UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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  October  31,  1999

                                        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:  000-24394

                             PENN OCTANE CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

                    DELAWARE                               52-1790357
        (State or Other Jurisdiction                    (I.R.S. Employer
       of Incorporation or Organization)               Identification No.)

77-530 ENFIELD LANE, BLDG. D, PALM DESERT, CALIFORNIA        92211
     (Address of Principal Executive Offices)              (Zip Code)

Registrant's  Telephone  Number,  Including  Area  Code:    (760)  772-9080

     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
      ---

     The number of shares of Common Stock, par value $.01 per share, outstanding
on  December  10,  1999  was  12,891,133.

                                        1
<PAGE>
<TABLE>
<CAPTION>
                                  PENN OCTANE CORPORATION
                                     TABLE OF CONTENTS


         ITEM                                                                     PAGE NO.
         ----                                                                     --------
<S>      <C>   <C>                                                                <C>
Part I     1.  Financial Statements

               Consolidated Balance Sheets as of October 31, 1999 (unaudited)          3-4
               and July 31, 1999

               Consolidated Statements of Operations for the three months
               ended October 31, 1999 and 1998 (unaudited)                               5

               Consolidated Statements of Cash Flows for the three months
               ended October 31, 1999 and 1998 (unaudited)                               6

               Notes to Consolidated Financial Statements (unaudited)                 7-19

           2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                             20-29

           3.  Quantitative and Qualitative Disclosures About Market Risk               29

Part II    1.  Legal Proceedings                                                        30

           2.  Changes in Securities and Use of Proceeds                                30

           3.  Defaults Upon Senior Securities                                          30

           4.  Submission of Matters to a Vote of Security Holders                      30

           5.  Other Information                                                        30

           6.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K         30
</TABLE>


                                        2
<PAGE>
PART  I
ITEM  1.

<TABLE>
<CAPTION>
                                       PENN OCTANE CORPORATION AND SUBSIDIARIES

                                             CONSOLIDATED BALANCE SHEETS

                                                        ASSETS


                                                                                             October 31,
                                                                                                1999        July 31,
                                                                                             (Unaudited)      1999
                                                                                            -------------  ----------
<S>                                                                                         <C>            <C>
Current Assets
 Cash (note I)                                                                              $   1,811,348  $1,032,265
 Trade accounts receivable, less allowance for doubtful accounts of $521,067 and $521,067       3,376,515   2,505,915
 Notes receivables (note F)                                                                        85,465      77,605
 Inventories (note D)                                                                           1,108,232     615,156
 Prepaid expenses and other current assets                                                         41,052      42,517
                                                                                            -------------  ----------
   Total current assets                                                                         6,422,612   4,273,458
Property, plant and equipment - net (note C)                                                    3,522,473   3,171,650
Lease rights (net of accumulated amortization of $535,803 and $524,355)                           618,236     629,684
Notes receivable (note F)                                                                         794,337     822,196
Other non-current assets                                                                           64,270      11,720
                                                                                            -------------  ----------
   Total assets                                                                             $  11,421,928  $8,908,708
                                                                                            =============  ==========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        3
<PAGE>
<TABLE>
<CAPTION>
                                   PENN OCTANE CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED BALANCE SHEETS - CONTINUED

                                     LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                               October 31,
                                                                                  1999           July 31,
                                                                               (Unaudited)         1999
                                                                             ---------------  ---------------
<S>                                                                          <C>              <C>
Current Liabilities
 Current maturities of long-term debt (note G)                                      345,692   $      365,859
 LPG trade accounts payable                                                       4,502,975        2,850,197
 Other accounts payable and accrued liabilities                                     936,051        1,382,603
                                                                                          -                -
                                                                             ---------------  ---------------
 Borrowings from IBC-Brownsville (note M)
   Total current liabilities                                                      5,784,718        4,598,659
Long-term debt, less current maturities (note G)                                    188,034          258,617
Commitments and contingencies (note I)                                                    -                -
Stockholders' Equity (note H)
 Series A -  Preferred stock-$.01 par value, 5,000,000 shares authorized;
 No shares issued and outstanding at October 31, 1999 and July 31,
 1999                                                                                     -                -
 Series B  - Senior preferred stock-$.01 par value, $10 liquidation value,
 5,000,000 shares authorized; 0 and 90,000 shares issued and
 outstanding at October 31, 1999 and July 31, 1999                                        -              900
 Common stock-$.01 par value, 25,000,000 shares authorized;
 12,884,133 and 11,845,497 shares issued and outstanding at October
 31, 1999 and July 31, 1999                                                         128,842          118,456
 Additional paid-in capital                                                      18,190,899       17,133,222
 Notes receivable from the president of the Company and a related party
 for exercise of warrants, less reserve of $506,302 and $451,141 at
 October 31, 1999 and July 31, 1999                                            (  2,765,350)    (  2,765,350)
 Accumulated deficit                                                           ( 10,105,215)    ( 10,435,796)
                                                                             ---------------  ---------------
   Total stockholders' equity                                                     5,449,176        4,051,432
                                                                             ---------------  ---------------
     Total liabilities and stockholders' equity                              $   11,421,928   $    8,908,708
                                                                             ===============  ===============
</TABLE>

The accompanying notes are an integral part of these statements.


                                        4
<PAGE>
<TABLE>
<CAPTION>
                                     PENN OCTANE CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                                    (UNAUDITED)

                                                                                           Three Months Ended
                                                                                       October 31,    October 31,
                                                                                          1999           1998
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Revenues                                                                              $ 15,970,900   $  6,478,566
Cost of goods sold                                                                      14,965,012      5,909,433
                                                                                      -------------  -------------
 Gross profit                                                                            1,005,888        569,133
                                                                                      -------------  -------------
Selling, general and administrative expenses
 Legal and professional fees                                                               165,729        203,082
 Salaries and payroll related expenses                                                     209,792        187,828
 Travel                                                                                     58,020         36,365
 Other                                                                                     133,897        109,735
                                                                                      -------------  -------------
                                                                                           567,438        537,010
                                                                                      -------------  -------------
 Operating income                                                                          438,450         32,123
Other income (expense)
 Interest expense                                                                        (  66,027)     (  92,393)
 Interest income                                                                             3,528            418
                                                                                      -------------  -------------
   Income (loss) from continuing operations before taxes                                   375,951      (  59,852)
Provision for income taxes                                                                       -              -
                                                                                      -------------  -------------
                   Income (loss) from continuing         operations                        375,951      (  59,852)
Discontinued operations, net of taxes (note E)
           Income (loss) from operations of CNG segment                                          -      (  81,419)
                                                                                      -------------  -------------
   Net income (loss)                                                                  $    375,951   $  ( 141,271)
                                                                                      =============  =============
Income (loss) from continuing operations
per common share (note B)                                                             $       0.03   $  (    0.01)
                                                                                      =============  =============
Net income (loss) per common share (note B)                                           $       0.03   $  (    0.01)
                                                                                      =============  =============
Income (loss) from continuing operations per common share assuming dilution (note B)  $       0.02   $  (    0.01)
                                                                                      =============  =============
Net income (loss) per common share assuming dilution (note B)                         $       0.02   $  (    0.01)
                                                                                      =============  =============
Weighted average common shares outstanding                                              12,476,371      9,952,673
                                                                                      =============  =============
</TABLE>

The accompanying notes are an integral part of these statements.


                                        5
<PAGE>
<TABLE>
<CAPTION>
                                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                  (UNAUDITED)

                                                                                      Three  Months  Ended
                                                                                  -----------------------------
                                                                                   October 31,     October 31,
                                                                                       1999           1998
                                                                                  --------------  -------------
<S>                                                                               <C>             <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income (loss)                                                                 $     375,951   $ (  141,271)
Adjustments to reconcile net income to net cash used in (provided by) operating
Activities:
 Depreciation and amortization                                                           58,374         65,806
 Amortization of lease rights                                                            11,449         11,449
 Other                                                                                        -     (    3,156)

Changes in current assets and liabilities:
 Trade accounts receivable                                                           (  870,599)    (  835,012)
 Inventories                                                                         (  493,076)    (   25,269)
 Prepaids and other current assets                                                        1,465     (   28,347)
 LPG trade accounts payable                                                           1,652,778        302,688
 Other assets and liabilities, net                                                   (   52,550)             -
 Other accounts payable and accrued liabilities                                      (  446,592)       187,035
                                                                                  --------------  -------------
   Net cash provided by (used in) operating activities                                  237,200     (  466,077)

Cash flows from investing activities:
 Capital expenditures                                                                (  409,197)    (   27,268)
 Payments on note receivable                                                             20,000              -
                                                                                  --------------  -------------

   Net cash used in investing activities                                             (  389,197)    (   27,268)

Cash flows from financing activities:
 Revolving credit facilities                                                                  -        359,555
 Preferred stock dividends                                                           (   45,370)             -
 Issuance of common stock                                                             1,067,200              -
 Reduction in debt                                                                   (   90,750)             -
                                                                                  --------------  -------------
   Net cash provided by financing activities                                            931,080        359,555
                                                                                  --------------  -------------

     Net increase (decrease) in cash                                                    779,083     (  133,790)
Cash at beginning of period                                                           1,032,265        157,513
                                                                                  --------------  -------------
Cash at end of period                                                             $   1,811,348   $     23,723
                                                                                  ==============  =============
Supplemental disclosures of cash flow information:
 Cash paid during the period for:
   Interest                                                                       $      57,677   $     31,750
                                                                                  ==============  =============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        6
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  A  -  ORGANIZATION


Penn  Octane  Corporation, formerly International Energy Development Corporation
(IEDC)  and The Russian Fund, a Delaware corporation, was incorporated on August
27,  1992.  On  October 21, 1993, IEDC acquired Penn Octane Corporation, a Texas
corporation, whose primary asset was a liquid petroleum gas (LPG) pipeline lease
agreement  (Pipeline  Lease)  with  Seadrift  Pipeline Corporation (Seadrift), a
subsidiary  of  Union  Carbide Corporation (Union Carbide).  On January 6, 1995,
the  Board  of  Directors  approved  the  change  of  IEDC's name to Penn Octane
Corporation.  The  Company  is  engaged primarily in the business of purchasing,
transporting  and  selling  LPG  and  has provided services and equipment to the
compressed natural gas (CNG) industry.  The Company owns and operates a terminal
facility in Brownsville, Texas (Brownsville Terminal Facility).  The Company has
a long-term lease agreement for approximately 132 miles of pipeline from certain
gas plants in Texas to the Brownsville Terminal Facility.  The Company sells LPG
primarily to P.M.I. Trading Limited (PMI).  PMI is the exclusive importer of LPG
into  Mexico.  PMI  is also a subsidiary of Petroleos Mexicanos, the state-owned
Mexican  oil company (PEMEX).  PMI distributes LPG in the northeastern region of
Mexico.

The Company commenced operations during the fiscal year ended July 31, 1995 upon
construction  of  the  Brownsville  Terminal  Facility.  Prior to such time, the
Company  was  in  the  "development  stage"  until the business was established.
Since  the  Company began operations, the primary customer for LPG has been PMI.
Sales  of  LPG  to  PMI  accounted  for approximately all of the Company's total
revenues  for  the  three  months  ended  October  31,  1999.

In  February 1997, the Company formed Wilson Acquisition Corporation, a Delaware
corporation  and  a  wholly-owned subsidiary, for the purpose of engaging in the
business  of designing, constructing, installing and servicing equipment for CNG
fueling stations and related products for use in the CNG industry throughout the
world.  The  subsidiary's  name was changed to PennWilson CNG, Inc. (PennWilson)
in  August  1997.

In  October  1997,  the  Company  formed  Penn  CNG Holdings, Inc. (Holdings), a
Delaware  corporation  and  a  wholly-owned  subsidiary.  In  February 1998, the
Company  formed PennWill, S.A. de C.V., Camiones Ecologicos, S.A. de C.V., Grupo
Ecologico  Industrial,  S.A. de C.V., Estacion Ambiental, S.A. de C.V., Estacion
Ambiental  II,  S.A.  de C.V., and Serinc, S.A. de C.V. (collectively Estacion),
all Mexican corporations.  To date there has not been significant operations for
any  of  these  entities.

During  May  1999,  the Company sold certain CNG related assets to a corporation
controlled  by  a director and officer of the Company (see note E).  As a result
of  the sale, the Company is no longer in the CNG business and has reflected the
historical  results  of  the  CNG segment as discontinued operations.  All prior
periods  have  been  restated.

BASIS  OF  PRESENTATION
-----------------------

The  accompanying financial statements include the Company and its subsidiaries,
PennWilson  and  Holdings  (Company).  All significant intercompany accounts and
transactions  are  eliminated.

The  unaudited  consolidated  balance sheet as of October 31,1999, the unaudited
consolidated  statements  of  operations  for the three months ended October 31,
1999  and  1998, and the unaudited consolidated statements of cash flows for the
three  months  ended October 31, 1999 and 1998 have been prepared by the Company
without  audit.  In  the opinion of management, the financial statements include
all  adjustments  (which include only normal recurring adjustments) necessary to
present  fairly  the unaudited consolidated financial position of the Company as
of October 31, 1999 and the unaudited consolidated results of operations for the
three  months  ended  October 31, 1999 and 1998, and unaudited consolidated cash
flows  for  the  three  months  ended  October  31,  1999  and  1998.

                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  A  -  ORGANIZATION  -  CONTINUED

Certain  information  and  footnote  disclosures  normally included in financial
statements  prepared in accordance with generally accepted accounting principles
have  been  omitted.  These  financial  statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report  on  Form  10-K  for  the  fiscal  year  ended  July  31,  1999.

Certain  reclassifications have been made to prior period balances to conform to
the  current  presentation. All reclassifications have been applied consistently
to  the  periods  presented.

NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE

Income  (loss)  per  share  of  common stock is computed on the weighted average
number  of  shares  outstanding.  During  periods  in which the Company incurred
losses,  giving  effect to common stock equivalents is not presented as it would
be  antidilutive.

The  Financial  Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per
Share",  which  supersedes Accounting Principles Board Opinion (APB) Opinion No.
15 (APB 15), "Earnings Per Share".  The statement became effective for financial
statements  issued for periods ending after December 15, 1997, including interim
periods.  Early  adoption  was  not  permitted.

The  following  table  presents  reconciliation's  from income (loss) per common
share  to  income  (loss) per common share assuming dilution (see note H for the
convertible  preferred  stock  and  the  warrants):

<TABLE>
<CAPTION>
                                            For the three months ended October 31, 1999
                                             -----------------------------------------
                                             Income (Loss)      Shares      Per-Share
                                              (Numerator)    (Denominator)    Amount
                                             --------------  -------------  ----------
<S>                                          <C>             <C>            <C>
Income (loss) from continuing operations     $     375,951               -           -
Income (loss) from discontinued operations               -               -           -
                                             --------------
Net income (loss)                                  375,951               -           -
Less:  Dividends on preferred stock              (  45,370)              -           -
BASIC EPS
Income (loss) from continuing operations
 available to common stockholders                  330,581      12,476,371  $     0.03
                                                                            ==========
Income (loss) from discontinued operations               -      12,476,371  $     0.00
                                             --------------                 ==========
Net income (loss) available to common
 stockholders                                      330,581      12,476,371  $     0.03
                                                                            ==========
EFFECT OF DILUTIVE SECURITIES
Warrants                                                 -         640,847           -
Convertible Preferred Stock                              -         166,304           -
DILUTED EPS
Income (loss) from continuing operations
 available to common stockholders                  330,581      13,283,522  $     0.02
                                                                            ==========
Income (loss) from discontinued operations               -      13,283,522  $     0.00
                                             --------------                 ==========
Net income (loss) available to common
 stockholders                                $     330,581      13,283,522  $     0.02
                                             ==============  =============  ==========
</TABLE>


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE  -  Continued

<TABLE>
<CAPTION>
                                            For the three months ended October 31, 1998
                                             -----------------------------------------
                                             Income (Loss)       Shares       Per-Share
                                              (Numerator)    (Denominator)     Amount
                                             --------------  --------------  -----------
<S>                                          <C>             <C>             <C>
Income (loss) from continuing operations        (  $59,852)               -           -
Income (loss) from discontinued operations      (   81,419)               -           -
                                             --------------
Net income (loss)                               (  141,271)               -           -
Less:  Dividends on preferred stock                      -                -           -
BASIC EPS
Income (loss) from continuing operations
 available to common stockholders               (   59,852)       9,952,673  $(    0.01)
                                                                             ===========
Income (loss) from discontinued operations      (   81,419)       9,952,673  $(    0.01)
                                             --------------                  ===========
Net income (loss) available to common
 stockholders                                   (  141,271)       9,952,673  $(    0.01)
                                                                             ===========
EFFECT OF DILUTIVE SECURITIES
Warrants                                                 -                -           -
Convertible Preferred Stock                              -                -           -
DILUTED EPS
Income (loss) from continuing operations
 available to common stockholders                      N/A              N/A  $      N/A
                                                                             ===========
Income (loss) from discontinued operations             N/A              N/A  $      N/A
                                                                             ===========

Net income (loss) available to common
 stockholders                                $         N/A   $          N/A  $      N/A
                                             ==============  ==============  ===========
</TABLE>


NOTE  C  -  PROPERTY,  PLANT  AND  EQUIPMENT

          Property,  plant  and  equipment  consists  of  the  following:

<TABLE>
<CAPTION>
                                                 October 31,     July 31,
                                                    1999           1999
                                                -------------  ------------
<S>                                             <C>            <C>

LPG:                                            $    173,500   $   173,500
 Building                                          3,426,440     3,426,440
 LPG terminal                                        388,839       388,839
 Automobile and equipment                             37,223        35,738
 Office equipment                                    896,114       572,774
 Capital construction in progress (see note J)       375,781       291,409
                                                -------------  ------------
 Leasehold improvements                            5,297,897     4,888,700


Less: accumulated depreciation and                (1,775,424)   (1,717,050)
                                                -------------  ------------
 amortization                                   $  3,522,473   $ 3,171,650
                                                =============  ============
</TABLE>


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  D  -  INVENTORIES

     Inventories  consist  of  the  following:

<TABLE>
<CAPTION>
                                                  October 31,   July 31,
                                                     1999        1999
                                                 ------------  ---------
<S>                                              <C>           <C>
LPG:                                             $    553,940  $ 434,987

 Pipeline                                             246,310    180,169
 LPG terminal                                         307,982          -
                                                 ------------  ---------
      Storage-Union Carbide (see notes I and L)  $  1,108,232  $ 615,156
                                                 ============  =========
</TABLE>


NOTE  E  -  DISCONTINUED  OPERATIONS

     RESULTS  OF  OPERATIONS
     -----------------------

In  connection  with  the  sale of assets related to the CNG business during May
1999,  the  Company  has  effectively  disposed  of  its  CNG  segment  and  has
discontinued operations of that segment.  In accordance with APB 30, the results
of  operations  related  to  the  CNG segment have been recorded as discontinued
operations  for all periods presented in the Company's financial statements (see
note  F).

NOTE  F  -  SALE  OF  CNG  ASSETS

During  May  1999,  the  Company sold its remaining CNG assets and business to a
company  (Buyer) controlled by a director and officer of the Company.  Under the
terms  of the sale, the Company received promissory notes aggregating $1,200,000
to be paid over a period of 61 months.   The notes are collateralized by the CNG
assets,  the  common  stock  of  the Buyer owned by the director and officer and
warrants  to  purchase  200,000  shares of common stock of the Company which had
previously been issued to the director and officer by the Company.  The director
and  officer  has  personally  guaranteed a portion of the balance of the notes.

The  notes contain a provision for prepayment at a discount and bear interest at
rates  specified  therein.  The  Company discounted the notes for the prepayment
discount,  resulting  in  a discount of $260,000 and a discounted balance of the
notes  of  $940,000  at the date of issuance, which the Company believes is less
than  the  fair  value  of  the collateral.   The effective interest rate of the
notes after giving affect to the discount is 8.6%. Because the Buyer can pay the
notes  at any time, the Company has determined that it will account for interest
income  using  the cost recovery method to account for collections on the notes.
Under  this method, the amounts recorded as notes receivable will not exceed the
discounted  cash  payoff  amounts.

The  Stock Pledge and Security Agreement (Agreement) executed in connection with
the sale provides that the Buyer may sell the collateral at fair market value at
any  time  during  the  term of the notes without the Company's consent provided
that  all proceeds collected from the sale will be applied to the note balances.
In  addition,  the Company has agreed to subordinate its secured interest in the
collateral  after  the  Buyer has paid $300,000 plus interest at 10% as provided
for  in  the  Agreement.

                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  G  -  LONG-TERM  DEBT

     Long-term  debt  consists  of  the  following:

<TABLE>
<CAPTION>



                                                                                     October 31,   July 31,
                                                                                         1999        1999
                                                                                     ------------  ---------
<S>                                                                                  <C>           <C>
Contract for Bill of Sale which was extended in April 1999; due in monthly
payments of $3,000, including interest at 10%; due in February 2001; collateralized
by a building.                                                                       $     41,347  $  50,347

Noninterest bearing note payable, discounted at 7%, for legal services, due in
monthly installments of $10,000 - $20,000 through January 2001 with a final
payment of $110,000 in February 2001.                                                     357,129    387,129

Note payable for legal services in connection with litigation; payable in monthly
installments of $11,092, including interest at 6.9% (see note I).                          95,250    127,000

Other long-term debt.                                                                      40,000     60,000

                                                                                     ------------  ---------
                                                                                          533,726    624,476
Current maturities.                                                                       345,692    365,859
                                                                                     ------------  ---------
                                                                                     $    188,034  $ 258,617
                                                                                     ============  =========
</TABLE>


In  connection with the notes to attorneys, the Company has agreed in the future
to  provide  a  "Stipulation of Judgment" to the creditors in the event that the
Company  defaults  under  the  settlement  agreements.


NOTE  H  -  STOCKHOLDERS'  EQUITY

SERIES  B  -  SENIOR  PREFERRED  STOCK
--------------------------------------

At  the 1997 Annual Meeting of Stockholders of the Company held on May 29, 1997,
the  stockholders authorized the amendment of the Company's Restated Certificate
of  Incorporation  to authorize 5,000,000 shares, $.01 par value per share, of a
new  class  of  senior  preferred  stock  (Series  B Senior Preferred Stock) for
possible  future  issuance in connection with acquisitions and general corporate
purposes,  including  public  or  private offerings of shares for cash and stock
dividends.

In  connection  with  the  Company's  notice  to repurchase 90,000 shares of the
Convertible  Stock  for $900,000 plus dividends of $45,370 on September 3, 1999,
the  holder  of  the Convertible Stock elected to convert all of the Convertible
Stock  into 450,000 shares of common stock of the Company.  The Company paid the
$45,370  of  dividends  in  cash.

The Company has granted one demand registration right with respect to the common
stock referred to in the preceding paragraph.  The Company and the holder of the
common  stock  have  agreed  to  share  the  costs  of  the  registration.

COMMON  STOCK
-------------

During  August  1999,  warrants  to purchase a total of 425,000 shares of common
stock  of  the Company were exercised, resulting in cash proceeds to the Company
of  $681,233.  The  proceeds  of  such  exercises  were used for working capital
purposes.

During  October  1999,  warrants to purchase a total of 163,636 shares of common
stock  of  the Company were exercised, resulting in cash proceeds to the Company
of  $385,951.  The  proceeds  of  such  exercises  were used for working capital
purposes.


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  Continued

In  connection  with  previous  warrants issued by the Company, certain of these
warrants  contain a call provision whereby the Company has the right to purchase
the warrants for a nominal price if the holder of the warrants does not elect to
exercise  the  warrants  within  the  prescribed  period.

BOARD  COMPENSATION  PLAN
-------------------------

During the Board of Directors (the Board) meeting held on September 3, 1999, the
Board  approved the implementation of a plan to compensate each outside director
serving  on  the  Board  (the Plan).  Under the Plan, all outside directors upon
election  to  the  Board will be entitled to receive warrants to purchase 20,000
shares of common stock of the Company and be granted warrants to purchase 10,000
shares  of  common  stock of the Company for each year of service as a director.
Such  warrants  will  expire  five  years after the warrants become vested.  The
exercise  price  of  the  warrants  issued  under  the Plan will be based on the
average trading price of the Company's common stock on the effective date of the
granting  of  the  warrants,  and the warrants will vest monthly over a one year
period.

In  connection  with  the  Plan,  the  Board granted warrants to purchase 40,000
shares of common stock at an exercise price of $2.50 for those outside directors
previously  elected and serving on the Board at September 3, 1999.  In addition,
the  Board  granted those directors warrants to purchase 20,000 shares of common
stock,  at an exercise of $2.50 per share with the vesting period to commence on
August  1,  1999.

REGISTRATION  RIGHTS
--------------------

In  connection  with  the  issuance  of  shares and warrants by the Company (the
Shares),  the  Company  has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities").  The obligations of the Company with
respect  to  the  Registrable  Securities  include  one-time demand registration
rights  and/or piggy-back registration rights (the "Registration").  The Company
is  required  to  file  an  effective registration by either September 19, 1999,
December  1,  1999  or January 31, 2000.  In connection with the Registration of
the  Registrable  Securities,  the  Company is required to provide notice to the
holder of the Registrable Securities, who may or may not elect to be included in
the  Registration.  The  Company  is  obligated  to  register  the  Registrable
Securities  even  though  the  Registrable Securities may be tradable under Rule
144.   The  Company  did not file a registration statement for the shares agreed
to  be  registered  by  September 19, 1999 or December 1, 1999.  The Company has
also  received  notice  of  a demand for registration for certain of the Shares.
The Registration Rights Agreements do not contain provisions for damages, if the
Registration  is not completed except for those Shares required to be registered
on  December  1,  1999,  whereby  for  each month after December 1999 and if the
Company  fails  to have an effective registration statement, the Company will be
required  to  pay a penalty of $80,000 to be paid in cash and/or common stock of
the  Company  based on the then current trading price of the common stock of the
Company.  The  Company  has  received  an  extension  with respect to the Shares
required  to  be  registered  on  December  1,  1999  until  January  15,  2000.

The  total  amount of shares and warrants subject to registration at December 1,
1999,  are  as  follows:

<TABLE>
<CAPTION>
                                           Unexercised
                                 Shares     Warrants
                                ---------  -----------
<S>                             <C>        <C>
Demand Registration Rights      1,400,000            -
Piggy-Back Registration Rights  1,522,576      882,500
                                ---------  -----------
Total Registrable Securities    2,922,576      882,500
                                =========  ===========
Registration Rights Subject To
  Penalty*                        400,000      200,000
<FN>

*  Also  entitled  to  piggy-back  registration  rights
</TABLE>


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  Continued

STOCK  AWARD  PLAN
------------------

Under the Company's 1997 Stock Award Plan, the Company has reserved for issuance
150,000  shares  of  Common  Stock,  of which 124,686 shares were unissued as of
October  31,  1999,  to  compensate  consultants  who  have rendered significant
services to the Company.  The Plan is administered by the Compensation Committee
of  the Board of Directors of the Company which has complete authority to select
participants,  determine  the awards of Common Stock to be granted and the times
such  awards  will  be granted, interpret and construe the 1997 Stock Award Plan
for  purposes of its administration and make determinations relating to the 1997
Stock  Award Plan, subject to its provisions, which are in the best interests of
the  Company  and  its  stockholders.  Only  consultants  who  have  rendered
significant  advisory  services  to  the Company are eligible to be participants
under  the  Plan.  Other  eligibility  criteria  may  be  established  by  the
Compensation  Committee  as  administrator  of  the  Plan.


NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES

LITIGATION

On  March  16,  1999, the Company settled in mediation a lawsuit with its former
chairman  of  the  board,  Jorge  V. Duran.  In connection therewith and without
admitting  or  denying  liability,  the  Company  agreed  to  pay  Mr.  Duran
approximately $456,300 in cash and common stock of the Company of which $100,000
is  to  be  paid  by  the Company's insurance carrier.  Litigation costs totaled
$221,391.  The  Company  has  agreed  to  register  the  stock  in  the  future.

On  October  14,  1998, a complaint was filed by Amwest Surety Insurance Company
("Amwest")  naming  as  defendants,  among  others,  PennWilson  and the Company
seeking  reimbursement  for  payments  made  to  date by Amwest of approximately
$160,000  on claims made against the performance and payment bonds in connection
with  services  provided  by suppliers, laborers and other materials and work to
complete  the  NYDOT contract (Vendors).  These amounts were previously recorded
in  the  Company's  balance  sheet  at  the  time  of  the  complaint.
In  addition, Amwest was seeking pre-judgment for any amounts ultimately paid by
Amwest  relating  to  claims  presented  to  Amwest  against the performance and
payment  bonds,  but have not yet been authorized or paid to date by Amwest.  In
May  1999, the Company and PennWilson reached a settlement agreement with Amwest
whereby  Amwest  will be reimbursed $160,000 by PennWilson for the payments made
to  the  Vendors,  with  the  Company  acting  as  guarantor.  Upon satisfactory
payment, Amwest will dismiss its pending claims related to the payment bond.  On
October 12, 1999, a Demand for Arbitration of $780,767 was filed by A.E. Schmidt
Environmental against Amwest, PennWilson and the Company on the performance bond
pursuant  to  the NYDOT contract. The Company is currently considering its legal
options  and  intends  to  vigorously defend against the claims made against the
performance  bond  but  not  yet  paid  by  Amwest.

The  Company  and  its  subsidiaries  are  also involved with other proceedings,
lawsuits  and  claims.  The  Company  is of the opinion that the liabilities, if
any,  ultimately resulting from such proceedings, lawsuits and claims should not
materially  affect  its  consolidated  financial  position.

CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER

As of October 31, 1999, the Company has a $10.0 million credit facility with RZB
Finance  L.L.C. (RZB) for demand loans and standby letters of credit (RZB Credit
Facility)  to  finance  the  Company's  purchase  of  LPG.  Under the RZB Credit
Facility,  the  Company  pays  a  fee  with  respect  to  each  letter of credit
thereunder  in  an  amount  equal  to  the greater of (i) $500, (ii) 2.5% of the
maximum face amount of such letter of credit, or (iii) such higher amount as may
be agreed to between the Company and RZB.  Any amounts outstanding under the RZB
Credit  Facility  shall accrue interest at a rate equal to the rate announced by
the  Chase  Manhattan  Bank  as  its  prime rate plus 2.5%.  Pursuant to the RZB
Credit  Facility,  RZB  has  sole  and  absolute discretion to terminate the RZB
Credit  Facility  and to make any loan or issue any letter of credit thereunder.
RZB  also  has  the  right  to


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  Continued

demand payment of any and all amounts  outstanding under the RZB Credit Facility
at any time. In connection with the RZB Credit  Facility,  the Company granted a
mortgage,  security interest and assignment in any and all of the Company's real
property,  buildings,  pipelines,  fixtures  and  interests  therein or relating
thereto,   including,   without  limitation,  the  lease  with  the  Brownsville
Navigation  District  of  Cameron  County  for the land on which  the  Company's
Brownsville  Terminal Facility is located, the Pipeline Lease, and in connection
therewith  agreed to enter into leasehold deeds of trust,  security  agreements,
financing  statements  and  assignments of rent, in forms  satisfactory  to RZB.
Under the RZB Credit  Facility,  the  Company  may not permit to exist any lien,
security interest, mortgage, charge or other encumbrance of any nature on any of
its  properties or assets,  except in favor of RZB,  without the consent of RZB.
The Company's  President,  Chairman and Chief  Executive  Officer has personally
guaranteed  all of the  Company's  payment  obligations  with respect to the RZB
Credit Facility.

In  connection  with  the  Company's  purchases  of  LPG  from  Exxon,  PG&E NGL
Marketing,  L.P.  (PG&E)  and/or  Koch Hydrocarbon Company ("Koch"), the Company
issues  letters  of  credit  on  a monthly basis based on anticipated purchases.

As  of  October  31,  1999,  letters  of credit established under the RZB Credit
Facility  in  favor  of  Exxon,  PG&E  and  Koch  for  purchases  of LPG totaled
$7,291,148  of  which  $4,502,975 was being used to secure unpaid purchases.  In
connection  with  these  purchases, the Company had unpaid invoices due from PMI
totaling  $3,164,861  and  cash  balances  maintained in the RZB Credit Facility
collateral  account  of  $1,302,470  as  of  October  31,  1999.

OPERATING  LEASE  COMMITMENTS

The  Pipeline  Lease  currently  expires  on  December  31, 2013, pursuant to an
amendment  (the "Pipeline Lease Amendment") entered into between the Company and
Seadrift  on  May  21,  1997,  which  became  effective  on January 1, 1999 (the
"Effective  Date").  The  Pipeline Lease Amendment provides, among other things,
for  additional  storage  access  and  inter-connection  with  another  pipeline
controlled  by  Seadrift, which the Company believes will provide greater access
to  and  from  the  Pipeline.  Pursuant  to  the  Pipeline  Lease Amendment, the
Company's fixed annual fee associated with the use of the Pipeline was increased
by  $350,000  less  certain  adjustments  during  the  first  two years from the
Effective  Date  and  the  Company  is  required  to pay for a minimum volume of
storage  of $300,000 per year beginning the second year from the Effective Date.
In  addition,  the  Pipeline  Lease  Amendment also provides for variable rental
increases  based  on monthly volumes purchased and flowing into the Pipeline and
storage  utilized.

CAPITALIZED  LEASE  COMMITMENT

The  following table is a schedule by years (assuming the Substantial Completion
Date  is  January  1, 2000) of the estimated future minimum lease payments under
the  Lease  Agreements  for  the  US  -  Mexico  Pipeline  and  Mexican Terminal
Facilities together with the present value of the net minimum lease payments net
of  the  30%  interest  purchased subsequent to September 16, 1999 (see note J):


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  Continued

<TABLE>
<CAPTION>
<S>                                                                  <C>
        Year ending July 31,
-------------------------------------------------------------------
                2000                                                 $     785,000
                2001                                                     1,884,000
                2002                                                     1,884,000
                2003                                                     1,884,000
                2004                                                     1,884,000
             Later years                                                19,939,000
                                                                     --------------

Total minimum lease payments                                            28,260,000

Less:  Amount representing estimated executory costs for operations   (  3,600,000)
                                                                     --------------

                                                                        24,660,000

Less:  Amounts related to the purchased interest - see note J         (  7,243,567)
                                                                     --------------

Net minimum lease payments                                              17,416,433

Less:  Amount representing interest                                   (  9,016,130)
                                                                     --------------

Present value of net minimum lease payments                          $   8,400,303
                                                                     ==============
</TABLE>


NOTE  J  -  LPG  EXPANSION  PROGRAM  (EXPANSION)

On  July  26,  1999,  the  Company  was  granted  a  permit by the United States
Department  of  State authorizing the Company to construct, maintain and operate
two  pipelines  (the  "US  Pipeline")  crossing  the international boundary line
between  the  United States and Mexico (from the Brownsville Terminal Facilities
near  the Port of Brownsville, Texas and El Sabino, Mexico) for the transport of
LPG  and  refined  products  (motor  gasoline  and  diesel  fuel)  [the "Refined
Products"].

Previously,  on  July  2, 1998, Penn Octane de Mexico, S.A. de C.V. ("PennMex"),
see  below,  received  a  permit  from  the  Comision Reguladora de Energia (the
"Mexican  Energy Commission") to build and operate one pipeline to transport LPG
(the  "Mexican  Pipeline")  [collectively,  the  US  Pipelines  and  the Mexican
Pipeline  are referred to as the "US-Mexico Pipeline"] between El Sabino (at the
point  North  of  the  Rio  Bravo)  and  to  a  terminal facility in the City of
Matamoros,  State  of  Tamaulipas,  Mexico  (the "Mexican Terminal Facilities").

In  addition  to  the  Expansion,  the  Company  has  begun  construction  of an
additional  LPG  terminal  facility  in Saltillo, Mexico (the "Saltillo Terminal
Facilities")  at  an  estimated  cost  of  $500,000.  The  Saltillo  Terminal
Facilities,  when  complete, will allow for the distribution of LPG by railcars,
which  will  directly  link  the Company's Brownsville Terminal Facility and the
Saltillo  Terminal  Facilities.  The  Saltillo  Terminal Facilities will contain
storage  to  accommodate  approximately  100,000  gallons  of  LPG.

On  May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for the
purpose  of  operating  LPG terminal facilities in Mexico, including the Mexican
Terminal  Facilities and the planned Saltillo Terminal Facilities and future LPG
terminal facilities in Mexico.  Tergas has been issued the permit to operate the
Mexican  Terminal  Facilities  and the Company anticipates Tergas will be issued
the  permit  to  operate  the  Saltillo  Terminal  Facilities.

In  connection  with  the  Expansion,  the  Company and CPSC International, Inc.
("CPSC")  entered into two separate Lease / Installation Purchase Agreements, as
amended,  ("the  Lease Agreements"), whereby CPSC will construct and operate the
US-Mexico  Pipeline  (including  an  additional  pipeline to accommodate refined
products)  and  the  Mexican  Terminal  Facilities and lease these assets to the
Company.  Under  the terms of the Lease Agreements, the Company will pay monthly
rentals  of  approximately  $157,000,  beginning  the  date  that  the US-Mexico
Pipeline


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)


NOTE  J  -  LPG  EXPANSION  PROGRAM  (EXPANSION)  -  Continued

and  Mexican Terminal Facilities are physically capable to transport and receive
LPG  in  accordance  with  technical  specifications  required (the "Substantial
Completion  Date").  In  addition,  the  Company has agreed to provide a lien on
certain  assets,  leases  and  contracts which are currently pledged to RZB, and
provide  CPSC  with a letter of credit of approximately $1,000,000.  The Company
is currently in negotiations with RZB and CPSC concerning RZB's subordination of
RZB's  lien  on  certain assets, leases and contracts.  The Company also has the
option to purchase the US-Mexico Pipeline and the Mexican Terminal Facilities at
the  end  of  the 10th year anniversary and 15th year anniversary for $5,000,000
and  $100,000,  respectively.  Under  the terms of the Lease Agreements, CPSC is
required  to  pay  all  costs  associated  with  the  construction  design  and
maintenance  of  the  US-Mexico  Pipeline  and  Mexican  Terminal  Facilities.

On  September 16, 1999, the Lease Agreements were amended whereby CPSC agreed to
accept  500,000  shares of common stock of the Company owned by the President of
the  Company  (the  "Collateral")  in  place  of the letter of credit originally
required  under  the  Lease  Agreements.  The  Collateral shall be replaced by a
letter  of  credit  or cash collateral over a ten month period beginning monthly
after  the  Substantial Completion Date.  In addition, the Company has agreed to
guarantee  the  value  of  the  Collateral based on the fair market value of the
Collateral  for  up  to  $1,000,000.

For  financial  accounting  purposes,  the  Lease Agreements are capital leases.
Therefore,  the assets and related liabilities will be recorded in the Company's
balance  sheet  on  the  Substantial  Completion  Date  (see  note  I).

On  September  16,  1999,  the Company and CPSC entered into an option agreement
whereby  the Company will purchase a 30% interest (the "Purchased Interests") in
the  US-Mexico  Pipeline and the Mexican Terminal Facilities for $3,000,000.  In
connection  with  the Purchased Interests, the Company will not assume any costs
associated  with  CPSC's  obligations  under  the  Lease  Agreements  until  the
Substantial  Completion  Date is reached, and the Company will receive a minimum
of  $54,000  per  month  from  the Company's payments under the Lease Agreements
(approximately  34%  of  the Company's monthly lease obligations under the Lease
Agreements).  The  Company  is  required  to  pay for the Purchased Interests on
January  3,  2000,  or  10  days  subsequent to the Substantial Completion Date,
whichever  is  later  (the  "Closing  Date").  To  secure  the  payment  of  the
$3,000,000  for  the  Purchased  Interests, the Company has agreed to assign its
interest  in the net cash proceeds to be received from the IBC-Brownsville award
judgment  (the  "Judgment").  In  the  event that the net cash received from the
Judgment  is  less  than  $3,000,000,  the  Company  will be required to pay the
difference.  In  addition, if the Judgment is not paid by the Closing Date, CPSC
may  require the Company to make immediate payment in exchange for the return of
the  Judgment  assignment.

Included  in  the  agreement  for  the  Purchased Interests, the Company has two
option  agreements  (the "Options") whereby the Company has the right to acquire
an  additional  20%  and  an additional 50% interest in the Lease Agreements for
$2,000,000  and  $7,000,000, respectively, within 90 days from the Closing Date.
The  Company  paid  $50,000  to  obtain  the  Options.

PennMex  and/or  Tergas  are  currently  the  owners  of the land which is being
utilized  for  the  Mexican  Pipeline  and  Mexican Terminal Facilities, own the
leases  associated  with the Saltillo Terminal Facilities, have been granted the
permit  for the Mexican Pipeline and have been granted and/or are expected to be
granted  permits  to  operate  the  Mexican Terminal Facilities and the Saltillo
Terminal  Facilities.  In  addition,  the  Company has advanced funds to PennMex
and/or  Tergas  in  connection  with  the purchase of assets associated with the
Mexican  Pipeline,  Mexican  Terminal  Facilities  and  the  Saltillo  Terminal
Facilities.

Both  PennMex  and  Tergas  are  Mexican  companies which are owned 90% and 95%,
respectively,  by  Jorge  R. Bracamontes, an officer and director of the Company
and  the  balance  by  other  citizens  of  Mexico.

                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  (EXPANSION)  -  Continued

During  the  years  ended  July 31, 1998 and 1999 and for the three months ended
October  31,  1999,  the  Company  paid  PennMex $181,000, $125,000 and $61,000,
respectively,  for  Mexico  related expenses incurred by that corporation on the
Company's  behalf.  Such  amounts  were  expensed.   In  addition, for the three
months  ended  October  31,  1999, the Company has advanced on behalf of PennMex
approximately $265,000 for purchases of equipment related to the Expansion which
are  included  in  capital  construction in progress in the consolidated balance
sheet.

The  actual  costs  to  complete  the  US-Mexico  Pipelines and Mexican Terminal
Facilities  are the sole responsibility of CPSC ("the Costs").  In addition, the
Company  has  spent approximately $555,000 as of October 31, 1999 related to the
Costs,  which  are  included  in  capital  construction  in  progress  in  the
consolidated  balance  sheet.

Under current Mexican law, foreign ownership of Mexican entities involved in the
distribution of LPG and the operation of LPG terminal facilities are prohibited.
However,  transportation  and  storage  of  LPG  by  foreigners  is  permitted.

In  October  1999,  the  Company  received  a  verbal  opinion  from the Foreign
Investment  Section  of  the  Department  of Commerce and Industrial Development
("SECOFI")  that the operation of the leases in Mexico  would be considered as a
transportation  rather  than  a  distribution  activity, and therefore, could be
performed  by  a  foreign  entity or through a foreign-owed Mexican entity.  The
Company  intends  to request a ruling from SECOFI confirming the verbal opinion.
On  November  8,  1999,  the  Company  and  Jorge  Bracamontes  and  the  other
shareholders  entered  into  a  purchase  agreement  to acquire up to 75% of the
common stock of PennMex for a nominal amount.  The purchase agreement is subject
to  among  other  things, the receipt of the aforementioned ruling.  The Company
intends  to  contract  with Tergas for services to be performed by Tergas at the
Mexican  Terminal  Facilities  and  the  Saltillo  Terminal  Facilities.

The  operations  of PennMex and/or Tergas are subject to the tax laws of Mexico,
which  among other things, require that Mexican subsidiaries of foreign entities
comply  with  transfer  pricing rules, the payment of income and/or asset taxes,
and  possibly  taxes  on  distributions  in  excess  of  earnings.  In addition,
distributions  to  foreign  corporations  may  be  subject to withholding taxes,
including  dividends  and  interest  payments.

NOTE  K  -  REALIZATION  OF  ASSETS

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles,  which contemplate continuation of the
Company as a going  concern.  The Company has had an  accumulated  deficit since
inception,  has historically  used cash in operations,  and prior to the quarter
ended October 31, 1999 has had a deficit in working  capital.  In addition,  the
Company is involved in litigation,  the outcome of which cannot be determined at
the present  time.  Although the Company has entered into the Lease  Agreements,
the  acquisition  of the interests in PennMex and the operating  agreement  with
Tergas  have yet to be  consummated.  As  discussed  in note A, the  Company has
historically depended heavily on sales to one major customer.

In view of the matters described in the preceding paragraph, recoverability of a
major  portion  of the  recorded  asset  amounts  as shown  in the  accompanying
consolidated balance sheet is dependent upon the collection of the Judgment, the
Company's ability to obtain additional  financing and to raise additional equity
capital,  and the success of the  Company's  future  operations.  The  financial
statements  do not include any  adjustments  related to the  recoverability  and
classification  of  recorded  asset  amounts or amounts  and  classification  of
liabilities  that might be necessary should the Company be unable to continue in
existence.

To provide the Company  with the  ability it believes  necessary  to continue in
existence, management is taking steps to (i) collect the Judgment, (ii) increase
sales to its current  customers,  (iii) increase its customer base,  (iv) extend
the terms and  capacity  of the  Pipeline  Lease  and the  Brownsville  Terminal
Facility,  (v) expand its product lines,  (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and (viii) raise additional debt and/or equity capital.

                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  K  -  REALIZATION  OF  ASSETS  -  Continued

At July 31, 1999, the Company had net operating loss  carryforwards  for federal
income tax purposes of approximately $8,000,000. The ability to utilize such net
operating loss carryforwards may be significantly  limited by the application of
the "change of ownership" rules under Section 382 of the Internal Revenue Code.

NOTE  L  -  CONTRACTS

LPG  BUSINESS

The  Company  has  entered  into a sales agreement, as amended, (Agreement) with
PMI,  its  major  customer,  to  provide  a minimum monthly volume of LPG to PMI
through  March  31,  2000.  Sales  to PMI for the three months ended October 31,
1999  totaled $15,957,316, representing approximately all of the  total revenues
for the period.  The Company is currently purchasing LPG from major suppliers to
meet  the  minimum  monthly  volumes  required in the Agreement.  The suppliers'
prices  are  below  the  sales  price  provided  for  in  the  Agreement.

Effective  October  1,  1999 (the "Closing Date"), the Company and Exxon entered
into a ten year LPG supply contract (the "Exxon Supply Contract"), whereby Exxon
has  agreed  to supply and the Company has agreed to take, the supply of propane
and  butane  available  at  Exxon's  King Ranch Gas Plant (the "Plant") which is
estimated  to be between 10,100,000 gallons per month and 13,900,000 gallons per
month  blended  in  accordance with the specifications as outlined under the PMI
Sales  Agreement  (the "Plant Commitment"), with a minimum of 10,100,000 gallons
per  month  guaranteed  by  Exxon  to  be  provided  to  the  Company.

In  addition,  under  the  terms  of  the Exxon Supply Contract, Exxon will make
operational  its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow  the Company to acquire an additional supply of propane from other propane
suppliers  located  near Corpus Christi, Texas (the "Additional Propane Supply),
and  bring  the  Additional  Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then  delivered  into  the  Pipeline.  In  connection  with the CCPL Supply, the
Company has agreed to supply a minimum of 7,700,000 gallons into the CCPL during
the  first  quarter  from  the  date that the CCPL is operational, approximately
92,000,000  gallons  the  following  year  and  122,000,000  gallons  each  year
thereafter  and  continuing  for  four  years.

The Exxon Supply Contract currently requires that the Company purchase a minimum
supply  of LPG, which is significantly higher than committed sales volumes under
the PMI Sales Agreement.  In addition, the Company is required to pay additional
fees  associated with the Additional Propane Supply, which will increase its LPG
costs by a minimum of $.01 per gallon without considering the actual cost of the
Additional  Propane  Supply  charged  to  the  Company.

In  September  1999,  the  Company and PG&E NGL Marketing, L.P. ("PG&E") entered
into  a  three  year supply agreement (the "PG&E Supply Agreement") whereby PG&E
has  agreed  to  supply and the Company has agreed to take, a monthly average of
2,500,000  gallons (the "PG&E Supply") of propane beginning during October 1999.
In  addition,  PG&E  is  in the process of obtaining up to 3,800,000 gallons per
month  of  additional  propane  commitments, which if successful by December 31,
1999,  would  be  an  adjustment  to  the  PG&E  Supply.

Under the terms of the PG&E Supply Agreement, when the CCPL becomes operational,
the  PG&E  Supply will be delivered to the CCPL, as described above, and blended
to  the  proper  specifications  as  outlined  under the PMI Sales Agreement. In
addition,  by  utilizing  the  PG&E  Supply,  the Company would satisfy the CCPL
Supply requirements under the Exxon Supply Contract.  Prior to the completion of
the  CCPL,  the  Company  will  receive  delivery of the PG&E Supply through the
facilities  provided  for  under  the  Pipeline  Lease  Amendment.

The  Company may incur significant additional costs associated with the storage,
disposal  and/or  changes  in  LPG prices resulting from the excess of the Plant
Commitment  and  PG&E  Supply  over  actual  sales  volumes.   Furthermore,  the
Company's existing letter of credit facility may not be adequate and the Company
may  require  additional  sources  of  financing  to  meet  the letter of credit
requirements  under  the  Exxon  Supply Agreement and the PG&E Supply Agreement.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    (UNAUDITED)

NOTE  L  -  CONTRACTS  -  Continued

CONSULTING  COMMISSION  AGREEMENT

The  Company  has entered into an incentive arrangement with several consultants
(the  "Arrangement")  whereby  the  Company will pay a commission based on $.001
plus  5% of every $.01 of gross margin in excess of $.0425 earned by the Company
in  connection  with  the  LPG sales of the Company, so long as the volume is in
excess  of 7,500,000  gallons  per month.  The Arrangement became effective July
1,  1999  and  is  renewable  annually.  The  amounts owed by the Company to the
Consultants  for  the  period from August 1, 1999 through October 31, 1999, were
not  material.

NOTE  M  -  AWARD  FROM  LITIGATION

On  August  24, 1994, the Company filed an Original Petition and Application for
Injunctive  Relief  against  the  International  Bank  of  Commerce-Brownsville
("IBC-Brownsville"),  a  Texas  state  banking  association,  seeking (i) either
enforcement  of  a  credit facility between the Company and IBC-Brownsville or a
release of the Company's property granted as collateral thereunder consisting of
significantly  all of the Company's business and assets; (ii) declaratory relief
with  respect  to  the  credit  facility;  and  (iii)  an  award for damages and
attorneys' fees.  After completion of an arbitration proceeding, on February 28,
1996, the 197th District Court in and for Cameron County, Texas entered judgment
(the  "Judgment") confirming the arbitral award for $3,246,754 to the Company by
IBC-Brownsville.

In  connection  with the lawsuit, IBC-Brownsville filed an appeal with the Texas
Court  of  Appeals  on  January 21, 1997.  The Company responded on February 14,
1997.  On September 18, 1997, the appeal was heard by the Texas Court of Appeals
and on June 18, 1998, the Texas Court of Appeals issued its opinion in the case,
ruling  essentially in favor of the Company.  IBC-Brownsville sought a rehearing
of  the  case  on  August  3,  1998.  On December 30, 1998, the Court denied the
IBC-Brownsville  request  for  rehearing.  On February 16, 1999, IBC-Brownsville
filed  a  petition  for review with the Supreme Court of Texas.  On May 10, 1999
the Company responded to the Supreme Court of Texas' request for response of the
Petitioner's  petition  for  review.  On  May  27, 1999, IBC-Brownsville filed a
reply  with  the  Supreme  Court  of  Texas  to  the  Company's  response of the
Petitioner's  petition for review.  On June 10, 1999, the Supreme Court of Texas
denied  the  Petitioner's petition for review.  During July 1999, the Petitioner
filed  an  appeal  with  the  Supreme  Court of Texas to rehear the Petitioner's
petition  for review.  On August 26, 1999, the Supreme Court of Texas upheld its
decision  to  deny  the Petitioner's petition for review.  During November 1999,
IBC-Brownsville  filed  a petition for writ of certiorari with the United States
Supreme  Court.  As  of  October  31,  1999,  the  net amount of the Judgment is
approximately  $4,000,000,  which  is  comprised  of  (i) the original judgment,
including  attorneys'  fees, (ii) post-award interest, and (iii) cancellation of
the  note and accrued interest payable to IBC-Brownsville, less attorneys' fees.
There is no certainty that IBC-Brownsville will not continue to seek other legal
remedies  against  the  Judgment.

For  the  year ended July 31, 1999, the Company recorded a gain of approximately
$987,000,  which  represented the amount of the Judgment which was recorded as a
liability  on  the  Company's balance sheet at December 31, 1998.  The remaining
net  amount  of  the  Judgment  to  be  realized by the Company is approximately
$4,000,000,  less  attorneys fees.  In addition, a former officer of the Company
is  entitled  to  5%  of  the net proceeds from the Judgment (after expenses and
legal  fees).  The  Company  will recognize the remaining amount of the Judgment
when  it  realizes  the  proceeds  associated  with  the  Judgment.

NOTE  N  -  SUBSEQUENT  EVENTS

EQUIPMENT  PURCHASE
-------------------

During  November  1999,  the  Company entered into an agreement to purchase four
storage  tanks,  pump  house  and  pipeline  facilities (the "Purchased Assets")
located  near  the  Brownsville  Terminal Facility for a total purchase price of
$195,000.  The  Company  has  made  payment of the purchase price into an escrow
account  subject  to  final approval by the Brownsville Navigation District (the
"District")  for  the Company to acquire the rights to the Purchased Assets.  In
connection  with the purchase, the Company agreed to partially fund the cost for
the  clean-up  of other assets located near the Purchased Assets required by the
District.  The  costs  are  not  expected  to  be  material.

                                       19
<PAGE>
ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
RESULTS  OF  OPERATIONS

     The  following  discussion  of  the  Company's  results  of  operations and
liquidity  and  capital  resources  should  be  read  in  conjunction  with  the
Consolidated  Financial  Statements  of  the  Company  and related Notes thereto
appearing  elsewhere  herein.  References to specific years preceded by "fiscal"
(e.g.  fiscal  1999)  refer  to  the  Company's  fiscal year ended July 31.  The
results of operations related to the Company's CNG segment, primarily consisting
of  PennWilson, which began operations in March 1997 and was discontinued during
fiscal  1999,  have  been  presented  separately  in  the Consolidated Financial
Statements  of  the  Company  as  discontinued  operations.

OVERVIEW

     The  Company  has  been principally engaged in the purchase, transportation
and  sale  of  LPG  and, from 1997 to March 1999, the provision of equipment and
services  to  the  CNG industry.  Beginning in July 1994, the Company has bought
and  sold  LPG  for  distribution  into northeast Mexico and the U.S. Rio Grande
Valley.

     Historically,  the  Company  has  derived substantially all of its revenues
from  sales  of LPG to PMI, its primary customer.  During the three months ended
October  31,  1999,  the  Company derived approximately all of its revenues from
sales  of  LPG.

     The  Company  provides  products  and  services  through  a  combination of
fixed-margin and fixed-price contracts.  Under the Company's agreements with its
customers  and  suppliers,  the  buying  and  selling prices of LPG are based on
variable  posted  prices  that  provide  the Company with a fixed margin.  Costs
included  in  cost of goods sold other than the purchase price of LPG may affect
actual  profits from sales, including costs relating to transportation, storage,
leases,  maintenance  and financing.  The Company generally attempts to purchase
in volumes commensurate with projected sales. However, mismatches in volumes and
prices  of  LPG  purchased  from  Exxon  and  resold  to  PMI  could  result  in
unanticipated  costs.

LPG  SALES

     The  following table shows the Company's volume sold in gallons and average
sales  price  of  LPG  for  the  three  months  ended October 31, 1999 and 1998.

<TABLE>
<CAPTION>
                              Three  Months  Ended
                            -------------------------
                            October 31,   October 31,
                             1999           1998
                            ------------  -----------
<S>                         <C>           <C>
Volume Sold

 LPG (millions of gallons)          33.8         22.4

Average sales price
 LPG (per gallon)                  $0.47        $0.28
</TABLE>


RESULTS  OF  OPERATIONS

     THREE  MONTHS  ENDED  OCTOBER 31, 1999 COMPARED WITH THE THREE MONTHS ENDED
OCTOBER  31,  1998

     Revenues.  Revenues  for the three months ended October 31, 1999 were $16.0
million  compared with $6.5 million for the three months ended October 31, 1998,
an  increase  of  $9.5  million  or  146.5%.  Of  this increase $5.4 million was
attributable  to increased volumes of LPG sold in the three months ended October
31,  1999 and $4.2 million was attributable to increased average sales prices of
LPG  sold  in  the  three  months  ended  October  31,  1999.

     Cost  of  sales.  Cost of sales for the three months ended October 31, 1999
was  $15.0 million compared with $5.9 million for the three months ended October
31, 1998, an increase of $9.1 million or 153.2%.  Of this increase


                                       20
<PAGE>
$4.9 million was  attributable  to  an increased volumes of LPG purchased in the
three  months  ended  October  31,  1999 and $4.2 million  was  attributable  to
increased average sales  prices  of  LPG  purchased  in  the  three months ended
October 31, 1999.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative expenses were $567,438 in the three months ended October 31, 1999
compared  with  $537,010 in the three months ended October 31, 1998, an increase
of  $30,428  or  5.7%.  This  increase  was primarily attributable to additional
administrative  costs  resulting  from  the  increased  volumes  of  LPG  sold.

     Other  income  and expense, net.  Other income (expense), net was ($62,499)
in  the three months ended October 31, 1999 compared with $(91,975) in the three
months  ended  October  31,  1998.  The  decrease  in other expense, net was due
primarily  to  reduced  interest  charges on outstanding indebtedness during the
three  months  ended  October  31,  1999.

     Income  tax.  Due  to  the availability of net operating loss carryforwards
($8.0  million  and $8.8 million at July 31, 1999 and 1998, respectively), there
was  no  income  tax  expense  in  either  period.  The  ability to use such net
operating  loss  carryforwards,  which  expire in the years 2009 to 2018, may be
significantly  limited  by  the  application  of the "change in ownership" rules
under  Section  382  of  the  Internal  Revenue  Code.


LIQUIDITY  AND  CAPITAL  RESOURCES

     General.  The Company has had an accumulated deficit since its inception in
1992,  and  until  the year ended July 31, 1999, has used cash in operations and
has  had  a deficit in working capital.  In addition, the Company is involved in
litigation,  the outcome of which cannot be determined at the present time.  The
Company  depends  heavily on sales to one major customer.  The Company's sources
of  liquidity  and capital resources historically have been provided by sales of
LPG  and  CNG-related  equipment,  proceeds  from the issuance of short-term and
long-term  debt,  revolving  credit  facilities and credit arrangements, sale or
issuance  of  preferred  and  common  stock of the Company and proceeds from the
exercise  of  warrants  to  purchase  shares  of  the  Company's  common  stock.

     The  following  summary table reflects comparative cash flows for the three
months  ended  October  31,  1999  and  1998.  All  information is in thousands.

<TABLE>
<CAPTION>
                                                          Three months Ended
                                                     ----------------------------
                                                      October 31,    October 31,
                                                         1999           1998
                                                     -------------  -------------
<S>                                                  <C>            <C>
Net cash provided by (used in) operating activities  $        237   $     (  466)
Net cash (used in) investing
 Activities . . . . . . . . . . . . . . . . . . . .        (  389)        (   28)
Net cash provided by financing activities . . . . .           931            360
                                                     -------------  -------------
Net increase (decrease) in cash . . . . . . . . . .  $        779   $     (  134)
                                                     =============  =============
</TABLE>

     PMI  Sales  Agreement.  The PMI Sales Agreement is effective for the period
from October 1, 1998 through September 30, 1999 and provides for the purchase by
PMI  of  minimum  monthly  volumes of LPG aggregating a minimum annual volume of
69.0  million gallons, similar to minimum volume requirements under the previous
sales  agreement  with  PMI  effective during the period from October 1, 1997 to
September  30, 1998.  During June 1999, the PMI Sales Agreement was amended (the
"PMI  Sales  Agreement Amendment") to extend the expiration date until March 31,
2000 and to provide the Company with additional margins for any volume exceeding
7.0  million  gallons per month during the summer period (April - September) and
9.0 million gallons per month during the winter period (October - March).  Under
the PMI Sales Agreement Amendment, PMI is obligated to purchase a minimum volume
of  45.0  million  gallons  during  October  1999  through  March  2000.


                                       21
<PAGE>
     LPG  Supply  Agreement.  During  October  1998,  the Company entered into a
monthly  supply  agreement  with  Exxon pursuant to which Exxon agreed to supply
minimum  volumes of LPG to the Company.  Effective November 1, 1998, the Company
entered  into  a supply agreement with Exxon to purchase minimum monthly volumes
of  LPG  through  September  1999.

     Effective October 1, 1999 (the "Exxon Closing Date"), the Company and Exxon
entered  into  a  ten  year  LPG  supply contract (the "Exxon Supply Contract"),
whereby  Exxon  has  agreed  to  supply  and the Company has agreed to take, the
supply  of  propane  and  butane  available at Exxon's King Ranch Gas Plant (the
"Plant")  which  is  estimated  to be between 10.1 million gallons per month and
13.9  million  gallons  per  month blended in accordance with the specifications
outlined  under the PMI Sales Agreement (the "Plant Commitment"), with a minimum
of  10.1  million  gallons  per  month guaranteed by Exxon to be provided to the
Company.

     In  addition, under the terms of the Exxon Supply Contract, Exxon will make
operational  its Corpus Christi Pipeline (the "CCPL") which when completed, will
allow  the Company to acquire an additional supply of propane from other propane
suppliers  located  near Corpus Christi, Texas (the "Additional Propane Supply),
and  bring  the  Additional  Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then  delivered  into  the  Pipeline.  In  connection  with the CCPL Supply, the
Company  has  agreed  to  supply  a minimum of 7.7 million gallons into the CCPL
during  the  first  quarter  from  the  date  that  the  CCPL  is  operational,
approximately 92 million gallons the following year and 122 million gallons each
year  thereafter  and  continuing  for  four  years.

     The  Exxon  Supply  Contract currently requires that the Company purchase a
minimum  supply  of  LPG,  which  is  significantly  higher than committed sales
volumes  under the PMI Sales Agreement.  In addition, the Company is required to
pay  additional  fees  associated with the Additional Propane Supply, which will
increase  its  LPG costs by a minimum of $.01 per gallon without considering the
actual  cost  of  the  Additional  Supply  charged  to  the  Company.

     In  September  1999,  the Company  and PG&E NGL  Marketing,  L.P.  ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E has agreed to supply and the Company has agreed to take, a monthly  average
of 2.5 million gallons (the "PG&E Supply") of propane  beginning  during October
1999. In addition, PG&E is in the process of obtaining up to 3.8 million gallons
per month of additional propane commitments, which if successful by December 31,
1999, would be an adjustment to the PG&E Supply.

     Under  the  terms  of the PG&E  Supply  Agreement,  when  the CCPL  becomes
operational  the PG&E Supply will be delivered to the CCPL, as described  above,
and  blended  to the  proper  specifications  as  outlined  under  the PMI Sales
Agreement.  In addition, by utilizing the PG&E Supply, the Company would satisfy
the CCPL  Supply  requirements  under the Exxon  Supply  Contract.  Prior to the
completion  of the CCPL,  the Company will  receive  delivery of the PG&E Supply
through the facilities provided for under the Pipeline Lease Amendment.

     In connection  with the Plant  Commitment and the PG&E Supply,  the Company
anticipates  lower  gross  margins  on its  sales  of LPG  under  the PMI  Sales
Agreement of approximately 10% - 40% as a result of increased LPG costs compared
with the previous  agreements to purchase LPG. The Company may incur significant
additional costs associated with storage,  disposal and/or changes in LPG prices
resulting  from the excess of the Plant  Commitment  and PG&E supply over actual
sales volumes.

     The Company  believes  that the terms of the Exxon Supply  Contract and the
PG&E Supply Contract are commensurate with the anticipated future demand for LPG
in Mexico and that any additional costs associated with the Additional Supply as
well as the  increase  in the costs  for LPG over  previous  agreements  will be
offset by increased  sales margins on LPG sold to the Company's  customers.  The
Company further  believes that any additional  costs incurred in connection with
the Plant Commitment and PG&E Supply, if any, will be short-term in nature.

     The  ability of the  Company to  increase  sales of LPG into  Mexico in the
future is  largely  dependent  on the  Company's  ability  to  negotiate  future
contracts with PMI and/or with local Mexican  distributors  once Deregulation in
Mexico is implemented.  In addition,  there can be no assurance that the Company
will be able to obtain  terms as favorable  as the PMI Sales  Agreement.  In the
event that the Company is unable to meet its intended LPG sales objectives, then
the Company may incur  significant  losses as a result of not being able to meet
its minimum purchase


                                       22
<PAGE>
requirements under the Exxon Supply Contract and the PG&E Supply Contract and/or
the costs of LPG may be in excess of prices received on sales of LPG.

     Furthermore,  until the US-Mexico Pipeline and Mexican Terminal  Facilities
and Saltillo Terminal Facilities are completed,  the Company will be required to
deliver the minimum  monthly  volumes from its  Brownsville  Terminal  Facility.
Historically,  sales of LPG from the  Brownsville  Terminal  Facility  have  not
exceeded  12.6  million  gallons per month.  In addition,  breakdowns  along the
planned  distribution  route for the LPG once  purchased  from PG&E and/or Exxon
and/or other suppliers, may limit the ability of the Company to accept the Plant
Commitment, CCPL Supply and/or the PG&E Supply.

     Under the terms of the Exxon Supply Contract and the PG&E Supply  Contract,
the Company must provide  letters of credit in amounts  equal to the cost of the
product purchased.  The amount of product to be purchased under the Exxon Supply
Contract and the PG&E Supply Contract are  significantly  higher than historical
amounts.  In addition,  the cost of the product  purchased  is tied  directly to
overall market conditions.  As a result, the Company's existing letter of credit
facility may not be adequate and the Company may require  additional  sources of
financing  to meet the  letter of  credit  requirements  under the Exxon  Supply
Contract and the PG&E Supply Agreement.  Furthermore upon the  implementation of
Deregulation  the Company  anticipates  entering  into  contracts  with  Mexican
customers which require payments in pesos. In addition the Mexican customers may
be limited in their ability to provide adequate financing.

     As a result of the Exxon Supply Contract and the PG&E Supply Contract,  the
Company  believes  that  its  has an  adequate  supply  of LPG  to  satisfy  the
requirements  of PMI under the PMI Sales  Agreement and to meet its future sales
obligations,  if any,  upon the  expiration of the PMI Sales  Agreement.  Due to
strategic  location of the  Company's  pipelines  and terminal  facilities,  the
Company  believes that it will be able to achieve  higher margins on the sale of
LPG in the future.

     In  determining  whether  any  supplier  will be utilized, the Company will
consider  the  applicable prices charged as well as any additional fees that may
be  required  to  be  paid  under  the  Pipeline  Lease.

     Pipeline  Lease.     The  Pipeline  Lease currently expires on December 31,
2013,  pursuant  to  an amendment  (the "Pipeline Lease Amendment") entered into
between  the  Company  and  Seadrift  on May 21, 1997, which became effective on
January  1, 1999 (the "Effective Date").  The Pipeline Lease Amendment provides,
among  other  things,  for  additional  storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from  the  Pipeline.  Pursuant  to  the  Pipeline Lease Amendment, the Company's
fixed  annual  fee  associated  with  the  use  of the Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date  and  the  Company  is  required  to pay for a minimum volume of storage of
$300,000  per  year  beginning  the  second  year  from  the  Effective Date. In
addition,  the  Pipeline  Lease Amendment provides for variable rental increases
based  on  monthly  volumes  purchased and flowing into the Pipeline and storage
utilized.  The  Company  believes that the Pipeline Lease Amendment provides the
Company  increased  flexibility  in negotiating sales and supply agreements with
its  customers  and  suppliers.

     Present  Pipeline  capacity  is approximately 265 million gallons per year.
During  the  three  months ended October 31, 1999, the Company sold 33.8 million
gallons  of LPG which flowed through the Pipeline.  The Company can increase the
Pipeline's  capacity  through  the installation of additional pumping equipment.
(See  "LPG  Expansion  Program"  below.)

     LPG  EXPANSION PROGRAM.  On July 26, 1999, the Company was granted a permit
by  the  United States Department of State authorizing the Company to construct,
maintain  and  operate  two  pipelines  (the  "US  Pipeline")  crossing  the
international  boundary  line  between  the  United  States and Mexico (from the
Brownsville Terminal Facility near the Port of Brownsville, Texas and El Sabino,
Mexico) for the transport of LPG and refined products (motor gasoline and diesel
fuel)  [the  "Refined  Products"].

     Previously,  on  July  2,  1998,  Penn  Octane  de  Mexico,  S.A.  de  C.V.
("PennMex"),  an  affiliated  company,  received  a  permit  from  the  Comision
Reguladora de Energia (the "Mexican Energy commission") to build and operate one
pipeline  to  transport  LPG  (the  "Mexican  Pipeline")  [collectively,  the US
Pipeline  and  the Mexican Pipeline are


                                       23
<PAGE>
referred to as the "US-Mexico Pipeline"] between El Sabino (at the  point  North
of the Rio Bravo) and to a terminal facility  in  the  City  of Matamoros, State
of Tamaulipas, Mexico (the "Mexican Terminal  Facilities").

     As  a  result  of  the  above,  the  Company  will be able to transport LPG
directly  from  the  US  into  Mexico  through the US-Mexico Pipeline and to the
Mexican  Terminal  Facilities  (the "Expansion").  Management believes that as a
result  of  the Expansion, the Company will have additional strengths due to its
ability  to  penetrate  further into Mexico, provide greater volumes of LPG as a
result  of  reduced  cross  border trucking delays and greater access to Mexican
distribution  resources  and the potential to achieve greater margins on its LPG
sales.

     In  addition  to  the  Expansion,  Tergas  has  begun  construction  of  an
additional  LPG  terminal  facility  in Saltillo, Mexico (the "Saltillo Terminal
Facilities")  for  an  estimated  cost  of  $500,000.  The  Saltillo  Terminal
Facilities,  when  complete, will allow for the distribution of LPG by railcars,
which  will  directly  link  the Company's Brownsville Terminal Facility and the
Saltillo  Terminal  Facilities.  The  Saltillo  Terminal Facilities will contain
storage to accommodate approximately 100,000 gallons of LPG.  As a result of the
Saltillo  Terminal  Facilities,  the  Company  believes  that it will be able to
further  penetrate  the  Mexican  market  for  the  sale of LPG.  Initially, the
Company  believes  that  the  Saltillo  Terminal Facilities, when complete, will
generate  additional  sales  of  5.0 million gallons monthly, independent of the
Expansion.

     On May 31, 1999, Tergas, S.A. de C.V. ("Tergas"), see below, was formed for
the  purpose  of  operating  LPG  terminal  facilities  in Mexico, including the
Mexican  Terminal  Facilities  and  the planned Saltillo Terminal Facilities and
future  LPG terminal facilities in Mexico.  Tergas has been issued the permit to
operate  the Mexican Terminal Facilities and the Company anticipates Tergas will
be  issued  the  permit  to  operate  the  Saltillo  Terminal  Facilities.

     In  connection with the Expansion and the Saltillo Terminal Facilities, the
Company  is  also  in  the  process  of  completing  upgrades at the Brownsville
Terminal  Facility  (the "Terminal Upgrades") and in January 2000 is planning to
begin certain enhancements to the Pipeline (the "Pipeline Enhancements").  Among
other  things, the Terminal Upgrades will include the installation of additional
piping  to connect the Pipeline to the loading dock at the railroad spur located
at  the  Brownsville  Terminal  Facility  and  construction  of  railcar loading
facilities  to  enable the Company to receive or deliver LPG for distribution of
LPG by railcar into Mexico and to the Saltillo Terminal Facilities.  The Company
expects  the  Terminal Upgrades to be completed by December 1999 at a total cost
of  approximately $200,000. Upon the completion of the Terminal Upgrades and the
Saltillo  Terminal  Facilities,  the  Company  will be able to distribute LPG to
Mexico  by railcars, which will directly link the Company's Brownsville Terminal
Facility  and  the  Saltillo  Terminal  Facilities.

     The  Pipeline  Enhancements  will  include  the  installation of additional
piping,  meters,  valves, analyzers and pumps along the Pipeline to increase the
capacity  of  the  Pipeline  and make the Pipeline bi-directional.  The Pipeline
Enhancements  will  increase the capacity of the Pipeline to 360 million gallons
per  year,  and  will provide the Company with access to a greater number of LPG
suppliers  and  additional storage facilities.  The Company expects to begin the
Pipeline  Enhancements  in  January  2000  and  to  be  completed  three  months
thereafter  at  a  cost  of  approximately  $1.5  million.

During  November  1999,  the  Company entered into an agreement to purchase four
storage  tanks,  pump  house  and  pipeline  facilities (the "Purchased Assets")
located  near  the  Brownsville  Terminal Facility for a total purchase price of
$195,000.  The  Company  has  made  payment of the purchase price into an escrow
account  subject  to  final approval by the Brownsville Navigation District (the
"District")  for  the Company to acquire the rights to the Purchased Assets.  In
connection  with the purchase, the Company agreed to partially fund the cost for
the  clean-up  of other assets located near the Purchased Assets required by the
District.  The  costs  are  not  expected  to  be  material.

     In  connection with the Expansion, the Company and CPSC International, Inc.
("CPSC")  entered into two separate Lease / Installation Purchase Agreements, as
amended,  ("the  Lease  Agreements"),  whereby CPSC will construct the US-Mexico
Pipeline  (including an additional pipeline to accommodate Refined Products) and
the  Mexican  Terminal  Facilities and lease these assets to the Company.  Under
the  terms  of  the  Lease  Agreements,  the Company will pay monthly rentals of
approximately  $157,000,  beginning  the  date  that  the US-Mexico Pipeline and
Mexican  Terminal Facilities are physically capable to transport and receive LPG
in  accordance  with  technical  specifications  required  (the  "Substantial
Completion  Date").  In  addition  the  Company  has agreed to provide a lien on
certain  assets,  leases  and  contracts which are currently pledged to RZB, and
provide CPSC with a letter of credit of


                                       24
<PAGE>
approximately $1.0 million.  The Company is currently in negotiations  with  RZB
and  CPSC  concerning  RZB's  subordination of RZB's  lien  on  certain  assets,
leases and contracts.  The Company also has the option to purchase the US-Mexico
Pipeline and Mexican Terminal Facilities at the end of the 10th year anniversary
and 15th year anniversary for $5.0 million  and  $100,000,  respectively.  Under
the  terms  of  the  Lease  Agreements,  CPSC  is  required  to  pay  all  costs
associated with the construction and maintenance of the  US  -  Mexico  Pipeline
and  Mexican  Terminal  Facilities.

     On  September  16,  1999,  the  Lease  Agreements were amended whereby CPSC
agreed  to  accept  500,000  shares  of common stock of the Company owned by the
President  of  the  Company  (the "Collateral") in place of the letter of credit
originally  required  under  the  Lease  Agreements.  The  Collateral  shall  be
replaced  by  a  letter  of  credit  or  cash collateral over a ten month period
beginning  monthly  after  the  Substantial  Completion  Date.  In addition, the
Company  has  agreed  to guarantee the value of the Collateral based on the fair
market  value  of  the  Collateral  for  up  to  $1.0  million.

     For financial accounting purposes, the Lease Agreements are capital leases.
Therefore,  the assets and related liabilities will be recorded in the Company's
balance  sheet  on  the  Substantial  Completion  Date.

     On  September  16,  1999,  the Company and CPSC entered into a purchase and
option  agreement  whereby  the  Company  will  purchase  a  30%  interest  (the
"Purchased Interests") in the US-Mexico Pipeline and Mexican Terminal Facilities
for  $3.0 million.  In connection with the Purchased Interests, the Company will
not  assume  any  costs  associated  with  CPSC's  obligations  under  the Lease
Agreements  until  the  Substantial  Completion Date is reached, and the Company
will  receive  a  minimum of $54,000 per month from the Company's payments under
the  Lease  Agreements  (approximately  34%  of  the  Company's  monthly  lease
obligations  under  the  Lease Agreements).   The Company is required to pay for
the  Purchased  Interests  on  January  3,  2000,  or  10 days subsequent to the
Substantial Completion Date, whichever is later (the "Closing Date").  To secure
the  payment  of  the  $3.0 million for the Purchased Interests, the Company has
agreed  to  assign its interest in the net cash proceeds to be received from the
IBC-Brownsville  award  judgment  (the "Judgment") of approximately $3.0 million
(see Item 3, "Legal Proceedings").  In the event that the net cash received from
the  Judgment is less than $3.0 million, the Company will be required to pay the
difference.  In  addition, if the Judgment is not paid by the Closing Date, CPSC
may  require the Company to make immediate payment in exchange for the return of
the  Judgment  assignment.

     Included  in the agreement for the Purchased Interests, the Company has two
option  agreements  (the "Options") whereby the Company has the right to acquire
an  additional  20%  and  an additional 50% interest in the Lease Agreements for
$2.0  million  and  $7.0  million, respectively, within 90 days from the Closing
Date.  In  the  event  the Company exercises the additional 20% option, then the
Purchased  Interests  will total 50% and the Company will receive a minimum from
the  Purchased  Interests of $90,000 per month from the Company's payments under
the  Lease  Agreements  (approximately  57%  of  the  Company's  monthly  lease
obligations under the Lease Agreements).  The Company paid $50,000 to obtain the
Options.

     During  the  years  ended  July  31, 1998 and 1999 and for the three months
ended October 31, 1999, the Company paid PennMex $181,000, $125,000 and $61,000,
respectively,  for  Mexico  related expenses incurred by that corporation on the
Company's  behalf.  Such  amounts  were  expensed.  In  addition,  for the three
months  ended  October  31,  1999, the Company has advanced on behalf of PennMex
approximately $265,000 for purchases of equipment related to the Expansion which
are  included  in capital construction in progress in the unaudited consolidated
balance  sheet.

The  actual  costs  to  complete  the  US-Mexico  Pipeline  and Mexican Terminal
Facilities  are the sole responsibility of CPSC (the "Costs").  In addition, the
Company  has  spent approximately $555,000 as of October 31, 1999 related to the
Costs,  which  are included in capital construction in progress in the unaudited
consolidated  balance  sheet.

     Foreign  Ownership of LPG  Operations.  Both PennMex and Tergas are Mexican
companies,  which are owned 90% and 95%, respectively,  by Jorge R. Bracamontes,
an officer and director of the Company  ("Bracamontes") and the balance by other
Mexican  citizens  ("Minority  Shareholders").  Under  current  Mexican law (see
"Deregulation of the LPG Market in Mexico" below),  foreign ownership of Mexican
entities  involved in the  distribution of LPG and the operation of LPG terminal
facilities  are  prohibited.  However,  foreign  ownership  is  permitted in the
transportation  and storage of LPG.  In October  1999,  the  Company  received a
verbal opinion from the


                                       25
<PAGE>
Foreign  Investment  Section  of  the  Department  of  Commerce  and  Industrial
Development  ("SECOFI"),  that the Company's planned strategy of selling  LPG to
PMI at the US border and then  transporting  the LPG through the Mexican portion
of the US - Mexico Pipeline to the Mexican Terminal Facilities would comply with
the LPG regulations. The Company intends to request a ruling (the "Ruling") from
SECOFI confirming the verbal opinion.  There  is  no  certainty that the Company
will obtain the Ruling, and if obtained  that the Ruling will not be affected by
future changes in Mexican laws.

     The  Company,  Bracamontes  and the Minority Shareholders have entered into
agreements  whereby  the Company may acquire up to 75% of the outstanding shares
of  PennMex  for a nominal amount, subject to among other things, receipt of the
Ruling.  The  Company  intends  to  contract  with  Tergas  for  services  to be
performed by Tergas at the Mexican Terminal Facilities and the Saltillo Terminal
Facilities.

     The  operations  of PennMex  and/or  Tergas are  subject to the tax laws of
Mexico,  which among other things,  require that Mexican subsidiaries of foreign
entities comply with transfer  pricing rules, the payment of income and/or asset
taxes, and possibly taxes on  distributions in excess of earnings.  In addition,
distributions  to foreign  corporations  may be subject  to  withholding  taxes,
including dividends and interest payments.

     Deregulation  of  the LPG Market in Mexico.  The Mexican petroleum industry
is  governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del  Petr  leo  (the  Regulatory Law to Article 27 of the Constitution of Mexico
concerning  Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and  Subsidiary  Entities  (the  "Organic Law")).  Under Mexican law and related
regulations,  PEMEX  is  entrusted  with  the central planning and the strategic
management  of  Mexico's  petroleum  industry,  including importation, sales and
transportation  of  LPG.  In  carrying out this role, PEMEX controls pricing and
distribution  of  various  petrochemical  products,  including  LPG.

     Beginning  in  1995,  as  part  of  a  national  privatization program, the
Regulatory  Law  was  amended to permit private entities to transport, store and
distribute  natural gas with the approval of the Ministry of Energy.  As part of
this  national  privatization  program,  the  Mexican  Government is expected to
deregulate  the  LPG  market ("Deregulation").  In June 1999, the Regulatory Law
for LPG was changed to permit foreign entities to participate without limitation
in LPG activities related to transportation and storage.  Upon the completion of
Deregulation, Mexican entities will be able to import LPG into Mexico.  However,
foreign  entities  will  be prohibited from participating in the distribution of
LPG  in  Mexico.  Accordingly,  the  Company  expects  to  sell  LPG directly to
independent  Mexican  distributors  as  well  as  PMI.  Upon Deregulation, it is
anticipated that the independent Mexican distributors will be required to obtain
authorization  from  the  Mexican government for the importation of LPG prior to
entering  into  contracts  with  the  Company.

     Pursuant  to the PMI  Sales  Agreement  upon  Deregulation  by the  Mexican
government of the LPG market, the Company will have the right to renegotiate the
PMI Sales  Agreement.  Depending on the outcome of any such  renegotiation,  the
Company  expects to either (i) enter into  contracts  directly with  independent
Mexican LPG  distributors  located in the  northeast  region of Mexico,  or (ii)
modify  the terms of the PMI Sales  Agreement  to  account  for the  effects  of
Deregulation.

     Currently  the  Company  sells  LPG  to PMI  at  its  Brownsville  Terminal
Facility.  Upon the completion of the US - Mexico Pipeline and Mexican  Terminal
Facilities,  the Company will sell LPG to PMI at the U.S.  border and  transport
the LPG to the Mexican Terminal Facilities through the US-Mexico Pipeline.  Upon
Deregulation,   the  Company   intends  to  sell  to  independent   Mexican  LPG
distributors as well as PMI.

     Credit  Arrangements.  As  of  October  31,  1999,  the Company has a $10.0
million  credit  facility  with  RZB  Finance  L.L.C. (RZB) for demand loans and
standby  letters  of  credit  (RZB  Credit  Facility)  to  finance the Company's
purchase  of  LPG.  Under  the  RZB Credit Facility, the Company pays a fee with
respect to each letter of credit thereunder in an amount equal to the greater of
(i)  $500,  (ii)  2.5%  of  the maximum face amount of such letter of credit, or
(iii)  such  higher amount as may be agreed to between the Company and RZB.  Any
amounts  outstanding  under  the  RZB Credit Facility shall accrue interest at a
rate  equal  to the rate announced by the Chase Manhattan Bank as its prime rate
plus  2.5%.  Pursuant  to  the  RZB  Credit  Facility, RZB has sole and absolute
discretion  to  terminate  the RZB Credit Facility and to make any loan or issue
any  letter  of  credit thereunder.  RZB also has the right to demand payment of
any  and  all amounts outstanding under the RZB Credit Facility at any time.  In
connection  with  the  RZB


                                       26
<PAGE>
Credit  Facility,  the  Company  granted  a  mortgage,  security  interest  and
assignment in any and all of the Company's real property, buildings,  pipelines,
fixtures  and  interests  therein  or  relating  thereto,  including,  without
limitation,  the  lease  with  the  Brownsville  Navigation District of  Cameron
County  for  the  land on which the Company's Brownsville Terminal  Facility  is
located, the Pipeline Lease, and in connection therewith agreed  to  enter  into
leasehold  deeds of  trust,  security  agreements,  financing  statements  and
assignments  of  rent,  in  forms  satisfactory  to RZB.  Under  the RZB  Credit
Facility, the Company  may  not  permit  to  exist  any lien, security interest,
mortgage,  charge  or  other  encumbrance of any nature on any of its properties
or  assets,  except in favor of RZB, without the consent of RZB.  The  Company's
President,  Chairman  and  Chief  Executive  Officer  has  personally guaranteed
all  of  the  Company's  payment obligations with respect to the RZB Credit
Facility.

     In  connection  with  the  Company's  purchases of LPG from Exxon, PG&E NGL
Marketing,  LP  (PG&E)  and/or  Koch  Hydrocarbon  Company ("Koch"), the Company
issues  letters  of  credit  on  a monthly basis based on anticipated purchases.

     As  of October 31, 1999, letters of credit established under the RZB Credit
Facility  in  favor  of  Exxon,  PG&E and Koch for purchases of LPG totaled $7.3
million  of  which  $4.5  million was being used to secure unpaid purchases.  In
connection  with  these  purchases, the Company had unpaid invoices due from PMI
totaling  $3.2  million  and cash balances maintained in the RZB Credit Facility
collateral  account  of  $1.3  million  as  of  October  31,  1999.

     Private  Placements  and  Other  Transactions.  In  connection  with  the
Company's  notice  to  repurchase  90,000  shares  of  the Convertible Stock for
$900,000  plus  dividends  of  $45,370  on  September 3, 1999, the holder of the
Convertible  Stock  elected to convert all of the Convertible Stock into 450,000
shares  of  common  stock  of  the  Company.  The  Company  paid  the $45,370 of
dividends  in  cash.

     The  Company  has granted one demand registration right with respect to the
common stock referred to in the preceding paragraph.  The Company and the holder
of  the  common  stock  have  agreed  to  share  the  costs of the registration.

     During  August  1999,  warrants  to  purchase a total of 425,000  shares of
common stock of the Company were  exercised,  resulting in cash  proceeds to the
Company of  $681,233.  The  proceeds  of such  exercises  were used for  working
capital purposes.

     During  October  1999,  warrants to  purchase a total of 163,636  shares of
common stock of the Company were  exercised,  resulting in cash  proceeds to the
Company of  $385,951.  The  proceeds  of such  exercises  were used for  working
capital purposes.

     In  connection  with  previous  warrants  issued by the Company, certain of
these  warrants  contain  a  call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect  to  exercise  the  warrants  within  the  call  provision.

     In connection  with the issuance of shares and warrants by the Company (the
"Shares"),  the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities").  The obligations of the Company with
respect to the  Registrable  Securities  include  one-time  demand  registration
rights and/or piggy-back  registration rights (the "Registration").  The Company
is required to file an  effective  registration  by either  September  19, 1999,
December 1, 1999 or January 31, 2000. In connection with the Registration of the
Registrable Securities,  the Company is required to provide notice to the holder
of the  Registrable  Securities,  who may or may not elect to be included in the
Registration.  The Company is obligated to register the  Registrable  Securities
even  though the  Registrable  Securities  may be tradable  under Rule 144.  The
Company  did not file a  registration  statement  for the  shares  agreed  to be
registered  by September  19, 1999.  The Company has also  received  notice of a
demand for  registration  for certain of the  Shares.  The  Registration  Rights
Agreements do not contain  provisions for damages,  if the  Registration  is not
completed except for those Shares required to be registered on December 1, 1999,
whereby for each month after  December  1999 and if the Company fails to have an
effective registration statement,  the Company will be required to pay a penalty
of $80,000 to be paid in cash and/or  common  stock of the Company  based on the
then current  trading price of the common stock of the Company.  The Company has
received an extension  with respect to the Shares  required to be  registered on
December 1, 1999 until January 15, 2000.


                                       27
<PAGE>
     Judgment  in  favor of the Company.  Judgment has been rendered in favor of
the  Company  in  connection  with  its  litigation against IBC-Brownsville.  On
August  26,  1999, IBC-Brownsville was denied a rehearing of an earlier decision
on  June  10,  1999 in which the Supreme Count of Texas denied IBC's-Brownsville
petition  for  review.  During  November 1999, IBC- Brownsville field a petition
for  writ  of  certiorari  with the United States Supreme Court.  As of July 31,
1999,  the  net  amount  of  the  award  is approximately $4.0 million, which is
comprised  of the sum of (i) the original award, including attorney's fees, (ii)
post-award  interest,  and  (iii)  cancellation of the note and accrued interest
payable,  less  attorneys'  fees.  Although  no  assurance  can  be  made  that
IBC-Brownsville  will  not  continue  to  seek  other legal remedies against the
Judgment, management believes that the Company will ultimately prevail, and will
receive  the  proceeds from such Judgment.  In addition, a former officer of the
Company  is  entitled to 5% of the net proceeds (after expenses and legal fees).

     Settlement  of  Litigation.  On  March  16,  1999,  the  Company settled in
mediation  a  lawsuit with its former chairman of the board, Jorge V. Duran.  In
connection  therewith  and  without  admitting  or denying liability the Company
agreed  to  pay Mr. Duran approximately $456,000 in cash and common stock of the
Company of which $100,000 is to be paid by the Company's insurance carrier.  The
Company  has  agreed  to  register  the  stock  in  the  future.

     Realization  of  Assets.  Recoverability of a major portion of the recorded
asset amounts on the Company's balance sheet is dependent upon the collection of
the  Judgment, the Company's ability to obtain additional financing and to raise
additional  equity  capital,  and the success of the Company's future operations
and  expansion  program,  which  includes  the  acquisition  of the interests in
PennMex  and  the  consummation  of  an  operating  agreement  with  Tergas.

     To  provide  the Company with the ability it believes necessary to continue
in  existence,  management  is  taking  steps  to (i) collect the Judgment, (ii)
increase  sales to its current customers, (iii) increase its customer base, (iv)
extend the terms and capacity of the Pipeline Lease and the Brownsville Terminal
Facility,  (v)  expand its product lines, (vi) increase its source of LPG supply
and at more favorable terms, (vii) obtain additional letters of credit financing
and  (viii)  raise  additional  debt  and/or  equity capital.  See note K to the
unaudited  consolidated  financial  statements.

     At  July  31,  1999,  the  Company had net operating loss carryforwards for
federal  income  tax  purposes  of  approximately  $8.0 million.  The ability to
utilize  such  net  operating loss carryforwards may be significantly limited by
the  application  of  the  "change  of ownership" rules under Section 382 of the
Internal  Revenue  Code.

     Year 2000 Date Conversion.  Management has determined that the consequences
of  its  Year  2000  issues  will  not  have  a material effect on the Company's
business,  results  of  operations,  or  financial  condition.

FINANCIAL  ACCOUNTING  STANDARDS

     In February 1997, the Financial Accounting Standards Board issued Statement
of  Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share.  SFAS
128  supersedes  APB  Opinion  No.  15 (Opinion No. 15), Earnings per Share, and
requires the calculation and dual presentation of basic and diluted earnings per
share (EPS), replacing the measures of primary and fully-diluted EPS as reported
under Opinion No. 15.  SFAS 128 became effective for financial statements issued
for  periods  ending  after  December  15,  1997;  earlier  application  was not
permitted.  Accordingly,  EPS  for  the  periods  presented  in the accompanying
consolidated  statements of operations are calculated under the guidance of SFAS
128.

     In  June 1997, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  130  (SFAS  130), Reporting Comprehensive
Income  and  Statement  of  Financial  Accounting  Standards No. 131 (SFAS 131),
Disclosure  about  Segments  of an Enterprise and Related Information.  Both are
effective  for  periods  beginning  after  December  15,  1997,  with  earlier
application  encouraged  for  SFAS  131.  The Company adopted SFAS 131 in fiscal
1997.


                                       28
<PAGE>
FORWARD-LOOKING  STATEMENTS

     Statements  in  this  report  regarding  future  events  or  conditions are
forward-looking  statements.  Actual  results, performance or achievements could
differ  materially  due to, among other things, factors discussed in this report
and  in  Part  I of the Company's Annual Report on Form 10-K for the fiscal year
ended  July  31,  1999.  These  forward-looking  statements include, but are not
limited to, statements regarding anticipated future revenues, sales, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico,  the  completion and operations of the US - Mexico Pipeline, the Mexican
Terminal  Facilities  and the Saltillo Terminal Facilities, foreign ownership of
LPG  operations, credit arrangements and other statements regarding matters that
are not historical facts, and involves predictions which are based upon a number
of  future  conditions  that  ultimately may prove to be inaccurate.  We caution
you,  however,  that  this  list  of  factors  may  not  be  complete.

ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

     None.


                                       29
<PAGE>
PART  II

ITEM  1.  LEGAL  PROCEEDINGS

          See Note I to the unaudited Consolidated Financial Statements and Note
          N to the  Company's  Annual  Report on Form 10-K for the  fiscal  year
          ended July 31, 1999.

ITEM  2.  CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

          See Note H to the unaudited consolidated financial statements and Note
          L to the  Company's  Annual  Report on Form 10-K for the  fiscal  year
          ended July 31, 1999.

ITEM  3.  DEFAULTS  UPON  SENIOR  SECURITIES

          None.

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

          None.

ITEM  5.  OTHER  INFORMATION

          None.

ITEM  6.  EXHIBITS,  FINANCIAL  STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

a.   Exhibits and Financial Statement Schedules

     The following Exhibits and Financial  Statement Schedules are filed as part
     of this report:

EXHIBIT  NO.
------------

     10.140 Transfer of Shares  Agreement  dated  November 4, 1999 between Jorge
            Bracamontes Aldana and the Company.

     10.141 Transfer of Shares  Agreement  dated  November 4, 1999  between Juan
            Jose Navarro Plascencia and the Company.

       27.1 Financial Data Schedule.

b.   Reports on Form 8-K.

     None.


                                       30
<PAGE>
                                   SIGNATURES

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


                           PENN  OCTANE  CORPORATION



December 13, 1999           By: /s/Ian T. Bothwell
                                --------------------
                                Ian T. Bothwell
                                Vice President, Treasurer, Assistant Secretary,
                                  Chief Financial Officer


                                       31
<PAGE>