<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549
                                                                                
                                   FORM 10-K

                                   (Mark One)

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

                  For the Fiscal year ended September 30, 1997
                                            ------------------
                                       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)


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

                                 Common Units
                  ---------------------------------------------
                               (Title of class)


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 filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated be reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ X ]

The aggregate market value of Star Gas Partners, L.P. Common Units held by non-
affiliates of Star Gas Partners, L.P. on November 21, 1997 was approximately
$66,500,000.  At November 21, 1997 there were outstanding 3,022,727 Common
Units and 2,396,078 Subordinated Units, each representing limited partner
interests.

Documents Incorporated by Reference:  None

<PAGE>
 
                            STAR GAS PARTNERS, L.P.
                          1997 FORM 10-K ANNUAL REPORT
                               TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
 
                                                                 Page
<S>         <C>                                                  <C>
 
Item  1.    Business                                                3
Item  2.    Properties                                             11
Item  3.    Legal Proceedings - Litigation                         11
Item  4.    Submission of Matters to a Vote of Security Holders    11
 
</TABLE>

                                    PART II

<TABLE>
<CAPTION>

<S>         <C>                                                    <C>
Item  5.    Market for the Registrant's Units and
              Related Matters                                      12
Item  6.    Selected Historical Financial and Operating Data       13
Item  7.    Management's Discussion and Analysis of
              Financial Condition and Results of Operations        14
Item  8.    Financial Statements and Supplementary Data            21
Item  9.    Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure                  21
 
</TABLE>

                                    PART III

<TABLE>
<CAPTION>
 
<S>         <C>                                                    <C>
Item 10.    Directors and Executive Officers of the Registrant     21
Item 11.    Executive Compensation                                 25
Item 12.    Security Ownership of Certain Beneficial Owners
              and Management                                       27
Item 13.    Certain Relationships and Related Transactions         30
 
</TABLE>

<TABLE> 
<CAPTION> 
                                    PART IV

<S>       <C>                                                      <C> 
Item 14.  Exhibits, Financial Statement Schedules, and
            Reports on Form 8-K                                    31
</TABLE> 

                                       2
<PAGE>
 
                                    PART I
                               ITEM 1. BUSINESS
                                        


STRUCTURE


   Star Gas Partners L.P. (the "Partnership" or the "MLP") was formed on October
16, 1995 to acquire and operate the propane business of Star Gas Corporation
(the "Company", "Star Gas" or the "General Partner") and its parent corporation
Petroleum Heat and Power Co., Inc. ("Petro" and, together with Star Gas
collectively the "Star Gas Group" or the "Predecessor Company").  Substantially
all of the consolidated assets and liabilities of the MLP are accounted for by
Star Gas Propane, L.P. (the "Operating Partnership" or the "OLP") in which the
MLP owns a 99% limited partnership interest and the Company owns a 1% general
partnership interest.


   The General Partner directs and manages all activities of the Partnerships
and the Operating Partnership and is reimbursed on a monthly basis for all
direct and indirect expenses it incurs on their behalf, including the cost of
employees.


ACQUISITION OF PEARL GAS

   On October 22, 1997, the OLP completed its acquisition of Pearl Gas Co.
("Pearl") which is based in Bowling Green, Ohio.  Pearl sells over 14 million
gallons of propane annually to over 12,000 customers, operating in northwest
Ohio, southern Michigan and northeast Indiana.  Over 80% of Pearl's volume is
sold to residential customers.

BUSINESS

   The Partnership is primarily engaged in the retail distribution of propane
and related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers.  Including the operations of Pearl Gas
Co., the Partnership believes that it is the eighth largest retail propane
distributor in the United States, serving approximately 162,000 customers from
54 branch locations and 30 satellite storage facilities in the Midwest and 18
branch locations and 15 satellite storage facilities in the Northeast.  The
Partnership also serves approximately 60 wholesale customers from its wholesale
operation in southern Indiana.

INDUSTRY BACKGROUND

   Propane is used primarily for space heating, water heating and cooking by
residential and commercial customers, which constitute the largest portion of
the customer base.  Propane is extracted from natural gas or oil wellhead gas at
processing plants or separated from crude oil during the refining process.
Propane is normally transported and stored in a liquid state under moderate
pressure or  refrigeration for  ease of  handling in  shipping and
distribution.  When the pressure is released or the temperature is increased, it
is usable as a flammable gas.  Propane is colorless and odorless; an odorant is
added to allow its detection.  Propane is clean-burning, producing negligible
amounts of pollutants when consumed. According to the National Propane Gas
Association, the domestic retail market for propane is approximately 9.4 billion
gallons annually,

                                       3
<PAGE>
 
INDUSTRY BACKGROUND (CONTINUED)


with limited growth for retail demand for the product.  Based upon information
contained in the Energy Information Administration's Annual Energy Review-1995,
propane accounts for approximately 3.8% of household energy consumption in the
United States.

BUSINESS STRATEGY

   The Partnership's strategy is to maximize its cash flow and profitability,
primarily through internal growth, controlling operating costs and acquisitions
which have the potential for generating attractive returns on investment.  The
retail propane industry is mature and experiences only limited growth in total
demand for the product.  The propane industry is also large and highly
fragmented, with approximately 6,000 independently owned and operated
distributors.  The Partnership focuses on acquiring smaller to medium-sized
local and regional independent propane distributors, particularly those with a
relatively large percentage of residential customers, which generate higher
margins than other types of customers, and those located in the Midwest and
Northeast, where the Partnership believes it can attain higher margins than in
other areas of the United States.

   Although there are no formal arrangements between Petro and the Partnership,
the Partnership anticipates that it will continue to have access to Petro's
management expertise.  In particular, the Partnership believes that the
extensive experience of Petro's management team in making acquisitions in the
home heating oil industry, which has many similar characteristics to the propane
industry provides the Partnership with a competitive advantage.  Additionally,
the field of potential acquisition candidates for the Partnership is broadened
because of the ability to acquire companies with both home heating oil and
propane operations, with the Partnership retaining the propane, operations and
Petro retaining the home heating oil operations or the Partnership retaining 
both the propane and the home heating oil operations or the Partnership 
retaining both the propane and the home heating oil operations. In this regard,
although the Partnership does not presently have any home heating oil
operations, it may consider acquiring or retaining such operations in the future
to the extent that the Partnership is able to identify attractive acquisition
candidates in the home heating oil field.

   In order to facilitate the Partnership's acquisition strategy, the Operating
Partnership has entered into the Bank Credit Facilities which consist of a $25.0
million Acquisition Facility (of which $21.0 million was outstanding as of
October 31, 1997) and a $12.0 million Working Capital Facility (of which $2.4
million was outstanding as of October 31, 1997).  In addition to borrowings
under the Bank Credit Facilities, the Partnership may fund future acquisitions
from internal cash flow, the issuance of additional Partnership interests or
incurrence of additional long-term debt.

   While the Partnership regularly considers and evaluates acquisitions as part
of its ongoing acquisition program, the Partnership does not have any present
agreements or commitments with respect to any acquisition.  There can be no
assurance that the Partnership will identify attractive acquisition candidates
in the future or that it will be able to acquire such candidates or obtain
financing for such acquisitions on acceptable terms.  If the Partnership is able
to make acquisitions, there can be no assurance, however, that such acquisitions
will not dilute earnings and distributions to Unitholders.  The General Partner
has broad discretion in making acquisitions and it is expected that the General
Partner will not generally seek Unitholder approval of acquisitions.


MARKETING AND OPERATIONS

   As of October 31, 1997, the Partnership distributed propane to approximately
162,000 retail customers in 13 states from 72 branch locations.  The
Partnership's operations are conducted under several leading trademarks and
trade names, including: Star Gas(R), Star Gas Service/TM/, Silgas/TM/, Blue
Flame(R), Maingas/TM/,

                                       4

<PAGE>
 
MARKETING AND OPERATIONS (CONTINUED)

Arrow Gas/TM/, Mid-Hudson Valley Propane/TM/, Coleman Gas Service/TM/, H & S
Gas/TM/, Isch Gas/TM/, Wilhoyte L.P. Gas/TM/ and Rural Natural Gas/TM/ and Pearl
Gas/TM/. (The Partnership does not have the right to use the trademark Star
Gas(R) in the State of New York nor does the Partnership have the right to use
the Blue Flame(R) trademark in certain limited areas outside of the
Partnership's current area of operations). The marketing areas served by the
Partnership are generally rural but also include suburban areas where natural
gas is generally not available.

The Partnership's retail operations are located primarily in the Northeast and
Midwest regions of the United States:

NORTHEAST                       MIDWEST         
---------                       -------
CONNECTICUT     PENNSYLVANIA    INDIANA                 KENTUCKY (continued)
Stamford        Hazelton        Akron                   Shelbyville
Hartford        Wind Gap        Batesville              Williamstown
                                Bedford
MAINE           RHODE ISLAND    Bluffton                MICHIGAN
Fairfield       Davisville      Coal City               Hillsdale
Fryeburg                        College Corner          Somerset Center
Skowhegan                       Columbia City 
Wells                           Decatur                 OHIO
Windham                         Ferdinand               Bowling Green
                                Greencastle             Cincinnati
MASSACHUSETTS                   Jeffersonville          Defiance
Belchertown                     Linton                  Deshler
Rochdale                        Madison                 Ft. Recovery
Westfield                       New Salisbury           Hebron
Swansea                         N. Manchester           Ironton
                                N. Vernon               Kenton
NEW HAMPSHIRE                   N. Webster              Lancaster
(from Fryeburg, ME)             Portland                Lewisburg
                                Remington               Lynchburg
NEW JERSEY                      Richmond                Macon
Maple Shade                     Salem                   Maumee
Tuckahoe                        Seymour                 McClure
                                Sulphur Springs         Milford
NEW YORK                        Versailles              Mt. Orab
Poughkeepsie                    Warren                  North Star
Washingtonville                 Waterloo                Ripley
                                Winamac                 Sabina
                                                        Waverly
                                KENTUCKY                West Union
                                Glencoe                 
                                Prospect                WEST VIRGINIA
                                                        (from Ironton, OH)


  The distribution of propane at the retail level generally involves large
numbers of small deliveries averaging 100-150 gallons each to residential,
commercial, industrial, agricultural and motor fuel users.  Homeowners or
residential customers use propane primarily for space heating, water heating,
clothes drying and cooking.  Commercial customers such as motels, restaurants,

                                       5
<PAGE>
 
MARKETING AND OPERATIONS (CONTINUED)

retail stores and laundromats, generally use propane for the same purposes as
residential customers.  Industrial users, such as manufacturers, use propane as
a heating and energy source in manufacturing and drying processes.  In addition,
propane is used to dry crops, cure tobacco and as a fuel source for certain
motor vehicles.

   During the fiscal year ended September 30, 1997, approximately 71% of the
Partnership's sales (by volume of gallons sold) were to retail customers (of
which approximately 52%, 21%, 18% and 9% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and approximately 29% were to wholesale customers.
Sales to residential customers in fiscal year 1997 accounted for 62% of the
Partnership's gross profit on propane sales, reflecting the higher-margin nature
of this segment of the market.

   From its branch locations, the Partnership also sells, installs and services
equipment related to its propane distribution business, including heating and
cooking appliances and, at some locations, rents water softeners.  Typical
branch locations consist of an office, appliance showroom, warehouse and service
facilities, with one or more 12,000 to 30,000 gallon bulk storage tanks on or
near the premises.  Satellite facilities typically contain only storage tanks.

   Retail deliveries of propane are usually made to customers by means of the
Partnership's fleet of 269 bobtail and rack trucks.  Propane is pumped from the
bobtail truck, which generally holds 2,000 to 3,000 gallons, into a stationary
storage tank on the customer's premises.  The Partnership generally owns these
storage tanks.  The capacity of these tanks ranges from approximately 24 gallons
to approximately 1,000 gallons.  The Partnership also delivers propane to retail
customers in portable cylinders, which typically are picked up and replenished
at the Partnership distribution locations, then returned to the retail customer.
To a limited extent, the Partnership also delivers propane to certain end users
of propane in larger trucks known as transports (which have an average capacity
of approximately 9,000 gallons).  End users receiving transport deliveries
include industrial customers, large-scale heating accounts, such as local gas
utilities which use propane as a supplemental fuel to meet peak demand
requirements, and large agricultural accounts which use propane for crop drying
and space heating.  "See Item 2--Properties".

   A majority of the Partnership's residential customers receive their propane
supply pursuant to an automatic delivery system which eliminates the customer's
need to make an affirmative purchase decision.  The Partnership delivers propane
to its customers an average of approximately six times during the year,
depending upon weather conditions and historical consumption patterns.  In
addition, the Partnership provides emergency service seven days a week, 52 weeks
a year.  Management believes its propane customer base to be relatively stable.
In excess of 95% of the Partnership's retail propane customers lease their tanks
from the Partnership.  In most states, certain fire safety regulations restrict
the refilling of a leased tank solely to the propane supplier that owns the
tank.  The inconvenience associated with switching tanks greatly reduces a
propane customer's tendency to change distributors.


   Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane.  The Partnership generally purchases propane in the contract and spot
markets, primarily from natural gas processors and major oil companies, for its
short-term requirements, therefore, its supply costs fluctuate with market price
fluctuations.  Should wholesale propane prices decline in the future, the

                                       6
<PAGE>
 
MARKETING AND OPERATIONS (CONTINUED)

Partnership's margins on its retail propane distribution business should
increase in the short-term because retail prices tend to change less rapidly
than wholesale prices.  Should the wholesale cost of propane increase, for
similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased.

   The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings.  Approximately 70% - 75% of the
Partnership's retail propane volume is sold during the peak heating season from
October through March, as many customers use propane for heating purposes.

   Consequently, sales and operating profits are largely generated in the first
and second fiscal quarters (October through March).  To the extent necessary,
the Partnership will reserve cash flows from the first and second quarters for
distribution to holders of Common Units in the third and fourth fiscal quarters.
In addition, sales volume traditionally fluctuates from year to year in response
to variations in weather, prices and other factors.  The Partnership believes
that the broad geographic distribution of its operations helps to minimize
exposure to regional weather or economic patterns.

SUPPLY

   The Partnership obtains propane from over 25 sources, all of which are
domestic or Canadian oil companies, including Amoco Canada Marketing Group;
Ashland Petroleum Company; Bayway Refining Company; Ferrell North America;
Marathon Oil Company; Markwest Hydrocarbons; Mobil Oil Company; Petro Canada LPG
Inc.; Shell Canada Limited; Shell Oil Company; and Warren Gas Liquids, Inc.
Supplies from these sources have traditionally been readily available, although
no assurance can be given that supplies of propane will be readily available in
the future.

   Substantially all of the Partnership's propane supply for its Northeast
retail operations are purchased under annual or longer term supply contracts,
which generally provide for pricing in accordance with market prices at the time
of delivery.  Certain of the contracts provide for minimum and maximum amounts
of propane to be purchased.  During the year ended September 30, 1997, none of
the Partnership's Northeast suppliers accounted for more than 10% of the
Partnership's volumes.

   The Partnership typically supplies its Midwest retail and wholesale
operations by a combination of (i) spot purchases from suppliers at Mont.
Belvieu, Texas, which are transported by pipeline to the Partnership's 21
million gallon underground storage facility in Seymour, Indiana ("the Seymour
Facility"), and then delivered to the Midwest branches and (ii) purchases from a
number of Midwest refineries which are transported by truck to the branches
either directly or via the Seymour facility.  Most of the refinery purchases are
purchased under contract.

   The Seymour facility is located on the TEPPCO Partners, L.P. pipeline system.
The pipeline is connected to the Mont. Belvieu storage facilities and is one of
the largest conduits of supply for the U.S. propane industry.  The Seymour
facility allows the Partnership to buy and store large quantities of propane
during periods of low demand, which generally occur during the summer months.
The General Partner believes that this ability allows the Partnership to achieve
cost savings to an extent generally not available to the Partnership's
competitors in its Midwest markets.

                                       7
<PAGE>
 
SUPPLY (CONTINUED)

   For fiscal 1997, 43% of the Midwest volume was purchased on the spot market
from various Mont. Belvieu sources, and 21% was purchased from three refineries
in Illinois and Indiana owned by the Amoco Canada Marketing Group. The balance
was purchased from five separate suppliers. The Partnership believes that its
diversification of suppliers will enable it to purchase all of its supply needs
at market prices if supplies are interrupted from any of the sources, without a
material disruption of its operations.

   Propane is generally transported from refineries, pipeline terminals and
storage facilities (including the Partnership's Seymour facility), and coastal
terminals to the Partnership's branch location bulk plants by a combination of
the Partnership's own highway transport fleet, common carriers, owner-operators
and railroad tank cars. Branches and their related satellites typically have
one or more 12,000 to 30,000 gallon storage tanks.

COMPETITION

   The Partnership's business is highly competitive. However, long-standing
customer relationships are typical of the retail propane industry. Retail
propane customers generally lease their storage tanks from their suppliers. The
lease terms and, in most states, certain fire safety regulations restrict the
refilling of a leased tank solely to the propane supplier that owns the tank.
The inconvenience of switching tanks minimizes a customer's tendency to switch
among suppliers of propane.

   The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership believes that its superior service capabilities and
customer responsiveness differentiate it from many of its competitors. Branch
operations offer emergency service twenty-four hours per day, seven days per
week.

   Propane competes primarily with electricity, natural gas and fuel oil as an
energy source on the basis of price, availability and portability. Propane is
generally less expensive to use than electricity for space heating, water
heating, clothes drying and cooking and competes effectively in those parts of
the country where propane is cheaper than electricity on an equivalent British
Thermal Unit basis. Propane is generally more expensive than natural gas, but
serves as an alternative to natural gas in rural and suburban areas where
natural gas is unavailable or portability of product is required. The expansion
of natural gas into traditional propane markets has historically been inhibited
by the capital costs required to expand distribution and pipeline systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in the areas affected, the Partnership believes that new
opportunities for propane sales arise as more geographically remote areas are
developed. Although propane is similar to fuel oil in space heating and water
heating applications as well as in market demand and price, propane and fuel oil
have generally developed their own distinct geographic markets. Because
furnaces and appliances that burn propane will not operate on fuel oil, a
conversion from one fuel to the other requires the installation of new
equipment.

   In addition to competing with alternative energy sources, the Partnership
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and
generally occurs on a local basis with other large full-service multi-state
propane marketers, smaller local independent marketers and farm cooperatives.
Based on industry publications, the Partnership believes that the ten largest
multi-state

                                       8
<PAGE>
 
COMPETITION (CONTINUED)

marketers, including the Partnership, account for less than 35% of the total
retail sales of propane in the United States, and that no single marketer has a
greater than 10% share of the total retail market in the United States. Most of
the Partnership's branches compete with five or more marketers or distributors.
The principal factors influencing competition among propane marketers are price
and service.  Each retail distribution outlet operates in its own competitive
environment as retail marketers locate in close proximity to customers to lower
the cost of providing service.  The typical retail distribution outlet has an
effective marketing radius of approximately 35 miles.

EMPLOYEES

   The Partnership has no employees, except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation and is managed by the
General Partner pursuant to the Partnership Agreement.  As of October 31, 1997,
Star Gas had 630 employees providing full time services to the Operating
Partnership, of which 44 were employed by the corporate office in Stamford,
Connecticut and 586 were located in branch offices, of which 191 were
administrative, 281 were engaged in transportation and storage and 114 were
engaged in field servicing.  Approximately 78 of Star Gas' employees are
represented by six different local chapters of labor unions.

   Management believes that its relations with both its union and non-union
employees are satisfactory.


GOVERNMENT REGULATIONS

   The Partnership is subject to various federal, state and local environmental,
health and safety laws and regulations.  Generally, these laws impose
limitations on the discharge of pollutants and establish standards for the
handling of solid and hazardous wastes.  These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right to Know Act,
the Clean Water Act and comparable state statues.  CERCLA, also known as the
"Superfund" law, imposes joint and several liability without regard to fault or
the legality of the original conduct on certain classes of persons that are
considered to have contributed to the release or threatened release of a
hazardous substance into the environment.  Propane is not a hazardous substance
within the meaning of CERCLA.  Such laws and regulations could result in civil
or criminal penalties in cases of non-compliance or impose liability for
remediation costs.  To date, the Partnership has not been named as a party to
any litigation in which the Partnership is alleged to have violated or otherwise
incurred liability under any of the foregoing laws and regulations.

   In connection with all acquisitions of retail propane businesses that involve
the purchase of real estate, the Partnership conducts a due diligence
investigation to attempt to determine whether any substance other than propane
has been sold from, or stored, on any such real estate prior to its purchase.

   Such due diligence includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
visual inspections of the properties, in which employees of the General Partner,
and in certain cases, independent environmental consulting firms hired by the
General Partner, look for evidence of hazardous substances or the existence of
underground storage tanks.

                                       9
<PAGE>
 
GOVERNMENT REGULATIONS (CONTINUED)

   National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which the Partnership operates.  In some states these laws are
administered by state agencies, and in others they are administered on a
municipal level.  With respect to the transportation of propane by truck, the
Partnership is subject to regulations promulgated under the Federal Motor
Carrier Safety Act.  These regulations cover the transportation of hazardous
materials and are administered by the United States Department of
Transportation.  The Partnership conducts ongoing training programs to help
ensure that its operations are in compliance with applicable regulations.  The
Partnership maintains various permits that are necessary to operate some of its
facilities, some of which may be material to its operations.  Management
believes that the procedures currently in effect at all of its facilities for
the handling, storage and distribution of propane are consistent with industry
standards and are in compliance in all material respects with applicable laws
and regulations.

   On August 18, 1997, the U.S. Department of Transportation (the "DOT") 
published its Final Rule for Continued Operation of the Present Propane Trucks
(the "Final Rule"). The Final Rule is intended to address perceived risks during
the transfer of propane. The Final Rule required certain immediate changes in
the industry operating procedures, including retrofitting all propane delivery
trucks. The Partnership, as well as the National Propane Gas Association
("NPGA") and the propane industry in general, believe that the Final Rule cannot
practicably be complied with in its current form. On October 15, 1997, five of
the principal multi-state propane marketers (unrelated to the Partnership) filed
an action against the DOT in the United States District Court for the Western
District of Missouri seeking to enjoin enforcement of the Final Rule. The NPGA
subsequently filed a similar suit. In addition, in November 1997, a bill was
introduced in the United State House of Representatives that would prohibit the
DOT from enforcing certain provisions of the Final Rule. At this time, the
Partnership cannot determine the likely outcome of the litigation or the
proposed legislation or what the ultimate long-term cost of compliance with the
Final Rule will be to the Partnership and the propane industry in general.

   Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect Partnership operations. It is not
anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership.  To the extent that there are
any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.

                                       10
<PAGE>
 
                               ITEM 2. PROPERTIES
                                        

   As of October 31, 1997, the Partnership owned 58 of its 72 branch locations
and 34 of its 45 satellite storage facilities and leased the balance.  In
addition, the Partnership owns the Seymour facility, in which it stores propane
for itself and third parties.  The Partnership leases its corporate headquarters
in Stamford, Connecticut, as well as office and training facilities in the
Midwest.

   The transportation of propane requires specialized equipment.  The trucks
utilized for this purpose carry specialized steel tanks that maintain the
propane in a liquefied state.  As of October 31, 1997, the Partnership had a
fleet of 28 tractors, 38 transport trailers, 269 bobtail and rack trucks and 314
other service and pick-up trucks, the majority of which are owned.  The
Partnership owns 20 and leases 33 automobiles.  As of October 31, 1997, the
Partnership owned approximately 238 bulk storage tanks with typical capacities
of 12,000 to 30,000 gallons, approximately 203,000 stationary customer storage
tanks with typical capacities of 24 to 1,000 gallons and approximately 34,000
portable propane cylinders with typical capacities of 5 to 24 gallons.  The
obligations of the Partnership under its borrowings are secured by liens and
mortgages on all real and personal property of the Partnership.




                     ITEM 3. LEGAL PROCEEDINGS - LITIGATION


   Propane is a flammable, combustible gas.  Serious personal injury and
property damage can occur in connection with its transportation, storage or use.
The Partnership, in the ordinary course of business, is threatened with or is
named as a defendant in various lawsuits which, among other items, seek actual
and punitive damages for product liability, personal injury and property damage.
However, 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 results of operations or the financial condition of the Partnership.  The
Partnership maintains liability insurance policies with insurers in such amounts
and with such coverages and deductibles as the General Partner believes is
reasonable and prudent.  However, there can be no assurance that such insurance
will be adequate to protect the Partnership from material expenses related to
such personal injury or property damage or that such levels of insurance will
continue to be available in the future at economical prices.



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


   No matters were submitted to a vote of the security holders of the
Partnership during the fiscal year ended September 30, 1997.

                                      11
<PAGE>
 
                                    PART II

           ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED MATTERS



   The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the NASDAQ National Market under the
symbol SGASZ.  The Common Units began trading on December 20, 1995, at an
initial public offering price of $22.00 per Common Unit.  The following table
sets forth the high and low closing prices for the Common Units on the NASDAQ
National Market and the cash distribution declared per Common Unit for the
periods indicated.


<TABLE>
<CAPTION> 

                                  COMMON UNIT PRICE RANGE                   DISTRIBUTIONS
                                HIGH                     LOW              DECLARED PER UNIT
                      ------------------------------------------------   --------------------   
Fiscal Quarter            1996        1997          1996        1997        1996        1997    
--------------            ----        ----          ----        ----        ----        ----
<S>                    <C>          <C>           <C>         <C>           <C>           <C>   
First Quarter           $22.50      $23.88         $22.00     $21.75          --        $0.55
Second Quarter          $22.50      $24.63         $21.13     $20.75          --        $0.55
Third Quarter           $22.00      $21.88         $19.75     $19.00     $0.6225/(a)/   $0.55
Fourth Quarter          $24.75      $23.50         $20.50     $21.00     $0.5500        $0.55  
</TABLE> 
---------
(a) This distribution amounted to $0.6225 per unit and represented a pro rata
    distribution of $0.0725 per unit for the period December 20, 1995 to
    December 31, 1995 and a quarterly distribution of $0.55 per unit for the
    three months ended March 31, 1996.

   As of September 30, 1997, there were approximately 104 holders of record of
the Partnership's Common Units.  There is no established public trading market
for the Partnership's 2,396,073 subordinated units, representing limited partner
interests ("Subordinated Units") which are all held by Star Gas Corporation.
The Partnership makes quarterly distributions to its partners in an aggregate
amount equal to its Available Cash (as defined) for such quarter.  Available
Cash generally means, with respect to any fiscal quarter of the Partnership, all
cash on hand at the end of such quarter, plus all additional cash on hand as of
the date of determination resulting from borrowings subsequent to the end of
such quarter, less the amount of cash reserves required under certain lending
arrangements and certain discretionary reserves established by the General
Partners for future cash requirements.  These reserves are retained to provide
for the proper conduct of the Partnership's business, the payment of debt
principal and interest and to provide funds for distribution during the next
four quarters.  The full definition of Available Cash is set forth in the
Agreement of Limited Partnership of the Partnership.  The information concerning
restrictions on distributions required by Item 5 is incorporated herein by
reference to Note 10 to the Partnership's Consolidated Financial Statements
which begin on page F-1 of this Report.  Distributions of Available Cash to the
Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the subordination period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
subordination period.

                                       12
<PAGE>
 
            ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

   The following table sets forth selected historical and other data of the
Partnership and the Star Gas Group and should be read in conjunction with the
more detailed financial statements included elsewhere in this report.  See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.

   The Selected Financial Data is derived from the financial information of the
Partnership and should be read in conjunction therewith.

<TABLE> 
<CAPTION> 
                                                                        Partnership/Star Gas Group--Historical
                                                        ----------------------------------------------------------------------------
                                                                              Year Ended September 30,
                                                                              ------------------------
                                                           1993            1994            1995            1996(a)             1997
                                                           ----            ----            ----            ----                ----
                                                                        (in thousands, except for per unit data)  
 <S>                                                    <C>             <C>              <C>              <C>             <C> 
    Sales.......................................        $ 143,216       $ 128,040        $ 104,550        $ 119,634      $ 135,159
    Gross profit................................           69,861          69,487           54,890           61,077         62,948
    Depreciation and amortization...............           16,703          13,039           10,073            9,808         10,405
    Operating income (loss).....................          (30,313)(c)       9,393            2,555(b)         9,802          9,003
    Interest expense (net)......................           16,479          10,497            8,549            7,124          6,966
    Net income (loss)...........................          (47,049)(c)      (1,404)          (6,169)(b)        2,593          2,012
    Net income per Unit(d)......................               --              --                          $    .11(f)   $     .37
    Cash distribution declared per unit.........               --              --                          $   1.17(f)   $    2.20 

BALANCE SHEET DATA (END OF PERIOD):
    Current assets..............................        $  20,637       $  17,374        $  14,266        $  17,842      $  14,165 
    Total assets................................          157,847         147,608          155,393          156,913        147,469
    Long-term debt..............................          123,992          70,163            1,389           85,000         85,000
    Due to Petro................................            4,723           8,809           86,002               --             --
  Predecessor's equity (deficiency)/Partners' 
    Capital.....................................           (2,825)         44,328           44,305           61,398         51,578
OTHER DATA:
    EBITDA(e)...................................        $  19,652       $  21,946        $  13,541(b)     $  19,870      $  19,703 
    Retail propane gallons sold.................          114,405         110,069           89,133           96,294         94,893

</TABLE> 
----------------------------------
(a) Reflects the results of operations of the Predecessor Company for the period
    October 1, 1995 through December 20, 1995 and the results of Star Gas
    Partners, L.P. from December 20, 1995 through September 30, 1996.  The
    operating results for the year ended September 30, 1996 were combined to
    facilitate an analysis of the fundamental operating data.  For the actual
    results of the Partnership from December 20, 1995 through September 30,
    1996, see Item 14, Page F-4.

(b) The decline in operating income, net income and EBITDA during the fiscal
    year 1995 was primarily due to the significantly warmer than normal weather
    conditions during the 1995 heating season.

(c) Includes a loss of approximately $33.0 million in respect of a charge for
    the impairment of long-lived assets.

(d) Net income per Unit is computed by dividing the limited partners' interest
    in net income by the limited partners' weighted average number of units
    outstanding.

(e) EBITDA is defined as operating income plus depreciation, amortization, less
    net gain (loss) on sale of businesses and equipment and other non-cash
    charges (including the impairment of long-lived assets).  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.

(f) Represents net income per unit and cash distributions paid per unit for the
    period December 20, 1995 through September 30, 1996.

                                       13
<PAGE>
 
                ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS



OVERVIEW

   In analyzing the historical financial results of the Star Gas Group and the
financial results of the Partnership, the following matters, should be
considered.

   Following Petro's initial investment in Star Gas in December 1993, new
management initiated significant restructuring efforts in order to focus and
expand its operations in its most profitable geographic markets, the Midwest and
Northeast. These activities included Star Gas' divestiture of its Texas
operation in August 1994, the sale of its southern Georgia operations in
November 1994, and the completion of six acquisitions totaling 4.7 million
gallons annually in its core Midwest and Northeast markets from June 1994 to
July 1996. The results for fiscal 1997 do not include the operating results of
the Partnership's most recent acquisition, Pearl Gas Co., which was completed on
October 22, 1997.

   Gross profit margins vary according to the customer mix.  For example, sales
to certain customer groups, such as residential or commercial, 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.


   Because propane's primary use is for heating in residential and commercial
buildings, weather conditions have a significant impact on the financial
performance of the Partnership.  Management believes that despite year-to-year
fluctuations, average temperatures have been relatively stable over time.
Nevertheless, as reflected by the unusually warm weather in fiscal 1995, actual
yearly weather conditions can vary substantially from historical averages.
Accordingly, in analyzing changes in financial performance, the weather
conditions in which the Partnership/Star Gas Group operated in any given period
should be considered.

   The following discussion reflects the results of operations and operating
data of the Predecessor Company for the year ended September 30, 1995 and is
compared to the combined results of the Predecessor Company for the period
October 1, 1995 through December 20, 1995, and the results of the MLP from
December 20, 1995 through September 30, 1996 and for the year ended September
30, 1997.  The operating results of the Predecessor Company and the MLP for the
year ended September 30, 1996 were combined to facilitate an analysis of the
fundamental operating data.

                                       14
<PAGE>
 
FISCAL YEAR ENDED SEPTEMBER 30, 1997
------------------------------------
COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------------------



VOLUME

For the year ended September 30, 1997, retail propane volume declined 1.4
million gallons, or 1.5%, to 94.9 million gallons, as compared to 96.3 million
gallons for fiscal 1996.  The decline was primarily attributable to the effect
on volume of warmer temperatures experienced during the second fiscal quarter
compared to the prior year's second fiscal quarter and to customer conservation
efforts attributable to significantly higher propane selling prices.  The
Partnership was able to mitigate the effects of the warmer temperatures on
retail propane volume through both internal account growth and two acquisitions
completed since March 15, 1996.  Also favorably impacting the year-to-year
comparison was an increase in sales to agricultural customers, resulting from a
return to more normal propane demand for grain drying.

SALES

For the year ended September 30, 1997, sales increased $15.5 million, or 13.0%,
to $135.2 million, as compared to $119.6 million for the year ended September
30, 1996.  The increase was due to higher selling prices in response to an
industry wide significant increase in propane supply costs experienced during
fiscal 1997.

COST OF SALES

Cost of sales increased $13.7 million, or 23.3%, to $72.2 million for fiscal
1997, as compared to $58.6 million for fiscal 1996.  The increase was due to
higher per gallon propane supply costs.

GROSS PROFIT

Gross profit increased $1.9 million, or 3.1%, to $62.9 million for fiscal 1997,
as compared to $61.1 million for fiscal 1996.  The increase in gross profit
resulted from higher per gallon margins across all market segments which was
partially offset by the impact of slightly lower retail propane volume.

DELIVERY AND BRANCH EXPENSES

Delivery and branch expenses increased $1.7 million, or 4.8%, to $36.4 million
for fiscal 1997, as compared to $34.8 million for fiscal 1996.  The increase was
primarily due to the additional expenses associated with the first fiscal
quarter's increase in agricultural volume, higher vehicle operating costs due to
an increase in fuel costs and higher employee benefit expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses increased $0.6 million, or 6.1%, to $10.4
million for fiscal 1997, as compared to $9.8 million for fiscal 1996, due to the
impact of two acquisitions completed since March 15, 1996, the amortization of
certain deferred charges relating to the Partnership's First Mortgage Notes and
depreciation expense associated with capital expenditures made during fiscal
1997 and 1996.

                                       15
<PAGE>
 
GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased $0.4 million, or 5.6%, to $6.8
million for fiscal 1997, as compared to $6.5 million for fiscal 1996.  This
increase was primarily due to $0.9 million of one-time expenses associated with
the exploration of strategic alternatives designed to maximize unitholder value 
including, without limitation, the sale or merger of the Partnership offset by
lower acquisition related expenses. On March 3, 1997, the Partnership decided to
terminate its efforts to seek a merger or possible sale of the Partnership.

INTEREST EXPENSE, NET

Interest expense , net declined $0.1 million, or 2.2%, to $7.0 million for
fiscal 1997, as compared to $7.1 million for fiscal 1996.  This reduction was
primarily due to a decline in the weighted average borrowing rate.

INCOME TAX EXPENSE

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

NET INCOME

Net income decreased $0.6 million or 22.4% to $2.0 million for fiscal 1997, as
compared to $2.6 million for fiscal 1996.  This decrease was attributable to the
increase in operating expenses, $0.9 million of one-time costs associated with
the exploration of strategic alternatives and $0.6 million of depreciation and
amortization which was partially offset by $1.9 million increase in gross
profit.

EBITDA

EBITDA (defined as operating income (loss) plus depreciation and amortization
less net gain (loss) on sales of businesses and equipment) decreased $0.2
million, or 1.0%, to $19.7 million for fiscal 1997, as compared to $19.9 million
for fiscal 1996. Excluding the one-time expenses associated with the strategic
alternative, EBITDA increased $0.7 million, or 3.7%, to $20.6 million due to
improved per gallon margins across all market segments and growth in the
customer base provided by both internal marketing and acquisition efforts.
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.

                                       16

<PAGE>
 
FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------
COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995
------------------------------------------------

VOLUME

   For the year ended September 30, 1996, retail propane volume increased 8.0%
or 7.2 million gallons to 96.3 million gallons, as compared to 89.1 million
gallons for the year ended September 30, 1995.  Excluding the divested southern
Georgia operations, which contributed 1.9 million gallons in fiscal 1995, retail
propane volume increased 10.4% or 9.1 million gallons.  Propane sold to
residential and commercial customers increased 17.9% or 11.5 million gallons,
due to colder temperatures, acquisitions and internal account growth. Based on
degree days in areas in which the Partnership operates, fiscal 1996 was 6.5%
colder than normal and 19.5% colder than fiscal 1995.  While the residential and
commercial market segments were favorably impacted by the colder temperatures,
sales to agricultural customers, who use propane predominately in the grain
drying process, declined by approximately 2.5 million gallons primarily due to
the unusually dry crop harvest during the first fiscal quarter.  For fiscal
1996, propane sold to wholesale customers was 39.0 million gallons, virtually
unchanged from the fiscal 1995 level.

SALES

   Sales increased 14.4% or $15.0 million, to $119.6 million for fiscal 1996, as
compared to $104.6 million for fiscal 1995.  Excluding the results attributable
to the southern Georgia operations, which contributed $2.1 million of sales in
fiscal 1995, sales rose $17.1 million or 16.7% due to increased volume and
higher retail and wholesale selling prices.


COST OF SALES

   Cost of sales increased 17.9% or $8.9 million to $58.6 million for fiscal
1996, as compared to $49.7 million for fiscal 1995.  While cost of sales
declined by $1.0 million due to the disposition of the southern Georgia assets,
cost of sales in the core Midwest and Northeast operations increased by $9.9
million due to the increase in volume and higher per gallon wholesale propane
costs.  During the first quarter of fiscal 1996, the partnership was able to
lower its cost of sales through the utilization of its underground storage
facility, however, this benefit was offset during the second fiscal quarter by a
rapid spike in wholesale propane costs.


GROSS PROFIT

   Gross profit increased 11.3% or $6.2 million, to $61.1 million for fiscal
1996 as compared to $54.9 million for fiscal 1995.  Excluding $1.0 million of
gross profit earned by the divested southern Georgia operations in fiscal 1995,
gross profit increased 13.4% or $7.2 million and was attributable to the retail
volume growth, improved wholesale gross profit margins and increased revenues
from the sale, service and rental of appliances.  Partially offsetting these
positive influences on gross profit were the effects of the second quarter rise
in wholesale propane costs and the decline in sales to lower margin agricultural
customers.  On an overall basis, per gallon retail gross profit margins
increased as a greater proportion of the Partnership's sales were made to higher
margin residential and commercial customers.


                                       17
<PAGE>
 
DELIVERY AND BRANCH EXPENSES

   Delivery and branch expenses declined 1.3% or $0.5 million to $34.8 million
for fiscal 1996 as compared to $35.2 million for fiscal 1995.  This decline was
due to the elimination of $1.6 million of operating costs attributable to the
southern Georgia operations which was partially offset by an increase of $1.1
million or 3.4% in the remaining core operations.  The 10.4% volume increase and
the impact on operating costs of the severe winter weather experienced in the
Partnership's Northeast markets were the primary factors for the $1.1 million
increase in operating costs in the core operations.  On a per gallon basis,
operating costs in the Midwest and Northeast operations declined 6.4% due to
lower insurance expense, improved operating efficiencies and economies of scale
achieved in connection with growing the Partnership's customer base.


DEPRECIATION AND AMORTIZATION

   Depreciation and amortization expense declined $0.3 million to $9.8 million
for fiscal 1996, as compared to $10.1 million for fiscal 1995 primarily due to a
reduction in these expenses due to the divestiture of the southern Georgia
operations.


GENERAL AND ADMINISTRATIVE EXPENSES

   General and administrative expenses increased approximately $0.4 million to
$6.5 million for fiscal 1996, as compared to $6.1 million for fiscal 1995.  This
increase was primarily due to $0.4 million of non-recurring expenses associated
with certain professionals engaged by the partnership to assist management in
analyzing and structuring two significant acquisition candidates.

NET GAIN (LOSS) ON SALES OF ASSETS

   Loss on sales of assets declined to $0.3 million for fiscal 1996 from $0.9
million in fiscal 1995.  During fiscal 1995 a loss of $0.7 million was recorded
in connection with the sale of the southern Georgia operations.


INTEREST EXPENSE, NET

   Interest expense, net of interest income, declined 16.7% or $1.4 million to
$7.1 million for fiscal 1996, as compared to $8.5 million for fiscal 1995.  This
reduction was primarily due to a decline in the weighted average long-term
borrowing rate and additional income generated on higher cash balances.  For
further discussions concerning the Partnership's debt structure.  (See Note 10
of the Consolidated Financial Statements of the Partnership.)


INCOME TAX EXPENSE

   Income tax expense for fiscal 1996 was approximately $0.1 million.  This
expense primarily represents certain state income taxes that the Star Gas Group
was required to pay.  Subsequent to December 20, 1995, taxes on income will be
borne by the Partners and not the Partnership, except for income taxes relating
to the Partnership's wholly owned corporate subsidiary which conducts non-
qualifying master limited partnership business.

NET INCOME

   Net Income increased $8.8 million to $2.6 million for fiscal 1996 as compared
to a loss of $6.2 million in fiscal 1995.  The improvement was attributable to
the 10.4% increase in retail propane volume, the positive impact of divesting
the southern Georgia operations and lower non-cash expenses, including the loss
on sales of assets.

                                       18
<PAGE>
 
EBITDA

   EBITDA (defined as operating income (loss) plus depreciation and amortization
less net gain (loss) of sale of businesses and equipment) increased $6.3 million
or 46.7% to $19.9 million for fiscal 1996 as compared to $13.5 million for
fiscal 1995. This improvement in EBITDA was the result of the volume increase
associated with colder temperatures and growth in the Partnership's customer
base due to both acquisitions and internal marketing, partially offset by the
impact of lower per-gallon gross profit margins experienced during the second
quarter of fiscal 1996. For continuing operations, delivery and branch expenses
declined by 6.4%, when measured on a per gallon basis, due to the impact of the
cost reduction programs implemented over the past two years and the increase in
volume. Also contributing to the growth in EBITDA was the divestiture of the
southern Georgia operations, which reduced EBITDA in the prior year by
approximately $0.6 million. 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 fiscal 1996, net cash flow provided by operating activities of $10.0
million consisted of $2.6 million of net income and $9.8 million of depreciation
and amortization, which was offset by a $2.4 million increase in working capital
and other changes.  Inventories increased by $2.3 million due to both an
increase in propane gallons stored and higher per unit propane costs.  Net
accounts receivable increased by $0.6 million due to an increase in sales in the
fourth quarter of fiscal 1996 compared to the fourth quarter of fiscal 1995.
Net cash used in investing activities was $7.0 million for 1996, as the proceeds
from the sale of fixed assets of $0.8 million were used to partially fund $2.4
million of acquisitions and $5.3 million of capital expenditures, including $2.3
million of maintenance capital expenditures.

   For fiscal 1997, net cash flow provided by operating activities of $19.0
million combined with $0.3 million from the sale of certain fixed assets
amounted to $19.3 million. These funds were utilized in investing activities to
fund $5.3 million of capital expenditures (including $3.1 million of maintenance
capital expenditures), in financing activities to repay net credit facility
borrowings of $2.4 million and to pay Partnership distributions of $11.8
million. As a result of the above activities, cash at September 30, 1997
declined by $0.2 million to $0.9 million, as compared to $1.1 million on hand at
the beginning of the period.

   On October 22, 1997, the Partnership completed the Pearl Gas Acquisition. The
total cost of the acquisition Gas was $23.0 million which was paid cash
(including estimated working capital of $1.9 million which is subject to
adjustments) and includes $0.4 million of transactional expenses plus the
issuance of limited and general partner interests in the Partnership, including
147,727 Common Units issued to the General Partner (valued in total as of
acquisition date at $3.5 million). The Partnership funded the cash purchase
price with $2.0 million of available cash and $21.0 million borrowed under the
Partnership's Acquisition Facility. (See Note 7 to the Consolidated Financial
Statements for further discussion of this transaction).

   Based on its current cash position, bank credit availability and expected net
cash flow from operating activities, the Partnership expects to be able to meet
all of its obligations for fiscal 1998, as well as all of its other current
obligations as they become due.  For fiscal 1998, the Partnership anticipates
paying interest on its First Mortgage Notes and acquisition facility of $8.3
million, anticipates paying Limited and General Partner distributions of $12.1
million, and plans to purchase fixed assets of approximately $3.0 million.

                                       19

<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

   Certain statements in this Annual Report that do not reflect historical
information are forward-looking statements.  These include statements about
markets in 1998; cost reduction targets; return on capital goals; ongoing and
planned capacity additions and expansions.  Important factors that could cause
actual results to differ materially from those discussed in such forward-looking
statements include: supply/demand balance for the Partnership's products,
competitive pricing pressures, weather patterns, and changes in industry laws
and regulations.

                                       20
<PAGE>
 
                                    ITEM 8.
                                        
                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   SEE INDEX TO FINANCIAL STATEMENTS PAGE F-1

                                    ITEM 9.
                       CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
                                      NONE
                                        

                                    PART III

                                        
                                    ITEM 10.
               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                        
PARTNERSHIP MANAGEMENT


   The General Partner manages and operates the activities of the Partnership.
Unitholders do not directly or indirectly participate in the management or
operation of the Partnership.  The General Partner owes a fiduciary duty to the
Unitholders.  Notwithstanding any limitation on obligations or duties, the
General Partner will be liable, as the general partner of the Partnership, for
all debts of the Partnership (to the extent not paid by the Partnership), except
to the extent that indebtedness or other obligations incurred by the Partnership
are made specifically non-recourse to the General Partner.

   William P. Nicoletti and Elizabeth K. Lanier, who are neither officers nor
employees of the General Partner nor directors, officers or employees of any
affiliate of the General Partner, have been appointed to serve on the Audit
Committee of the General Partner's Board of Directors with the authority to
review, at the request of the General Partner, specific matters as to which the
General Partner believes there may be a conflict of interest in order to
determine if the resolution of such conflict proposed by the General Partner is
fair and reasonable to the Partnership.  Any matters approved by the Audit
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner of any duties it may owe the Partnership or the Unitholders. In
addition, the Audit Committee will review external financial reporting of the
Partnership, will recommend engagement of the Partnership's independent
accountants and will review the Partnership's procedures for internal auditing
and the adequacy of the Partnership's internal accounting controls. With respect
to such additional matters, the Audit Committee may act on its own initiative to
question the General Partner and, absent the delegation of specific authority by
the entire Board of Directors, its recommendations with regard thereto will be
advisory.

   As is commonly the case with publicly traded limited partnerships, the
Partnership will not directly employ any of the persons responsible for managing
or operating the Partnership.  The management and workforce of Star Gas and
certain employees of Petro manage and operate the Partnership's business as
officers and employees of the General Partner and its Affiliates.  See Item 1 -
Business--Employees.

                                       21
<PAGE>
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER



   The following table sets forth certain information with respect to the
directors and executive officers of the General Partner. Executive officers and
directors are elected for one-year terms.


<TABLE>
<CAPTION>
                <S>                     <C>     <C>  
                NAME                    AGE     POSITION WITH THE GENERAL PARTNER
------------------------------------  -------  -----------------------------------
Irik P. Sevin(1)....................    50      Chairman of the Board of
                                                 Directors
William G. Powers, Jr...............    44      President and Chief Executive
                                                 Officer
David R. Eastin.....................    39      Vice President -- Operations     
Norman L. Bushey....................    68      Vice President --
                                                 Safety/Compliance
Richard F. Ambury...................    40      Vice President-Finance
Audrey L. Sevin.....................    71      Director and Secretary
Thomas J. Edelman...................    46      Director
Paul Biddelman......................    51      Director
Wolfgang Traber(1)..................    53      Director
William P. Nicoletti(2).............    52      Director
Elizabeth K. Lanier(2)..............    46      Director
</TABLE>


--------------------
(1)  Member of the Compensation Committee
(2)  Member of the Audit Committee



IRIK P. SEVIN has been the Chairman of the Board of Directors of Star Gas since
December 1993.  Mr. Sevin has been a Director of Petro since its organization in
October 1979, and Chairman of the Board of Petro since January 1993.  Mr. Sevin
has been President of Petro, Inc. since November 1979 and of Petro since 1983.
Mr. Sevin was an associate in the investment banking division of Kuhn Loeb & Co.
and then Lehman Brothers Kuhn Loeb Incorporated from February 1975 to December
1978.  Mr. Sevin is a graduate of the Cornell University School of Industrial
and Labor Relations (B.S.), New York University School of Law (J.D.) and the
Columbia University School of Business Administration (M.B.A.).

WILLIAM G. POWERS, JR. has been President of Star Gas since December 1993.
Prior to joining Star Gas, he was employed by Petro from 1984 to 1993 where he
served in various capacities, including Regional Operations Manager and Vice
President of Acquisitions.  He has participated in over 90 acquisitions for
Petro.  From 1977 to 1983, he was employed by The Augsbury Corporation, a
company engaged in the wholesale and retail distribution of fuel oil and
gasoline throughout New York and New England and served as Vice President of
Marketing and Operations. Mr. Powers is a graduate of the University of Notre
Dame (B.A. 1975) and the University of Vermont Graduate School of Business
(M.B.A. 1984).

DAVID R. EASTIN has served as Vice President of Operations of Star Gas since
September 1995.  He joined Star Gas in 1992, and served as a Regional Manager
and as Director of Operations--Eastern Area.  Prior to joining Star Gas, he was
employed by Ferrellgas, Inc. (1987 through 1992) and a predecessor company,
Buckeye Gas Products (1980 through 1987), in a variety of operational
capacities. Mr. Eastin is a graduate of the University of Tulsa (B.S. 1980) and
Duquesne University (M.B.A. 1985).

                                       22
<PAGE>
 
RICHARD F. AMBURY has been Vice President of Finance of Star Gas since February
1996.  Prior to joining Star Gas, he was employed by Petro from 1983-1996 where
he served in various accounting/finance capacities.  From 1979 to 1983, Mr.
Ambury was employed by a predecessor firm of KPMG Peat Marwick LLP, a public
accounting firm.  Mr. Ambury graduated from Marist College with a degree in
Business Administration in 1979 and has been a Certified Public Accountant since
1981.


NORMAN L. BUSHEY has served as Vice President of Safety/Compliance of Star Gas
since September 1995.  Prior thereto he served as the Northeast Area Safety
Manager for Star Gas following Star Gas' acquisition of Maingas, Inc. in 1988.
From 1974 through 1988, Mr. Bushey served as Vice President and General Manager
of Maingas, Inc.  From 1953 through 1974, Mr. Bushey was employed by Suburban
Propane.


AUDREY L. SEVIN has been a Director of Star Gas since December 1993 and the
Secretary of Star Gas since June 1994.  Mrs. Sevin has been a Director and
Secretary of Petro since its organization in October 1979.  Mrs. Sevin was a
Director, executive officer and principal shareholder of A. W. Fuel Co., Inc.
from 1952 until its purchase by Petro in May 1981.  Mrs. Sevin is a graduate of
New York University (B.S.).

THOMAS J. EDELMAN has been a Director of Star Gas from December 1993 through
June 1995 and since October 1995.  Mr. Edelman has been a Director of Petro
since its organization in October 1979.  Mr. Edelman is the Chairman of the
Board, President and Chief Executive Office of Patina Oil & Gas Corporation
since its formation in May 1996.  Mr. Edelman also serves as Chairman of Lomak
Petroleum, Inc.  He co-founded Snyder Oil Corporation and was its President and
a Director from 1981 through February 1997.  Prior to 1981, he was a Vice
President of The First Boston Corporation.  From 1975 through 1980, Mr. Edelman
was with Lehman Brothers Kuhn Loeb Incorporated.  Mr. Edelman received his
Bachelor of Arts Degree from Princeton University and his Masters Degree in
Finance from Harvard University's Graduate School of Business Administration.
Mr. Edelman serves as a Director of Paradise Music & Entertainment, Inc.,
Weatherford Enterra, Inc., and serves as a Trustee of The Hotchkiss School.


PAUL BIDDELMAN has been a Director of Star Gas from December 1993 through June
1995 and since October 1995, and a Director of Petro since October 1994.  Mr.
Biddelman has been Treasurer of Hanseatic Corporation since April 1992.  Mr.
Biddelman is also a Director of Celadon Group, Inc., Electronic Retailing
Systems International, Inc., Insituform Technologies, Inc. and Premier Parks,
Inc.

WOLFGANG TRABER has been a Director of Star Gas from December 1993 through June
1995 and since October 1995.  Mr. Traber has been a Director of Petro since its
organization in October 1979.  Mr. Traber is Chairman of the Board of Hanseatic
Corporation, a private investment corporation in New York, New York. Mr. Traber
is a Director of Deltec Asset Management Corporation, Blue Ridge Real Estate
Company, Hellespont Tankers Ltd. and M.M. Warburg & CO.

WILLIAM P. NICOLETTI has been a Director of Star Gas since November 1995.  Since
1991, Mr. Nicoletti has been Managing Director of Nicoletti & Company Inc., a
private investment bank servicing clients in energy-related industries.  From
1988 through 1990, he was a Managing Director and head of the Energy and Natural
Resources Group of PaineWebber Incorporated.  From 1969 through 1987, he was
with E.F. Hutton & Company Inc., where from 1980 through 1987 he was a Senior
Vice President and head of the Energy and Natural Resources Group.  He is also
Chairman of the Board of Amerac Energy Corporation and a Director of Domain
Energy Corporation and StatesRail, Inc.

                                       23
<PAGE>
 
ELIZABETH K. LANIER has been a Director of Star Gas since November 1995. Since
June 1996, Ms. Lanier has been Vice President and Chief of Staff for Cinergy
Corp.  Before joining Cinergy, Ms. Lanier was a partner in the law firm of Frost
& Jacobs in Cincinnati Ohio.  From 1976 through 1982, she was associated with
Davis Polk & Wardwell in New York, New York.  Ms. Lanier is a graduate of Smith
College (B.A.) and the Columbia University School of Law (J.D.).

AUDREY SEVIN is the mother of Irik P. Sevin.  There are no other familial
relationships between any of the directors and executive officers.

  On November 7, 1997, the General Partner announced that William G. Powers,
Jr., the President and Chief Executive Officer of the General Partner, had
been appointed as the President of Petro, effective as of December 1, 1997 and
that Joseph P. Cavanaugh, Senior Vice President of Petro, will succeed Mr.
Powers as President and Chief Executive Officer of the General Partner. The
General Partner also announced that Mr. Powers will become a Director of the
General Partner and a member of the newly organized management committee of
the Board of Directors of the General Partner (consisting of Mr. Powers and
Irik P. Sevin, Chairman of the Board) effective as of December 1, 1997.
 
  Mr. Cavanaugh, 60, has been Senior Vice President-Safety and Compliance of
Petro since January 1993. From October 1985 to January 1993, Mr. Cavanaugh was
Vice President of Petro. Mr. Cavanaugh was Controller of Petro, Inc. from 1973
to 1985 and of Petro from its organization in 1983 until 1994. Mr. Cavanaugh has
also taken an active role in assisting the Partnership's management with the
development of safety/compliance programs, assisting with acquisitions and their
subsequent integration into the Partnership and with the Partnership's risk
management efforts, since Petro's initial involvement with the Star Gas Group in
1993. Mr. Cavanaugh is a graduate of Iona College (B.B.A.) and Pace University
(M.S. in Taxation).


MEETINGS AND COMPENSATION OF DIRECTORS

   During fiscal 1997, the Board of Directors met six times, including one via
telephonic conference.  All Directors attended each meeting except for Messrs.
Sevin and Edelman who attended six meetings and Mr. Traber who attended five
meetings.  Star Gas pays each director including the chairman an annual fee of
$17,500.  Members of the audit committee receive an additional $5,000 per annum.


COMMITTEES OF THE BOARD OF DIRECTORS

   The Company's Board of Directors has an Audit Committee and a Compensation
Committee.  The members of each committee are appointed by the Board of
Directors for a one year term and until their respective successors are elected.

   In connection with the Partnership's decision to explore strategic
alternatives to maximize shareholder value, the board of directors appointed a
special committee to review the proposals received by Morgan Stanley & Co.,
Incorporated. Ms. Lanier and Mr. Nicoletti received $20,000 each for
compensation in serving on this committee.


AUDIT COMMITTEE

   The duties of the Audit Committee are described above under "Partnership
Management".

   The members of the Audit Committee are Elizabeth K. Lanier and William P.
Nicoletti.  Members of the Audit Committee may not be employees of the Company.


COMPENSATION COMMITTEE

   The duties of the Compensation Committee are (i) to determine the annual
salary, bonus and other benefits, direct and indirect, of any and all named
executive officers (as defined under Regulation S-K promulgated by the
Securities and Exchange Commission), (ii) to review and recommend to the full
Board any and all matters related to benefit plans covering the foregoing
officers and any other employees in the event such matters are appropriate for
stockholder approval, and (iii) to administer the Partnership's Unit Option Plan
as the Option Committee thereunder.  The members of the Compensation Committee
are Wolfgang Traber and Irik P. Sevin.


REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER

   The General Partner does not receive any management fee or other compensation
in connection with its management of the Partnership.  The General Partner is
reimbursed at cost for all expenses incurred on behalf of the Partnership,
including the costs of compensation described herein properly allocable to the
Partnership, and all other expenses necessary or appropriate to the conduct of
the business of, and allocable to, the Partnership.

                                       24

<PAGE>
 
   The Partnership Agreement provides that the General Partner shall determine
the expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion.  Affiliates of the
General Partner, including Petro, perform certain management and acquisition
services for the General Partner on behalf of the Partnership.  Such affiliates
do not receive a fee for such services, but are reimbursed for all direct and
indirect expenses incurred in connection therewith.


   In addition, the General Partner owns 2,396,078 subordinated units and
147,727 common units of the Partnership and is entitled to receive distributions
on such Units, and the General Partner is entitled to incentive distributions in
respect of its general partner interest.



                        ITEM 11.  EXECUTIVE COMPENSATION
                                        

   The following table sets forth the annual salary, bonuses and all other
compensation awards and payouts to the President and Chief Executive Officer and
to certain named executive officers of the General Partner for services rendered
to Star Gas and its subsidiaries during the fiscal years ended September 30,
1997, 1996 and 1995.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                        Annual Compensation
                                                        ------------------------------------------------------------
                                                                                                       OTHER
                                                                                                       ANNUAL
               NAME AND PRINCIPAL POSITION              YEAR        SALARY          BONUS           COMPENSATION
------------------------------------------              ----        ------          -----           ------------
<S>                                                   <C>          <C>             <C>              <C>
William G. Powers, Jr.
    President and Chief Executive Officer                1997      $225,000        $100,000         $20,803  (1)
                                                         1996      $225,000        $100,000         $21,071  (1)
                                                         1995      $219,231        $ 75,000         $18,094  (1)
Richard F. Ambury                                                  
    Vice President - Finance                             1997      $143,000         $35,750         $20,408  (1)
                                                         1996      $ 99,667(4)      $25,000            --
David R. Eastin                                                    
    Vice President - Operations                          1997      $120,000         $30,000         $ 3,214  (2)
                                                         1996      $106,826         $26,707         $ 9,292  (3)
                                                         1995      $ 89,896         $10,000            --
Norman L. Bushey                                                   
    Vice President - Safety/Compliance                   1997       $70,000         $17,500         $ 2,625  (2)
                                                         1996       $63,000         $15,750         $ 1,900  (2)
</TABLE>
------------------------------

(1) Represents amounts paid in lieu of contribution under Star Gas' 401(k) plan.
(2) Represents matching contributions paid to Star Gas' 401(k) plan.
(3) Represents a $7,570 relocation allowance and Star Gas' matching contribution
    to Mr. Eastin's 401(k) retirement plan of $1,722.
(4) Mr. Ambury joined Star Gas on February 1, 1996.

                                       25
<PAGE>
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                     NUMBER OF UNEXERCISED OPTIONS AT           
                                            SEPTEMBER 30, 1997                  VALUE OF IN THE MONEY OPTIONS
NAME                                  Exercisable(E)/Unexercisable(U)              AT SEPTEMBER 30, 1997(1)   
---------------------------------    --------------------------------           ----------------------------- 
<S>                                     <C>                                         <C>
William G. Powers, Jr.                           30,000 (U)                                 $3,750
David R. Eastin                                  10,000 (U)                                 $1,250
</TABLE> 

--------------------------------
(1) Values are calculated by deducting the exercise price from the fair market
    value of the common units as of September 30, 1997.


OPTIONS GRANTED IN LAST FISCAL YEAR

   None.


UNIT OPTION PLAN

   In December 1995, the General Partner adopted the 1995 Star Gas Corporation
Unit Option Plan (the "Unit Option Plan"), which currently authorizes the
issuance of options (the "Unit Options") and Unit Appreciation Rights ("UARS")
covering up to 300,000 Subordinated Units to certain officers and employees of
the General Partner.  A total of 40,000 options were granted to key executives
in December 1995.  The Unit Options have the following characteristics:  1)
exercise price of $22 per unit, which is an estimate of the fair market value of
the Subordinated Units at the time of grant, 2) vest over five year period, 3)
exercisable after January 12, 2001, assuming the lapse of the subordination
period and 4) expire on the tenth anniversary of the date of grant.  Upon
conversion of the Subordinated Units held by the General Partner and its
affiliates, the Unit Options granted will convert to Common Unit Options.


401(K) PLAN

   The Star Gas Corporation Employee Savings Plan is a voluntary defined
contribution plan covering non-union and union employees who have attained the
age of 21 and who have completed one year of service.  Participant's in the plan
may elect to contribute a sum not to exceed 15% of a participant's compensation.
For non-union employees, the Company contributes a matching amount equaling the
participant's contribution not to exceed 3% of the participant's compensation.
In addition, the plan allows the Company to contribute an additional
discretionary amount which will be allocated to each participant based on such
participant's compensation as a percentage of total compensation of all
participant's.

                                       26

<PAGE>
 
                                    ITEM 12.
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


OWNERSHIP OF COMMON AND SUBORDINATED UNITS


   The following table set forth certain information as of November 4, 1997
regarding the beneficial ownership of (i) the Common and Subordinated Units of
the Partnership by certain beneficial owners and all directors of the General
Partner, each of the named executive officers and all directors and executive
officers as a group.  The General Partner knows of no person beneficially owning
more than 5% of the Common Units.


<TABLE>
<CAPTION>
                                 
                                                                           UNITS                                
                                   NAME AND ADDRESS OF                  BENEFICIALLY             PERCENT OF     
TITLE OF CLASS                      BENEFICIAL OWNER                      Owned(1)                 Class        
--------------                    ---------------------                -------------            -----------     
<S>                              <C>                                  <C>                      <C>
Common Units                      Richard F. Ambury(1)                      525                      --
Common Units                      Star Gas Corporation(1)               147,727                     4.8%
Subordinated Units                Star Gas Corporation(1)             2,396,078                   100.0%
</TABLE>

---------
(1) The address of such person is care of the Partnership at 2187 Atlantic
   Street, Stamford, CT 06902.

                                       27
<PAGE>
 
OWNERSHIP OF PETRO COMMON STOCK BY THE DIRECTORS AND EXECUTIVE OFFICERS OF THE
GENERAL PARTNER


   The table below sets forth as of November 1, 1997, the beneficial ownership
of Petro Common Stock by each director and each named executive officer of the
General Partner, as well as the directors and all of the executive officers of
the General Partner as a group.  The total shares beneficially owned by the
directors and executive officers as a group, including 393,518 shares of Class A
Common Stock and 70,379 shares of Class C Common Stock subject to options
exercisable within the next 60 days, represent 22.03% of Petro's outstanding
Class A Common Stock and 55.67% of Petro's outstanding Class C Common Stock.
Each share of Class A Common Stock is entitled to one vote and each share of
Class C Common Stock is entitled to 10 votes, but otherwise the two Classes have
the same rights.  Petro's Class A Common Stock is traded on the NASDAQ National
Market (Symbol:  HEAT).

<TABLE>
<CAPTION>
                                          Number of Shares (1)              Percent of Total     Percent of
                                        ----------------------------      -------------------   Total Voting
            Name                          Class A          Class C        Class A     Class C     Power (2)
----------------------------------      ------------      ----------      -------     -------   ------------  
<S>                                     <C>               <C>              <C>         <C>          <C> 
Audrey L. Sevin (3)................     1,888,624         477,716          7.95%       18.39%       13.41%
Irik P. Sevin (3)..................     1,167,847(4)      272,020(4)       4.84%       10.20%        7.65%
Wolfgang Traber (5)................     1,652,203(6)      606,472(7)       6.96%       23.35%       15.52%
Thomas J. Edelman (3)..............       593,049(8)      129,019          2.50%        4.97%        3.79%
Paul Biddelman (5).................     1,654,589(6)      597,424          6.97%       23.00%       15.34%
William G. Powers, Jr. (3)                     --              --            --           --           --
Richard F. Ambury (3)..............        12,345(9)           --          0.05%          --         0.02%
David R. Eastin (3)                            --              --            --           --          --
Norman L. Bushey (3)                           --              --            --           --          --
Elizabeth K. Lanier (10)                       --              --            --           --          --
William P. Nicoletti (11)                      --              --            --           --          --
All officers and directors as a
 group (11 persons)................     5,316,454       1,485,227         22.03%       55.67%       39.86%
                                                                                 
</TABLE> 
--------------------------
 (1) For purposes of this table, a person or group is deemed to have "beneficial
     ownership" of any shares which such person has the right to acquire within
     60 days after November 1, 1997. For purposes of calculating the percentage
     of outstanding shares held by each person named above, any shares which
     such person has the right to acquire within 60 days after November 1, 1997
     are deemed to be outstanding, but not for the purpose of calculating the
     percentage ownership of any other person.
 (2) Total voting power means the total voting power of all shares of Class A
     Common Stock and Class C Common Stock. This column reflects the percentage
     of total voting power represented by all shares of Class A Common Stock and
     Class C Common Stock held by the named persons.
 (3) The address of such person is c/o the Partnership at 2187 Atlantic Street,
     Stamford, CT 06902.
 (4) Includes options to purchase 381,518 shares of Class A Common Stock and
     70,379 shares of Class C Common Stock.
 (5) The address of such person is 450 Park Avenue, New York, NY 10022.
 (6) Includes 1,652,203 shares held by Hanseatic Americas LDC, a Bahamian
     limited duration company in which the sole managing member is Hansabel
     Partners, LLC, a Delaware limited liability company in which the sole
     managing member is Hanseatic Corporation, a New York corporation
     ("Hanseatic"). Messrs. Traber and Biddelman are executive officers of
     Hanseatic and Mr. Traber holds in excess of a majority of the shares of
     capital stock of Hanseatic.
 (7) Includes 298,717 shares owned by each of Hanseatic and Tortosa
     Vermogensverwaltungsgesellschaft gmbh ("Tortosa"), a German corporation
     owned and controlled by Hubertus Langen, and as to which Hanseatic and
     Tortosa each hold shared voting power.
 (8) Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
     and minor children.
 (9) Includes options to purchase 12,000 shares of Class A Common Stock.
(10) The address of such person is 221 E. Fourth St., 30th Fl., Cincinnati, OH
     45202.
(11) The address of such person is 1155 Avenue of the Americas, 29th Fl., New
     York, NY  10036.

                                       28
<PAGE>
 
   Section 16(a) of the Securities and Exchange Act of 1934 requires the General
Partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC").  Officers, directors and greater than 10 percent
unitholders are required by SEC regulation to furnish the General Partner with
copies of all Section 16(a) forms.

   Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year 1997 all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were met in a timely
manner.

                                       29
<PAGE>
 
            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                                        

   The Partnership and the General Partner have certain ongoing relationships
with Petro and its affiliates.  Affiliates of the General Partner, including
Petro, perform certain administrative services for the General Partner on behalf
of the Partnership.  Such affiliates do not receive a fee for such services, but
are reimbursed for all direct and indirect expenses incurred in connection
therewith.

   For the period October 1, 1996 through September 30, 1997, the Partnership
reimbursed the General Partner and Petro $17.1 million representing salary,
payroll tax and other compensation to the employees of the General Partner,
including $0.2 million paid to Petro for corporate services such as compliance,
supply and finance.  In addition, the Partnership has reimbursed Petro for $0.9
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.

   Petro and the General Partner entered into a Management Services Agreement on
December 21, 1993 pursuant to which Petro agreed to provide executive, financial
and managerial oversight services to the General Partner for a period of ten
years.  Pursuant to the Management Services Agreement, Petro was entitled to a
yearly management fee of $500,000, plus a bonus under certain circumstances.
For the fiscal years ended September 30, 1995, the General Partner paid fees of
$500,000 pursuant to the Management Services Agreement.  The Management Services
Agreement was terminated in December 1995.

   Prior to Petro's acquisition of Star Gas, Star Gas engaged Nicoletti &
Company Inc., an investment banking firm owned by William P. Nicoletti, who is
now a Director of the General Partner, to perform certain investment banking
services for Star Gas.  Pursuant to such engagement, Star Gas paid Nicoletti &
Company Inc. fees of $81,600, $521,500 and $40,000 for services rendered during
1994, 1993 and 1992, respectively.  In 1995, Star Gas paid Nicoletti & Company
Inc. $20,000 in advisory fees in connection with a proposed acquisition.  In
1997, Star Gas paid Mr. Nicoletti $20,000 for serving on the Board of Directors
Special Committee which explored the possible sale or merger of the Partnership.

   Elizabeth K. Lanier, a Director of the General Partner, was a partner in the
law firm of Frost & Jacobs, in Cincinnati, Ohio until June 1996.  Frost & Jacobs
has acted as counsel to Star Gas in connection with certain litigation matters.
In 1997, Star Gas paid Ms. Lanier $20,000 for serving on the Board of Directors
Special Committee which explored the possible sale or merger of the Partnership.

   In 1993 Star Gas paid an aggregate of $50,000 in advisory fees to Warwick
Energy Advisors, Inc. (Warwick), a company controlled by Thomas Edelman, now a
Director of the General Partner and Petro. In 1993, Petro paid Warwick and Mr.
Edelman an aggregate of $211,500 in advisory fees in connection with Petro's
acquisition of Star Gas. In 1994, Petro paid Mr. Edelman an additional $248,500
in such fees.  In 1995, Petro paid Mr. Edelman $20,000 in advisory fees in
connection with a proposed acquisition by Star Gas.

   For a discussion of certain indebtedness of the General Partner to Petro, see
Note 10 of the notes to the financial statements.

                                       30
<PAGE>
 
                                    PART IV

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

  (a) 1. Financial Statements

         See "Index to Consolidated Financial Statements and Financial
         Statement Schedule" set forth on page F-1.

      2. Financial Statement Schedule.

         See "Index to Consolidated Financial Statements and Financial
         Statement Schedule" set forth on page F-1.

      3. Exhibits.

         See "Index to Exhibits" set forth on page 31.

  (b)    Reports on Form 8-K.

         The Partnership did not file a Form 8-K during the quarter
         ended September 30, 1997.

                                       31

<PAGE>
 
                               INDEX TO EXHIBITS
                                  DESCRIPTION
                                  -----------

<TABLE>
<CAPTION>
            Exhibit
            Number   Description
            -------  ---------------------------------------------------
    <C>      <C>     <S> 
     (1)      3.1    Form of Agreement of Limited Partnership of Star
                     Gas Partners, L.P. (included as Appendix A to
                     the Prospectus)
     (1)      3.2    Form of Agreement of Limited Partnership of
                     Star Gas Propane, L.P.
     (1)     10.1    Form of Credit Agreement among Star Gas Propane,
                     L.P. and certain banks
     (1)     10.2    Form of Conveyance and Contribution Agreement
                     among Star Gas Corporation, the Partnership and
                     the Operating Partnership
     (1)     10.3    Form of First Mortgage Note Agreement among
                     certain insurance companies, Star Gas
                     Corporation and Star Gas Propane, L.P.
     (1)     10.4    Intercompany Debt
     (1)     10.5    Form of Non-competition Agreement between Petro
                     and the Partnership
     (1)     10.6    Form of Star Gas Corporation 1995 Unit Option
                     Plan
     (1)     10.7    Amoco Supply Contract
     (1)       21    Subsidiaries of the registrant
     (2)       27    Financial data schedule
     (3)     99.1    Stock Purchase Agreement dated October 20, 1997
     (3)     99.2    Conveyance and Contribution Agreement
     (3)     99.3    Second Amendment dated October 21, 1997 to the Bank
                     Credit Agreement
</TABLE>

     ___________________
     (1) Incorporated by reference to the same Exhibit to Registrant's Statement
         on Form S-1, File No. 33-98496, filed with the Commission on December
         13, 1995.

     (2) Filed herein.

     (3) Incorporated by reference to the same Exhibit to Registrants Statement
         on Form 8-K filed on October 23, 1997.

                                       32

<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)


                                         William G. Powers, Jr.
                                         ----------------------
                                By: /s/  William G. Powers, Jr.
                                         William G. Powers, Jr.
                                         President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the date
indicated:

<TABLE> 
<S>                                   <C>                           <C> 
Signature                             Title                         Date
---------                             -----                         ----
/s/  William G. Powers, Jr.         President                  November 24, 1997
     ----------------------         Star Gas Corporation                      
     William G. Powers, Jr.         Principal Executive
                                    Officer)

/s/  Richard F. Ambury              Vice President - Finance   November 24, 1997
     -----------------              Star Gas Corporation                      
     Richard F. Ambury              (Principal Financial and
                                    Accounting Officer)

/s/  Irik P. Sevin                  Director                   November 24, 1997
     --------------------           Star Gas Corporation
     Irik P. Sevin                  

/s/  Audrey L. Sevin                Director                   November 24, 1997
     --------------------           Star Gas Corporation
     Audrey L. Sevin                

/s/  William P. Nicoletti           Director                   November 24, 1997
     --------------------           Star Gas Corporation
     William P. Nicoletti           

/s/  Elizabeth K. Lanier            Director                   November 24, 1997
     --------------------           Star Gas Corporation
     Elizabeth K. Lanier            
 
/s/  Paul Biddelman                 Director                   November 24, 1997
     --------------------           Star Gas Corporation
     Paul Biddelman                 
 
/s/  Thomas J. Edelman              Director                   November 24, 1997
     --------------------           Star Gas Corporation
     Thomas J. Edelman              
 
/s/  Wolfgang Traber                Director                   November 24, 1997
     --------------------           Star Gas Corporation  
     Wolfgang Traber                

</TABLE>

                                       33


<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                                        
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
                                        
<TABLE>
<CAPTION>  
<S>                                                                         <C> 
                                                                            PAGE
                                                                            ----

PART II   FINANCIAL INFORMATION:

          Item 8 - Financial Statements

          Star Gas Partners, L.P. and Subsidiary and the Star Gas
          -------------------------------------------------------
          Group(Predecessor)
          ------------------

            Independent Auditors' Report .................................  F-2

            Consolidated Balance Sheets as of September 30, 1996
            and 1997......................................................  F-3

            Consolidated Statements of Operations for the year ended
            September 30, 1995 (Predecessor), and from October 1, 1995
            through December 20, 1995 (Predecessor), December 20, 1995
            through September 30, 1996, and the year ended September 30,
            1997..........................................................  F-4

            Consolidated Statement of Partners' Capital for the period
            December 20, 1995 through September 30, 1996 and the year
            ended September 30, 1997 and the Consolidated Statement of
            Predecessor's Equity for year ended September 30, 1995
            (Predecessor) and the period October 1, 1995 through December 20,
            1995 (Predecessor)............................................  F-5

            Consolidated Statements of Cash Flows for the year ended
            September 30, 1995 (Predecessor), and from October 1, 1995
            through December 20, 1995 (Predecessor), December 20, 1995
            through September 30, 1996, and the year ended September 30,
            1997 .........................................................  F-6

            Notes to Consolidated Financial Statements ..................   F-7 -- F-18
            Schedule for the years ended September 30, 1995, 1996 and 1997

                  II.  Valuation and Qualifying Accounts .................  F-19

                      All other schedules are omitted because they are not
                      applicable or the required information is shown in the
                      consolidated financial statements or the notes therein.
</TABLE> 
                                      F-1
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Partners of Star Gas Partners, L.P.:


         We have audited the consolidated financial statements of Star Gas
         Partners, L.P. and Subsidiary and its Predecessor as listed in the
         accompanying index.  In connection with our audits of the consolidated
         financial statements, we have also audited the financial statement
         schedule as listed in the accompanying index.  These consolidated
         financial statements and financial statement schedule are the
         responsibility of the Partnership's management. Our responsibility is
         to express an opinion on these consolidated financial statements and
         financial statement schedule based on our audits.

         We conducted our audits in accordance with generally accepted auditing
         standards.  Those standards 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.  An audit also includes assessing the accounting
         principles used and significant estimates made by management, as well
         as evaluating the overall financial statement presentation.  We believe
         that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to
         above, present fairly, in all material respects, the financial position
         of Star Gas Partners, L.P. and Subsidiary and its Predecessor as of
         September 30, 1996 and 1997 and the results of their operations and
         their cash flows for each of the years in the three-year period ended
         September 30, 1997, in conformity with generally accepted accounting
         principles.  Also in our opinion, the related financial statement
         schedule, when considered in relation to the basic consolidated
         financial statements taken as a whole, presents fairly, in all material
         respects, the information set forth therein.



         Stamford, Connecticut                             KPMG Peat Marwick LLP
         November 7, 1997

                                      F-2

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

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,         SEPTEMBER 30,
                                                                1996                   1997
                                                                ----                   ----
<S>                                                            <C>                    <C> 
ASSETS
 
Current assets:
   Cash and cash equivalents                                   $  1,106               $    889
   Receivables, net of allowance of $291 and
      $273, respectively                                          7,226                  5,720
   Inventories                                                    8,494                  6,597
   Prepaid expenses and other current assets                      1,016                    959
                                                               --------               --------
      Total current assets                                       17,842                 14,165
       
Property and equipment, net                                      97,733                 95,282

Intangibles and other assets, net                                41,338                 38,022
                                                               --------               --------
      Total assets                                             $156,913               $147,469
                                                               ========               ========
LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities:
   Bank credit facility borrowings                             $  2,350               $     --
   Accounts payable                                               1,991                  3,178
   Accrued expenses                                               2,757                  3,004
   Accrued interest                                                 340                    321
   Customer credit balances                                       2,858                  4,343
                                                               --------               --------
      Total current liabilities                                  10,296                 10,846
                                                               --------               --------  
Long-term debt                                                   85,000                 85,000
Other long-term liabilities                                         219                     45

Partners' Capital:
   Common unitholders                                            52,821                 47,573
 Subordinated unitholder                                          8,410                  4,034
 General partner                                                    167                    (29)
                                                               --------               --------
      Total Partners' Capital                                    61,398                 51,578
                                                               --------               --------  
      Total Liabilities and Partners' Capital                  $156,913               $147,469
                                                               ========               ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3

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

<TABLE>
<CAPTION>
                                    YEAR             OCTOBER 1, 1995      DECEMBER 20,       OCTOBER 1, 1995    
                                    ENDED                THROUGH             1995                THROUGH       
                                SEPTEMBER 30,          DECEMBER 20,         THROUGH           SEPTEMBER 30,         YEAR ENDED
                                    1995                  1995            SEPTEMBER 30,            1996            SEPTEMBER 30,
                                (Predecessor)         (Predecessor)           1996              (Combined)             1997
                              -----------------    -------------------   ---------------    -----------------    ----------------
<S>                                <C>                  <C>                  <C>                <C>                   <C>
Sales                              $104,550             $28,159              $91,475            $119,634              $135,159 
Cost of sales                        49,660              12,808               45,749              58,557                72,211 
                                   --------             -------              -------            --------              -------- 
   Gross profit                      54,890              15,351               45,726              61,077                62,948  
            
Delivery and branch                  35,222               7,729               27,021              34,750                36,427 
Depreciation and                   
   amortization                      10,073               2,177                7,631               9,808                10,405 
General and                        
   administrative                     6,127               1,349                5,108               6,457                 6,818      
Net (loss) on sales of   
   assets                              (913)               (113)                (147)               (260)                 (295) 
                                   --------             -------              -------            --------              -------- 
Operating income                      2,555               3,983                5,819               9,802                 9,003 
Interest expense, net                 8,549               1,922                5,202               7,124                 6,966 
                                   --------             -------              -------            --------              -------- 
Income (loss) before                
  income taxes                       (5,994)              2,061                  617               2,678                 2,037  
Income tax expense                      175                  60                   25                  85                    25 
                                   --------             -------              -------            --------              -------- 
Net income (loss)                  $ (6,169)            $ 2,001              $   592            $  2,593              $  2,012 
                                   ========             =======              =======            ========              ========
General Partner's                     
  interest in net income                                                     $    12                                  $    $40
                                                                             -------                                  -------- 
Limited Partners'                                                                                               
  interest in net income                                                     $   580                                  $  1,972
                                                                             =======                                  ======== 
Net Income per Limited                                                                         
  Partner unit                                                               $  0.11                                  $   0.37 
                                                                             =======                                  ======== 
Weighted average number                                                                   
 of Limited Partner                                                                       
 units outstanding                                                             5,271                                     5,271 
                                                                             =======                                  ========  
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                    STAR GAS PARTNERS, L.P. AND SUBSIDIARY

      CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL AND PREDECESSOR EQUITY
                     (IN THOUSANDS, EXCEPT PER UNIT DATA)

                             PREDECESSOR'S EQUITY
         YEAR ENDED SEPTEMBER 30, 1995 AND THE PERIOD OCTOBER 1, 1995
                           THROUGH DECEMBER 20, 1995

<TABLE>
<CAPTION> 
                                                 8%                                                         Total
                                             Cumulative      12.5%       Capital in                     Predecessor's
                                             Preferred      Preferred     Excess of                        Equity
                                               Stock         Stock       Par Value       Deficit        (Deficiency)
                                             ---------      ---------    ----------      -------        -----------
<S>                                          <C>             <C>        <C>            <C>                <C> 
Balance as of September 30, 1994              $ 500           $ --       $108,336       $(64,508)          $44,328
 Conversion of preferred stock                 (266)           319            (53)            --                --
 Redemption of preferred stock                  (49)            --         (5,042)            --            (5,091)
 Stock dividends declared                         4             --            368           (732)             (360)
 Cash dividends preferred stock                  --             --             --         (5,287)           (5,287)
 Purchase accounting adjustment                  --             --        (51,906)        68,790            16,884
 Net loss                                        --             --             --         (6,169)           (6,169)
                                              -----           ----       --------       --------           -------
Balance as of September 30, 1995                189            319         51,703         (7,906)           44,305
 Dividends                                                                               (21,309)          (21,309)
 Additional capital contribution                 --             --          4,184             --             4,184
 Net income                                      --             --             --          2,001             2,001
                                              -----           ----       --------       --------           -------
Balance as of December 20, 1995               $ 189           $319       $ 55,887       $(27,214)          $29,181
                                              =====           ====       ========       ========           =======
</TABLE>

                               PARTNERS' CAPITAL
       FOR THE PERIOD ENDED DECEMBER 20, 1995 THROUGH SEPTEMBER 30, 1996
                     AND THE YEAR ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                           Number of Units                                                  Total 
                                      -------------------------                                General     Partners'
                                       Common     Subordinated     Common     Subordinated     Partner      Capital
                                       ------     ------------     ------     -----------      -------     ---------
<S>                                     <C>              <C>        <C>           <C>           <C>        <C> 
Balance as of December 20, 1995            --               --      $    --       $    --       $  --      $     --

 Contribution of assets, net               --            2,396           --        10,956         225        11,181
 Issuance of Common Units, net          2,875               --       55,875            --          56        55,931
 Net Income                                --               --          317           263          12           592
 Distributions ($1.17 per unit)            --               --       (3,371)       (2,809)       (126)       (6,306)
                                        -----            -----      -------       -------       -----      --------
Balance as of September 30, 1996        2,875            2,396       52,821         8,410         167        61,398
                                        -----            -----      -------       -------       -----      --------
 Net Income                                --               --        1,077           895          40         2,012
 Distributions ($2.20 per unit)            --               --       (6,325)       (5,271)       (236)      (11,832)
                                        -----            -----      -------       -------       -----      --------
Balance as of September 30, 1997        2,875            2,396      $47,573       $ 4,034       $ (29)     $ 51,578
                                        =====            =====      =======       =======       =====      ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                            OCTOBER 1
                                                              1995                                                            
                                              YEAR ENDED    THROUGH                            OCTOBER 1, 1995
                                             SEPTEMBER 30, DECEMBER 20    DECEMBER 20, 1995        THROUGH             
                                                 1995         1995            THROUGH         SEPTEMBER 30, 1996      YEAR ENDED
                                            (PREDECESSOR) (PREDECESSOR)  SEPTEMBER 30, 1995      (COMBINED)       SEPTEMBER 30, 1997
                                            ------------   ----------    ------------------    -----------------  -----------------
<S>                                            <C>          <C>                <C>                 <C>                <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                            
Net income (loss)                              $ (6,169)    $  2,001           $    592            $  2,593           $  2,012  
Adjustments to reconcile net income (loss) to                                                                                    
  net cash provided by operating activities:                                                                                    
Depreciation and amortization                    10,073        2,177              7,631               9,808             10,405  
Provision for losses on accounts receivable         809          101                321                 422                312  
Net (gain) loss on sales of assets                  913          113                147                 260                295  
Changes in operating assets and liabilities:                                                                                     
  Decrease (increase) in receivables              1,390       (2,779)             1,766              (1,013)             1,193  
  Decrease (increase) in inventories             (1,196)       1,430             (3,770)             (2,340)             1,897  
  Decrease (increase) in prepaid and other       
    assets                                          188         (455)               754                 299                124
  Increase (decrease) in other current           
    liabilities                                  (5,504)      (1,703)             1,757                  54              2,900
  Decrease in other long-term liabilities           (87)         (12)               (89)               (101)              (174) 
                                               --------     --------           --------            --------           --------
    Net cash provided by operating activities       417          873              9,109               9,982             18,964
                                               --------     --------           --------            --------           --------
                                                                                                                                 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                            
Capital expenditures                             (7,988)      (1,617)            (3,715)             (5,332)            (5,279) 
Business acquisitions                            (4,557)          --             (2,440)             (2,440)                --   
Proceeds from sales of fixed assets                 707          566                252                 818                374  
Proceeds from sale of businesses                 13,250           --                 --                  --                 --  
                                               --------     --------           --------            --------           --------
    Net cash provided by (used in) investing                                                                                     
      activities                                  1,412       (1,051)            (5,903)             (6,954)            (4,905) 
                                               --------     --------           --------            --------           --------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                            
Credit facility borrowings                        6,700           --              5,850               5,850              5,000  
Credit facility repayments                      (10,700)          --             (3,500)             (3,500)            (7,350) 
Acquisition facility borrowings                     700           --                 --                  --              3,350  
Acquisition facility repayments                    (700)          --                 --                  --             (3,350) 
Borrowings (repayments) of debt                   6,576      (35,783)           (53,780)            (89,563)                --  
Repayments of preferred stock                    (5,091)      (8,625)                --              (8,625)                --  
Cash dividends paid                                (412)     (21,309)                --             (21,309)                --  
Distributions                                        --           --             (6,306)             (6,306)           (11,832) 
Loan to Petro                                        --      (12,000)                --             (12,000)                --  
Proceeds from issuance of First Mortgage                                                  
  Notes                                              --       85,000                 --              85,000                 --  
Proceeds from issuance of Common Units, net          --           --             55,931              55,931                 --  
Debt placement and credit agreement expenses         --       (1,313)              (814)             (2,127)               (94) 
Cash retained by general partner                     --       (6,000)                --              (6,000)                --  
                                               --------     --------           --------            --------           --------
   Net cash used in financing activities         (2,927)         (30)            (2,619)             (2,649)           (14,276) 
                                               --------     --------           --------            --------           --------
   Net increase (decrease) in cash               (1,098)        (208)               587                 379               (217) 
Cash at beginning of period                       1,825          727                519                 727              1,106  
                                               --------     --------           --------            --------           --------
Cash at end of period                          $    727     $    519           $  1,106            $  1,106           $    889  
                                               ========     ========           ========            ========           ========
</TABLE>        

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (IN THOUSANDS, EXCEPT PER UNIT DATA)


1)   PARTNERSHIP ORGANIZATION AND FORMATION

       Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") was
     formed on October 16, 1995, as a Delaware limited partnership.  Star Gas
     Partners and its subsidiary, Star Gas Propane, L.P., a Delaware limited
     partnership, (the "Operating Partnership" or the "OLP") were formed to
     acquire, own and operate substantially all of the propane operations and
     assets and liabilities of Star Gas Corporation ("Star Gas"), a Delaware
     corporation (and the general partner of Star Gas Partners and the Operating
     Partnership) and the propane operations and assets and liabilities of Star
     Gas' parent corporation, Petroleum Heat and Power Co., Inc., a Minnesota
     corporation ("Petro"), (collectively hereinafter referred to as the "Star
     Gas Group" or the "Predecessor Company").  The Operating Partnership is,
     and the Star Gas Group was, engaged in the marketing and distribution of
     propane gas and related appliances to retail and wholesale customers in the
     United States located principally in the Midwest and Northeast.  On
     December 20, 1995, (i) Petro conveyed all of its propane assets and related
     liabilities to Star Gas and (ii) Star Gas and its subsidiaries conveyed
     substantially all of their assets (other than $83.7 million in cash from
     the proceeds of the First Mortgage Notes and certain non-operating assets)
     to the Operating Partnership (the "Star Gas Conveyance") in exchange for
     general and limited partner interests in the Operating Partnership and the
     assumption by the Operating Partnership of substantially all of the
     liabilities of Star Gas and its subsidiaries (excluding certain income tax
     liabilities and certain other long-term obligations of Star Gas that were
     assumed by Petro), including the First Mortgage Notes and approximately
     $53.8 million in outstanding Star Gas debt due to Petro.  The net book
     value of the assets contributed by Star Gas and its subsidiaries to the
     Operating Partnership exceeded the liabilities assumed by $11.2 million.
     Immediately after the Star Gas Conveyance, Star Gas and its subsidiaries
     conveyed their limited partner interests in the Operating Partnership to
     Star Gas Partners in exchange for an aggregate of 2.4 million Subordinated
     Units of limited partner interests in Star Gas Partners.

       Of the $83.7 million in cash retained by the General Partner, $35.8
     million was paid to Petro in satisfaction of additional indebtedness, $8.6
     million was used to redeem preferred stock of the General Partner held by
     Petro, $12.0 million was loaned to Petro, and $6.0 million was retained to
     be available to fund the General Partner's additional capital contribution
     obligation. The remaining $21.3 million was paid to Petro as dividends.

       During fiscal 1996, Star Gas Partners completed its initial public
     offering of 2.9 million Common Units, including over allotment shares of
     0.3 million, representing Limited Partner interests, at a price of $22.00 a
     unit.  The net proceeds received of $55.9 million, after deducting
     underwriting discounts, commissions and  expenses  were  contributed to the
     Operating Partnership and used to repay $50.3 million of debt due to Petro,
     which was assumed by the Operating Partnership in the Star Gas Conveyance
     and the Partnership used the balance of $5.6 million for general operating
     purposes.

                                      F-7
<PAGE>
 
1)   PARTNERSHIP ORGANIZATION AND FORMATION (CONTINUED)

       In order that the Partnership would commence operations with $6.2 million
     of working capital on December 20, 1995, the Conveyance Agreement provided
     that the amount of debt due to Petro at closing would be adjusted upwards
     or downwards to the extent that the Star Gas Partners' net working capital
     exceeded or was less than $6.2 million.  At closing, net working capital
     was $9.7 million and $3.5 million was repaid to Petro on January 18, 1996.

       The General Partner holds a 1.0% general partner interest in Star Gas
     Partners and a 1.0101% general partner interest in the Operating
     Partnership.  Star Gas Partners and the Operating Partnership have no
     employees, except for certain employees of its corporate subsidiary Stellar
     Propane Service Corporation.  The General Partner conducts, directs and
     manages all activities of Star Gas Partners and the Operating Partnership
     and is reimbursed on a monthly basis for all direct and indirect expenses
     it incurs on their behalf including the cost of employee wages.

       The Operating Partnership is and the Star Gas Group was, primarily
     engaged in the retail distribution of propane and related supplies and
     equipment to residential, commercial, industrial, agricultural and motor
     fuel customers, operating from 49 branches in the Midwest and 18 branches
     in the Northeast.  Propane is used primarily for space heating, water
     heating and cooking by the Partnership's residential and commercial
     customers and as a result, weather conditions have a significant impact on
     the demand for propane for both heating and agricultural purposes.
     Accordingly, actual weather conditions can vary substantially from year to
     year, significantly affecting the Partnership's financial performance.

2)   ACQUISITION BY PETRO

       In December 1993, Petro acquired an approximate 29.5% interest in Star
     Gas for $16.0 million.  Petro exercised its right in December 1994 to
     purchase the remaining outstanding common equity of Star Gas by paying $3.8
     million in cash and issuing approximately 2.5 million shares of its common
     stock.

       The acquisition was accounted for as a purchase, accordingly, the
     purchase price was allocated to the underlying assets and liabilities based
     upon their estimated fair value at the date of acquisition.  The fair value
     of assets acquired was $141.3 million (including $3.3 million in cash) and
     liabilities and preferred stock was $109.5 million.  The excess of the
     purchase price over the fair value of assets acquired and liabilities
     assumed was $9.0 million and is being amortized over a period of twenty-
     five years.

3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

       The Consolidated Financial Statements for the year ended September 30,
     1995 and the period October 1, 1995 through December 20, 1995 include the
     propane operations, assets and liabilities of the Star Gas Group.  The
     Consolidated Financial Statements for the period December 20, 1995 through
     September 30, 1996 and for the year ended September 30, 1997 include the
     accounts of Star Gas Partners, L.P., the Operating Partnership and its
     corporate subsidiary, Stellar Propane Service Corp., collectively referred
     to herein as (the "Partnership"). All material intercompany items and
     transactions have been eliminated in consolidation and certain
     reclassifications have been made to the 1995 and 1996 financial statements
     to conform to the 1997 presentation.

                                      F-8
<PAGE>
 
3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Net Income per Limited Partner Unit

       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.

     Revenue Recognition

       Sales of propane and propane appliances are recognized at the time of
     delivery of the product to the customer or at the time of sale or
     installation.  Revenue from service repairs and maintenance is recognized
     upon completion of the service provided.

     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:

<TABLE>
<CAPTION>
                                   September 30,
                                   --------------
                                     1996    1997
                                   ------  ------
<S>                                <C>     <C>
       Propane gas...............  $6,625  $4,805
       Appliances and equipment..   1,869   1,792
                                   ------  ------
                                   $8,494  $6,597
                                   ======  ======
</TABLE>

       Substantially all of the Partnership's propane supply for the Northeast
     retail operations are purchased under supply contracts.  Certain of the
     supply contracts provide for minimum and maximum amounts of propane to be
     purchased thereunder, and provide for pricing in accordance with posted
     prices at the time of delivery or include a pricing formula that typically
     is based on current market prices.  One supply agreement, representing
     approximately 7,200 gallons, extends through March 31, 1999. During 1995,
     1996 and 1997 spot purchases from Mont. Belvieu sources accounted for an
     aggregate of approximately 8%, 26% and 36%, respectively, of the
     Partnership's total volume of propane purchases. In addition, the three
     single largest suppliers accounted for an aggregate of approximately 56%,
     32% and 31%, respectively, of total propane purchases in 1995, 1996 and
     1997.
     

     Property and Equipment

       Property and equipment are stated at cost.  Depreciation is computed over
     the estimated useful lives of the depreciable assets using the straight-
     line method.

     Intangible Assets

       The excess of cost over the fair value of net assets resulting from the
     acquisition of the Company by Petro in December 1994 is being amortized
     using the straight-line method over 25 years. For the period October 1993
     through December 1994, goodwill was amortized over 10 years. Other
     intangible assets, including covenants not to compete and customer lists
     are recorded at cost and are being amortized over their estimated useful
     lives, ranging from 1 to 15 years. Also included as intangible assets are
     the costs associated with the issuance of the Company's First Mortgage
     Notes which are being amortized under the interest method over the life of
     the notes.

                                      F-9

<PAGE>
 
3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     It is the Partnership's policy to review intangible assets for impairment
     whenever events or changes in circumstances indicate that the carrying
     amount of such assets may not be recoverable.  The Partnership determines
     that the carrying values of intangible assets are recoverable over their
     remaining estimated lives through undiscounted future cash flow analysis.
     If such a review should indicate that the carrying amount of the intangible
     assets is not recoverable, it is the Partnership's policy to reduce the
     carrying amount of such assets to fair value.

     Customer Credit Balances

       Customer credit balances represent pre-payments received from customers.
     These payments relate primarily to a budget payment plan whereby customers
     pay their estimated annual propane gas charges on a fixed monthly basis and
     the payments made have exceeded actual deliveries billed.

     Use of Estimates

       In accordance with generally accepted accounting principles, management
     of the Partnership has made a number of estimates and assumptions relating
     to the reporting of assets and liabilities and the disclosure of contingent
     assets and liabilities to prepare these financial statements.  Actual
     results could differ from those estimates.

     Cash Equivalents

       The Partnership considers all highly liquid investments with a maturity
     of three months or less, when purchased, to be cash equivalents.

     Income Taxes

       The Partnership is a master limited partnership.  As a result, for
     Federal income tax purposes, earnings or losses are allocated directly to
     the individual partners.  Except for the Partnership's corporate subsidiary
     which generates non-qualifying Master Limited Partnership income, no
     recognition has been given to Federal income taxes in the accompanying
     financial statements of the Partnership.  Net earnings for financial
     statement purposes may differ significantly from taxable income reportable
     to unitholders as a result of differences between the tax basis and
     financial reporting basis of assets and liabilities and due to taxable
     income allocation requirements of the Partnership agreement.

       From December 1994 and prior to the Partnership's formation, the 
     Predecessor filed a consolidated Federal income tax return with Petro and
     its affiliates.  Income taxes were computed as though each company filed
     its own income tax return.  Deferred income taxes were recognized for the
     tax consequences of temporary differences between the financial statement
     carrying amounts and the tax basis of existing assets and liabilities.
     Prior to the December 1994 acquisition by Petro, Star Gas filed
     consolidated tax returns with its subsidiaries.

4)   QUARTERLY DISTRIBUTION OF AVAILABLE CASH

       The Partnership distributes to its partners, on a quarterly basis,
     all of its "Available Cash."  Available Cash generally means, with respect
     to any fiscal quarter of the Partnership, all cash on hand at the end of
     such quarter, less the amount of cash reserves that are necessary or
     appropriate in the reasonable discretion of the General Partner.

                                      F-10

<PAGE>
 
4)   QUARTERLY DISTRIBUTION OF AVAILABLE CASH (CONTINUED)

       Distribution by the Partnership in an amount equal to 100% of its
     Available Cash will generally be made 98% to the Common and Subordinated
     Unitholders and 2% to the General Partner, subject to the payment of
     incentive distributions in the event Available Cash exceeds the Minimum
     Quarterly Distribution ($0.55) on all Units.  To the extent there is
     sufficient Available Cash, the holders of Common Units have the right to
     receive the Minimum Quarterly Distribution, plus any arrearage, prior to
     the distribution of Available Cash to holders of Subordinated Units. Common
     Units will not accrue arrearage for any quarter after the end of the
     Subordination Period (as defined below) and Subordinated Units will not
     accrue any arrearage with respect to distributions for any quarter.

       The first distribution commenced with the quarter ending March 31, 1996
     and was paid on May 15, 1996 to holders of record as of May 1, 1996.  The
     initial distribution was $0.6225 per unit and represented a pro rata
     distribution of $0.0725 per unit for the period December 20, 1995 to
     December 31, 1995 and a quarterly distribution of $0.55 per unit for the
     three months ended March 31, 1996.  During fiscal 1996, distributions of
     $1.17 per unit (including the initial distribution) were declared and paid
     on all common, subordinated and general partnership interests. The
     aggregate amount paid for such distributions was $6.3 million during fiscal
     1996.

       During fiscal 1997, distributions of $2.20 per unit were declared and
     paid on all common, subordinated and general partnership interests.  The
     aggregate paid for such distributions was $11.8 million during fiscal 1997.

5)   DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD

       The Subordination Period will generally extend until the first day of any
     quarter beginning on or after January 1, 2001 in respect of which (i)
     distributions of Available Cash from Operating Surplus on the Common Units
     and the Subordinated Units equals or exceeds the sum of the Minimum
     Quarterly Distribution on all of the outstanding Common Units and
     Subordinated Units with respect to each of the three non-overlapping four-
     quarter periods immediately preceding such date, (ii) the Adjusted
     Operating Surplus generated during each of the three immediately preceding
     non-overlapping four-quarter periods equals or exceeds the sum of the
     Minimum Quarterly Distribution on all of the outstanding Common Units and
     Subordinated Units during such periods and (iii) there are no arrearages in
     payment of the Minimum Quarterly Distribution on the Common Units.

       Prior to the end of the Subordination Period, a portion of the
     Subordinated Units will convert into Common Units on the first day after
     the record date established for any quarter ending on or after March 31,
     1999 (with respect to 599,020 of the Subordinated Units) and March 31, 2000
     (with respect to an additional 599,020 of the Subordinated Units), on a
     cumulative basis, in respect of which (i) distributions of Available Cash
     from Operating Surplus on the Common Units and the Subordinated Units
     equals or exceeds the sum of the Minimum Quarterly Distribution on all of
     the outstanding Common Units and Subordinated Units with respect to each of
     the three non-overlapping four-quarter periods immediately preceding such
     date, (ii) the Adjusted Operating Surplus generated during each of the
     three immediately preceding non-overlapping four-quarter periods equals or
     exceeds the sum of the Minimum Quarterly Distribution on all of the
     outstanding Common Units and Subordinated Units during such periods and
     (iii) there are no arrearages in payment of the Minimum Quarterly
     Distribution on the Common Units.

                                      F-11
<PAGE>
 
6)   ACQUISITIONS - PRO FORMA

       During fiscal 1995 and 1996, the Partnership acquired several propane
     dealers with an aggregate cost of $4.6 million and $2.4 million, in each
     respective fiscal year. There were no acquisitions of propane dealers made
     during fiscal 1997.

       The acquisitions were accounted for under the purchase method of
     accounting.  Purchase prices have been allocated to the acquired assets and
     liabilities based on their respective fair market values on the dates of
     acquisition.  The purchase prices in excess of the fair values of net
     assets acquired were classified as intangibles in the Consolidated Balance
     Sheets. Sales and net income have been included in the Consolidated
     Statements of Operations from the respective dates of acquisition.

       Unaudited Pro forma data giving effect to the purchased businesses as if
     they had been acquired on October 1 of the year preceding the year of
     purchase.

<TABLE>
<CAPTION>
                                           YEARS ENDED SEPTEMBER 30,
                                           -------------------------
                                              1995            1996
                                              ----            ----
<S>                                         <C>             <C> 
Sales                                       $107,714        $120,645
                                            ========        ========
Net income (loss)                           $(6,260)          $2,817
                                            ========        ========
</TABLE>

7)     SUBSEQUENT EVENTS - ACQUISITION OF PEARL GAS CO.

       On October 22, 1997, pursuant to a purchase agreement ("Stock Purchase
     Agreement") dated as of October 20, 1997, Star Gas Corporation 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.  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.

       The purchase price for said stock was $22.6 million and was paid in cash.
     The purchase price included estimated working capital of $1.9 million. This
     amount will be adjusted on or before December 5, 1997 upward or downward
     based on actual working capital as of October 21, 1997. The amount of
     consideration for the Pearl Common Stock was determined by arms length
     bargaining between Star Gas and the Sellers. Funding for the stock purchase
     was provided by a $23.0 million bank acquisition facility. Subsequent to
     the acquisition of the common stock of Pearl, Pearl was merged into Star
     Gas in a tax-free liquidation.

       On October 22, 1997, a Conveyance and Contribution Agreement was entered
     into by, and among, the Partnership, the OLP and Star Gas Corporation.
     Star Gas Corporation contributed to the OLP all of the Pearl assets it
     obtained in the stock purchase of Pearl Gas and the subsequent merger of
     Pearl into Star Gas Corporation.  In exchange, Star Gas 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 interests transferred to Star Gas from the OLP is $3.5 million.

                                      F-12
<PAGE>
 
7)   SUBSEQUENT EVENTS - ACQUISITION OF PEARL GAS CO. (CONTINUED)

       The issuance of the additional partnership interests to Star Gas is
     intended to compensate Star Gas 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 Star Gas and
     the Executive Committee of Petro.

        Star Gas 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.

8)   PROPERTY, PLANT AND EQUIPMENT

       The components of property, plant and equipment and their estimated
     useful lives were as follows at the indicated dates:

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                         ----------------------     
                                                         1996              1997            USEFUL LIVES
                                                         ----              ----            ------------
<S>                                                   <C>               <C>                <C>  
Land                                                  $  3,916          $  4,060                 -  
                                                                                                           
Buildings                                                8,945             8,871               30 years    
                                                                                                           
Fleet                                                   12,679            14,464           5 - 30 years  
                                                                                                           
Tanks and equipment                                     82,296            84,766           5 - 30 years  
                                                                                                           
Furniture and fixtures                                   2,440             2,504               10 years     
                                                      --------          --------   
  Total                                                110,276           114,665   
                                  
Less: accumulated depreciation                         (12,543)          (19,383) 
                                                      --------          --------  
  Total                                               $ 97,733          $ 95,282   
                                                      ========          ========    
                                 
</TABLE>                         
9)   INTANGIBLES AND OTHER ASSETS

       The components of intangibles and other assets were as follows at the
     indicated dates:

<TABLE>
<CAPTION>
                                                 September 30,
                                            -----------------------
                                            1996               1997
                                            ----               ----
<S>                                       <C>                <C>
     Goodwill                             $14,186            $14,186
     Covenants not to compete               2,040              2,040
     Customer lists                        28,797             28,797
     Deferred charges and other assets      2,795              2,822
                                          -------            -------
       Total                               47,818             47,845
     Less: accumulated amortization        (6,480)            (9,823)
                                          -------            -------
       Total                              $41,338            $38,022
                                          =======            =======
</TABLE>

                                      F-13
<PAGE>
 
10)  LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS

       In December 1995, the General Partner issued $85.0 million of first
     mortgage notes (the "First Mortgage Notes") with an annual interest rate of
     8.04%.  These notes were assumed as part of the Star Gas Conveyance by the
     Operating Partnership.  The Operating Partnership's obligations under the
     First Mortgage Note Agreement are secured, on an equal basis with the
     Operating Partnership's obligations under the Bank Credit Facilities, by
     a mortgage on substantially all of the real property and liens on 
     substantially all of the operating facilities, equipment and other assets
     of the Operating Partnership.  The First Mortgage Notes will mature
     September 15, 2009, and will require semiannual prepayments, without
     premium on the principal thereof, beginning on March 15, 2001.  Interest is
     payable semiannually on March 15 and September 15.  For the year ended
     September 30, 1997, the Partnership paid interest in the amount of $6.8
     million on the First Mortgage Notes.

       The First Mortgage Note Agreement contains various restrictive and
     affirmative covenants applicable to the Operating Partnership, including
     restrictions on the incurrence of additional indebtedness and restrictions
     on certain investments, guarantees, loans, sales of assets and other
     transactions.

       As of September 30, 1997, the Partnership was in compliance with all
     borrowing agreement covenants, as amended.

       The Bank Credit Facilities consist of a $25.0 million Acquisition
     Facility and a $12.0 million Working Capital Facility.  The agreement
     governing the Bank Credit Facilities contains covenants and default
     provisions generally similar to those contained in the First Mortgage Note
     Agreement.  As of September 30, 1997, there were no outstanding borrowings
     under the Acquisition Facility or the Working Capital Facility.  The Bank
     Credit Facilities bear interest at a rate based upon, at the Partnership's
     option, either the London Interbank Offered Rate plus a margin or a Base
     Rate (each as defined in the Bank Credit Facilities).  The Partnership is
     required to pay a fee for unused commitments which amounted to $0.1 million
     for fiscal 1996 and $0.2 million for fiscal 1997.

       The Working Capital Facility will expire December 31, 1999, but may be
     extended annually thereafter with the consent of the banks.  Borrowings
     under the Acquisition Facility will revolve until September 30, 1998, after
     which time any outstanding loans thereunder, will amortize quarterly in
     equal principal payments with a final payment due on December 31, 2001.
     However, there must be no amount outstanding under the Working Capital
     Facility for at least 30 consecutive days during each fiscal year.

       As of September 30, 1997, the annual maturities of the First Mortgage
     Notes are set forth in the following table:

                                 1998      $   --
                                 1999          --
                                 2000          --
                                 2001        1,923
                                 2002        8,703
                              Thereafter    74,374
                                           -------
                                           $85,000
                                           =======

       In connection with the Pearl acquisition, the Operating Partnership
     borrowed $21.0 million under the Acquisition Facility on October 22, 1997.

                                      F-14
<PAGE>
 
11)  EMPLOYEE BENEFIT PLANS

       Star Gas has a 401(k) plan which covers certain eligible union and non-
     union employees.  Subject to IRS limitations, the 401(k) plan provides for
     each employee to contribute from 1.0% to 15.0% of compensation.  Star Gas
     contributes to non-union participants a matching amount up to a maximum of
     3.0% of compensation.  Aggregate matching contributions made to the 401(k)
     plan during fiscal 1995, 1996 and 1997 were $0.2 million, $0.3 million and
     $0.4 million, respectively.

       Star Gas also makes monthly contributions on behalf of its union
     employees to a union sponsored defined benefit plan.  The amount charged to
     expense was $0.2 million, $0.3 million and $0.4 million in fiscal 1995,
     1996 and 1997, respectively.

12)  UNIT OPTION PLAN

       On December 20, 1995, the General Partner adopted the 1995 Star Gas
     Corporation Unit Option Plan (the "Unit Option Plan"), which currently
     authorizes the issuance of options (the "Unit Options") and Unit
     Appreciation Rights ("UARS") covering up to 300,000 Subordinated Units to
     certain officers and employees of the General Partner.  A total of 40,000
     options were granted to key executives in December 1995.  The Unit Options
     have the following characteristics:  1) an exercise price of $22 per unit,
     which is an estimate of the fair market value of the Subordinated Units at
     the time of grant, 2) vest over a five year period, 3) are exercisable
     after January 1, 2001, assuming the subordination period has elapsed, and
     4) expire on the tenth anniversary of the date of grant.  Upon conversion
     of the Subordinated Units held by the General Partner and its affiliates,
     the Unit Options granted will convert to Common Unit Options.  No UARS have
     been granted pursuant to the plan.

13)  LEASE COMMITMENTS

       The Partnership has entered into certain operating leases for office
     space, trucks and other equipment.
 
       The future minimum rental commitments at September 30, 1997 under leases
     having an initial or remaining non-cancelable term of one year or more are
     as follows:

          1998                            $  906
          1999                               786
          2000                               701
          2001                               669
          2002                               540
          Thereafter                         345
                                          ------
          Total Minimum lease payments    $3,947
                                          ======

       The Partnership incurred rent expense of $1.2 million, $1.2 million and
     $1.3 million in 1995, 1996 and 1997, respectively.

                                      F-15
<PAGE>
 
14)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION> 
                                                                        YEARS ENDED SEPTEMBER 30,
                                                               ----------------------------------------------------
                                                                       1995             1996              1997
                                                               -----------------   ---------------  ---------------
<S>                                                             <C>                <C>              <C>
Cash paid during the year for:
  Income taxes                                                  $2,950             $   80           $    7
                                                                ======             ======           ======
  Interest                                                      $4,284             $5,088           $7,170
                                                                ======             ======           ======
Non-cash adjustment:

Purchase accounting adjustment:
  Increase in intangibles                                      $23,028
  Decrease in property & equipment                                (680)
  Increase in other accrued expenses                            (4,000)
  Increase in long-term debt                                    (1,700)
  Decrease in deferred income taxes                                236
                                                               -------
                                                               $16,884
                                                               =======
  Dividends declared                                           $ 4,875
                                                               =======
</TABLE>

15)    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 Partnership.

16)  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 the General Partner.  Pursuant to the Partnership
     Agreement, the General Partner is entitled to reimbursement 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 fiscal year
     ended September 30, 1996 and September 30, 1997, the Partnership reimbursed
     the General Partner and Petro $14.4 million and $17.1 million,
     respectively, representing salary, payroll tax and other compensation paid
     to the employees of the General Partner, including $0.3 million and $0.2
     million paid to Petro for certain corporate functions such as finance and
     compliance.  In addition, the Partnership reimbursed Petro for $1.9 million
     and $0.9 million for the fiscal year ended September 30, 1996 and September
     30, 1997, respectively, 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.

                                      F-16
<PAGE>
 
17)  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

     Cash, Accounts Receivable, Notes Receivable and Other Current Assets,
     Working Capital Borrowing, Accounts Payable and Accrued Expenses
     ----------------------------------------------------------------
 
       The carrying amount approximates fair value because of the short maturity
     of these instruments.

     Long-Term Debt
     --------------

       The fair values of each of the Partnership's long-term financing
     instruments, including current maturities, are based on the amount of
     future cash flows associated with each instrument, discounted using the
     Company's current borrowing rate for similar instruments of comparable
     maturity.

       The estimated fair value of the Partnership's long-term debt is
     summarized as follows:

<TABLE>
<CAPTION>
                                                AT SEPTEMBER 30, 1997
                                                ---------------------
                                              CARRYING          ESTIMATED
                                               Amount           Fair Value
                                              --------          ----------   

<S>                                            <C>               <C>
Long-term debt                                 $85,000            $86,726
                                               =======            =======
</TABLE>

                                      F-17
<PAGE>
 
18)  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

       The seasonal nature of the Partnership's business results in the sale by
     the Partnership of approximately 35% of its volume in the first fiscal
     quarter and 40% of its volume in the second fiscal quarter of each year.
     The Partnership generally realizes net income in both of these quarters and
     net losses during the quarters ending June and September.

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                        ------------------------------------------------------------------------------------------------ 
                           DECEMBER 31,         MARCH 31,          JUNE 30,          SEPTEMBER 30,    
                               1995               1996               1996                1996                Total       
                        ------------------  -----------------  -----------------  -------------------  -----------------  
<S>                         <C>                  <C>                <C>                 <C>                 <C>          
Sales                       $34,634(a)           $47,080            $18,416             $19,504             $119,634      
                                                                                                                          
Gross profit                 18,729(a)            22,599              9,933               9,816               61,077      
                                                                                                                          
Income (loss)                                                                                                             
  before taxes                3,546(a)             7,244             (4,029)             (4,083)               2,678      
                                                                                                                          
Net income (loss)             3,486(a)             7,230             (4,046)             (4,077)               2,593      
                                                                                                                          
Limited Partner                                                                                                           
  interest in net                                                                                                         
  income (loss)               1,455(b)             7,085             (3,965)             (3,995)                 580      
                                                                                                                          
Net income (loss)                                                                                                         
  per Limited                                                                                                             
  Partner Unit                $0.28(b)             $1.34             ($0.75)             ($0.76)               $0.11     
                                                  


                                                            THREE MONTHS ENDED
                        ------------------------------------------------------------------------------------------------ 
                           DECEMBER 31,         MARCH 31,          JUNE 30,          SEPTEMBER 30,
                               1996               1997               1997                1997                Total
                        ------------------  -----------------  -----------------  -------------------  -----------------
Sales                       $50,876              $46,442            $20,078             $17,763             $135,159   
                                                                                                                                
Gross profit                 21,849               21,523             10,446               9,130               62,948            
                                                                                                                                
Income (loss)                                                                                                                   
  before taxes                5,898                5,332             (4,138)             (5,055)               2,037            
                                                                                                                                
Net income (loss)             5,892                5,325             (4,143)             (5,062)               2,012            
                                                                                                                                
Limited Partner                                                                                                                 
  interest in net                                                                                                               
  income (loss)               5,774                5,218             (4,060)             (4,960)               1,972           
                                                                                                                                
Net income (loss)                                                                                                               
  per Limited                                                                                                                   
  Partner Unit                $1.10                $0.99             ($0.77)             ($0.94)               $0.37     
                                                                 
</TABLE>


(a) Reflects the results of operations of the Predecessor Company for the period
    October 1, 1995 through December 20, 1995 and of Star Gas Partners, L.P.
    from December 20, 1995 through December 31, 1995.

(b) Reflects limited partners interest from December 20, 1995 through
    December 31, 1995.

                                     F-18

<PAGE>
 
                                                                     Schedule II


                     STAR GAS PARTNERS, L.P. AND SUBSIDIARY

                       VALUATION AND QUALIFYING ACCOUNTS

                 YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        ADDITIONS
                                        ----------------------------------------
                                        BALANCE AT     CHARGED TO     CHARGED TO         OTHER
                                        BEGINNING      COSTS AND        OTHER           CHANGES        BALANCE AT
 YEAR      DESCRIPTION                   OF YEAR        EXPENSES       ACCOUNT        ADD(DEDUCT)      END OF YEAR
 ----      -----------                  ----------     ----------     ----------     -----------       -----------

<S>        <C>                         <C>             <C>            <C>            <C>               <C> 
1995       Allowance for doubtful
           accounts                    $521            809                           (968)(a)          $362
                                       ====            ===                           ====              ====

1996       Allowance for doubtful                                                    (184)(b)
           accounts                    $362            422                           (309)(a)          $291
                                       ====            ===                           ====              ====

1997       Allowance for doubtful
           accounts                    $291            312                           (330)(a)          $273
                                       ====            ===                           ====              ====

</TABLE>
_______________
(a) Bad debts written off (net of recoveries).
(b) Amount excluded from the Star Gas Conveyance which took place on December
    20, 1995.

                                      F-19