UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549



                                    FORM 10-Q/A


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

     For the quarterly period ended January 31, 2004

                                       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 of                          (I.R.S. Employer
 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
    ----

     Indicate  by  check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes          No    X
    -----       -------

     The number of shares of Common Stock, par value $.01 per share, outstanding
on March 3, 2003 was 15,285,245.


                                       1
<PAGE>
                             PENN OCTANE CORPORATION
                                TABLE OF CONTENTS


        ITEM                                                            PAGE NO.
        ----                                                            --------

Part I   1.    Financial Statements

               Independent Certified Public Accountants' Review Report         3

               Consolidated Balance Sheets as of
               January 31, 2004 (unaudited) and July 31, 2003                4-5

               Unaudited Consolidated Statements of Operations for the three
               Months and six months ended January 31, 2004 and 2003           6

               Unaudited Consolidated Statements of Cash Flows for the six
               months ended January 31, 2004 and 2003                          7

               Notes to Consolidated Financial Statements (Unaudited)       8-21

         2.    Management's Discussion and Analysis of
               Financial Condition and Results of Operations               22-34

         3.    Quantitative and Qualitative Disclosures
               About Market Risk                                              34

         4.    Controls and Procedures                                        34

Part II  1.    Legal Proceedings                                              35

         2.    Changes in Securities, Use of Proceeds
               and Issuer Purchases of Equity Securities                      35

         3.    Defaults Upon Senior Securities                                35

         4.    Submission of Matters to a Vote of Security Holders            35

         5.    Other Information                                              35

         6.    Exhibits and Reports on Form 8-K                            35-36

         Signatures                                                           37


                                       2
<PAGE>
             Independent Certified Public Accountants' Review Report

Board of Directors and Shareholders
Penn Octane Corporation

We  have  reviewed the consolidated balance sheet of Penn Octane Corporation and
subsidiaries  (Company)  as  of  January  31, 2004, and the related consolidated
statements  of  operations for the three months and six months ended January 31,
2004  and  2003 and the consolidated statements of cash flows for the six months
ended  January  31,  2004  and  2003.  These  financial  statements  are  the
responsibility  of  the  Company's  management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A  review  of  interim financial
information  consists  principally of applying analytical procedures  and making
inquiries  of  persons  responsible for financial and accounting matters.  It is
substantially less in scope than an audit conducted in accordance with generally
accepted  auditing  standards,  the  objective  of which is the expression of an
opinion regarding the financial statements taken as a whole.  Accordingly, we do
not  express  such  an  opinion.

Based on our reviews, we are not aware of any material modifications that should
be  made  to  the  financial  statements  referred  to  above  for them to be in
conformity with accounting principles generally accepted in the United States of
America.

We  have  previously  audited,  in  accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of Penn
Octane  Corporation  and  Subsidiaries  as  of  July  31,  2003, and the related
consolidated  statements of operations, stockholders' equity, and cash flows for
the  year  then  ended (not presented herein); and in our report dated September
19,  2003,  we  expressed an unqualified opinion on those consolidated financial
statements.  In  our  opinion,  the  information  set  forth in the accompanying
consolidated  balance  sheet  as  of  July  31,  2003,  is  fairly  stated.

Our  auditor's  report on the Company's financial statements as of July 31, 2003
included  an  explanatory paragraph referring to the matters discussed in Note P
of those financial statements which raised substantial doubt about the Company's
ability  to  continue  as  a  going  concern.  As  indicated  in  Note  J of the
accompanying  unaudited  interim  financial  statements,  conditions continue to
exist which raise substantial doubt about the Company's ability to continue as a
going  concern.


                         /s/ BURTON MCCUMBER & CORTEZ, L.L.P.

Brownsville, Texas
March 5, 2004


                                       3
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM  1.

                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS


                                                                             January 31,
                                                                                2004        July 31,
                                                                             (Unaudited)      2003
                                                                            -------------  -----------
<S>                                                                         <C>            <C>
Current Assets

   Cash                                                                     $      84,306  $    71,064

   Restricted  cash                                                             4,133,465    3,404,782

   Trade accounts receivable (less allowance for doubtful accounts of $0 at
   January 31, 2004 and $5,783 at July 31, 2003)                               13,434,280    4,143,458

   Inventories                                                                  1,175,714      878,082

   Assets held for sale                                                           220,000      720,000

   Prepaid expenses and other current assets                                      120,530      476,109
                                                                            -------------  -----------

      Total current assets                                                     19,168,295    9,693,495

Property, plant and equipment - net                                            17,244,512   17,677,830

Lease rights (net of accumulated amortization of $730,433 and $707,535 at
January 31, 2004 and July 31, 2003)                                               423,606      446,504

Other non-current assets                                                           20,030       19,913
                                                                            -------------  -----------

      Total assets                                                          $  36,856,443  $27,837,742
                                                                            =============  ===========
<FN>
       The accompanying notes and accountants' report are an integral part of these statements.
</TABLE>


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

                                  CONSOLIDATED BALANCE SHEETS - CONTINUED

                                   LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                               January 31,
                                                                                  2004         July 31,
                                                                               (Unaudited)       2003
                                                                              -------------  -------------
<S>                                                                           <C>            <C>
Current Liabilities
    Current maturities of long-term debt                                      $    247,527   $    746,933

    Short-term debt                                                                      -      1,744,128

    LPG trade accounts payable                                                  15,969,399      7,152,098

    Other accounts payable                                                       1,645,639      2,470,880

    Foreign taxes payable                                                           18,928         60,000

    Accrued liabilities                                                          1,125,677      1,083,966
                                                                              -------------  -------------
      Total current liabilities                                                 19,007,170     13,258,005

Long-term debt, less current maturities                                          1,678,516         60,000

Commitments and contingencies                                                            -              -

Stockholders' Equity

    Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
    No shares issued and outstanding at January 31, 2004 and July 31, 2003               -              -

    Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
    5,000,000 shares authorized; No shares issued and outstanding at
    January 31, 2004 and July 31, 2003                                                   -              -

    Common stock - $.01 par value, 25,000,000 shares authorized;
    15,285,245 and 15,274,749 shares issued and outstanding at January 31,
    2004 and July 31, 2003                                                         152,852        152,747

    Additional paid-in capital                                                  28,487,341     28,298,301

    Notes receivable from an officer of the Company and another party for
    exercise of warrants, less reserve of $468,693 and $516,653 at January
    31, 2004 and July 31, 2003                                                  (2,728,000)    (2,897,520)

    Accumulated deficit                                                        ( 9,741,436)   (11,033,791)
                                                                              -------------  -------------
    Total stockholders' equity                                                  16,170,757     14,519,737
                                                                              -------------  -------------
        Total liabilities and stockholders' equity                            $ 36,856,443   $ 27,837,742
                                                                              =============  =============
<FN>
         The accompanying notes and accountants' report are an integral part of these statements.
</TABLE>


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

                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                                    (UNAUDITED)


                                                            Three Months Ended              Six Months Ended
                                                            ------------------              ----------------
                                                         January 31,    January 31,    January 31,    January 31,
                                                            2004           2003           2004           2003
                                                        -------------  -------------  -------------  -------------
<S>                                                     <C>            <C>            <C>            <C>

Revenues                                                $ 50,609,858   $ 43,621,932   $ 89,158,965   $ 81,062,590

Cost of goods sold                                        47,317,579     40,237,561     83,800,756     75,163,800
                                                        -------------  -------------  -------------  -------------

    Gross profit                                           3,292,279      3,384,371      5,358,209      5,898,790

Selling, general and administrative expenses

    Legal and professional fees                              416,526        731,677      1,178,395      1,051,791

    Salaries and payroll related expenses                    632,925        511,096      1,134,340        969,833

    Other                                                    506,365        182,937        782,280        508,942
                                                        -------------  -------------  -------------  -------------

                                                           1,555,816      1,425,710      3,095,015      2,530,566


  Estimated reduction in value of assets held for sale             -              -       (500,000)             -
                                                        -------------  -------------  -------------  -------------

    Operating income                                       1,736,463      1,958,661      1,763,194      3,368,224

Other income (expense)

    Interest and LPG financing expense                    (  338,998)     ( 422,370)     ( 714,584)    (  794,035)

    Interest income                                           39,836         13,574         45,175         82,443

    Other income                                                   -              -        210,000              -
                                                        -------------  -------------  -------------  -------------


       Income before taxes                                 1,437,301      1,549,865      1,303,785      2,656,632


Benefit (provision) for income tax                            13,572              -     (   11,428)       100,000
                                                        -------------  -------------  -------------  -------------


         Net income                                     $  1,450,873   $  1,549,865   $  1,292,357   $  2,756,632
                                                        =============  =============  =============  =============


Net income per common share                             $       0.09   $       0.10   $       0.08   $       0.19
                                                        =============  =============  =============  =============

Net income per common share assuming
dilution                                                $       0.09   $       0.10   $       0.08   $       0.18
                                                        =============  =============  =============  =============

Weighted average common shares outstanding                15,352,808     14,866,836     15,325,535     14,868,906
                                                        =============  =============  =============  =============
<FN>
            The accompanying notes and accountants' report are an integral part of these statements.
</TABLE>


                                       6
<PAGE>
<TABLE>
<CAPTION>
                            PENN OCTANE CORPORATION AND SUBSIDIARIES

                              CONSOLIDATED STATEMENTS OF CASH FLOWS

                                           (UNAUDITED)


                                                                         Six Months Ended
                                                                    ----------------------------
                                                                     January 31,    January 31,
                                                                        2004           2003
                                                                    -------------  -------------
<S>                                                                 <C>            <C>
Cash flows from operating activities:
Net income                                                          $  1,292,357   $  2,756,632
Adjustments to reconcile net income to net cash (used in) provided
  by operating activities:
    Depreciation and amortization                                        455,637        506,969
    Amortization of lease rights                                          22,898         22,898
    Non-employee stock based costs                                        62,434        104,101
    Amortization of loan discount related to detachable warrants          63,335         39,583
    Interest income - officer note and related party                     (32,334)       (67,241)
    Estimated reduction in value of assets held for sale                 500,000              -
    Gain on sale of equipment                                                  -        (83,406)
Changes in current assets and liabilities:
    Trade accounts receivable                                         (9,290,822)      (410,531)
    Inventories                                                         (297,632)    (1,594,619)
    Prepaid and other current assets                                     293,145       (161,549)
    LPG trade accounts payable                                         8,817,301      3,611,918
    Other accounts payable and accrued liabilities                      (708,259)    (1,371,082)
    Foreign taxes payable                                                (41,072)             -
                                                                    -------------  -------------
      Net cash provided by operating activities                        1,136,988      3,353,673
Cash flows from investing activities:
    Proceeds from the sale of equipment                                        -         96,000
    Capital expenditures                                                 (22,320)      (367,354)
    (Increase) decrease in other  non-current assets                        (117)        71,995
                                                                    -------------  -------------
      Net cash used in investing activities                              (22,437)      (199,359)
Cash flows from financing activities:
    Increase in restricted cash                                         (728,683)    (2,824,080)
    Revolving credit facilities                                                -       (150,000)
    Issuance of common stock                                             122,188              -
    Issuance of debt                                                     367,536        584,711
    Reduction in debt                                                   (862,350)      (866,045)
                                                                    -------------  -------------
      Net cash used in financing activities                           (1,101,309)    (3,255,414)
                                                                    -------------  -------------
           Net increase (decrease) in cash                                13,242       (101,100)
Cash at beginning of period                                               71,064        130,954
                                                                    -------------  -------------
Cash at end of period                                               $     84,306   $     29,854
                                                                    =============  =============

Supplemental disclosures of cash flow information:
    Cash paid during the year for:
    Interest and LPG financing                                      $    631,785   $    753,924
                                                                    =============  =============
Supplemental disclosures of noncash transactions:
    Equity-common stock and warrants issued                         $    528,024   $    316,665
                                                                    =============  =============
    Mortgage receivable/ note payable                               $          -   $    108,785
                                                                    =============  =============
    Equipment exchanged for note receivable                         $          -   $    720,000
                                                                    =============  =============
    Stock exchanged for note receivable                             $    169,520   $     30,480
                                                                    =============  =============
<FN>
    The accompanying notes and accountants' report are an integral part of these statements.
</TABLE>


                                       7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE  A  -  ORGANIZATION

     Penn  Octane  Corporation  was incorporated in Delaware in August 1992. The
     Company  has  been  principally engaged in the purchase, transportation and
     sale  of  liquefied  petroleum  gas  (LPG). The Company owns and operates a
     terminal  facility  on  leased  property in Brownsville, Texas (Brownsville
     Terminal  Facility)  and  owns  a  LPG  terminal  facility  in  Matamoros,
     Tamaulipas, Mexico (Matamoros Terminal Facility) and approximately 23 miles
     of pipelines (US - Mexico Pipelines) which connect the Brownsville Terminal
     Facility  to  the  Matamoros Terminal Facility. The Company has a long-term
     lease  agreement  for approximately 132 miles of pipeline (Leased Pipeline)
     which  connects  ExxonMobil  Corporation's  (Exxon) King Ranch Gas Plant in
     Kleberg  County,  Texas  and Duke Energy's La Gloria Gas Plant in Jim Wells
     County, Texas, to the Company's Brownsville Terminal Facility. In addition,
     the  Company  has  access  to a twelve-inch pipeline which connects Exxon's
     Viola  valve station in Nueces County, Texas to the inlet of the King Ranch
     Gas  Plant (ECCPL) as well as existing and other potential propane pipeline
     suppliers  which  have  the ability to access the ECCPL. In connection with
     the  Company's  lease  agreement  for  the Leased Pipeline, the Company may
     access  up  to  21,000,000  gallons  of  storage  located in Markham, Texas
     (Markham  Storage),  as well as other potential propane pipeline suppliers,
     via  approximately 155 miles of pipeline located between Markham, Texas and
     the  Exxon  King Ranch Gas Plant. The Company sells LPG primarily to P.M.I.
     Trading  Limited  (PMI).  PMI is the exclusive importer of LPG into Mexico.
     PMI  is  a  subsidiary  of Petroleos Mexicanos, the state-owned Mexican oil
     company  (PEMEX).  The  LPG  purchased from the Company by PMI is generally
     destined  for  consumption  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. Since the
     Company  began operations, the primary customer for LPG has been PMI. Sales
     of  LPG  to  PMI  accounted  for approximately 86% and 84% of the Company's
     total  revenues  for  the  three  and  six  months  ended January 31, 2004,
     respectively.  See  notes  J,  K  and  M.

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

     The  accompanying consolidated financial statements include the Company and
     its  United  States  subsidiaries  including  its recently formed Rio Vista
     Energy  Partners L.P. and its subsidiaries, all inactive (see note M), Penn
     Octane  International,  L.L.C.,  PennWilson CNG, Inc. (PennWilson) and Penn
     CNG  Holdings, Inc. and subsidiaries, its Mexican subsidiaries, Penn Octane
     de  Mexico,  S.A. de C.V. (PennMex) and Termatsal, S.A. de C.V. (Termatsal)
     and  its  other  inactive Mexican subsidiaries, (collectively the Company).
     All  significant  intercompany  accounts  and  transactions are eliminated.

     The  unaudited  consolidated  balance  sheet  as  of  January 31, 2004, the
     unaudited  consolidated  statements  of operations for the three months and
     six  months  ended January 31, 2004 and 2003 and the unaudited consolidated
     statements  of  cash  flows  for  the six months ended January 31, 2004 and
     2003,  have  been  prepared by the Company without audit. In the opinion of
     management,  the  unaudited  consolidated  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  January  31, 2004, the unaudited consolidated results of operations
     for the three months and six months ended January 31, 2004 and 2003 and the
     unaudited  consolidated  statements  of cash flows for the three months and
     six  months  ended  January  31,  2004  and  2003.

     Certain  information  and  footnote  disclosures  normally  included  in
     consolidated  financial  statements  prepared in accordance with accounting
     principles  generally  accepted  in  the United States of America have been
     omitted.  These  unaudited consolidated financial statements should be read
     in conjunction with the consolidated financial statements and notes thereto
     included  in  the  Company's Annual Report on Form 10-K for the fiscal year
     ended  July  31,  2003.

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


                                       8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

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 incurs
     losses,  giving  effect  to common stock equivalents is not presented as it
     would  be  antidilutive.

     The  following tables present reconciliations from income (loss) per common
     share to income (loss) per common share assuming dilution:

<TABLE>
<CAPTION>
                                                For the three months ended January 31, 2004
                                                -------------------------------------------
                                                 Income (Loss)       Shares      Per-Share
                                                  (Numerator)    (Denominator)     Amount
                                                 --------------  --------------  ----------
<S>                                              <C>             <C>             <C>
   Net income (loss)                             $    1,450,873

   BASIC EPS
   Net income (loss) available to common
     stockholders                                     1,450,873      15,352,808  $     0.09
                                                                                 ==========

   EFFECT OF DILUTIVE SECURITIES
   Warrants                                                   -          21,298
                                                 --------------  --------------

   DILUTED EPS
   Net income (loss) available to common
   stockholders                                  $    1,450,873      15,374,106  $     0.09
                                                 ==============  ==============  ==========


                                                For the three months ended January 31, 2003
                                                -------------------------------------------
                                                 Income (Loss)      Shares       Per-Share
                                                  (Numerator)    (Denominator)     Amount
                                                 --------------  --------------  ----------
   Net income (loss)                             $    1,549,865

   BASIC EPS
   Net income (loss) available to common
     stockholders                                     1,549,865      14,866,836  $     0.10
                                                                                 ==========

   EFFECT OF DILUTIVE SECURITIES
   Warrants                                                   -         169,926
                                                 --------------  --------------

   DILUTED EPS
   Net income (loss) available to common
     stockholders                                $    1,549,865      15,036,762  $     0.10
                                                 ==============  ==============  ==========
</TABLE>


                                       9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

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

<TABLE>
<CAPTION>
                                               For the six months ended January 31, 2004
                                               -----------------------------------------
                                               Income (Loss)       Shares      Per-Share
                                                (Numerator)    (Denominator)     Amount
                                               --------------  --------------  ----------
<S>                                            <C>             <C>             <C>
   Net income (loss)                           $    1,292,357

   BASIC EPS
   Net income (loss) available to common
     stockholders                                   1,292,357      15,325,535  $     0.08
                                                                               ==========

   EFFECT OF DILUTIVE SECURITIES
   Warrants                                                 -          10,649
                                               --------------  --------------

   DILUTED EPS
   Net income (loss) available to common
   stockholders                                $    1,292,357      15,336,184  $     0.08
                                               ==============  ==============  ==========


                                                For the six months ended January 31, 2003
                                                -----------------------------------------
                                                 Income (Loss)     Shares       Per-Share
                                                  (Numerator)   (Denominator)    Amount
                                               --------------  --------------  ----------
   Net income (loss)                           $    2,756,632

   BASIC EPS
   Net income (loss) available to common
     stockholders                                   2,756,632      14,868,906  $     0.19
                                                                               ==========

   EFFECT OF DILUTIVE SECURITIES
   Warrants                                                 -          85,065
                                               --------------  --------------

   DILUTED EPS
   Net income (loss) available to common
   stockholders                                $    2,756,632      14,953,971  $     0.18
                                               ==============  ==============  ==========
</TABLE>


                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE  C  -  STOCK-BASED  COMPENSATION

     The  Company  accounts  for  stock  option  plans  in  accordance  with the
     provisions  of  APB No. 25, "Accounting for Stock Issued to Employees", and
     related  interpretations which recognizes compensation expense on the grant
     date if the current market price of the stock exceeds the exercise price.

     Had  compensation  cost  related  to the warrants granted to employees been
     determined  based on the fair value at the grant dates, consistent with the
     provisions  of SFAS 123, the Company's pro forma net income (loss), and net
     income (loss) per common share would have been as follows:

<TABLE>
<CAPTION>
                                                                 Three Months Ended           Six Months Ended
                                                           ----------------------------  ----------------------------
                                                            January 31,    January 31,    January 31,    January 31,
                                                               2004           2003           2004           2003
                                                           -------------  -------------  -------------  -------------
<S>                                                        <C>            <C>            <C>            <C>

Net income, as reported                                    $  1,450,873   $  1,549,865   $  1,292,357   $  2,756,632

Less:  Total stock-based employee compensation expense
   determined under fair value based method for all awards,
   net of related tax effects                                   (14,859)      (465,753)       (67,773)    (1,120,309)
                                                           -------------  -------------  -------------  -------------

Net income, pro forma                                      $  1,436,014   $  1,084,112   $  1,224,584   $  1,636,323
                                                           =============  =============  =============  =============

Net income per common share, as reported                   $       0.09   $       0.10   $       0.08   $       0.19
                                                            =============  =============  =============  =============

Net income per common share, pro forma                     $       0.09   $       0.07   $       0.08   $       0.11
                                                           =============  =============  =============  =============

Net income per common share assuming dilution, as
reported                                                   $       0.09   $       0.10   $       0.08   $       0.18
                                                           =============  =============  =============  =============

Net income per common share assuming dilution,
pro forma                                                  $       0.09   $       0.07   $       0.08   $       0.11
                                                           =============  =============  =============  =============
</TABLE>

     The  following assumptions were used for grants of warrants to employees in
     the  six  months  ended  January 31, 2004, to compute the fair value of the
     warrants  using  the  Black-Scholes option-pricing model; dividend yield of
     0%;  expected  volatility  of 72% and 81%; risk free interest rate of 3.22%
     and  3.27%  and  expected  lives  of  5  years.

     The  following assumptions were used for grants of warrants to employees in
     the  six  months  ended  January 31, 2003, to compute the fair value of the
     warrants  using  the  Black-Scholes option-pricing model; dividend yield of
     0%;  expected volatility of 80%; risk free interest rate of 1.75% and 1.81%
     and  expected  lives  of  5  years.


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE D - ESTIMATED REDUCTION IN VALUE OF ASSETS HELD FOR SALE

     During  February  2004,  the Company sold all of its compressed natural gas
     (CNG)  equipment to a third party for $220,000. The purchase price was paid
     in cash. Under the terms of the sales agreement, the equipment was sold "as
     is".

NOTE E - PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                         January 31,       July 31,
                                                             2004            2003
                                                        --------------  --------------
LPG:
<S>                                                     <C>             <C>
     Midline pump station                               $   2,343,988   $   2,443,988
     Brownsville Terminal Facility: (a)
       Building                                               173,500         173,500
       Terminal facilities                                  3,631,207       3,631,207
       Tank Farm                                              373,945         373,945
       Leasehold improvements                                 302,657         302,657
       Capital construction in progress                        96,212          96,212
       Equipment                                              226,285         226,285
       Terminal vehicle                                        25,968               -
                                                        --------------  --------------
                                                            7,173,762       7,247,794
                                                        --------------  --------------
     US - Mexico Pipelines and Matamoros Terminal
     Facility: (a)

     U.S. Pipelines and Rights of Way                       6,775,242       6,680,242
     Mexico Pipelines and Rights of Way                       993,300         993,300
     Matamoros Terminal Facility                            5,107,514       5,107,514
     Saltillo Terminal                                      1,027,267       1,027,267
     Land                                                     856,358         856,358
                                                        --------------  --------------
                                                           14,759,681      14,664,681
                                                        --------------  --------------
            Total LPG                                      21,933,443      21,912,475
                                                        --------------  --------------
Other:
     Office equipment                                          94,553          93,201
     Software                                                  75,890          75,890
                                                        --------------  --------------
                                                              170,443         169,091
                                                        --------------  --------------
                                                           22,103,886      22,081,566
     Less:  accumulated depreciation and amortization    (  4,859,374)   (  4,403,736)
                                                        --------------  --------------

                                                        $  17,244,512   $  17,677,830
                                                        ==============  ==============
     (a)  See note M.
</TABLE>

                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE E - PROPERTY, PLANT AND EQUIPMENT - CONTINUED

     The  Company  had  previously  completed  construction of an additional LPG
     terminal  facility in Saltillo, Mexico (Saltillo Terminal). The Company was
     unable  to  receive  all the necessary approvals to operate the facility at
     that  location. While the terminal is not currently operable, the equipment
     is  capable  of  being  used  for  its intended purpose at any other chosen
     location. The Company has identified an alternate site in Hipolito, Mexico,
     a  town  located  in the proximity of Saltillo to establish a LPG terminal.

     The  Company  has  accounted  for  the  Saltillo Terminal at cost. The cost
     included  in  the  balance sheet is comprised primarily of dismantled pipe,
     dismantled steel structures, steel storage tanks, pumps and compressors and
     capitalized  engineering  costs  related to the design of the terminal. The
     cost  of dismantling the terminal at the Saltillo location was expensed and
     on-going  storage  fees  have  also  been  expensed.  The  expense  of  the
     relocation,  which  is  estimated  to be $500,000, will also be expensed as
     incurred.

     Property,  plant  and  equipment, net of accumulated depreciation, includes
     $6,280,698  and  $6,427,387 of costs, located in Mexico at January 31, 2004
     and  July  31,  2003,  respectively.


NOTE  F  -  INVENTORIES

     Inventories  are valued at the lower of cost or market (LCM) and consist of
     the  following:

<TABLE>
<CAPTION>
                                              January 31, 2004        July 31, 2004
                                            ---------------------  -------------------
                                             Gallons       LCM      Gallons      LCM
                                            ---------  ----------  ---------  --------
<S>                                         <C>        <C>         <C>        <C>
LPG:
   Leased Pipeline                          1,175,958  $  866,375  1,175,958  $638,623
   Brownsville Terminal Facility,
    Matamoros Terminal Facility
    and railcars                              419,875     309,339    440,771   239,368
   Markham Storage and other                        -           -        168        91
                                            ---------  ----------  ---------  --------

                                            1,595,833  $1,175,714  1,616,897  $878,082
                                            =========  ==========  =========  ========
</TABLE>

NOTE  G  -  DEBT  OBLIGATIONS

<TABLE>
<CAPTION>
Debt consists of the following:
                                                                                          January 31,    July 3,
                                                                                              2004         2003
                                                                                          ------------  ----------
<S>                                                                                       <C>           <C>
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility. (a)                                                  $     40,246  $  284,731

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility. (a)                                                        34,587     198,178

Noninterest-bearing note payable, discounted at 7%, for legal services; due in February
2002.                                                                                          137,500     137,500

Restructured Notes and $280,000 Notes                                                        1,598,174   1,744,128

Other debt.                                                                                    115,536     186,524
                                                                                          ------------  ----------
          Total debt                                                                         1,926,043   2,551,061
Less:  Current maturities                                                                      247,527     746,933
       Short term debt                                                                               -   1,744,128
                                                                                          ------------  ----------
          Long-term debt                                                                  $  1,678,516  $   60,000
                                                                                          ============  ==========
</TABLE>

(a)  Paid subsequent to January 31, 2004


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE  G  -  DEBT  OBLIGATIONS  -  CONTINUED

     EXTENSION  OF  CERTAIN  OF THE NEW ACCEPTING NOTEHOLDERS' NOTES, ADDITIONAL
     NOTE  AND  $250,000 NOTE TOTALING $1,525,000 (COLLECTIVELY THE RESTRUCTURED
     NOTES)

     On  January 16, 2004, the Restructured Notes which were due on December 15,
     2003  were  renewed  and  extended  (Restructuring). In connection with the
     Restructuring,  the  due  date  of  the  Restructured Notes was extended to
     December 15, 2005. The Restructured Notes can be repaid at any time without
     penalty. Annual interest on the Restructured Notes is 16.5% and the Company
     also  agreed  to  pay  a  fee  of  1.5%  on  any  principal  balance of the
     Restructured  Notes  outstanding  at  the  end  of  each  quarterly period,
     beginning  December  15,  2003.  Interest  and  fees  are payable quarterly
     beginning  March  15,  2004.

     In  addition,  the  Company  agreed  to  extend  the  expiration  date  on
     outstanding  warrants  to  purchase  common  stock  of  the Company held by
     holders  of  the  Restructured  Notes until December 15, 2008 and agreed to
     issue new warrants to purchase units of Rio Vista Energy Partners L.P. (Rio
     Vista)  in  an  amount  equal  to  2,500  warrants  for  each  $100,000  of
     Restructured  Notes  and an additional 2,500 warrants in Rio Vista for each
     $100,000  of Restructured Notes outstanding at December 15, 2004 (Rio Vista
     Warrants).  The Rio Vista Warrants will expire three years from the date of
     the  Spin-Off  (see note M) and the exercise price will be determined based
     on  a formula whereby the annualization of the first quarterly distribution
     will  represent a 20% yield on the exercise price. In addition, the Company
     agreed  to issue an additional 37,500 warrants to purchase shares of common
     stock  of  the  Company  to  certain  holders  of  the  Restructured Notes.

     Certain  holders  of  promissory  notes  totaling approximately $280,000 of
     principal  due  December  15, 2003 which did not agree to the Restructuring
     (Declining  Noteholders)  were  paid  by  the  Company.  In connection with
     amounts  due  to  the Declining Noteholders, the Company issued $280,000 of
     promissory  notes  ($280,000  Notes).  The  terms of the $280,000 Notes are
     substantially similar to the Restructured Notes, except that the holders of
     the  $280,000  Notes  were not entitled to receive any warrants to purchase
     shares  of  common  stock  of  the  Company.

     In addition, holders of the Restructured Notes and $280,000 Notes consented
     to  the Spin-Off of Rio Vista provided that the assets of the Company to be
     transferred  to  Rio  Vista  will  continue to be pledged as collateral for
     payment  of the Restructured Notes and $280,000 Notes, Rio Vista guarantees
     the  Company's  obligations under the Restructured Notes and $280,000 Notes
     and  that  Rio  Vista is prohibited against making any distributions in the
     event  that  the  Company  is  in  default under the Restructured Notes and
     $280,000  Notes.

     In  connection with the Restructured Notes and $280,000 Notes, Philadelphia
     Brokerage Corporation acted as placement agent and will receive a fee equal
     to  1.5% of the Restructured Notes and $280,000 Notes and after the date of
     the  Spin-Off  warrants  to  purchase  10,000  units  in  Rio  Vista and an
     additional  10,000  warrants  to  purchase 10,000 units in Rio Vista if the
     Restructured  Notes  and  $280,000 Notes are not paid by December 15, 2004.
     The  terms  of  the  warrants  are  the  same  as  the  Rio Vista Warrants.

     In  connection with the issuance of the new warrants of the Company and the
     extension  of  the warrants of the Company, the Company recorded a discount
     of  $220,615  related  to  the  fair  value  of  the newly issued, modified
     warrants  and  fees of which $13,788 has been amortized through January 31,
     2004.  In  addition, $75,622 of discount was amortized which related to the
     New  Accepting Noteholders' Notes, Additional Note and $250,000 Note during
     the  six  months  ended  January  31,  2004.  The  Company  will  record an
     additional  discount  related to the obligation to issue Rio Vista warrants
     to  the holders of the Restructured Notes and $280,000 Notes after the date
     of  the Spin-off and after the Company is able to determine the fair value,
     if  any.


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE G - DEBT OBLIGATIONS - CONTINUED

     OTHER

     During September 2003, the Company entered into a settlement agreement with
     one  of  the  holders  of  a  promissory note issued in connection with the
     acquisition  of the US-Mexico Pipelines and the Matamoros Terminal Facility
     whereby the noteholder was required to reimburse the Company for $50,000 to
     be  paid  through  the  reduction of the final payments of the noteholder's
     note  (see  note  I).


NOTE H - STOCKHOLDERS' EQUITY

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

     The  Company  routinely  issues  shares  of  its common stock for cash, the
     exercise  of  warrants,  in  payment  of notes and other obligations and to
     settle  lawsuits.

     During  September  2003, warrants to purchase 32,250 shares of common stock
     of  the Company were exercised resulting in cash proceeds to the Company of
     $80,625.

     During  September 2003, the Company issued 21,818 shares of common stock of
     the  Company to Mr. Jorge Bracamontes, a former officer and director of the
     Company  which  had  been previously accrued but unissued at July 31, 2003.

     During October 2003, cashless warrants to purchase 103,685 shares of common
     stock of the Company were exercised. The exercise price of the warrants was
     $2.50  per  share and the market price of the Company's common stock on the
     date  of  exercise  was  $3.01  per share, resulting in the net issuance of
     17,568  shares  of  common stock of the Company. The Company had previously
     expensed  the  cost  associated  with  the  warrants when the warrants were
     originally  granted.

     During November 2003, warrants to purchase 16,625 shares of common stock of
     the  Company  were  exercised  resulting in cash proceeds to the Company of
     $41,563.

     During  January  2004, the Company agreed to accept 77,765 shares of common
     stock  of  the  Company  as  full  satisfaction of indebtedness owed to the
     Company  by  a  related party. As a result, the Company recorded previously
     unrecorded  interest  income  of  $32,334.

     STOCK  WARRANTS
     ---------------

     The  Company applies APB 25 for warrants granted to the Company's employees
     and  to  the  Company's  Board  of  Directors  serving  in  the capacity as
     directors  and  SFAS  123 for warrants issued to acquire goods and services
     from  non-employees.

     In  connection with the restructuring of certain debt obligations (see Note
     G),  during  January  2004  the  Company issued warrants to purchase 37,500
     shares  of  common  stock  of the Company at an exercise price of $2.50 per
     share,  exercisable  until  December  15,  2008.

     In  connection  with  warrants previously 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 during the call provision period.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE H - STOCKHOLDERS' EQUITY - CONTINUED

     BOARD  COMPENSATION  PLAN  (BOARD  PLAN)

     In  connection  with  the  Board Plan, during August 2003 the Board granted
     warrants  to  purchase  20,000  shares  of  common  stock of the Company at
     exercise prices of $3.22 and $3.28 per share to outside directors. Based on
     the  provisions  of  APB 25, no compensation expense was recorded for these
     warrants.

     In  connection  with the Board Plan, during November 2003 the Board granted
     warrants  to  purchase  10,000  shares  of  common  stock of the Company at
     exercise  price  of  $2.61  per  share to an outside director. Based on the
     provisions  of  APB  25,  no  compensation  expense  was recorded for these
     warrants.


NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION

     On March 2, 2000, litigation was filed in the Superior Court of California,
     County of San Bernardino by Omnitrans against Penn Octane Corporation, Penn
     Wilson  and  several other third parties alleging breach of contract, fraud
     and  other  causes  of  action  related  to the construction of a refueling
     station  by  a  third  party. Penn Octane Corporation and Penn Wilson, have
     both  been  dismissed  from  the litigation pursuant to a summary judgment.
     Omnitrans  appealed  the  summary judgment in favor of the Company and Penn
     Wilson.  During  August  2003,  the  Appellate  Court  issued a preliminary
     decision  denying Omnitran's appeal of the summary judgment in favor of the
     Company  and  Penn  Wilson.  Oral  arguments  on  the  appeal were heard in
     November  2003  and  the  Company  prevailed  on  its  summary  judgment.

     On  October  11,  2001, litigation was filed in the 197th Judicial District
     court  of  Cameron  County,  Texas  by  the Company against Tanner Pipeline
     Services,  Inc.  (Tanner); Cause No. 2001-10-4448-C alleging negligence and
     aided  breaches  of  fiduciary duties on behalf of CPSC International, Inc.
     (CPSC)  in  connection  with  the  construction of the US Pipelines. During
     September 2003, the Company entered into a settlement agreement with Tanner
     whereby Tanner was required to reimburse the Company for $50,000 to be paid
     through  the reduction of the final payments on Tanner's note (see note G).


     The  Company and its subsidiaries are also involved with other proceedings,
     lawsuits  and  claims.  The  Company believes that the liabilities, if any,
     ultimately  resulting from such proceedings, lawsuits and claims, including
     those  discussed  above,  should  not  materially  affect  its consolidated
     financial  statements.


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

     CREDIT FACILITY, LETTERS OF CREDIT AND OTHER

     As  of January 31, 2004, the Company had a $15,000,000 credit facility (see
     below)  with  RZB Finance L.L.C. (RZB) for demand loans and standby letters
     of  credit (RZB Credit Facility) to finance the Company's purchases 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
     loan  amounts  outstanding  under  the  RZB  Credit  Facility  shall accrue
     interest  at  a rate equal to the rate announced by the JPMorgan Chase Bank
     as  its  prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB has
     sole and absolute discretion to limit or terminate its participation in 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  Credit  Facility,  the  Company  granted  a security interest and
     assignment  in  any  and  all  of  the  Company's accounts, inventory, real
     property,  buildings, pipelines, fixtures and interests therein or relating
     thereto,  including,  without  limitation,  the  lease with the Brownsville
     Navigation  District of Cameron County (District) 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 subsequent 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.

     Mr.  Richter  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, Duke Energy
     NGL  Services,  Inc.  (Duke),  Koch Hydrocarbon Company (Koch) and/or other
     suppliers,  letters  of  credit  are  issued  on  a  monthly basis based on
     anticipated  purchases.  Outstanding  letters of credit at January 31, 2004
     totaled  approximately  $15,300,000.

     In  connection  with  the  Company's  purchase of LPG, under the RZB Credit
     Facility,  assets  related  to product sales (Assets) are required to be in
     excess  of  borrowings  and  commitments  (including  restricted  cash  of
     $4,133,465  at  January  31,  2004).  At  January  31,  2004, the Company's
     borrowings  and  commitments  were  less  than  the  amount  of the Assets.

     The  RZB  Credit Facility was to be reduced from $15,000,000 to $12,000,000
     after  January  31,  2004. However, the RZB Credit Facility has remained at
     $15,000,000  pursuant to month-to-month extensions. The Company and RZB are
     currently  in  negotiations  to maintain the credit facility at $15,000,000
     for  a  longer  term  than  month-to-month.

     Under  the  terms  of  the  RZB Credit Facility, the Company is required to
     maintain  net  worth  of a minimum of $9,000,000 and is not allowed to make
     cash  dividends  to  shareholders  without  the  consent  of  RZB.

     CONCENTRATIONS  OF  CREDIT  RISK

     Financial  instruments  that potentially subject the Company to credit risk
     include  cash  balances  at banks which at times exceed the federal deposit
     insurance.


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE  J  -  REALIZATION  OF  ASSETS

     The  accompanying  consolidated  financial statements have been prepared in
     conformity  with  accounting  principles  generally  accepted in the United
     States of America, which contemplate continuation of the Company as a going
     concern. The Company has had an accumulated deficit since inception and has
     historically  had  a deficit in working capital. In addition, significantly
     all  of  the  Company's  assets  are  pledged or committed to be pledged as
     collateral  on existing debt in connection with the Restructured Notes, the
     $280,000  Notes and the RZB Credit Facility. The RZB Credit Facility was to
     be reduced from $15,000,000 to $12,000,000 after January 31, 2004. However,
     the  RZB  Credit  Facility  has  remained  at  $15,000,000  pursuant  to
     month-to-month  extensions.  The  Company  and  RZB  are  currently  in
     negotiations  to  maintain  the credit facility at $15,000,000 for a longer
     term than month-to-month. On December 29, 2003, the Company received notice
     from PMI that it was terminating the Contract effective March 31, 2004 (see
     note  K).

     In  addition  to the above, the Company intends to Spin-Off a major portion
     of  its  assets  to  its  stockholders  (see  note  M).  As a result of the
     Spin-Off,  the Company's stockholders' equity will be materially reduced by
     the  amount of the Spin-Off, which may result in a deficit in stockholders'
     equity  and  a  portion  of the Company's current cash flow from operations
     will be shifted to the Partnership. Therefore, the Company's remaining cash
     flow  may  not be sufficient to allow the Company to pay its federal income
     tax  liability  resulting  from the Spin-Off, if any, and other liabilities
     and  obligations  when  due. The Partnership will be liable as guarantor on
     the  Company's collateralized debt discussed in the preceding paragraph and
     will  continue  to pledge all of its assets as collateral. In addition, the
     Partnership has agreed to indemnify the Company for a period of three years
     from  the  fiscal  year  end that includes the date of the Spin-Off for any
     federal  income  tax  liabilities  resulting from the Spin-Off in excess of
     $2,500,000.

     In  view  of  the  matters  described  in  the  preceding  paragraphs,
     recoverability  of  the  recorded  asset  amounts shown in the accompanying
     consolidated balance sheet is dependent upon (1) the ability of the Company
     to  generate  sufficient cash flow through operations or additional debt or
     equity  financing  to  pay its liabilities and obligations when due, or (2)
     the  ability  of  the  Partnership  to  meet its obligations related to its
     guarantees  and tax indemnification in the event the Spin-Off occurs if the
     Company does not generate sufficient cash flow. The ability for the Company
     and  the  Partnership  to  generate  sufficient cash flows is significantly
     dependent  on the continued sales of LPG to PMI at acceptable monthly sales
     volumes  and  margins. The consolidated 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 negotiating with PMI to renew and extend the
     Contract  at  acceptable  monthly  sales  volumes and margins. In addition,
     management  is  taking  steps to (i) consummate the Spin-Off (ii) diversify
     its  operations  to  reduce  dependency on sales to PMI, (iii) increase and
     extend the RZB Credit Facility and (iv) raise additional debt and/or equity
     capital.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE K - CONTRACTS

     LPG  SALES  TO  PMI

     Effective  March  1,  2002, the Company and PMI entered into a contract for
     the  minimum  monthly  sale  of  17,000,000  gallons  of  LPG  (see  supply
     agreements  below),  subject  to  monthly  adjustments based on seasonality
     (Contract).  The  Contract  was  originally  to  expire on May 31, 2004. On
     December  29,  2003,  the Company received a notice from PMI requesting the
     termination of the Contract effective March 31, 2004, the end of the winter
     period  as  defined  under  the Contract. The Company and PMI are currently
     negotiating  the  renewal  of  the  Contract.

     PMI  has  primarily  used  the  Matamoros  Terminal  Facility  to  load LPG
     purchased from the Company for distribution by truck in Mexico. The Company
     continues  to  use the Brownsville Terminal Facility in connection with LPG
     delivered  by  railcar  to  other  customers, storage and as an alternative
     terminal  in  the  event  the  Matamoros  Terminal Facility cannot be used.

     LPG  SUPPLY  AGREEMENTS

     The  Company  has  entered  into  minimum  long-term  supply agreements for
     quantities  of  LPG  totaling  approximately  24,000,000  gallons per month
     although  the  Contract  provides  for  lesser  quantities.

     During  December  2003,  the  Company  and  Koch Hydrocarbon Company (Koch)
     entered  into a new three year supply agreement. The terms of the agreement
     are  similar  to  the  agreement  previously in effect between the parties.

     In  addition  to  the  LPG costs charged by the Suppliers, the Company also
     incurs  additional  costs  to  deliver  LPG  to  the  Company's facilities.
     Furthermore,  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,  Koch Supply or Duke Supply over actual
     sales  volumes.  Under  the terms of the Supply Contracts, the Company must
     provide letters of credit in amounts equal to the cost of the product to be
     purchased.  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  to  meet  the  letter  of  credit
     requirements under the agreements with the Suppliers or other suppliers due
     to  increases in quantities of LPG purchased and/or to finance future price
     increases  of  LPG.


NOTE  L  -  OTHER  INCOME

     In  connection  with  a  contract  to  upgrade its computer and information
     systems,  the  Company  entered  into an agreement with a vendor during the
     year  ended July 31, 2003. On October 1, 2003, the vendor agreed to pay the
     Company $210,000 for cancellation of the contract. This amount was included
     in  earnings  during  the  quarter  ending  October  31,  2003.


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE  M  -  SPIN-OFF  OF  SUBSIDIARY

     On  July  10,  2003,  the  Company  formed  Rio  Vista Energy Partners L.P.
     (Partnership),  a  Delaware  partnership. The Partnership is a wholly owned
     subsidiary  of the Company. The Partnership has two subsidiaries, Rio Vista
     Operating  Partnership  L.P. (.1% owned by Rio Vista Operating G.P. LLC and
     99.9% owned by the Company) and Rio Vista Operating GP LLC (wholly owned by
     the Partnership). The above subsidiaries are newly formed and are currently
     inactive.

     The  Company formed the Partnership for the purpose of transferring a 99.9%
     interest  in  Rio  Vista  Operating Partnership L.P. (L.P. Transfer), which
     will  own  substantially  all  of the Company's owned pipeline and terminal
     assets  in Brownsville and Matamoros (Asset Transfer), in exchange for a 2%
     general  partner  interest  and  a  98% limited partnership interest in the
     Partnership.  The  Company  intends to spin off 100% of the limited partner
     units  to  its common stockholders (Spin-Off), resulting in the Partnership
     becoming  an  independent  public company. The remaining 2% general partner
     interest  will  be  initially  owned  and controlled by the Company and the
     Company  will  be  responsible  for  the management of the Partnership. The
     Company  will  account  for  the  Spin-Off  at  historical  cost.

     During September 2003, the Company's Board of Directors and the Independent
     Committee  of  its  Board  of  Directors formally approved the terms of the
     Spin-Off  and  the  Partnership filed a Form 10 registration statement with
     the  Securities  and Exchange Commission. The Form 10 has subsequently been
     amended.  The  amended  Form  10  was  filed on March 5, 2004. The Board of
     Directors  anticipates  that  the Spin-Off will occur in 2004, subject to a
     number  of  conditions  including  the  absence  of  any  contractual  and
     regulatory  restraints  or  prohibitions preventing the consummation of the
     Spin-Off; and final action by the Board of Directors to set the record date
     and  distribution  date  for  the  Spin-Off  and  the  effectiveness of the
     registration  statement.

     Each shareholder of the Company will receive one common unit of the limited
     partnership  interest  in  the  Partnership  for  every eight shares of the
     Company's  common  stock  owned  as  of  the  record  date.

     Warrants  issued  to  holders  of  the existing unexercised warrants of the
     Company  will  be  exchanged  in  connection  with the Spin-Off whereby the
     holder  will  receive  options to acquire unissued units in the Partnership
     and  unissued  common  shares  of  the Company in exchange for the existing
     warrants.  The  number  of  units  and  shares  subject to exercise and the
     exercise price will be set to equalize each option's value before and after
     the  Spin-Off.

     Ninety-eight percent of the cash distributions from the Partnership will be
     distributed  to  the  limited  unit  holders  and  the remaining 2% will be
     distributed  to  the general partner for distributions up to $1.25 per unit
     annually  (approximately  $2,500,000  per year). Distributions in excess of
     that  amount  will  be  shared  by the limited unit holders and the general
     partner  based  on  a  formula  whereby  the  general  partner will receive
     disproportionately  more  distributions  per  unit  than  the  limited unit
     holders  as  annual  cash  distributions  exceed  certain  milestones.

     Subsequent  to the L.P. Transfer, the Partnership will sell LPG directly to
     PMI  and  will  purchase  LPG  from  the  Company  under a long-term supply
     agreement.  The  purchase  price  of  the  LPG  from  the  Company  will be
     determined  based  on  the Company's cost to acquire LPG and a formula that
     takes  into  consideration  operating  costs  of  both  the Company and the
     Partnership.


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE M - SPIN-OFF OF SUBSIDIARY - CONTINUED

     In  connection with the Spin-Off, the Company will grant to Mr. Richter and
     Shore  Capital  LLC  (Shore),  a  company  owned  by Mr. Richard Shore, the
     Company's  President, options to each purchase 25% of the limited liability
     company  interests  in  the  general  partner  of  the  Partnership.  It is
     anticipated  that  Mr.  Richter  and  Shore  will  exercise  these  options
     immediately  after  the Spin-Off occurs. The exercise price for each option
     will  be  the  pro  rata share (.5%) of the Partnership's tax basis capital
     immediately  after  the Spin-Off. The Company will retain voting control of
     the  Partnership  pursuant  to  a voting agreement. In addition, Shore will
     also receive an option to acquire 5% of the common stock of the Company and
     5%  of  the  limited  partnership interest in the Partnership at a combined
     equivalent  exercise  price  of  $2.20  per  share.

     The  Partnership  will  be  liable  as  guarantor  for  the  Company's
     collateralized  debt  (see  note  G) and will continue to pledge all of its
     assets  as  collateral.  The Partnership may also be prohibited from making
     any distributions to unit holders if it would cause an event of default, or
     if  an  event  of default is existing, under the Company's revolving credit
     facilities,  or  any  other covenant which may exist under any other credit
     arrangement  or  other  regulatory  requirement  at  the  time.

     The  Spin-Off will be a taxable transaction for federal income tax purposes
     (and  may  also  be  taxable  under applicable state, local and foreign tax
     laws)  to  both  the  Company  and its stockholders. The Company intends to
     treat  the  Spin-Off  as  a  "partial  liquidation"  for federal income tax
     purposes.  A  "partial  liquidation" is defined under Section 302(e) of the
     Code  as  a  distribution  that  (i)  is  "not  essentially equivalent to a
     dividend," as determined at the corporate level, which generally requires a
     genuine  contraction of the business of the corporation, (ii) constitutes a
     redemption  of  stock  and  (iii)  is  made  pursuant  to a plan of partial
     liquidation  and  within  the  taxable year in which the plan is adopted or
     within  the  succeeding  taxable  year.

     The  Company may have a federal income tax liability in connection with the
     Spin-Off.  If  the  income  tax  liability  resulting  from the Spin-Off is
     greater  than  $2,500,000,  the  Partnership  has  agreed  to indemnify the
     Company  for  any  tax liability resulting from the transaction which is in
     excess  of  that  amount.

     Because  the  Company will have control of the Partnership by virtue of its
     ownership  and  related  voting  control  of  the  general  partner,  the
     Partnership  will  continue  to  be  consolidated  with the Company and the
     interests of the limited partners will be classified as minority interests.

     Had  the  transaction  been  consummated  on January 31, 2004 the amount of
     stockholders'  equity  reflected  in  the  Company's pro forma consolidated
     balance  sheet  would have been reduced by approximately $14,500,000 with a
     corresponding  credit  to  minority  interest.  This would have resulted in
     stockholders'  equity  of  approximately  $1,700,000.

     Had  the  transaction  been consummated as of August 1, 2003, the Company's
     pro forma consolidated net income for the six months ended January 31, 2004
     would have decreased to a net loss of approximately $(800,000) after giving
     effect  to minority interest related to the Spin-Off and estimated expenses
     related  to  the  estimated  intrinsic  value  associated  with the options
     granted  to Shore and Mr. Richter. As a result of the foregoing, income per
     share would have decreased to a net loss per share of approximately $(.05).


                                       21
<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  2003)  refer  to  the  Company's  fiscal  year  ended  July  31.

FORWARD-LOOKING  STATEMENTS

The  statements contained in this Quarterly Report that are not historical facts
are  forward-looking  statements  within  the  meaning  of  Section  27A  of the
Securities  Act  of 1933.  These forward-looking statements may be identified by
the  use  of forward-looking terms such as "believes," "expects," "may," "will",
"should"  or  anticipates"  or by discussions of strategy that involve risks and
uncertainties.  From  time  to  time,  we  have made or may make forward-looking
statements,  orally  or  in  writing.  These  forward-looking statements include
statements regarding anticipated future revenues, sales, LPG supply, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico,  the  operations  of  the  US - Mexico Pipelines, the Matamoros Terminal
Facility  and  the  Saltillo Terminal, other upgrades to our facilities, foreign
ownership  of  LPG  operations,  short-term obligations and credit arrangements,
outcome  of  litigation,  the  proposed Spin-off  and other statements regarding
matters  that  are not historical facts, and involve predictions which are based
upon  a  number of future conditions that ultimately may prove to be inaccurate.
Actual  results,  performance  or  achievements could differ materially from the
results  expressed in, or implied by, these forward-looking statements.  Factors
that  may  cause or contribute to such differences include those discussed under
Part  I  of  the  Company's Annual Report on Form 10-K for the fiscal year ended
July  31,  2003 as well as those discussed elsewhere in this Report.  We caution
you,  however,  that  this  list  of  factors  may  not  be  complete.

OVERVIEW

     The  Company  has  been principally engaged in the purchase, transportation
and  sale of LPG for distribution into northeast Mexico.  In connection with the
Company's  desire  to  reduce quantities of inventory, the Company may also sell
LPG  to  U.S.  and  Canadian  customers.

     During the three and six months ended January 31, 2004, the Company derived
86%  and 84%, respectively of its revenues from sales of LPG to PMI, its primary
customer.

     The  Company  provides  products  and  services  through  a  combination of
fixed-margin  and  fixed-price contracts.  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 and maintenance.
Mismatches in volumes of LPG purchased from suppliers and volumes sold to PMI or
others  could  result  in  gains  during  periods of rising LPG prices or losses
during  periods  of  declining  LPG prices as a result of holding inventories or
disposing  of  excess  inventories.

LPG  SALES

     The  following  table  shows  the  Company's  volume  sold and delivered in
gallons  and average sales price for the three months ended January 31, 2004 and
2003;

                                                     2004      2003
                                                    -----     -----
Volume  Sold

     LPG  (millions  of  gallons)  -  PMI            59.1        61.7
     LPG  (millions  of  gallons)  -  Other          10.9         9.3
                                                   ------       -----
                                                     70.0        71.0
                                                  =======      ======

Average  sales  price

     LPG  (per  gallon)  -  PMI                  $   0.74    $   0.63
     LPG  (per  gallon)  -  Other                    0.65        0.52


                                       22
<PAGE>
RESULTS  OF  OPERATIONS

THREE MONTHS ENDED JANUARY 31, 2004 COMPARED WITH THREE MONTHS ENDED JANUARY 31,
2003

     Revenues.  Revenues  for the three months ended January 31, 2004 were $50.6
million compared with $43.6 million for the three months ended January 31, 2003,
an  increase  of  $6.9  million  or  16.0%.  Of  this increase, $6.8 million was
attributable  to increases in average sales prices of LPG sold to PMI during the
three  months ended January 31, 2004, $1.2 million was attributable to increased
average  sales  prices  of LPG sold to customers other than PMI during the three
months  ended  January  31,  2004 and $1.0 million was attributable to increased
volumes  of  LPG  sold to customers other than PMI during the three months ended
January  31,  2004,  partially  offset by $1.9 million attributable to decreased
volumes  of  LPG  sold  to  PMI  during the three months ended January 31, 2004.

     Cost  of goods sold.  Cost of goods sold for the three months ended January
31,  2004  was  $47.3  million  compared with $40.2 million for the three months
ended January 31, 2003, an increase of $7.1 million or 17.6%.  Of this increase,
$6.6 million was attributable to increases in the cost of LPG sold to PMI during
the  three  months  ended  January  31,  2004,  $1.1 million was attributable to
increased  costs of LPG sold to customers other than PMI during the three months
ended January 31, 2004, and $1.0 million was attributable to increased volume of
LPG  sold  to customers other than PMI during the three months ended January 31,
2004,  partially  offset by $1.7 million attributable to decreased volume of LPG
sold  to  PMI  during  the  three  months  ended  January  31,  2004.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative expenses were $1.5 million for the three months ended January 31,
2004  compared with $1.4 million for the three months ended January 31, 2003, an
increase of $130,106 or 9.1%. The increase during the three months ended January
31, 2004 was principally due to legal and other professional fees related to the
Spin-Off,  salary  related  costs, insurance costs, foreign ad valorem and asset
taxes  and  domestic  real  estate  taxes  partially  offset  by  a reduction in
professional  fees  related  to  litigation.

     Other income (expense). Other income (expense) was $(299,162) for the three
months  ended  January  31,  2004, compared with $(408,796) for the three months
ended  January  31,  2003.  The  decrease in other expenses was due primarily to
reduced  interest  and LPG financing costs resulting from reduced debt and lower
LPG  purchases,  respectively.

     Income  tax.   The  Company  reduced  its estimate of Mexican income tax by
$66,072  and  recorded  U.S.  federal  income  taxes  of  $52,500  related  to
alternative  minimum  taxes  for  the  three  months  ended  January  31,  2004.

SIX  MONTHS  ENDED  JANUARY  31, 2004 COMPARED WITH SIX MONTHS ENDED JANUARY 31,
2003

     Revenues.  Revenues  for  the  six months ended January 31, 2004 were $89.1
million  compared  with $81.0 million for the six months ended January 31, 2003,
an  increase  of  $8.1  million  or  10.0%.  Of this increase, $11.0 million was
attributable  to increases in average sales prices of LPG sold to PMI during the
six  months  ended  January  31,  2004,  and  $3.6  million  was attributable to
increased  average  sales  prices of LPG sold to customers other than PMI during
the  six  months  ended  January  31,  2004,  partially  offset  by $2.5 million
attributable to decreased volumes of LPG sold to PMI during the six months ended
January  31, 2004 and $3.9 million attributable to decreased volumes of LPG sold
to  customers  other  than  PMI  during  the  six months ended January 31, 2004.

     Cost  of  goods  sold.  Cost of goods sold for the six months ended January
31,  2004 was $83.8 million compared with $75.2 million for the six months ended
January 31, 2003, an increase of $8.6 million or 11.5%.  Of this increase, $10.8
million  was attributable to increases in the cost of LPG sold to PMI during the
six months ended January 31, 2004 and $3.9 million was attributable to increased
costs  of  LPG  sold  to  customers  other  than PMI during the six months ended
January  31,  2004,  partially  offset by $4.0 million attributable to decreased
volume  of  LPG  sold  to  customers  other than PMI during the six months ended
January  31,  2004 and $2.2 million attributable to decreased volume of LPG sold
to  PMI  during  the  six  months  ended  January  31,  2004.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were $3.1 million for the six months ended January 31,
2004  compared  with  $2.5 million for the six months ended January 31, 2003, an
increase  of $564,449 or 22.3%. The increase during the six months ended January
31, 2004 was principally due to legal and other professional fees related to the
Spin-Off,  salary  related  costs, insurance costs, foreign ad valorem and asset
taxes  and  domestic  real  estate  taxes  partially  offset  by  a reduction in
professional  fees  related  to  litigation.


                                       23
<PAGE>

     Other  income (expense) and estimated reduction in value of assets held for
sale. Other income (expense) was $(959,409) for the six months ended January 31,
2004,  compared  with  $(711,592) for the six months ended January 31, 2003. The
increase  in  other  expenses  was  due  primarily  to increased amortization of
discounts  on  outstanding debt incurred and the estimated reduction in value of
assets  held  for sale of $500,000 during the six months ended January 31, 2004,
partially  offset  by  reduced  interest  costs  resulting from reduced debt and
$210,000  of  other  income  related  to  the  cancellation  of  a  contract.

     Income  tax.   The  Company  reduced  the  estimate  for Mexican income tax
expense  by $41,072 and recorded U.S. federal income taxes of $52,500 related to
alternative  minimum  taxes  for  the  six  months  ended  January  31,  2004.

LIQUIDITY  AND  CAPITAL  RESOURCES

     General.  The  Company  has  had an accumulated deficit since its inception
and  has  historically  had  a  deficit  in  working  capital.  In  addition,
significantly all of the Company's assets are pledged or committed to be pledged
as  collateral  on existing debt in connection with the  Restructured Notes, the
$280,000  Note and  the RZB Credit Facility.   The RZB Credit Facility was to be
reduced  from  $15.0  million to $12.0 million after January 31, 2004.  However,
the RZB Credit Facility has remained at $15.0 million pursuant to month-to-month
extensions.  The  Company  and RZB are currently in negotiations to maintain the
credit  facility  at  $15.0  million for a longer term than month-to-month.  The
Company  may need to increase its credit facility for increases in quantities of
LPG  purchased  and/or  to  finance  future price increases of LPG.  The Company
depends  heavily  on  sales  to  one major customer.   On December 29, 2003, the
Company  received notice from PMI that it was terminating the Contract effective
March  31,  2004 (see below).     The Company's sources of liquidity and capital
resources  historically  have  been  provided by sales of LPG, 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.

     In  addition  to the above, the Company intends to Spin-Off a major portion
of  its  assets to its stockholders.  As a result of the Spin-Off, the Company's
stockholders'  equity  will be materially reduced by the amount of the Spin-Off,
which  may  result  in  a  deficit  in stockholders' equity and a portion of the
Company's  current cash flow from operations will be shifted to the Partnership.
Therefore,  the Company's remaining cash flow may not be sufficient to allow the
Company  to pay its federal income tax liability resulting from the Spin-Off, if
any,  and  other  liabilities and obligations when due.  The Partnership will be
liable  as  guarantor  on  the  Company's  collateralized  debt discussed in the
preceding paragraph and will continue to pledge all of its assets as collateral.
In addition, the Partnership has agreed to indemnify the Company for a period of
three  years from the fiscal year end that includes the date of the Spin-Off for
any federal income tax liabilities resulting from the Spin-Off in excess of $2.5
million  (see  Rio  Vista  Energy  Partners  L.P.  below).

     The  following summary table reflects comparative cash flows for six months
ended  January  31,  2004,  and  2003.  All  information  is  in  thousands.

<TABLE>
<CAPTION>
                                             2004       2003
                                           ---------  --------
<S>                                        <C>        <C>
Net cash provided by operating activities  $  1,137   $ 3,354
Net cash (used in) investing activities .       (23)   (  199)
Net cash (used in) financing activities .   ( 1,101)   (3,256)
                                           ---------  --------
Net increase (decrease)  in cash. . . . .  $     13   $  (101)
                                           ---------  --------
</TABLE>


                                       24
<PAGE>
     Sales  to PMI.    Effective March 1, 2002, the Company and PMI entered into
a  contract for the minimum monthly sale of 17.0 million gallons of LPG, subject
to  monthly  adjustments  based  on  seasonality (the "Contract").  The Contract
expires  on  May  31, 2004, except that the Contract may be terminated by either
party  upon 90 days written notice, or upon a change of circumstances as defined
under  the  Contract.

     In  connection  with  the  Contract, the parties also executed a settlement
agreement,  whereby  the  parties  released  each  other  in connection with all
disputes  between  the  parties  arising during the period April 1, 2001 through
February  28,  2002,  and previous claims related to the contract for the period
April  1,  2000  through  March  31,  2001.

     On December 29, 2003, the Company received a notice from PMI requesting the
termination  of  the  Contract  effective  March 31, 2004, the end of the winter
period as defined under the Contract.  The Company believes that the termination
was based on PMI's desire to have the new contract fall within PMI's traditional
period  of  arranging  for  LPG  supplies.  The  Company  and  PMI are currently
negotiating the renewal of the Contract, however, there can be no assurance that
such  an agreement or any agreement will be reached with PMI or, if so, that the
terms  of  such  agreement  will  be more or less beneficial to the Company than
those  of  the  Contract.

     PMI  has  primarily  used  the  Matamoros  Terminal  Facility  to  load LPG
purchased  from  the  Company  for distribution by truck in Mexico.  The Company
continues  to  use  the  Brownsville  Terminal  Facility  in connection with LPG
delivered  by railcar to other customers, storage and as an alternative terminal
in  the  event  the  Matamoros  Terminal  Facility  cannot  be  used.

     LPG  Supply  Agreements.  The  Company  has  entered into minimum long-term
supply  agreements  for  quantities  of  LPG totaling approximately 24.0 million
gallons  per  month  although  the  Contract  provides  for  lesser  quantities.

     During  December  2003,  the  Company and Koch Hydrocarbon Company ("Koch")
entered into a new three year supply agreement.   The terms of the agreement are
similar  to  the  agreement  previously  in  effect  between  the  parties.

     In  addition  to  the  LPG costs charged by the Suppliers, the Company also
incurs  additional  costs  to  deliver  LPG  to  the  Company's  facilities.
Furthermore,  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,  Koch  Supply  or Duke Supply over actual sales volumes.
Under  the  terms  of  the Supply Contracts, the Company must provide letters of
credit  in  amounts  equal  to  the  cost  of  the  product to be purchased.  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 to meet the letter of credit requirements under the agreements
with  the  Suppliers  or  other  suppliers due to increases in quantities of LPG
purchased  and/or  to  finance  future  price  increases  of  LPG.

     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 Leased
Pipeline.  Pursuant  to the Pipeline Lease Amendment, the Company's fixed annual
rent  for  the  use  of  the  Leased  Pipeline is $1.0 million including monthly
service payments of $8,000 through March 2004.  The service payments are subject
to  an  annual adjustment based on a labor cost index and an electric power cost
index.  The  Company  is also required to pay for a minimum volume of storage of
$300,000  per  year (based on reserved storage of 8.4 million gallons) beginning
January  1,  2000.   In  connection  with  the  Pipeline Lease, the Company  may
reserve  up  to  21.0  million  gallons  each  year thereafter provided that the
Company  notifies  Seadrift  in  advance.

      The  Pipeline Lease Amendment provides for variable rental increases based
on  monthly  volumes  purchased and flowing into the Leased 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.


                                       25
<PAGE>
     The  Company  at  its  own expense, installed a mid-line pump station which
included  the  installation  of additional piping, meters, valves, analyzers and
pumps along the Leased Pipeline to increase the capacity of the Leased Pipeline.
The  Leased  Pipeline's  capacity is estimated to be between 300 million and 360
millions  gallons  per  year.

     Upgrades.  The  Company  also  intends  to  contract  for  the  design,
installation  and  construction  of pipelines which will connect the Brownsville
Terminal  Facility  to the water dock facilities at the Brownsville Ship Channel
and  install  additional storage capacity.  The cost of this project is expected
to  approximate  $2.0  million.  In  addition the Company intends to upgrade its
computer  and  information  systems  at  a  total  estimated  cost  of $350,000.

     Sales  of  Assets.   During  February  2004,  the  Company  sold all of its
compressed  natural  gas  ("CNG")  equipment to a third party for $220,000.  The
purchase  price  was  paid in cash.  Under the terms of the sales agreement, the
equipment  was  sold  "as  is".

     Mexican  Operations.  Under  current  Mexican  law,  foreign  ownership  of
Mexican  entities  involved  in  the distribution of LPG or the operation of LPG
terminal  facilities  is  prohibited.  Foreign  ownership  is  permitted  in the
transportation  and  storage  of  LPG.  Mexican  law also provides that a single
entity  is  not  permitted  to  participate  in more than one of the defined LPG
activities  (transportation,  storage  or  distribution).  PennMex  has  a
transportation  permit  and  the other Mexican Subsidiary owns, leases, or is in
the  process  of obtaining the land or rights of way used in the construction of
the  Mexican portion of the  US-Mexico Pipelines, and own the Mexican portion of
the  assets  comprising the US-Mexico Pipelines, the Matamoros Terminal Facility
and  the  Saltillo  Terminal.  The  Company's Mexican affiliate, Tergas, S.A. de
C.V.  ("Tergas"),  has been granted the permit to operate the Matamoros Terminal
Facility  and  the  Company relies on Tergas' permit to continue its delivery of
LPG  at the Matamoros Terminal Facility.  Tergas is owned 95% by Mr. Soriano and
the  remaining  balance  is  owned  by  Mr.  Abelardo  Mier, a consultant of the
Company.  The  Company  pays Tergas its actual cost for distribution services at
the  Matamoros  Terminal  Facility  plus a small profit.   During July 2003, the
Company  acquired an option to purchase Tergas for a nominal price (estimated to
be  $5,000)  from  Mr.  Soriano  and  Mr.  Mier.

     The  Company  had  previously  completed  construction of an additional LPG
terminal facility in Saltillo, Mexico (the "Saltillo Terminal"). The Company was
unable  to  receive  all the necessary approvals to operate the facility at that
location. While the terminal is not currently operable, the equipment is capable
of being used for its intended purpose at any other chosen location. The Company
has  identified  an  alternate  site  in Hipolito, Mexico, a town located in the
proximity  of  Saltillo  to  establish  a  LPG  terminal.

     The  Company  has  accounted  for  the Saltillo Terminal at cost.  The cost
included  in  the  balance  sheet  is  comprised  primarily  of dismantled pipe,
dismantled  steel  structures,  steel  storage  tanks, pumps and compressors and
capitalized  engineering  costs related to the design of the terminal.  The cost
of  dismantling  the terminal at the Saltillo location was expensed and on-going
storage  fees  have also been expensed.  The expense of the relocation, which is
estimated  to  be  $500,000,  will  also  be  expensed  as  incurred.

     Once completed, the Company expects the newly-constructed terminal facility
to be capable of off-loading LPG from railcars to trucks.  The newly-constructed
terminal facility will have three truck loading racks and storage to accommodate
approximately  390,000  gallons  of  LPG.

     Once  operational,  the Company can directly transport LPG via railcar from
the  Brownsville  Terminal  Facility to the Saltillo area.  The Company believes
that  by  having the capability to deliver LPG to the Saltillo area, the Company
will  be  able  to  further  penetrate  the  Mexican market for the sale of LPG.

     Through  its  operations  in  Mexico  and  the  operations  of  the Mexican
Subsidiaries and Tergas, the Company is subject to the tax laws of Mexico which,
among other things, require that the Company comply with transfer pricing rules,
the  payment  of  income,  asset  and  ad  valorem  taxes, and possibly taxes on
distributions  in  excess  of  earnings.  In  addition, distributions to foreign
corporations,  including  dividends  and  interest  payments  may  be subject to
Mexican  withholding  taxes.


                                       26
<PAGE>
     Deregulation of the LPG Industry 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
the  defined  LPG  activities  related  to  transportation and storage. However,
foreign entities are prohibited from participating in the distribution of LPG in
Mexico.  Upon  Deregulation,  Mexican  entities  will be able to import LPG into
Mexico.  Under  Mexican  law, a single entity is not permitted to participate in
more  than  one  of  the  defined  LPG  activities  (transportation, storage and
distribution).  The  Company  or  its  affiliates expect to sell LPG directly to
independent  Mexican  distributors as well as PMI upon Deregulation. The Company
anticipates that the independent Mexican distributors will be required to obtain
authorization  from  the  Mexican  government  for  the  importation of LPG upon
Deregulation  prior  to  entering  into  contracts  with  the  Company.

     During  July  2001, the Mexican government announced that it would begin to
accept  applications  from  Mexican  companies  for  permits  to  allow  for the
importation  of  LPG  pursuant to provisions already provided for under existing
Mexican  law.

     In  connection  with  the above, in August 2001, Tergas received a one year
permit  from  the  Mexican government to import LPG.  During September 2001, the
Mexican  government asked Tergas to defer use of the permit and as a result, the
Company  did  not  sell  LPG to distributors other than PMI.  In March 2002, the
Mexican  government  again  announced  its  intention  to issue permits for free
importation of LPG into Mexico by distributors and others beginning August 2002,
which  was  again  delayed.  Tergas'  permit to import LPG expired during August
2002.  Tergas  intends to obtain a new permit when the Mexican government begins
to accept applications once more.  As a result of the foregoing, it is uncertain
as to when, if ever, Deregulation will actually occur and the effect, if any, it
will  have  on  the  Company.  However,  should  Deregulation  occur,  it is the
Company's intention to sell LPG directly to distributors in Mexico as well as to
PMI.  Tergas  also  received  authorization  from  Mexican  Customs  authorities
regarding  the  use  of  the  US-Mexico  Pipelines  for the importation of  LPG.

     The  point  of sale for LPG which flows through the US-Mexico Pipelines for
delivery  to the Matamoros Terminal Facility is the United States-Mexico border.
For  LPG  delivered  into  Mexico,  PMI  is  the  importer  of  record.

     Sales  of Refined Products.  During January 2004, the Company initiated its
plans  to  become  involved  in  the  bulk  and  rack sales of refined petroleum
products  consisting  of gasoline and diesel.  The Company expects that the sale
of  refined  products  will  commence  during April 2004, subject to the Company
obtaining  the necessary trade financing required.  The Company anticipates that
based on adequate financing, the sale of refined products will approximate $70.0
million  on an annual basis and operating profits of approximately $1.0 million.


                                       27
<PAGE>
     Credit  Arrangements.  As  of  January  31,  2004,  the Company had a $15.0
million  credit  facility (see below) with RZB Finance L.L.C. ("RZB") for demand
loans  and  standby letters of credit (the "RZB Credit Facility") to finance the
Company's  purchases  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  loan  amounts  outstanding under the RZB Credit Facility shall accrue
interest at a rate equal to the rate announced by the JPMorgan Chase Bank as its
prime  rate  plus  2.5%.  Pursuant  to the RZB Credit Facility, RZB has sole and
absolute  discretion to limit or terminate their participation in 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 Credit
Facility,  the Company granted a security interest and assignment in any and all
of  the  Company's  accounts,  inventory,  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 subsequent 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.

     Mr.  Richter  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, Duke, Koch
and/or other suppliers, letters of credit are issued on a monthly basis based on
anticipated  purchases.   Outstanding  letters  of  credit  at  January 31, 2004
totaled  approximately  $15.3 million.

     In  connection  with  the  Company's  purchase of LPG, under the RZB Credit
Facility,  assets  related to product sales (the "Assets") are required to be in
excess  of borrowings and commitments (including restricted cash of $4.1 million
at  January  31,  2004).  At  January  31,  2004,  the  Company's borrowings and
commitments  were  less  than  the  amount  of  the  Assets.

     The  RZB  Credit  Facility  was  to  be reduced from $15.0 million to $12.0
million  after  January 31, 2004.  However, the RZB Credit Facility has remained
at $15.0 million pursuant to month-to-month extensions.  The Company and RZB are
currently in negotiations to maintain the credit facility at $15.0 million for a
longer  term  than  month-to-month.

     Under  the  terms  of  the  RZB Credit Facility, the Company is required to
maintain  net worth of a minimum of $9.0 million and is not allowed to make cash
dividends  to  shareholders  without  the  consent  of  RZB.

     Private  Placements and Other Transactions. On January 16, 2004, certain of
the  Extending  Noteholders'  notes  and  $250,000  Note  totaling  $1.5 million
(collectively the "Restructured Notes") which were due on December 15, 2003 were
renewed  and  extended  (the  "Restructuring").  In  connection  with  the
Restructuring,  the  due date of the Restructured Notes was extended to December
15,  2005.  The  Restructured  Notes  can be repaid at any time without penalty.
Annual  interest  on the Restructured Notes is 16.5% and the Company also agreed
to  pay  a  fee  of  1.5%  on  any  principal  balance of the Restructured Notes
outstanding  at  the  end of each quarterly period, beginning December 15, 2003.
Interest  and  fees  are  payable  quarterly  beginning  March  15,  2004.

     Certain  holders  of  promissory  notes  totaling approximately $280,000 of
principal  due  December  15, 2003 which did not agree to the Restructuring (the
"Declining  Noteholders")  were paid by the Company.  In connection with amounts
due  to  the  Declining  Noteholders,  the Company issued $280,000 of promissory
notes (the "$280,000 Notes").  The terms of the $280,000 Notes are substantially
similar to the Restructured Notes, except that the holders of the $280,000 Notes
were  not entitled to receive any warrants to purchase shares of common stock of
the  Company.

     During  September  2003, warrants to purchase 32,250 shares of common stock
of  the  Company  were  exercised  resulting  in cash proceeds to the Company of
$80,625.


                                       28
<PAGE>
     During  September 2003, the Company issued 21,818 shares of common stock of
the  Company  to the former officer and director as severance compensation which
had  been  previously  accrued  but  unissued  at  July  31,  2003.

     During October 2003, cashless warrants to purchase 103,685 shares of common
stock  of  the  Company  were exercised.  The exercise price of the warrants was
$2.50  per  share and the market price of the Company's common stock on the date
of  exercise was $3.01 per share, resulting in the net issuance of 17,568 shares
of  common  stock  of  the  Company.

     During November 2003, warrants to purchase 16,625 shares of common stock of
the Company were exercised resulting in cash proceeds to the Company of $41,563.

     During  January  2004, the Company agreed to accept 77,765 shares of common
stock of the Company as full satisfaction of indebtedness owed to the Company by
a  related  party.  As  a  result,  the  Company  recorded previously unrecorded
interest  income  of  $32,334.

     In  connection  with  warrants previously 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  during  the  call  provision  period.

     Settlement  of  Litigation.   On  October 11, 2001, litigation was filed in
the  197th  Judicial  District  Court  of  Cameron  County, Texas by the Company
against  Tanner  Pipeline  Services,  Inc.  ("Tanner"); Cause No. 2001-10-4448-C
alleging  negligence  and  aided  breaches of fiduciary duties on behalf of CPSC
International,  Inc.  (CPSC)  in  connection  with  the  construction  of the US
Pipelines.  During  September  2003,  the  Company  entered  into  a  settlement
agreement  with  Tanner whereby Tanner was required to reimburse the Company for
$50,000 to be paid through the reduction of the final payments on Tanner's note.

     Litigation.  On  March  2, 2000, litigation was filed in the Superior Court
of  California,  County  of  San  Bernardino  by  Omnitrans  against Penn Octane
Corporation,  Penn  Wilson  and  several  other third parties alleging breach of
contract,  fraud  and  other  causes  of action related to the construction of a
refueling  station  by  a  third party.  Penn Octane Corporation and Penn Wilson
have  both  recently  been  dismissed  from the litigation pursuant to a summary
judgment.  Omnitrans  appealed the summary judgments in favor of the Company and
Penn  Wilson.  During  August  2003,  the  Appellate  Court issued a preliminary
decision  denying  Omnitran's  appeal  of  the  summary judgment in favor of the
Company  and Penn Wilson.    Oral arguments on the appeal were heard in November
2003  and  the  Company  prevailed  on  its  summary  judgment.

     The  Company and its subsidiaries are also involved with other proceedings,
lawsuits  and  claims.  The  Company  believes  that  the  liabilities,  if any,
ultimately resulting from such proceedings, lawsuits and claims, including those
discussed  above,  should  not  materially  affect  its  consolidated  financial
statements.

     Other  Income.  In  connection  with a contract to upgrade its computer and
information  systems, the Company entered into an agreement with a vendor during
the  year ended July 31, 2003.  On October 1, 2003, the vendor agreed to pay the
Company  $210,000 for cancellation of the contract.  This amount was included in
earnings  during  the  quarter  ending  October  31,  2003.


                                       29
<PAGE>

     Realization of Assets.   The accompanying consolidated financial statements
have  been  prepared in conformity with accounting principles generally accepted
in  the  United States of America, which contemplate continuation of the Company
as  a going concern.  The Company has had an accumulated deficit since inception
and  has  historically  had  a  deficit  in  working  capital.  In  addition,
significantly all of the Company's assets are pledged or committed to be pledged
as  collateral  on  existing debt in connection with the Restructured Notes, the
$280,000  Notes  and the RZB Credit Facility.  The RZB Credit Facility was to be
reduced  from  $15.0  million to $12.0 million after January 31, 2004.  However,
the RZB Credit Facility has remained at $15.0 million pursuant to month-to-month
extensions.  The  Company  and RZB are currently in negotiations to maintain the
credit  facility  at  $15.0  million for a longer term than month-to-month.   On
December  29, 2003, the Company received notice from PMI that it was terminating
the  Contract effective March 31, 2004 (see note K to the unaudited consolidated
financial  statements).

     In  addition  to the above, the Company intends to Spin-Off a major portion
of  its  assets  to  its  stockholders (see note M to the unaudited consolidated
financial statements).  As a result of the Spin-Off, the Company's stockholders'
equity  will  be  materially  reduced  by  the amount of the Spin-Off, which may
result  in  a  deficit  in  stockholders'  equity and a portion of the Company's
current  cash  flow  from  operations  will  be  shifted  to  the  Partnership.
Therefore,  the Company's remaining cash flow may not be sufficient to allow the
Company  to pay its federal income tax liability resulting from the Spin-Off, if
any,  and  other  liabilities and obligations when due.  The Partnership will be
liable  as  guarantor  on  the  Company's  collateralized  debt discussed in the
preceding paragraph and will continue to pledge all of its assets as collateral.
In addition, the Partnership has agreed to indemnify the Company for a period of
three  years from the fiscal year end that includes the date of the Spin-Off for
any federal income tax liabilities resulting from the Spin-Off in excess of $2.5
million.

     In  view  of  the  matters  described  in  the  preceding  paragraphs,
recoverability  of  the  recorded  asset  amounts  shown  in  the  accompanying
consolidated  balance  sheet is dependent upon (1) the ability of the Company to
generate  sufficient  cash  flow through operations or additional debt or equity
financing to pay its liabilities and obligations when due, or (2) the ability of
the  Partnership  to  meet  its  obligations  related  to its guarantees and tax
indemnification  in  the  event  the  Spin-Off  occurs  if  the Company does not
generate  sufficient cash flow.  The ability for the Company and the Partnership
to  generate  sufficient  cash flows is significantly dependent on the continued
sales  of  LPG  to  PMI  at  acceptable  monthly sales volumes and margins.  The
consolidated  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  negotiating  with  PMI  to  renew and extend the
Contract  at  acceptable  monthly  sales  volumes  and  margins.  In  addition,
management  is  taking  steps to (i) consummate the Spin-Off (ii)  diversify its
operations  to  reduce dependency on sales to PMI, (iii) increase and extend the
RZB  Credit  Facility  and  (iv)  raise  additional  debt and/or equity capital.

     Rio  Vista  Energy  Partners L.P.  On July 10, 2003, the Company formed Rio
Vista  Energy  Partners  L.P.  (the "Partnership"), a Delaware partnership.  The
Partnership  is  a  wholly owned subsidiary of the Company.  The Partnership has
two  subsidiaries,  Rio Vista Operating Partnership L.P. (.1% owned by Rio Vista
Operating  G.P.  LLC  and 99.9% owned by the Company) and Rio Vista Operating GP
LLC  (wholly owned by the Partnership).  The above subsidiaries are newly formed
and  are  currently  inactive.

     The  Company formed the Partnership for the purpose of transferring a 99.9%
interest in Rio Vista Operating Partnership L.P. (L.P. Transfer), which will own
substantially  all  of  the  Company's  owned  pipeline  and  terminal assets in
Brownsville  and  Matamoros (the "Asset Transfer"), in exchange for a 2% general
partner interest and a 98% limited partnership interest in the Partnership.  The
Company  intends  to  spin  off  100% of the limited partner units to its common
stockholders  (the  "Spin-Off"),  resulting  in  the  Partnership  becoming  an
independent  public  company.  The remaining 2% general partner interest will be
initially  owned  and  controlled  by  the  Company  and  the  Company  will  be
responsible  for  the  management of the Partnership.   The Company will account
for  the  Spin-Off  at  historical  cost.


                                       30
<PAGE>
     During September 2003, the Company's Board of Directors and the Independent
Committee  of its Board of Directors formally approved the terms of the Spin-Off
and  the  Partnership filed a Form 10 registration statement with the Securities
and Exchange Commission.  The Form 10 has subsequently been amended. The amended
Form  10 was filed on March 5, 2004. The Board of Directors anticipates that the
Spin-Off  will  occur  in  2004, subject to a number of conditions including the
absence  of any contractual and regulatory restraints or prohibitions preventing
the  consummation of the Spin-Off; and final action by the Board of Directors to
set the record date and distribution date for the Spin-Off and the effectiveness
of  the  registration  statement.

     Each shareholder of the Company will receive one common unit of the limited
partnership  interest in the Partnership for every eight shares of the Company's
common  stock  owned  as  of  the  record  date.

     Warrants  issued  to  holders  of  the existing unexercised warrants of the
Company  will  be  exchanged  in connection with the Spin-Off whereby the holder
will  receive  options to acquire unissued units in the Partnership and unissued
common  shares of the Company in exchange for the existing warrants.  The number
of  units  and  shares subject to exercise and the exercise price will be set to
equalize  each  option's  value  before  and  after  the  Spin-Off.

     Ninety-eight percent of the cash distributions from the Partnership will be
distributed to the limited unit holders and the remaining 2% will be distributed
to  the  general  partner  for  distributions  up  to  $1.25  per  unit annually
(approximately  $2.5  million per year).  Distributions in excess of that amount
will  be  shared  by the limited unit holders and the general partner based on a
formula  whereby  the  general  partner  will  receive  disproportionately  more
distributions  per  unit  than  the  limited  unit  holders  as  annual  cash
distributions  exceed  certain  milestones.

     Subsequent  to the L.P. Transfer, the Partnership will sell LPG directly to
PMI  and  will purchase LPG from the Company under a long-term supply agreement.
The  purchase  price of the LPG from the Company will be determined based on the
Company's  cost  to  acquire  LPG  and  a  formula that takes into consideration
operating  costs  of  both  the  Company  and  the  Partnership.

     In  connection with the Spin-Off, the Company will grant to Mr. Richter and
Shore  Capital  LLC (Shore), a company owned by Mr. Richard Shore, the Company's
President,  options  to  each  purchase  25%  of  the  limited liability company
interests in the general partner of the Partnership.  It is anticipated that Mr.
Richter  and  Shore  will  exercise these options immediately after the Spin-Off
occurs.  The  exercise price for each option will be the pro rata share (.5%) of
the Partnership's tax basis capital immediately after the Spin-Off.  The Company
will  retain  voting  control of the Partnership pursuant to a voting agreement.
In addition, Shore will also receive an option to acquire 5% of the common stock
of  the Company and 5% of the limited partnership interest in the Partnership at
a  combined  equivalent  exercise  price  of  $2.20  per  share.

     The  Partnership  will  be  liable  as  guarantor  for  the  Company's
collateralized  debt  (see note G) and will continue to pledge all of its assets
as  collateral.  The  Partnership  may  also  be  prohibited  from  making  any
distributions  to  unit  holders if it would cause an event of default, or if an
event  of  default is existing, under the Company's revolving credit facilities,
or  any  other  covenant  which  may exist under any other credit arrangement or
other  regulatory  requirement  at  the  time.

     The  Spin-Off will be a taxable transaction for federal income tax purposes
(and  may also be taxable under applicable state, local and foreign tax laws) to
both  the  Company  and  its  stockholders.  The  Company  intends  to treat the
Spin-Off as a "partial liquidation" for federal income tax purposes.  A "partial
liquidation"  is defined under Section 302(e) of the Code as a distribution that
(i)  is  "not  essentially  equivalent  to  a  dividend,"  as  determined at the
corporate  level, which generally requires a genuine contraction of the business
of  the  corporation,  (ii)  constitutes a redemption of stock and (iii) is made
pursuant  to  a plan of partial liquidation and within the taxable year in which
the  plan  is  adopted  or  within  the  succeeding  taxable  year.

     The  Company may have a federal income tax liability in connection with the
Spin-Off.  If  the  income  tax liability resulting from the Spin-Off is greater
than  $2.5  million, the Partnership has agreed to indemnify the Company for any
tax liability resulting from the transaction which is in excess of  that amount.

     Because  the  Company will have control of the Partnership by virtue of its
ownership  and  related  voting  control of the general partner, the Partnership
will  continue  to  be  consolidated  with  the Company and the interests of the
limited  partners  will  be  classified  as  minority  interests.



                                       31
<PAGE>
     Had  the  transaction  been  consummated  on January 31, 2004 the amount of
stockholders'  equity  reflected in the Company's pro forma consolidated balance
sheet  would  have  been  reduced  by  approximately  $14.5  million  with  a
corresponding  credit  to  minority  interest.  This  would  have  resulted  in
stockholders'  equity  of  approximately  $1.7  million.

     Had  the  transaction  been consummated as of August 1, 2003, the Company's
pro  forma  consolidated  net  income  for the six months ended January 31, 2004
would  have  decreased  to  a  net loss of approximately $(800,000) after giving
effect  to  minority  interest  related  to  the Spin-Off and estimated expenses
related  to the estimated intrinsic value associated with the options granted to
Shore  and  Mr.  Richter.  As  a result of the foregoing, income per share would
have  decreased  to  a  net  loss  per  share  of  approximately  $(.05).

     Liquidity:
     ---------

     The  Partnership  expects  that  once  the period for minimum distributions
commences,  it  will  distribute  to  the holders of common units on a quarterly
basis  at  least the minimum quarterly distribution of $0.25 per common unit, or
$1.00  per  year,  to  the  extent that the Partnership has sufficient cash from
operations  after  establishment  of  cash  reserves  and  payment  of expenses,
including  the  reimbursement of the general partner fees and the guarantees and
tax agreement discussed below. The Company intends to restructure certain of its
liabilities  and  obligations  to  the  extent  possible,  but  there  can be no
assurance  that  such  restructuring  can  be  accomplished  or  that it will be
adequate  to allow the Company to pay such liabilities and obligations when due.

     A  portion  of  the  Company's  current  cash  flow from operations will be
shifted  to  the  Partnership  as  a  result  of  the Spin-Off. As a result, the
Company's remaining cash flow from operations may not be sufficient to allow the
Company  to pay its federal income tax liability resulting from the Spin-Off, if
any,  and  other  liabilities  and obligations when due. The Partnership will be
liable  as guarantor and will continue to pledge all of its assets as collateral
on  the  Company's  existing  debt obligations. In addition, the Partnership has
agreed to indemnify the Company for a period of three years from the fiscal year
end  that  includes  the  date  of  the  Spin-Off  for  any  federal  income tax
liabilities  resulting from the Spin-Off in excess of $2.5 million. However as a
result  of  the distributions, the Partnership may not have sufficient cash flow
to  pay  any  obligations  related  to  its  guarantees  and  tax  agreement.

     If  the Company's cash flow from operations is not adequate to satisfy such
payment  of  liabilities and obligations and/or tax liabilities when due and the
Partnership  is  unable  to  satisfy  its  guarantees and /or tax agreement, the
Company  may  be  required to pursue additional debt and/or equity financing. In
such  event, the Company's management does not believe that the Company would be
able  to obtain such financing from traditional commercial lenders. In addition,
there  can  be  no assurance that such additional financing will be available on
terms  attractive to the Company or at all. If additional financing is available
through  the  sale  of  the Company's equity and/or other securities convertible
into  equity  securities  through  public or private financings, substantial and
immediate  dilution  to  existing  stockholders may occur. There is no assurance
that  the  Company  would  be able to raise any additional capital if needed. If
additional financing cannot be accomplished and the Company is unable to pay its
liabilities  and  obligations  when  due  or  to  restructure  certain  of  its
liabilities  and  obligations,  the  Company  may  suffer  material  adverse
consequences  to  its  business,  financial condition and results of operations.


                                       32
<PAGE>
     Contractual  Obligations  and  Commercial  Commitments.  The following is a
summary  of  the  Company's  estimated  minimum  contractual  obligations  and
commercial obligations as of January 31, 2004.  Where applicable, LPG prices are
based  on the January 2004 monthly average as published by Oil Price Information
Services.

<TABLE>
<CAPTION>
                                                            PAYMENTS DUE BY PERIOD
                                                             (AMOUNTS IN MILLIONS)
                                     -----------------------------------------------------
                                                      Less than     1-3     4-5     After
Contractual Obligations                   Total         1 Year     Years   Years   5 Years
------------------------------------  --------------  ----------  -------  ------  --------
<S>                                   <C>             <C>         <C>      <C>     <C>
Long-Term Debt Obligations            $            -  $        -  $     -  $    -  $      -
Operating Leases                                12.1         1.4      2.8     2.6       5.3
LPG Purchase Obligations                       810.1       174.9    329.9   229.3      76.0
Other Long-Term Obligations                        -           -        -       -         -
                                      --------------  ----------  -------  ------  --------
  Total Contractual Cash Obligations  $        822.2  $    176.3  $ 332.7  $231.9  $   81.3
                                      ==============  ==========  =======  ======  ========

                                                      AMOUNT OF COMMITMENT EXPIRATION
                                                                 PER PERIOD
                                                           (AMOUNTS IN MILLIONS)
                                     -----------------------------------------------------
Commercial                            Total Amounts   Less than    1 - 3   4 - 5    Over
Commitments                             Committed       1 Year     Years   Years   5 Years
------------------------------------  --------------  ----------  -------  ------  --------

Lines of Credit                       $            -  $        -  $     -  $    -  $      -
Standby Letters of Credit                       15.3        15.3        -       -         -
Guarantees                                       N/A         N/A      N/A     N/A       N/A
Standby Repurchase Obligations                   N/A         N/A      N/A     N/A       N/A
Other Commercial Commitments                     N/A         N/A      N/A     N/A       N/A
                                      --------------  ----------  -------  ------  --------
  Total Commercial Commitments        $         15.3  $     15.3  $     -  $    -  $      -
                                      ==============  ==========  =======  ======  ========
</TABLE>


                                       33
<PAGE>
STATEMENT  BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED  PUBLIC  ACCOUNTANTS.

     The  unaudited consolidated financial statements included in this filing on
Form  10-Q  have  been reviewed by Burton McCumber & Cortez, L.L.P., independent
certified  public  accountants,  in  accordance  with  established  professional
standards  and  procedures  for  such  review.  The  report of Burton McCumber &
Cortez,  L.L.P.  commenting  on  their  review,  accompanies  the  unaudited
consolidated  financial  statements  included  in  Item  1  of  Part  I.


ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

     Market  risk  is  the  risk  of loss arising from adverse changes in market
rates  and  prices.  Because  the  Company primarily sells LPG on a fixed margin
basis  and does not expect to hold inventory of LPG, the Company is not expected
to be exposed to market risk for fluctuations in the price of LPG. To the extent
the  Company ever maintains quantities of LPG inventory in excess of commitments
for  quantities of undelivered LPG and/or has commitments for undelivered LPG in
excess  of  inventory  balances,  the  Company  would  be exposed to market risk
related  to  the  volatility  of  LPG  prices.  In the event that such inventory
balances  were  to  exceed  commitments  for  undelivered LPG, during periods of
falling LPG prices, the Company may sell excess inventory to customers to reduce
the  risk  of  these  price  fluctuations.  In  the  event  that commitments for
undelivered LPG were to exceed such inventory balances, the Company may purchase
contracts  which  protect  us  against  future  price  increases  of  LPG.

     The  Company  does  not  maintain  quantities of LPG inventory in excess of
quantities  actually  ordered  by PMI.  Therefore, the Company has not currently
entered into and does not currently expect to enter into any arrangements in the
future  to  mitigate  the  impact  of  commodity  price  risk.

     The  Company  has  historically borrowed only at fixed interest rates.  All
current  interest  bearing  debt  is at a fixed rate.  Trade accounts receivable
from the Company's limited number of customers and the Company's trade and other
accounts  payable  do not bear interest.  The Company's credit facility with RZB
does  not bear interest since generally no cash advances are made to the Company
by  RZB.  Fees  paid  to RZB for letters of credit are based on a fixed schedule
provided  in the Company's agreement with RZB.  Therefore, the Company currently
has  limited,  if  any,  interest  rate  risk.

     The  Company  routinely  converts  U.S.  dollars  into Mexican pesos to pay
terminal  operating  costs  and income taxes.  Such costs have historically been
less  than $1 million per year and the Company expects such costs will remain at
less than $1 million dollars in any year.  The Company does not maintain Mexican
peso bank accounts with other than nominal balances.  Therefore, the Company has
limited,  if  any,  risk  related  to  foreign  currency  exchange  rates.


ITEM  4.  CONTROLS  AND  PROCEDURES.

     The  Company's  management,  including  the principal executive officer and
principal financial officer, conducted an evaluation of the Company's disclosure
controls  and  procedures,  as  such  term  is  defined  under  Rule  13a-14(c)
promulgated  under  the  Securities  Exchange Act of 1934, as amended, within 90
days  of  the  filing  date  of  this  report.  Based  on  their evaluation, the
Company's principal executive officer and principal accounting officer concluded
that  the  Company's  disclosure  controls  and  procedures  are  effective.

     There  have  been no significant changes (including corrective actions with
regard  to  significant  deficiencies  or  material weaknesses) in the Company's
internal  controls  or  in  other  factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph above.


                                       34
<PAGE>
PART  II

ITEM 1.   LEGAL PROCEEDINGS

          See  note  I  to  the  accompanying  unaudited  consolidated financial
          statements  and note K to the Company's Annual Report on Form 10-K for
          the  fiscal  year  ended  July  31,  2003.

ITEM 2.   CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
          EQUITY SECURITIES

          See  note  H  to  the  accompanying  unaudited  consolidated financial
          statements  and  notes  I and J to the Company's Annual Report on Form
          10-K  for  the  fiscal  year  ended  July  31,  2003,  for information
          concerning  certain  sales  of  Securities.

          In  connection with the issuances of securities discussed in note I to
          the  accompanying  unaudited  consolidated  financial  statements, the
          transactions were issued without registration under the Securities Act
          of  1933,  as  amended,  in  reliance  upon  the  exemptions  from the
          registration provisions thereof, contained in Section 4(2) thereof and
          Rule  506  of  Regulation  D  promulgated  thereunder.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None.

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

          None.

ITEM 5.   OTHER INFORMATION

          None.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

     a.   Exhibits

     THE FOLLOWING EXHIBITS ARE INCORPORATED HEREIN BY REFERENCE:

     Exhibit  No.
     ------------

     10.01     LPG  sales  agreement  entered  into  as  of March 1, 2002 by and
               between  Penn  Octane  Corporation  ("Seller") and P.M.I. Trading
               Limited  ("Buyer").  (Incorporated  by reference to the Company's
               Quarterly  Report  on  Form  10-Q  for the quarterly period ended
               January 31, 2002 filed on June 13, 2002, SEC File No. 000-24394).

     10.02     Settlement  agreement,  dated  as of March 1, 2002 by and between
               P.M.I. Trading Limited and Penn Octane Corporation. (Incorporated
               by  reference  to the Company's Quarterly Report on Form 10-Q for
               the  quarterly  period  ended  January 31, 2002 filed on June 13,
               2002,  SEC  File  No.  000-24394).

     10.03     Form  of Amendment to Promissory Note (the "Note") of Penn Octane
               Corporation  (the  "Company")  due December 15, 2002, and related
               agreements  and  instruments  dated December 9, 2002, between the
               Company  and the holders of the Notes. (Incorporated by reference
               to  the Company's Quarterly Report on Form 10-Q for the quarterly
               period  ended  January 31, 2003 filed on March 20, 2003, SEC File
               No.  000-24394).

     10.04     Employee  contract  entered  into  and  effective  July 29, 2002,
               between  the  Company  and  Jerome  B.  Richter. (Incorporated by
               reference  to the Company's Quarterly Report on Form 10-Q for the
               quarterly  period ended January 31, 2003 filed on March 20, 2003,
               SEC  File  No.  000-24394).


                                       35
<PAGE>

THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

     10.05     Employee contract entered into and effective May 13, 2003,
               between the Company  and  Richard Shore,  Jr.

     15        Accountant's  Acknowledgment

     31.1      Certification  Pursuant  to Rule 13a - 14(a) / 15d - 14(a) of the
               Exchange  Act.

     31.2      Certification  Pursuant  to Rule 13a - 14(a) / 15d - 14(a) of the
               Exchange  Act.

     32        Certification  Pursuant  to  18  U.S.C.  Section  1350 as Adopted
               Pursuant  to  Section  906  of  the  Sarbanes -Oxley Act of 2002.

     b.        Reports  on  Form  8-K

                  None.


                                       36
<PAGE>
                                   SIGNATURES

     Pursuant  to  the requirements of the Securities Exchange Act of 1934, this
report  has been signed by the following persons on behalf of the registrant and
in  the  capacities  and  on  the  dates  indicated.


                           PENN OCTANE CORPORATION


May 21, 2004               By:   /s/Ian T. Bothwell
                                 --------------------------------------------
                                 Ian T. Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                 Chief Financial Officer


                                       37
<PAGE>