<PAGE>

================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

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

               For the Quarterly Period Ended September 30, 2001

                                      OR

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


                       Commission File Number 001-10311

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

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

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

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

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

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

Number of Units of the Registrant outstanding at October 31, 2001:  20,285,090

================================================================================
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
--------------------------------------------------------------------------------

                                                                        Page No.
                                                                        --------
                        Part I. Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated Statements of Income - Three and Nine Months Ended
           September 30, 2001 and 2000                                         1

         Condensed Consolidated Balance Sheets - September 30, 2001
           and December 31, 2000                                               2

         Condensed Consolidated Statements of Cash Flows - Nine
           Months Ended September 30, 2001 and 2000                            3

         Notes to Consolidated Financial Statements                            4

Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of Operations                      11

Item 3.  Quantitative and Qualitative Disclosure About Market Risk            16

                         Part II.  Other Information

Item 6.  Exhibits and Reports on Form 8-K                                     16
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands--Except Per Unit Amounts)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                          Three Months Ended        Nine Months Ended
                                             September 30,            September 30,
                                          -------------------      -------------------
                                            2001       2000          2001       2000
                                          --------   --------      --------   --------
<S>                                       <C>       <C>            <C>        <C>
Revenues                                  $ 53,403   $ 41,051      $154,424   $116,169
                                          --------   --------      --------   --------
Costs and expenses:
  Operating costs                           23,396     17,336        67,333     51,620
  Depreciation and amortization              5,624      4,004        17,326     11,940
  General and administrative                 2,307      2,245         7,483      7,262
                                          --------   --------      --------   --------

     Total costs and expenses               31,327     23,585        92,142     70,822
                                          --------   --------      --------   --------
Operating income                            22,076     17,466        62,282     45,347
Interest and other income, net                 122         84         4,218        225
Interest expense                            (3,380)    (3,036)      (12,144)    (9,016)
                                          --------   --------      --------   --------
Income before minority interest,
 income taxes and extraordinary item        18,818     14,514        54,356     36,556
Minority interest in net income               (185)      (142)         (537)      (359)
Income tax provision                          (295)      (253)         (602)      (629)
                                          --------   --------      --------   --------

Income before extraordinary item            18,338     14,119        53,217     35,568
Extraordinary item - loss on debt
 extinguishment, net of minority interest
 and income taxes                                -          -        (5,757)         -
                                          --------   --------      --------   --------
     Net income                             18,338     14,119        47,460     35,568

General partner's interest in net income      (924)      (435)       (1,868)    (1,238)
                                          --------   --------      --------   --------
Limited partners' interest in net income  $ 17,414   $ 13,684      $ 45,592   $ 34,330
                                          ========   ========      ========   ========
Allocation of net income
 per unit:
  Before extraordinary item               $    .86   $    .75      $   2.54   $   1.87
  Extraordinary item                             -          -          (.29)         -
                                          --------   --------      --------   --------
                                          $    .86   $    .75      $   2.25   $   1.87
                                          ========   ========      ========   ========
Weighted average number of limited
 partnership units outstanding              20,285     18,310        20,285     18,310
                                          ========   ========      ========   ========
</TABLE>

                See notes to consolidated financial statements.

                                       1
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

                                                  September 30,    December 31,
                                                      2001             2000
                                                  -------------    ------------
                                                   (Unaudited)
               ASSETS
Current assets:
    Cash and cash equivalents                      $   11,368       $    4,758
    Accounts receivable                                23,392           21,091
    Prepaid expenses and other                          4,414            5,291
                                                   ----------       ----------
      Total current assets                             39,174           31,140
                                                   ----------       ----------
Property and equipment                                638,430          458,926
Less accumulated depreciation                         160,307          137,571
                                                   ----------       ----------
    Net property and equipment                        478,123          321,355
                                                   ----------       ----------
Investment in affiliates                               21,747           22,568
                                                   ----------       ----------
                                                   $  539,044       $  375,063
                                                   ==========       ==========

     LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
    Current portion of long-term debt              $   23,958       $        -
    Accounts payable and accrued expenses              24,695           17,491
    Accrued distributions payable                      16,263           13,372
    Payable to general partner                          3,183            1,889
                                                   ----------       ----------
      Total current liabilities                        68,099           32,752
                                                   ----------       ----------
Long-term debt, less current portion                  235,900          166,900

Other liabilities and deferred taxes                   14,958           13,676

Minority interest                                       1,000              968

Commitments and contingencies

Partners' capital                                     219,087          160,767
                                                   ----------       ----------
                                                   $  539,044       $  375,063
                                                   ==========       ==========

                See notes to consolidated financial statements.

                                       2
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                       Nine Months Ended
                                                                         September 30,
                                                                     ---------------------
                                                                        2001        2000
                                                                     ---------    --------
<S>                                                                  <C>          <C>
Operating activities:
 Net income                                                          $  47,460    $ 35,568
 Adjustments to reconcile net income to net
  cash provided by operating activities:
   Depreciation and amortization                                        17,326      11,940
   Minority interest                                                       537         359
   Equity in earnings of affiliates, net of distributions                  581        (285)
   Deferred income taxes                                                   602         629
   Extraordinary item                                                    5,757           -
   Changes in other liabilities                                         (2,360)     (1,525)
   Changes in working capital components                                10,420       2,593
                                                                     ---------    --------

      Net cash provided by operating activities                         80,323      49,279
                                                                     ---------    --------
Investing activities:
  Capital expenditures                                                  (9,589)     (6,434)
  Acquisition of terminals, net of cash acquired                      (106,810)    (12,053)
  Proceeds from sale of assets                                           2,807           -
  Other, net                                                              (646)       (481)
                                                                     ---------    --------
      Net cash used in investing activities                           (114,238)    (18,968)
                                                                     ---------    --------
Financing activities:
  Issuance of debt                                                     257,500      16,500
  Payments of debt                                                    (171,082)     (5,700)
  Distributions, including minority interest                           (45,893)    (40,115)
                                                                     ---------    --------

      Net cash provided by (used in) financing activities               40,525     (29,315)
                                                                     ---------    --------

Increase in cash and cash equivalents                                    6,610         996
Cash and cash equivalents at beginning of period                         4,758       5,127
                                                                     ---------    --------

Cash and cash equivalents at end of period                           $  11,368    $  6,123
                                                                     =========    ========

Supplemental cash flow information:
 Cash paid for interest                                              $  11,229    $  7,919
                                                                     =========    ========
 Non-cash investing and financing activities -
    Issuance of units for acquisition of terminals                   $  56,488    $      -
                                                                     =========    ========
</TABLE>

                See notes to consolidated financial statements.

                                       3
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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


1.  SIGNIFICANT ACCOUNTING POLICIES

  The unaudited condensed consolidated financial statements of Kaneb Pipe Line
  Partners, L.P. and its subsidiaries (the "Partnership") for the three and nine
  month periods ended September 30, 2001 and 2000, have been prepared in
  accordance with accounting principles generally accepted in the United States
  of America applied on a consistent basis. Significant accounting policies
  followed by the Partnership are disclosed in the notes to the consolidated
  financial statements included in the Partnership's Annual Report on Form 10-K
  for the year ended December 31, 2000. In the opinion of the Partnership's
  management, the accompanying condensed consolidated financial statements
  contain the adjustments, consisting of normal recurring accruals, necessary to
  present fairly the consolidated financial position of the Partnership and its
  consolidated subsidiaries at September 30, 2001 and the consolidated results
  of their operations and cash flows for the periods ended September 30, 2001
  and 2000.  Operating results for the three and nine months ended September 30,
  2001 are not necessarily indicative of the results that may be expected for
  the year ending December 31, 2001.


2.  ACQUISITION AND FINANCING

  On January 3, 2001, the Partnership, through a wholly-owned subsidiary,
  acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
  Partnership units (valued at $56.5 million on the date of agreement and its
  announcement).   Financing for the cash portion of the purchase price was
  supplied under a new $275 million unsecured revolving credit agreement with a
  group of banks.  The acquisition has been accounted for using the purchase
  method of accounting.   Assuming the acquisition occurred on January 1, 2000,
  unaudited pro forma revenues, net income and net income per unit would be
  $49.9 million, $15.8 million and $0.76, respectively, for the three months
  ended September 30, 2000, and $140.8 million, $39.8 million and $1.90,
  respectively, for the nine months ended September 30, 2000.

  The $128 million of first mortgage notes outstanding at December 31, 2000
  which were due in varying amounts from 2001 to 2016, were repaid in full in
  January of 2001 with the proceeds from the $275 million revolving credit
  facility.  Under the provisions of the mortgage notes, the Partnership
  incurred a $6.5 million prepayment penalty, before minority interest and
  income taxes, which has been recognized as an extraordinary expense in the
  first quarter of 2001.

                                       4
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

3.  COMPREHENSIVE INCOME

  Comprehensive income for the three and nine months ended September 30, 2001
  and 2000 is as follows:
  <TABLE>
  <CAPTION>
                                                Three Months Ended       Nine Months Ended
                                                  September 30,            September 30,
                                              ----------------------    -------------------
                                                2001          2000        2001       2000
                                              --------      --------    --------   --------
                                                               (in thousands)
  <S>                                         <C>           <C>         <C>        <C>
  Net income                                  $ 18,338      $ 14,119    $ 47,460   $ 35,568
  Other comprehensive income (loss)
   - foreign currency translation adjustment       678            12        (180)      (913)
                                              --------      --------    --------   --------
  Comprehensive income                        $ 19,016      $ 14,131    $ 47,280   $ 34,655
                                              ========      ========    ========   ========
  </TABLE>


4.  CASH DISTRIBUTIONS

  The Partnership makes quarterly distributions of 100% of its Available Cash,
  as defined in the Partnership Agreement, to holders of limited partnership
  units ("Unitholders") and the general partner.  Available Cash consists
  generally of all the cash receipts of the Partnership, plus the beginning cash
  balance less all of its cash disbursements and reserves.  The Partnership
  expects to make distributions of all Available Cash within 45 days after the
  end of each quarter to Unitholders of record on the applicable record date.
  Cash distributions of $0.70 per unit for each of the first and second quarters
  of 2001 were paid on May 15, 2001 and August 14, 2001, respectively.  A cash
  distribution of $0.75 per unit for the third quarter of 2001 was declared to
  holders of record on October 31, 2001 and will be paid on November 14, 2001.


5.  CONTINGENCIES

  The operations of the Partnership are subject to Federal, state and local laws
  and regulations in the United States and the United Kingdom relating to
  protection of the environment. Although the Partnership believes its
  operations are in general compliance with applicable environmental
  regulations, risks of additional costs and liabilities are inherent in
  pipeline and terminal operations, and there can be no assurance that
  significant costs and liabilities will not be incurred by the Partnership.
  Moreover, it is possible that other developments, such as increasingly
  stringent environmental laws, regulations and enforcement policies thereunder,
  and claims for damages to property or persons resulting from the operations of
  the Partnership, could result in substantial costs and liabilities to the
  Partnership.

  On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
  Power Company ("PEPCO") ruptured.  The pipeline was operated by a partnership
  of which ST

                                       5
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  Services, a wholly-owned subsidiary of the Partnership, is general partner.
  PEPCO has reported that, through December 2000, it incurred approximately $66
  million in clean-up costs and expects to incur total cleanup costs of $70
  million to $75 million. Since May 2000, ST Services has participated
  provisionally in a minority share of the cleanup expense, which has been
  funded by ST Services' insurance carriers. The Partnership cannot predict the
  amount, if any, that ultimately may be determined to be ST Services' share of
  the remediation expense, but it believes that such amount will be covered by
  insurance and will not materially affect the Partnership's financial
  condition.

  As a result of the rupture, purported class actions have been filed in federal
  and state court in Maryland by property and/or business owners alleging
  damages in unspecified amounts against PEPCO and ST Services under various
  theories, including the federal Oil Pollution Act.  The court has ordered a
  consolidated complaint to be filed in this action. ST Services' insurance
  carriers have assumed the defense of these actions.  While the Partnership
  cannot predict the amount, if any, of any liability it may have in these
  suits, it believes that such amounts will be covered by insurance and that
  these actions will not have a material adverse effect on its financial
  condition.

  PEPCO and ST Services have agreed with the State of Maryland to pay costs of
  assessing natural resource damages under the federal Oil Pollution Act, but
  they cannot predict at this time the amount of any damages that may be claimed
  by Maryland.  The Partnership believes that both the assessment costs and such
  damages are covered by insurance and will not materially affect the
  Partnership's financial condition.

  The U.S. Department of Transportation has issued a Notice of Proposed
  Violation to PEPCO and ST Services alleging violations over several years of
  pipeline safety regulations and proposing a civil penalty of $674,000.  ST
  Services and PEPCO have contested the allegations of violations and the
  proposed penalty.  The ultimate amount of any penalty attributable to ST
  Services cannot be determined at this time, but the Partnership believes that
  this matter will not have a material effect on the Partnership's financial
  condition.

  Certain subsidiaries of the Partnership were sued in a Texas state court in
  1997 by Grace Energy Corporation ("Grace"), the entity from which the
  Partnership acquired ST Services in 1993.  The lawsuit involves environmental
  response and remediation allegedly resulting from jet fuel leaks in the early
  1970's from a pipeline.  The pipeline, which connected a former Grace terminal
  with Otis Air Force Base in Massachusetts, was abandoned in 1976, when the
  connecting terminal was sold to an unrelated entity.

  Grace alleged that subsidiaries of the Partnership acquired the abandoned
  pipeline, as part of the acquisition of ST Services in 1993, and assumed
  responsibility for environmental damages allegedly caused by the jet fuel
  leaks. Grace sought a ruling that these subsidiaries are responsible for all
  present and future remediation and expenses for these leaks and that Grace has
  no obligation to indemnify these subsidiaries for these expenses.

                                       6
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  In the lawsuit, Grace also sought indemnification for expenses that it has
  incurred since 1996 of approximately $3.5 million for response and remediation
  required by the State of Massachusetts and for additional expenses that it
  expects to incur in the future. The consistent position of the Partnership's
  subsidiaries is that they did not acquire the abandoned pipeline as part of
  the 1993 ST Services transaction, and therefore did not assume any
  responsibility for the environmental damage nor any liability to Grace for the
  pipeline.

  At the end of the trial, the jury returned a verdict including findings that
  Grace had breached a provision of the 1993 acquisition agreement and that the
  pipeline was abandoned before 1978.  On August 30, 2000, the Judge entered
  final judgment in the case, which is now on appeal to the Dallas Court of
  Appeals, that Grace take nothing from the subsidiaries on its claims,
  including claims for future expenses. Although the Partnership's subsidiaries
  have not incurred any expenses in connection with the remediation, the court
  also ruled, in effect, that the subsidiaries would not be entitled to an
  indemnification from Grace if any such expenses were incurred in the future.
  However, the Judge let stand a prior summary judgment ruling that the pipeline
  was an asset of the company acquired as part of the 1993 ST Services
  transaction. The Judge also awarded attorney fees to Grace.

  While the judgment means that the subsidiaries have no obligation to reimburse
  Grace for the approximately $3.5 million it has incurred, as required by the
  State of Massachusetts, the Partnership's subsidiaries have filed an appeal of
  the judgment finding that the Otis Pipeline was transferred to them and the
  award of attorney fees.

  On April 2, 2001, Grace filed a petition in bankruptcy, which created an
  automatic stay against actions against Grace.  This automatic stay will affect
  the appeal of this matter.  The Texas court of appeals has issued an order
  staying all proceedings of the appeal because of the bankruptcy.  Once that
  stay is lifted, the Partnership's subsidiaries that are party to the lawsuit
  intend to resume vigorous prosecution of the appeal.

  The Otis Air Force Base is a part of the Massachusetts Military Reservation
  ("MMR"), which has been declared a Superfund Site pursuant to the
  Comprehensive Environmental Response, Compensation and Liability Act.  The MMR
  Site contains nine groundwater contamination plumes, two of which are
  allegedly associated with the pipeline, and various other waste management
  areas of concern, such as landfills.  The United States Department of Defense
  and the United States Coast Guard, pursuant to a Federal Facilities Agreement,
  have been responding to the Government remediation demand for most of the
  contamination problems at the MMR Site.  Grace and others have also received
  and responded to formal inquiries from the United States Government in
  connection with the environmental damages allegedly resulting from the jet
  fuel leaks.  The Partnership's subsidiaries voluntarily responded to an
  invitation from the Government to provide information indicating that they do
  not own the pipeline.  In connection with a court-ordered mediation between
  Grace and the subsidiaries, the Government advised the parties in April 1999
  that it has identified the two spill areas that it believes to be related to
  the pipeline that is the subject of the Grace suit.  The Government at that
  time advised the parties that it believed it had incurred costs of
  approximately $34 million, and expected in the future to incur costs of
  approximately $55 million, for

                                       7
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  remediation of one of the spill areas. This amount was not intended to be a
  final accounting of costs or to include all categories of costs. The
  Government also advised the parties that it could not at that time allocate
  its costs attributable to the second spill area.

  By letter dated July 26, 2001, the United States Department of Justice advised
  ST Services that the Government intends to seek reimbursement from it under
  the Massachusetts Oil and Hazardous Material Release Prevention and Response
  Act and the Declaratory Judgment Act for the Government's response costs at
  the two spill areas.   The Government advised ST Services that it believes it
  has incurred costs exceeding  $40 million and expects in the future to incur
  costs exceeding an additional $22 million, for remediation of the two spill
  areas. The Partnership believes that its subsidiaries have substantial
  defenses.  ST Services responded to the Department of Justice on September 6,
  2001, contesting the Government's positions and declining to reimburse any
  response costs.

  The Partnership does not believe that either the Grace litigation or the
  claims made by the Government will adversely affect its ability to make cash
  distributions to its unitholders, but there can be no assurances in that
  regard.

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


6.  BUSINESS SEGMENT DATA

  The Partnership conducts business through two principal operations; the
  "Pipeline Operations," which consists primarily of the transportation of
  refined petroleum products in the Midwestern states as a common carrier, and
  the "Terminaling Operations," which provide storage for petroleum products,
  specialty chemicals and other liquids.

  The Partnership measures segment profit as operating income.  Total assets are
  those controlled by each reportable segment.  Business segment data is as
  follows:

                              Three Months  Ended  Nine Months Ended
                                 September 30,       September 30,
                              -------------------  ------------------
                                2001        2000     2001      2000
                              -------     -------  --------  --------
                                           (in thousands)

  Business segment revenues:
   Pipeline operations        $20,195     $19,567  $ 55,155  $ 52,298
   Terminaling operations      33,208      21,484    99,269    63,871
                              -------     -------  --------  --------
                              $53,403     $41,051  $154,424  $116,169
                              =======     =======  ========  ========

                                       8
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                         Three Months  Ended          Nine Months Ended
                                            September 30,               September 30,
                                         --------------------        -------------------
                                           2001         2000           2001       2000
                                         -------      -------        --------   --------
                                                          (in thousands)
<S>                                      <C>          <C>            <C>        <C>
  Business segment profit:
   Pipeline operations                   $ 9,827      $10,233        $ 26,640   $ 26,700
   Terminaling operations                 12,249        7,233          35,642     18,647
                                         -------      -------        --------   --------
     Operating income                     22,076       17,466          62,282     45,347
   Interest and other income, net            122           84           4,218        225
   Interest expense                       (3,380)      (3,036)        (12,144)    (9,016)
                                         -------      -------        --------   --------
   Income before minority interest,
     income taxes and extraordinary
     item                                $18,818      $14,514        $ 54,356   $ 36,556
                                         =======      =======        ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                 September 30,   December 31,
                                                                     2001           2000
                                                                 -------------   ------------
                                                                      (in thousands)
<S>                                                              <C>             <C>
  Total assets:
    Pipeline operations                                            $106,098       $102,656
    Terminaling operations                                          432,946        272,407
                                                                   --------       --------
                                                                   $539,044       $375,063
                                                                   ========       ========
</TABLE>

7.  DERIVATIVE INSTRUMENTS

  Effective January 1, 2001, the Partnership adopted the provisions of Statement
  of Financial Accounting Standards ("SFAS") No. 133, "Accounting For Derivative
  Instruments and Hedging Activities", which establishes the accounting and
  reporting standards for such activities.  Under SFAS No. 133, companies must
  recognize all derivative instruments on their balance sheet at fair value.
  Changes in the value of derivative instruments, which are considered hedges,
  are offset against the change in fair value of the hedged item through
  earnings, or recognized in other comprehensive income until the hedged item is
  recognized in earnings, depending on the nature of the hedge.  SFAS No. 133
  requires that unrealized gains and losses on derivatives not qualifying for
  hedge accounting be recognized currently in earnings.  On January 1, 2001, the
  Partnership was not a party to any derivative contracts; accordingly, initial
  adoption of SFAS No. 133 at that date did not have any effect on the
  Partnership's result of operations or financial position.

                                       9
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  In March of 2001, a wholly-owned subsidiary of the Partnership entered into
  two contracts for the purpose of locking in interest rates on $100 million of
  anticipated ten-year public debt offerings.  As the interest rate locks were
  not designated as hedging instruments pursuant to the requirements of SFAS No.
  133, increases or decreases in the fair value of the contracts are included as
  a component of interest and other income, net. On May 22, 2001, the contracts
  were settled resulting in an aggregate gain of $3.8 million.

                                       10
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

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

  Operating Results:

  Pipeline Operations
                                     Three Months Ended     Nine Months Ended
                                        September 30,         September 30,
                                     ------------------     -----------------
                                       2001        2000       2001      2000
                                     -------     -------    -------   -------
                                                   (in thousands)

  Revenues                           $20,195     $19,567    $55,155   $52,298
  Operating costs                      8,448       6,997     22,356    18,839
  Depreciation and amortization        1,324       1,293      3,937     3,877
  General and administrative             596       1,044      2,222     2,882
                                     -------     -------    -------   -------
      Operating income               $ 9,827     $10,233    $26,640   $26,700
                                     =======     =======    =======   =======


  Pipeline revenues are based on volumes shipped and the distances over which
  such volumes are transported.  For the three and nine month periods ended
  September 30, 2001, revenues increased by 3% and 5%, respectively, compared to
  the same 2000 periods, due to increases in barrel miles shipped and increases
  in terminaling charges.  Barrel miles totaled 5.0 billion and 4.7 billion for
  the three month periods ended September 30, 2001 and 2000, respectively, and
  13.9 billion and 13.1 billion for the nine month periods ended September 30,
  2001 and 2000, respectively.

  Operating costs, which include fuel and power costs, materials and supplies,
  maintenance and repair costs, salaries, wages and employee benefits, and
  property and other taxes, increased by $1.5 million and $3.5 million for the
  three and nine month periods ended September 30, 2001, respectively, when
  compared to 2000, due primarily to increases in fuel and power costs and
  expenses from pipeline relocation projects.  General and administrative costs,
  which include managerial, accounting, and administrative personnel costs,
  office rental and expense, legal and professional costs and other non-
  operating costs, decreased by $0.4 million and $0.7 million, respectively, for
  the three and nine month periods ended September 30, 2001, when compared to
  the same prior year periods.

                                       11
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  Terminaling Operations

                                   Three Months Ended   Nine Months Ended
                                      September 30,       September 30,
                                   ------------------   -----------------
                                     2001       2000      2001      2000
                                   -------    -------   -------   -------
                                               (in thousands)

  Revenues                         $33,208    $21,484   $99,269   $63,871
  Operating costs                   14,948     10,339    44,977    32,781
  Depreciation and amortization      4,300      2,711    13,389     8,063
  General and administrative         1,711      1,201     5,261     4,380
                                   -------    -------   -------   -------

      Operating income             $12,249    $ 7,233   $35,642   $18,647
                                   =======    =======   =======   =======

  On January 3, 2001, the Partnership, through a wholly-owned subsidiary,
  acquired Shore Terminals LLC ("Shore") for $107 million in cash and 1,975,090
  Partnership units (valued at $56.5 million on the date of agreement and its
  announcement).   Financing for the cash portion of the purchase price was
  supplied under a new $275 million unsecured revolving credit agreement with a
  group of banks.  See "Liquidity and Capital Resources".  Shore owns seven
  terminals, located in four states, with a total tankage capacity of 7.8
  million barrels.  All of the terminals handle petroleum products and, with the
  exception of one, have deep water access.

  Terminaling revenues increased by $11.7 million and $35.4 million,
  respectively, for the three and nine month periods ended September 30, 2001,
  compared to the same 2000 periods, due to the Shore acquisition and overall
  increases in utilization at existing locations, the result of relatively
  favorable market conditions.  Average annual tankage utilized for the three
  and nine month periods ended September 30, 2001 increased to 30.0 million
  barrels and 30.1 million barrels, respectively, up from 20.8 million barrels
  for both the three and nine month periods ended September 20, 2000.  For the
  three and nine month periods ended September 30, 2001, average annualized
  revenues per barrel of tankage utilized increased to $4.40 per barrel and
  $4.42 per barrel, respectively, compared to $4.09 per barrel for both the
  three and nine month periods ended September 30, 2000, also the result of
  favorable market conditions, when compared to the same 2000 periods.

  For the three and nine month periods ended September 30, 2001, operating costs
  increased by $4.6 million and $12.2 million, respectively, when compared to
  the same 2000 periods, the result of the Shore acquisition and increases in
  volumes stored.  General and administrative costs for each of the three and
  nine month periods ended September 30, 2001, increased by $0.5 million and
  $0.9 million, respectively, when compared to the same 2000 periods, due also
  to the Shore acquisition.

                                       12
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  Total tankage capacity (38.3 million barrels at September 30, 2001) has been,
  and is expected to remain, adequate to meet existing customer storage
  requirements.  Customers consider factors such as location, access to cost
  effective transportation and quality of service, in addition to pricing, when
  selecting terminal storage.


  Interest Expense

  For the three and nine months ended September 30, 2001, interest expense
  increased by $0.3 million and $3.1 million, respectively, compared to the same
  2000 periods, due to increases in debt resulting from the Shore acquisition
  (see "Liquidity and Capital Resources"), partially offset by overall declines
  in interest rates.


  Liquidity and Capital Resources

  During the first nine months of 2001, the Partnership's working capital
  requirements for operations, capital expenditures (excluding acquisitions) and
  cash distributions were funded through the use of internally generated funds.

  Cash provided by operations was $80.3 million and $49.3 million for the nine
  months ended September 30, 2001 and 2000, respectively. Capital expenditures
  (excluding acquisitions) were $9.6 million for the nine months ended September
  30, 2001, compared to $6.4 million during the same 2000 period.  The
  Partnership anticipates that routine maintenance capital expenditures will
  total approximately $12 million to $15 million (excluding acquisitions) for
  the year ending December 31, 2001.

  On November 12, 2001, the Partnership entered into a definitive agreement to
  acquire all of the liquids terminaling subsidiaries of Statia Terminals Group
  NV ("Statia") for approximately $193 million in cash plus the assumption of
  approximately $107 million in debt. The acquisition, which is subject to
  approval by Statia public shareholders and standard closing conditions,
  including regulatory approval, is expected to close in the first quarter of
  2002. The cash portion of the purchase price is expected to be initially
  funded with bank financing.

  In December of 2000, the Partnership entered into a credit agreement with a
  group of banks that provides for a $275 million unsecured revolving credit
  facility through December 2003.  The credit facility bears interest at
  variable rates and has a variable commitment fee on the unutilized amounts.
  The credit facility contains operational and financial covenants, including
  limitations on investments, sales of assets and transactions with affiliates,
  and absent an event of default, the covenants do not restrict distributions to
  unitholders.  At September 30, 2001, $235.9 million was drawn on the facility
  at an interest rate of 4.60%, which is due in December of 2003.

  The $128 million of first mortgage notes outstanding at December 31, 2000,
  which were due in varying amounts from 2001 to 2016, were repaid in full in
  January of 2001 with the proceeds from the $275 million revolving credit
  facility.  Under the provisions of the mortgage notes, the Partnership
  incurred a $6.5 million prepayment penalty, before minority interest and
  income taxes, which was recognized as an extraordinary expense in the first
  quarter of 2001.

                                       13
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  In August of 2000, a wholly-owned subsidiary of the Partnership filed a shelf
  registration statement on Form S-3 for the issuance of up to $500 million of
  public debt securities.  In March of 2001, this subsidiary entered into two
  contracts for the purpose of locking in interest rates on $100 million of the
  anticipated ten-year public debt offerings. In May of 2001, the Partnership
  announced that, due to increases in ten-year Treasury rates, coupled with the
  declines in floating interest rates, it had elected to defer issuance of the
  public debt securities. On May 22, 2001, the contracts were settled resulting
  in an aggregate gain of $3.8 million.

  The Partnership makes distributions of 100% of its Available Cash to
  Unitholders and the general partner.  Available Cash consists generally of all
  the cash receipts less all cash disbursements and reserves. Cash distributions
  of $0.70 per unit for each of the first and second quarters of 2001 were paid
  on May 15, 2001 and August 14, 2001, respectively.  A cash distribution of
  $0.75 per unit for the third quarter of 2001 was declared to holders of record
  on October 31, 2001 and will be paid on November 14, 2001.

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

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


  Recent Accounting Pronouncements

  In July of 2001, the Financial Accounting Standards Board (the "FASB") issued
  Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
  Combinations", which requires that all business combinations initiated after
  June 30, 2001 be accounted for under the purchase method of accounting.

  Additionally, in July of 2001, the FASB issued SFAS No. 142 "Goodwill and
  Other Intangible Assets", which requires that goodwill no longer be amortized
  to earnings, but instead be reviewed for impairment. The Partnership is
  currently assessing the impact of SFAS  No. 142, which must be adopted in the
  first quarter of 2002.

  Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
  Obligations", which establishes requirements for the removal-type costs
  associated with asset retirements. The Partnership is currently assessing the
  impact of SFAS  No. 143, which must be adopted in the first quarter of 2003.

                                       14
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

  On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
  Impairment or Disposal of Long-Lived Assets", which addresses financial
  accounting and reporting for the impairment or disposal of long-lived assets.
  SFAS No. 144 is effective for fiscal years beginning after December 15, 2001
  and interim periods within those fiscal years with earlier application
  encouraged.  The Partnership is currently assessing the impact on its
  financial statements.

                                       15
<PAGE>

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

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

Quantitative and Qualitative Disclosure About Market Risk

In March of 2001, a wholly-owned subsidiary of the Partnership entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings.  As the interest rate locks were not
designated as hedging instruments pursuant to the requirements of SFAS No. 133,
increases or decreases in the fair value of the contracts are included as a
component of interest and other income, net. On May 22, 2001, the contracts were
settled resulting in an aggregate gain of $3.8 million.


                          Part II - Other Information

Item 6.   Exhibits and Reports on Form 8-K

     (a)  Exhibits.

          None.

     (b)  Reports on  Form 8-K

          None.


                                   Signature
                                   ---------

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



                                      KANEB PIPE LINE PARTNERS, L.P.
                                      (Registrant)
                                      By KANEB PIPE LINE COMPANY
                                         -------------------------------------
                                      (Managing General Partner)


Date:   November 13, 2001             //s//
                                      ----------------------------------------
                                      Howard C. Wadsworth
                                      Vice President, Treasurer and Secretary

                                       16