired in conveyance                                              --                    1,825
Acquisition related costs                                                --                     (922)
                                                                    -------                 --------
       Net cash used in investing activities                         (3,612)                  (1,966)
                                                                    -------                 --------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facility borrowings                                            5,000                   11,060
Credit facility repayments                                           (7,350)                 (11,060)
Acquisition facility borrowings                                       3,350                   21,000
Acquisition facility repayments                                      (3,350)                 (21,000)
Distributions                                                        (5,916)                  (6,453)
Increase in deferred charges                                            (94)                    (177)
Proceeds from issuance of Common Units, net                              --                   16,089
Repayment of debt                                                        --                  (23,000)
Proceeds from issuance of debt                                           --                   11,000
                                                                    -------                 --------
       Net cash used in financing activities                         (8,360)                  (2,541)
                                                                    -------                 --------
       Net increase in cash                                           3,213                    7,361
Cash at beginning of period                                           1,106                      889
                                                                    -------                 --------
Cash at end of period                                               $ 4,319                 $  8,250
                                                                    =======                 ========
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest                                                          $ 3,417                 $  4,014
                                                                    =======                 ========
 
Non-cash investing activities:
  Acquisitions                                                                              $ 26,467
  Assumption of note payable                                                                $(23,000)
Non-cash financing activities:
  Issuance of Common Units                                                                  $ (3,399)
  Additional General Partner interest                                                       $    (68)
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                                        
                  CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                      (IN THOUSANDS, EXCEPT PER UNIT DATA)
                                  (UNAUDITED)

                                        
<TABLE>
<CAPTION>
                                         NUMBER OF UNITS                                                      TOTAL
                                     ------------------------                                  GENERAL      PARTNERS'
                                      COMMON    SUBORDINATED      COMMON      SUBORDINATED     PARTNER       CAPITAL
                                     ---------  -------------  ------------  --------------  ------------  ------------
<S>                                  <C>        <C>            <C>           <C>             <C>           <C>
Balance as of September 30, 1997         2,875          2,396      $47,573         $ 4,034         $ (29)      $51,578
 Issuance of Common Units, net             809             --       15,745              --           344        16,089
 Conveyance of Assets, net                 148             --        3,399              --            68         3,467
 Net Income                                 --             --        5,925           3,944           201        10,070
 Distributions ($1.10 per unit)             --             --       (3,690)         (2,634)         (129)       (6,453)
                                         -----          -----      -------         -------         -----       -------
Balance as of March 31, 1998             3,832          2,396      $68,952         $ 5,344         $ 455       $74,751
                                         =====          =====      =======         =======         =====       =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       7
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998



1)   BASIS OF PRESENTATION

          The unaudited consolidated financial statements reflect all
     adjustments which are, in the opinion of management, necessary for a fair
     statement of the interim periods presented.  All adjustments to the
     financial statements were of a normal recurring nature.

          The propane industry is seasonal in nature because propane is used
     primarily for heating in residential and commercial buildings.  Therefore,
     the results of operations for the periods ended March 31, 1997 and March
     31, 1998 are not necessarily indicative of the results to be expected for a
     full year.

     Inventories

          Inventories are stated at the lower of cost or market and are computed
     on a first-in, first-out basis.  At the dates indicated, the components of
     inventory were as follows:

                                 SEPTEMBER 30,  MARCH 31,
                                     1997         1998
                                 -------------  ---------
     Propane gas                        $4,805     $1,817
     Appliances and equipment            1,792      1,842
                                        ------     ------
                                        $6,597     $3,659
                                        ======     ======
 

2)   BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT

          Basic net income per Limited Partner Unit is computed by dividing net
     income, after deducting the General Partner's 2.0% interest, by the
     weighted average number of Common Units and Subordinated Units outstanding.
     Diluted net income per Limited Partner Unit, reflects the dilutive effect
     of the unit option plan.

3)   COMMITMENTS AND CONTINGENCIES

          In the ordinary course of business, the Partnership is threatened
     with, or is named in, various lawsuits.  The Partnership is not a party to
     any litigation which individually or in the aggregate could reasonably be
     expected to have a material adverse effect on the company.

4)   RELATED PARTY TRANSACTIONS

          The Partnership has no employees, except for certain employees of
     its corporate subsidiary, Stellar Propane Service Corporation, and is
     managed and controlled by Petroleum Heat and Power Co., Inc. ("Petro").
     Pursuant to the Partnership Agreement, the General Partner is entitled to
     reimbursement

                                       8
<PAGE>
 
4)   RELATED PARTY TRANSACTIONS (CONTINUED)

     for all direct and indirect expenses incurred or payments it makes on
     behalf of the Partnership, and all other necessary or appropriate expenses
     allocable to the Partnership or otherwise reasonably incurred by the
     General Partner in connection with operating the Partnership's business.
     For the six months ended March 31, 1998, the Partnership reimbursed the
     General Partner and Petro $10.0 million representing salary, payroll tax
     and other compensation paid to the employees of the General Partner and to
     Petro for certain corporate functions such as finance and compliance.  In
     addition, the Partnership reimbursed Petro $0.3 million relating to the
     Partnership's share of the costs incurred by Petro in conducting the
     operations of a certain shared branch location which includes managerial
     services.

5)   ACQUISITIONS

          On October 22, 1997, pursuant to a purchase agreement ("Stock Purchase
     Agreement") dated as of October 20, 1997, Star Gas Corporation ("General
     Partner") purchased 240 shares of Common Stock ($100 par value) of Pearl
     Gas Co. ("Pearl"), an Ohio Corporation, representing all of the issued and
     outstanding capital stock of Pearl.

          The purchase price for said stock was $22.6 million and was paid in
     cash.  The assets purchased included working capital of $1.9 million.
     Funding for the stock purchase and related transaction expenses of $0.4
     million was provided by a $23.0 million bank acquisition facility.
     Subsequent to the acquisition of the common stock of Pearl, Pearl was
     merged into the General Partner in a tax-free liquidation.

          Immediately following the merger, a Conveyance and Contribution
     Agreement was entered into by, and among, the Partnership, the OLP and the
     General Partner.  The General Partner contributed to the OLP all of the
     Pearl assets it obtained in the merger of Pearl into the General Partner.
     In exchange, the General Partner received a 2.7% limited partnership
     interest in the OLP and a 0.00028% general partnership interest in the OLP.
     In addition, the OLP assumed all of the liabilities associated with the
     Pearl stock purchase prior and subsequent to the merger, including the
     $23.0 million of bank debt.  The aggregate value of the Partnership's
     interests transferred to the General Partner from the OLP was $3.5 million.

          The issuance of the partnership interests to the General Partner is
     intended to compensate the General Partner for additional significant
     income tax liabilities which would be reflected in the consolidated federal
     income tax return of Star Gas' parent corporation, Petro.  The issuance of
     such partnership interests was approved by the Audit Committee of the
     General Partner and the Executive Committee of Petro.

          The General Partner then exchanged the above described interest in the
     OLP for a 0.00027% general partnership interest in the Partnership and 148
     common units in the Partnership, at a per unit price based upon the average
     closing price of the Partnership's common units ten days prior to the
     execution of the Stock Purchase Agreement.  The OLP then repaid the $23.0
     million acquisition facility with $2.0 million of available cash and $21.0
     million borrowed under the OLP's own acquisition facility.

                                       9
<PAGE>
 
5)  ACQUISITIONS (CONTINUED)

          Pearl markets and distributes propane in Ohio and Michigan through a
     storage and distribution system consisting of five offices, fifteen bulk
     storage plants, fifty employees and over forty-five vehicles.  For the
     twelve months ended September 30, 1997, Pearl sold approximately 14.3
     million gallons of propane, primarily to residential customers.  Pearl
     currently serves over 12,000 active customers.

          Sales and net income have been included in the Consolidated Statements
     of Operations from October 22, 1997.

          On February 20, 1998, the Partnership acquired the propane operations
     and assets of Tri-County Propane, which is based in Williamstown, Kentucky.
     The aggregate consideration for this acquisition, accounted for under the
     purchase method was approximately $0.6 million.

          Unaudited pro forma data giving effect to the acquisitions as if they
     had been acquired on October 1 of the year preceding the year of purchase
     is as follows:

                                                 SIX MONTHS ENDED
                                          ------------------------------
                                                    MARCH 31,
                                          ------------------------------
                                               1997            1998
                                          --------------  --------------
Sales                                        $108,855         $80,319
                                             ========         =======
Net income                                   $ 13,805         $10,208
                                             ========         =======
Basic and diluted net income
   per limited partner unit                  $   2.17         $  1.61
                                             ========         =======


6)   PUBLIC OFFERING

          On December 16, 1997, the Partnership completed a public offering of
     809,000 Common Units, representing Limited Partner interests, at a price of
     $21.25 a unit.  The net proceeds received of $15.7 million, after deducting
     underwriting discounts, commissions and expenses, were used to repay $10.0
     million borrowed under the Partnership's bank acquisition facility and $5.7
     million borrowed under its working capital facility.  In connection with
     the issuance of the Common Units, the General Partner made a capital
     contribution of $0.3 million.

7)   FIRST MORTGAGE NOTES

          In January 1998, the Operating Partnership issued $11.0 million of
     First Mortgage Notes with an annual interest rate of 7.17%.  The proceeds
     from these notes were used to repay $11.0 million borrowed under the
     Operating Partnership's acquisition facility.  These First Mortgage Notes
     will mature on September 15, 2010, and will require a prepayment of $5.5
     million on March 15, 2010.  Interest is payable semi-annually on March 15
     and September 15.

8)   SUBSEQUENT EVENT - CASH DISTRIBUTION

          On April 21, 1998 the Partnership announced that it would pay a cash
     distribution of $0.55 per Limited Partner Unit for the three months ended
     March 31, 1998.  The distribution is payable on May 14, 1998 to holders of
     record as of May 1, 1998.

                                       10
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

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


THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------


OVERVIEW

In analyzing the financial results of the Partnership, the following matters
should be considered.

Propane's primary use is for heating in residential and commercial applications.
As a result, weather conditions have a significant impact on financial
performance and should be considered when analyzing changes in financial
performance.

In addition, gross profit margins vary according to the customer mix.  For
example, sales to residential customers generate higher gross profit margins
than sales to other customer groups, such as agricultural customers.
Accordingly, a change in customer mix can affect gross profit without
necessarily impacting total sales.

Lastly, the propane industry is seasonal in nature with peak activity occurring
during the winter months.  Accordingly, results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year.

This quarterly report on form 10-Q contains forward-looking information that is
subject to risks and uncertainties.  The factors that could cause actual results
to differ materially include the effects of weather, competitive and propane
pricing pressure and other factors impacting the propane distribution industry.
Readers are cautioned not to place undue reliance on this forward-looking
information, which generally speak only as of the date of this report on form
10-Q.

VOLUME

For the three months ended March 31, 1998, retail propane volume increased 1.1
million gallons, or 3.3%, to 34.0 million gallons, as compared to 32.9 million
for the three months ended March 31, 1997.  The increase was due to the
additional volume provided by the october 1997 acquisition of pearl gas, which
was mostly offset by the impact of temperatures, as measured on a degree day
basis, that were 14.3% warmer than the previous year's comparable period.  In
addition, for the three months ended March 31, 1998, temperatures were 21.1%
warmer than normal.

For the three months ended March 31, 1998, wholesale propane volume declined by
3.3 million gallons, or 34.6%, to 6.3 million gallons, as compared to 9.6
million gallons for the three months ended March 31, 1997.  This decline was due
in part to the abnormally warm winter weather and a reduction in spot sales to
certain customers.

                                       11
<PAGE>
 
SALES

For the three months ended March 31, 1998, sales declined $8.6 million, or
18.4%, to $37.9 million, as compared to $46.4 million for the three months ended
March 31, 1997.  This decline was primarily due to weather-related reductions in
volume and lower retail and wholesale selling prices.  Retail and wholesale
selling prices declined versus the prior year's comparable period in response to
the lower propane supply costs.  To a certain extent, the additional sales
provided by the Pearl operations mitigated the effects of the warm winter
weather.

COST OF SALES

For the three months ended March 31, 1998, cost of sales decreased $9.4 million,
or 37.6%, to $15.6 million, as compared to $24.9 million for the three months
ended March 31, 1997.  Cost of sales declined from the prior period due to lower
wholesale propane supply costs and a decline in wholesale volume sold.  This
decline was partially offset by the cost of sales attributable to the Pearl
operations.

GROSS PROFIT

For the three months ended March 31, 1998, gross profit increased $0.8 million,
or 3.7%, to $22.3 million, as compared to $21.5 million for the three months
ended March 31, 1997.  This increase in gross profit was attributable to higher
retail and wholesale per gallon margins and the increase in retail volume
associated with the Pearl acquisition.  This increase in gross profit was less
than expected due to the impact on volume of the abnormally warm temperatures.

DELIVERY AND BRANCH EXPENSES

For the three months ended March 31, 1998, delivery and branch expenses
increased $0.1 million, or 0.9%, to $9.6 million, as compared to $9.5 million
for the three months ended March 31, 1997.  This increase was primarily due to
expenses of $0.8 million relating to the Pearl operations.  Excluding the costs
of the Pearl operations, delivery and branch expenses declined $0.7 million, as
the Partnership was able to reduce branch costs in response to the warm winter
weather.

DEPRECIATION AND AMORTIZATION EXPENSE

For the three months ended March 31, 1998, depreciation and amortization expense
increased $0.3 million, or 10.5%, to $2.9 million, as compared to $2.6 million
for the three months ended March 31, 1997.  This increase was due to the impact
of the Pearl acquisition.

GENERAL AND ADMINISTRATIVE EXPENSES

For the three months ended March 31, 1998, general and administrative expenses
declined $0.9 million, or 36.8%, to $1.4 million, as compared to $2.3 million
for the three months ended March 31, 1997.  The decline was primarily due to the
recognition of expenses relating to the strategic initiative, which was
concluded during March 1997.

                                       12
<PAGE>
 
INTEREST EXPENSE, NET

For the three months ended March 31, 1998, interest expense, net increased $0.1
million, or 5.9%, to $1.9 million, as compared to $1.8 million for the three
months ended March 31, 1997.  This change was primarily due to an increase in
long-term debt associated with the Pearl acquisition.

NET INCOME

For the three months ended March 31, 1998, net income increased $1.1 million, or
19.5% to $6.4 million, as compared to $5.3 million for the three months ended
March 31, 1997.  The increase in net income was primarily attributable to the
impact of the Pearl acquisition.  During the three months ended March 31, 1998,
the Partnership, excluding the Pearl operations, was able to achieve
approximately the same level of net income as the prior year's comparable
period, despite the effect of temperatures that were 14.3% warmer.

EBITDA

For the three months ended March 31, 1998, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
increased $1.6 million, or 16.1%, to $11.3 million, as compared to $9.7 million
for the three months ended March 31, 1997.  The increase in EBITDA exceeded the
increase in both retail volume and gross profit, primarily through a reduction
in delivery and branch expenses in response to the warm temperatures and a lower
level of general and administrative expenses.  EBITDA should not be considered
as an alternative to net income (as an indicator of operating performance) or as
an alternative to cash flow (as a measure of liquidity or ability to service
debt obligations) but provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution.

                                       13
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

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


SIX MONTHS ENDED MARCH 31, 1998
-------------------------------
COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
-------------------------------------------



VOLUME

For the six months ended March 31, 1998, retail propane volume increased 5.3
million gallons, or 7.8%, to 72.6 million gallons, as compared to 67.3 million
gallons for the six months ended March 31, 1997.  The increase was entirely due
to the October 22, 1997 acquisition of Pearl Gas, which provided 9.0 million
gallons of additional volume.  The positive impact of the Pearl acquisition was
partially offset by the effect of temperatures which were 6.9% warmer than the
prior year's comparable period and 11.4% warmer than normal.

For the six months ended March 31, 1998, wholesale propane volume declined by
7.9 million gallons, or 33.3%, to 15.9 million gallons, as compared to 23.8
million gallons for the six months ended March 31, 1997.  This decline was due
in part to the abnormally warm winter weather and a reduction in spot sales to
certain customers.

SALES

For the six months ended March 31, 1998, sales declined $17.6 million, or 18.1%,
to $79.7 million, as compared to $97.3 million for the six months ended March
31, 1997.  This decline was due to weather-related reductions in retail and
wholesale volume, the reduction in wholesale spot sales and lower retail and
wholesale selling prices, partially offset by the additional sales provided by
the Pearl operations.  During the six months ended March 31, 1998, retail and
wholesale selling prices declined versus the prior year's comparable period in
response to lower propane supply costs.

COST OF SALES

For the six months ended March 31, 1998, cost of sales declined $16.7 million,
or 31.0%, to $37.2 million, as compared to $53.9 million for the six months
ended March 31, 1997.  This decline was largely due to lower propane supply
costs and lower wholesale sales volume, partially offset by the cost of sales
attributable to the Pearl operations.

GROSS PROFIT

For the six months ended March 31, 1998, gross profit declined $0.9 million, or
2.0%, to $42.5 million, as compared to $43.4 million for the six months ended
March 31, 1997.  This change was attributable to lower wholesale volume and a
decline in wholesale and retail margins.  As expected, per gallon margins were
lower than the prior year's comparable period when the Partnership benefited
from unusual supply and wholesale market conditions.

                                       14
<PAGE>
 
GROSS PROFIT (CONTINUED)

While retail margins for the six months ended March 31, 1998 were lower than the
comparable 1997 period, these margins compare favorably with those achieved
during the six month periods ending March 31, 1996 and March 31, 1995.

DELIVERY AND BRANCH EXPENSES

For the six months ended March 31, 1998, delivery and branch expenses increased
$0.4 million, or 2.0%, to $19.7 million, as compared to $19.4 million for the
six months ended March 31, 1997.  This increase was solely due to the additional
operating costs associated with the Pearl operations.  Excluding the Pearl
operations, delivery and branch expenses were $1.0 million less than the prior
year's comparable period due to lower insurance costs and management's ability
to reduce operating costs in response to the warm winter weather.

DEPRECIATION AND AMORTIZATION

For the six months ended March 31, 1998, depreciation and amortization expense
increased $0.5 million, or 9.9%, to $5.7 million, as compared to $5.2 million
for the six months ended March 31, 1997, primarily due to additional
depreciation expense associated with the Pearl acquisition.

GENERAL AND ADMINISTRATIVE EXPENSES

For the six months ended March 31, 1998, general and administrative expenses
decreased $1.1 million, or 27.6%, to $2.8 million, as compared to $3.9 million
for the six months ended March 31, 1997.  This decline was primarily due to the
recognition of expenses relating to the strategic initiative, which was
concluded during March 1997.

INTEREST EXPENSE, NET

For the six months ended March 31, 1998, interest expense, net increased $0.3
million, or 9.5%, to $4.0 million, as compared to $3.7 million for the six
months ended March 31, 1997.  This change was primarily due to the additional
long-term borrowing associated with the Pearl Gas acquisition.

INCOME TAX EXPENSE

Income tax expense primarily represents certain state income taxes related to
the partnership's wholly-owned corporation which conducts non-qualifying master
limited partnership business.

NET INCOME

For the six months ended March 31, 1998, net income decreased $1.1 million, or
10.2%, to $10.1 million, as compared to $11.2 million for the six months ended
March 31, 1997.  This decline was primarily due to lower wholesale gross profit
and increases in depreciation and amortization expenses, as well as interest
costs relating to the financing of the Pearl Gas acquisition.

                                       15
<PAGE>
 
EBITDA

For the six months ended March 31, 1998, EBITDA (defined as operating income
plus depreciation and amortization less net gain (loss) on sales of assets)
declined only $0.2 million to $20.0 million.  This slight reduction was achieved
in a period which was impacted by 11.4% warmer than normal temperatures, as the
effects of the abnormally warm winter weather were mostly offset by the
additional EBITDA provided from the Pearl acquisition and reductions in total
operating expenses.  EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations) but
provides additional information for evaluating the Partnership's ability to make
the Minimum Quarterly Distribution.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended March 31, 1998, net cash provided by operating
activities decreased $3.3 million, to $11.9 million, as compared to $15.2
million for the six months ended March 31, 1997.  This decrease was primarily
due to the additional cash requirements of inventory and accounts payable and
lower cash flow due to lower net income.

Net cash used in investing activities decreased $1.6 million to $2.0 million for
the six months ended March 31, 1998, as compared to $3.6 million for the six
months ended March 31, 1997.  The decline was primarily due to the receipt of
$1.8 million in cash from the October 1997 Pearl Gas Conveyance.

Net cash flows used in financing activities declined $5.8 million to $2.5
million for the six months ended March 31, 1998, as compared to $8.4 million for
the six months ended March 31, 1997.  Additional capital was raised during the
six months ended March 31, 1998 to finance the Partnership's acquisition
program.  The Partnership raised $27.1 million in capital through the offering
of additional Common Units, $16.1 million in net proceeds, including a General
Partner contribution of $0.3 million, and the private placement of $11.0 million
of 7.17% First Mortgage Notes due 2010.  These proceeds were used to repay $23.0
million of long-term debt conveyed in the Pearl Gas acquisition.  For the six
months ended March 31, 1998, unitholder distributions of $6.5 million were paid.

The Partnership's cash requirements for the remainder of fiscal 1998 include
maintenance capital expenditures of approximately $1.0 million and interest
payments of $3.8 million on its First Mortgage Notes.  In addition, the
Partnership plans to pay $7.0 million of Limited and General Partner
distributions.  Based on its current cash position, bank credit availability and
expected net cash from operating activities, the partnership expects to be able
to meet all of these obligations for fiscal 1998, as well as all of its other
current obligations as they become due.

The Partnership has a number of information system improvement initiatives under
way that will require increased expenditures during the next several years.
These initiatives include the modification of certain computer software and
hardware systems to be Year 2000 compliant.  Although the final estimates to
modify current systems have not yet been determined, the Partnership does not
expect that such costs will have a material effect on the Partnership's results
of operations or financial position.

                                       16
<PAGE>
 
                          PART II:  OTHER INFORMATION
                                        



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


       (a)  Exhibits Included Within:
            ------------------------ 

            (10.12) THIRD AMENDMENT dated as of April 15, 1998 (this "Third
                    Amendment"), to the Credit Agreement dated as of December
                    13, 1995 (as amended prior to the date hereof, the "Credit
                    Agreement"), among Star Gas Propane, L.P., a Delaware
                    limited partnership (the "Borrower"), the lenders party
                    thereto, The First National Bank of Boston (now known as
                    BankBoston, N.A.), as Administrative Agent (the
                    "Administrative Agent"), and NationsBank, N.A., as
                    Documentation Agent (the "Documentation Agent", and together
                    with the Administrative Agent, the "Agents").

            (27)    Financial Data Schedule


       (b)  Reports on Form 8-K
            -------------------

            No reports on Form 8-K have been filed during this quarter for which
            this report is filed.

                                       17
<PAGE>
 
                                   SIGNATURE
                                   ---------


Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf of the undersigned
thereunto duly authorized:



Star Gas Partners, L.P.
By:  Star Gas Corporation (General Partner)


 
SIGNATURE                   TITLE                          DATE
---------                   -----                          ----
 
/s/    Joseph P. Cavanaugh  President                      May 7, 1998
       -------------------  Star Gas Corporation
       Joseph P. Cavanaugh  (Principal Executive Officer)

/s/    Richard F. Ambury    Vice President Finance         May 7, 1998
       -------------------  Star Gas Corporation
       Richard F. Ambury    (Principal Financial
                            & Accounting Officer)

                                       18