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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                                       OR

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

For the Quarterly Period                                        Commission File
Ended September 30, 1998                                       Number 001-10311

                         KANEB PIPE LINE PARTNERS, L.P.
             (Exact name of registrant as specified in its charter)


          DELAWARE                                               75-2287571
(State or other jurisdiction of                               (I.R.S. Employer 
 Incorporation or Organization)                              Identification No.)

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

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

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

                            Yes X           No

Number of Units of the Registrant outstanding at November 13, 1998:  16,060,000.

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

<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

                                                                        Page No.
                Part I. Financial Information

Item 1.    Financial Statements (Unaudited)

           Consolidated Statements of Income - Three and Nine Months
              Ended September 30, 1998 and 1997                             1

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

           Condensed Consolidated Statements of Cash Flows - Nine
              Months Ended September 30, 1998 and 1997                      3

           Notes to Consolidated Financial Statements                       4

Item 2.    Management's Discussion and Analysis of
             Financial Condition and Results of Operations                  6

                Part II. Other Information

Item 6.    Exhibits and Reports on Form 8-K                                 9

           Signature                                                        9




<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                            Three Months Ended       Nine Months Ended
                                               September 30,           September 30,
                                           --------------------    --------------------
                                             1998        1997        1998        1997
                                           --------    --------    --------    --------
<S>                                        <C>         <C>         <C>         <C>     
Revenues ...............................   $ 33,709    $ 31,465    $ 92,332    $ 89,837
                                           --------    --------    --------    --------
Costs and expenses:
     Operating costs ...................     13,176      12,967      37,781      37,926
     Depreciation and amortization .....      3,075       2,946       9,040       8,744
     General and administrative ........      1,748       1,596       4,955       4,263
                                           --------    --------    --------    --------
       Total costs and expenses ........     17,999      17,509      51,776      50,933
                                           --------    --------    --------    --------

Operating income .......................     15,710      13,956      40,556      38,904

Interest and other income, net .........         20         143         107         418
Interest expense .......................     (2,816)     (2,858)     (8,283)     (8,561)
                                           --------    --------    --------    --------
Income before minority interest
     and income taxes ..................     12,914      11,241      32,380      30,761
Minority interest in net income ........       (127)       (148)       (319)       (338)
Income tax provision ...................       (189)       (118)       (473)       (592)
                                           --------    --------    --------    --------
Net income .............................     12,598      10,975      31,588      29,831
General partner's interest in net income       (205)       (148)       (539)       (338)
                                           --------    --------    --------    --------
Limited partners' interest in net income   $ 12,393    $ 10,827    $ 31,049    $ 29,493
                                           ========    ========    ========    ========
Allocation of net income per Unit ......   $    .77    $    .68    $   1.93    $   1.84
                                           ========    ========    ========    ========

Weighted average number of Partnership
   Units outstanding ...................     16,060      16,060      16,060      16,060
                                           ========    ========    ========    ========
</TABLE>

<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

                                                 September 30,      December 31,
                                                     1998               1997
                                                 -------------      ------------
                                                  (Unaudited)
               ASSETS

Current assets:
   Cash and cash equivalents .................   $      5,710       $     6,376
   Accounts receivable .......................         13,989            11,503
   Prepaid expenses ..........................          3,683             4,021
                                                 ------------       -----------
     Total current assets ....................         23,382            21,900
                                                 ------------       -----------
Property  and equipment ......................        368,730           345,802
Less accumulated depreciation and amortization        107,342            98,670
                                                 ------------       -----------
     Net property and equipment ..............        261,388           247,132
                                                 ------------       -----------
                                                 $    284,770       $   269,032
                                                 ============       ===========

     LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Current portion of long-term debt .........   $      5,762       $     2,335
   Accounts payable and accrued expenses .....         14,674            10,546
   Distributions payable .....................         10,725            10,725
   Payable to general partner ................          1,045             1,143
                                                 ------------       -----------
     Total current liabilities ...............         32,206            24,749
                                                 ------------       -----------
Long-term debt, less current portion .........        139,300           132,118

Other liabilities and deferred taxes .........          8,302             6,935

Minority interest ............................          1,034             1,034

Commitments and contingencies

Partners' capital ............................        103,928           104,196
                                                 ------------       -----------

                                                 $    284,770       $   269,032
                                                 ============       ===========



<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

                                                              Nine Months Ended
                                                                September 30,
                                                           ---------------------
                                                              1998        1997
                                                           --------    ---------

Operating activities:
   Net income ......................................       $ 31,588    $ 29,831
   Adjustments to reconcile net income
     to net cash provided by operating activities:
       Depreciation and amortization ...............          9,040       8,744
       Minority interest in net income .............            319         338
       Deferred income taxes .......................            292         592
       Changes in working capital components .......          1,980       4,076
                                                           --------    --------
           Net cash provided by operating activities         43,219      43,581
                                                           --------    --------
Investing activities:
   Capital expenditures ............................         (8,048)     (7,162)
   Acquisitions of terminals .......................        (14,673)       --
   Other, net ......................................            500         631
                                                           --------    --------
           Net cash used in investing activities ...        (22,221)     (6,531)
                                                           --------    --------
Financing activities:
   Changes in payable to general partner ...........            (98)        975
   Issuance of long-term debt ......................         11,736        --
   Payments of long-term debt ......................         (1,127)     (1,500)
   Distributions to partners .......................        (32,175)    (30,390)
                                                           --------    --------
           Net cash used in financing activities ...        (21,664)    (30,915)
                                                           --------    --------
Increase (decrease) in cash and cash equivalents ...           (666)      6,135
Cash and cash equivalents at beginning of period ...          6,376       8,196
                                                           --------    --------
Cash and cash equivalents at end of period .........       $  5,710    $ 14,331
                                                           ========    ========





<PAGE>
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
(Unaudited)
--------------------------------------------------------------------------------
                                               
1.   SIGNIFICANT ACCOUNTING POLICIES

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


2.   NEW ACCOUNTING PRONOUNCEMENT

     The  Partnership  has adopted the  provisions  of  Statement  of  Financial
     Accounting  Standards  No. 130,  "Reporting  Comprehensive  Income,"  which
     establishes standards for the reporting and display of comprehensive income
     and its components in a full set of general purpose  financial  statements.
     There were no items to report for the three and nine months ended September
     30, 1998 or 1997.


3.   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. The Partnership expects
     to make  distributions  of Available Cash for each quarter of not less than
     $0.55 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.  A cash distribution of $0.65 per unit
     for the  fourth  quarter  of 1997 was made on  February  14,  1998.  A cash
     distribution of $0.65 for each of the first three quarters of 1998 was paid
     on May 15, 1998, August 14, 1998 and November 13, 1998, respectively.

     Payment of the August 14, 1998,  regular cash distribution  represented the
     12th consecutive quarterly distribution of Available Cash constituting Cash
     from  Operations  in an amount  equal to or  exceeding  the  $0.55  Minimum
     Quarterly Distribution specified in the Partnership Agreement. Accordingly,
     pursuant to the terms of the Partnership  Agreement,  distinctions  between
     Senior  Preference Units,  Preference Units and Common Units  automatically
     ceased as of such date.  At that  time,  all  outstanding  units of limited
     partnership  interest in the  Partnership  became  "Units"  constituting  a
     single  class of  equity  securities.  The  Units now trade on the New York
     Stock Exchange under the symbol "KPP".


<PAGE>


KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

     This  discussion  should  be  read in  conjunction  with  the  consolidated
     financials statements of Kaneb Pipe Line Partners, L.P. (the "Partnership")
     and notes thereto included elsewhere in this report.

     Operating Results:

     Pipeline Operations

                                   Three Months Ended       Nine Months Ended
                                      September 30,           September 30,
                                  ---------------------   ---------------------
                                    1998        1997        1998        1997
                                  ---------   ---------   ---------   ---------
                                                   (in thousands)

     Revenues                     $  17,406   $  16,312   $  46,858   $  45,180
     Operating costs                  6,055       5,773      16,816      16,644 
     Depreciation and amortization    1,192       1,228       3,569       3,648
     General and administrative         813         816       2,365       2,154
                                  ---------   ---------   ---------   ---------
        Operating income          $   9,346   $   8,495   $  24,108   $  22,734
                                  =========   =========   =========   =========

     Pipeline revenues are based on volumes shipped and the distances over which
     such  volumes are  transported.  For the three and nine month  period ended
     September 30, 1998, revenues increased 7% and 4%, respectively, compared to
     the same 1997  periods,  due to an overall  increase  in  volumes  shipped,
     primarily on the East  Pipeline.  Barrel miles totaled 4.8 billion and 12.5
     billion for the three and nine months ended September 30, 1998, compared to
     4.2 billion and 11.9 billion for the respective prior year periods.


     Operating  costs,  which  include  fuel  and  power  costs,  materials  and
     supplies,  maintenance  and  repair  costs,  salaries,  wages and  employee
     benefits,  and  property  and  other  taxes,  increased  slightly  over the
     comparable  prior year  periods due  primarily  to the  increase in volumes
     shipped.   General  and  administrative  costs  which  include  managerial,
     accounting,  and administrative personnel costs, office rental and expense,
     legal  and  professional  costs  and  other  non-operating  costs  remained
     constant for the three months ended  September 30, 1998 and increased  $0.2
     million for the nine months ended  September 30, 1998,  over the comparable
     1997 periods.

     Terminaling Operations

                                   Three Months Ended       Nine Months Ended
                                      September 30,           September 30,
                                  ---------------------   ---------------------
                                    1998        1997        1998        1997
                                  ---------   ---------   ---------   ---------
                                                   (in thousands)

     Revenues                     $  16,303   $  15,153   $  45,474   $  44,657
     Operating costs                  7,121       7,194      20,965      21,282
     Depreciation and amortization    1,883       1,718       5,471       5,096
     General and administrative         935         780       2,590       2,109
                                  ---------   ---------   ---------   ---------
         Operating income         $   6,364   $   5,461   $  16,448   $  16,170
                                  =========   =========   =========   =========

     In March 1998, the Partnership completed the acquisition of certain liquids
     terminaling  assets located in Chicago,  Illinois which included 19 storage
     tanks with an  aggregate  capacity of 752  thousand  barrels.  In September
     1998, the Partnership  acquired 31 liquid chemical  storage tanks, dry bulk
     fertilizer  storage  and a liquid  packaging  line  located  in  Vancouver,
     Washington   (collectively   referred  to  as  the   "Acquisitions").   The
     Acquisitions  were funded by the  Partnership's  existing  revolving credit
     facility.

     Revenues  increased  8% and 2% for the three and nine month  periods  ended
     September 30, 1998,  respectively,  compared to the same 1997 periods,  due
     primarily  to an  increase  in tank  utilization  due to  favorable  market
     conditions  and the  Acquisitions,  partially  offset by a decrease  in the
     overall  average price realized for storage.  For the three and nine months
     ended September 30, 1998, average annualized revenues per barrel of tankage
     utilized  decreased  to $3.97  and  $4.23,  compared  to $4.87 and 4.85 per
     barrel for the same prior year periods, primarily the result of the storage
     of  a  larger  proportionate  volume  of  petroleum  products,   which  are
     historically  at lower per barrel rates than specialty  chemicals.  Average
     annual  tankage  utilized  for the nine  months  ended  September  30, 1998
     increased  to 14.3  million  barrels  from  12.3  million  barrels  for the
     comparable   prior  year  period,   primarily  as  a  result  of  increased
     utilization at the Partnership's largest petroleum storage facility and the
     Acquisitions.

     For the three and nine month  periods ended  September 30, 1998,  operating
     costs  decreased  by $0.1  million  and  $0.3  million  respectively,  when
     compared to the same 1997 periods, as the result of variances in the mix of
     products  stored,  partially  offset by an  increase  in tank  utilization.
     General and  administrative  expense  for the three and nine  months  ended
     September  30,  1998,  increased  by $0.2  million and $0.5  million,  when
     compared to the same period in 1997, due primarily to the Acquisitions.

     Total tankage  capacity  (18.0  million  barrels at September 30, 1998) 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. 

     Liquidity and Capital Resources

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

     Cash  provided by  operations  was $43.2  million and $43.6 million for the
     nine  months  ended  September  30,  1998 and 1997,  respectively.  Capital
     expenditures (excluding acquisitions) were $8.0 million for the nine months
     ended September 30, 1998, compared to $7.2 million in 1997.

     The  Partnership  makes  distributions  of  100% of its  Available  Cash to
     Unitholders and the General Partner.  Available Cash consists  generally of
     all cash receipts less all cash  disbursements and reserves.  Distributions
     of $0.65 per unit were declared to  Unitholders in the first three quarters
     of 1998 and $2.50 per unit was declared in the calendar year 1997.

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

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

     Year 2000 Issue

     Although  the  Partnership   believes  that  most  of  its  activities  and
     operations are not  materially  impacted by Year 2000 Issues  ("Y2K"),  the
     Partnership   recognizes  the  challenges   associated  with  Y2K  and  has
     undertaken  a review  and  testing  of its  computer  systems  to  identify
     Y2K-related  issues  associated with any items of software or hardward used
     in its  business  operations.  Most  of the  software  systems  used by the
     Partnership  are licensed  from third parties and are Y2K compliant or will
     be upgraded to Y2K  compliant  releases  over the next year.  This issue is
     being   addressed  by  the  Partnership  in  multiple   phases,   including
     assessment,  remediation, testing and implementation, and progress is being
     monitored by the  Partnership's  senior  management.  All material systems,
     including non-information technology systems which may house non-compliant,
     imbedded technology, such as office machines, are being evaluated.

     In addition to  addressing  the  Partnership's  own  systems,  as described
     above, the Partnership must assess the state of readiness of the systems of
     other entities with which it does business.  Failure by these third parties
     to  adequately  resolve  their Y2K problems  could have a material  adverse
     effect on the Partnership's operations.

     The  Partnership  believes its success in being Y2K  compliant  will not be
     conclusively  known  until  the year  2000 is  actually  reached.  Although
     failure by one or more of the  Partnership's  own systems  could  result in
     lost  revenues  and/or  additional  expenses  required  to carry out manual
     processing of transactions,  the Partnership cannot predict the effect that
     external   forces  could  have  on  its   business.   Failures  by  banking
     institutions,   the  telecommunications  industry  and  others  could  have
     far-reaching effects on the Partnership and the entire economy.

     The  Partnership  expects to complete  its Y2K program in a timely  manner.
     However, the Partnership believes that it is not possible to determine with
     certainty  that  all Y2K  problems  affecting  the  Partnership  have  been
     identified or  corrected.  The number of devices that could be affected and
     the interactions among these devices are simply too numerous.  In addition,
     the Partnership  cannot accurately predict how many failures related to the
     Y2K problem will occur or the severity,  duration or financial consequences
     of such  failures.  The  Partnership  is in the process of  evaluating  and
     hiring an outside Y2K  consultant to assist the  Partnership in meeting its
     goals  and in  developing  contingency  plans to  define  and  address  the
     worst-case  scenario  likely  to be faced by the  Partnership.  The plan is
     expected to be in place in by the end of the first quarter of 1999.

     Expenses  incurred  by the  Partnership  during  1997,  and the first three
     quarters  of 1998,  related  to  assessing,  remediating  and  testing  its
     information technology systems, which was not material,  have been expensed
     as incurred and funded from operations. The Partnership does not anticipate
     that the cost to become fully Y2K compliant will be material.

     This  entire   section  is  hereby   designated  a  "Year  2000   Readiness
     Disclosure",  as  defined  in  the  Year  2000  Information  and  Readiness
     Disclosure Act.

     Allocation of Net Income and Earnings

     Net income is  allocated to the limited  partnership  units pro rata on the
     aggregate  amount of  distributions  declared.  Prior to June 30, 1998, the
     Partnership had three classes of partnership  interests  designated  Senior
     Preference Units, Preference Units and Common Units, respectively. Pursuant
     to the Partnership Agreement,  on August 14, 1998, each such class of units
     were converted into a single class designated  "Units",  effective June 30,
     1998. The  allocation of net income per Unit reflected in the  Consolidated
     Statements of Income was allocated to each class of partnership interest.

     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 Unit  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 Units, by
     the weighted  average  number of Units  outstanding.  If the  allocation of
     income  had  been  made as if all  income  had  been  distributed  in cash,
     earnings per Unit would have been $0.76 and $0.67 for the three months, and
     $1.93 and $1.83 for the nine  months  ended  September  30,  1998 and 1997,
     respectively.


<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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


                           PART II - Other Information

Item 6.                             Exhibits and Reports on Form 8-K

         (a)          Exhibits.

                      27.    Financial Data Schedule

         (b)           Reports on Form 8-K

                      Registrant's  Current Report on Form 8-K, dated August 14,
                      1998, (SEC File No.  001-10311).

                      Registrant's Current Report on Form 8-K, dated November 6,
                      1998, (SEC File No.  001-10311).



                                    Signature


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


                                        KANEB PIPE LINE PARTNERS, L.P.
                                        (Registrant)

                                        By:   KANEB PIPE LINE COMPANY
                                              (Managing General Partner)


Date:  November 16, 1998                               //s//
                                              ----------------------
                                              Jimmy L. Harrison
                                              Vice President and Controller