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 April 30, 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                          (I.R.S. Employer
    of Incorporation or Organization)                     Identification No.)

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

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

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

     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
June  11,  2004  was  15,285,245.


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


               ITEM                                                               PAGE NO.
               ----                                                               --------
<S>            <C>                                                                <C>

Part I     1.  Financial  Statements

               Independent  Certified  Public  Accountants' Review Report             3

               Consolidated  Balance  Sheets  as  of  April  30,  2004
               (unaudited)and  July  31,  2003                                       4-5

               Unaudited  Consolidated  Statements  of  Operations for the three
               months and  nine  months  ended  April  30,  2004  and  2003           6

               Unaudited  Consolidated  Statements  of  Cash  Flows for the
               nine monthsended  April  30,  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
</TABLE>


                                        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  April  30,  2004,  and the related consolidated
statements  of  operations  for the three months and nine months ended April 30,
2004  and 2003 and the consolidated statements of cash flows for the nine months
ended  April  30,  2004  and  2003.  These  financial  statements  are  the
responsibility  of  the  Company's  management.

We  conducted  our review in accordance with the standards of the Public Company
Accounting  Oversight  Board  (United  States).  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 the
standards  of  the  Public  Company Accounting Oversight Board, 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  United  States  generally  accepted  accounting  principles.

We  have  previously  audited,  in  accordance  with the standards of the Public
Company  Accounting  Oversight  Board  (United States), 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
May 28, 2004


                                        3
<PAGE>
<TABLE>
<CAPTION>
PART  I
ITEM  1.
                               PENN OCTANE CORPORATION AND SUBSIDIARIES

                                     CONSOLIDATED BALANCE SHEETS

                                                ASSETS

                                                                             April 30,
                                                                               2004        July 31,
                                                                            (Unaudited)      2003
                                                                            ------------  -----------
<S>                                                                         <C>           <C>
Current Assets
      Cash                                                                  $     17,570  $    71,064

      Restricted cash                                                          4,726,845    3,404,782

      Trade accounts receivable (less allowance for doubtful accounts of
      $0 at April 30, 2004 and $5,783 at July 31, 2003)                        6,853,054    4,143,458

      Inventories                                                                828,798      878,082

      Assets held for sale                                                             -      720,000

      Prepaid expenses and other current assets                                  183,697      476,109
                                                                            ------------  -----------

        Total current assets                                                  12,609,964    9,693,495

Property, plant and equipment - net                                           16,993,392   17,677,830

Lease rights (net of accumulated amortization of $741,882 and $707,535 at
April 30, 2004 and July 31, 2003)                                                412,157      446,504

Other non-current assets                                                          18,130       19,913
                                                                            ------------  -----------

          Total assets                                                      $ 30,033,643  $27,837,742
                                                                            ============  ===========
</TABLE>

   The accompanying notes and accountants' report are an integral part of these
                                   statements.


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

                                 CONSOLIDATED BALANCE SHEETS - CONTINUED

                                  LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                               April 30,
                                                                                 2004           July 31,
                                                                              (Unaudited)         2003
                                                                            ---------------  ---------------
<S>                                                                         <C>              <C>
Current Liabilities

   Current maturities of long-term debt                                     $      162,694   $      746,933

   Short-term debt                                                                       -        1,744,128

   LPG trade accounts payable                                                    8,869,912        7,152,098

   Other accounts payable                                                        1,369,315        2,470,880

   Foreign taxes payable                                                            43,914           60,000

   Accrued liabilities                                                           1,062,197        1,083,966
                                                                            ---------------  ---------------

      Total current liabilities                                                 11,508,032       13,258,005

Long-term debt, less current maturities                                          1,706,220           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 April 30, 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 April 30,
   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 April 30, 2004
   and July 31, 2003                                                               152,852          152,747

   Additional paid-in capital                                                   28,460,971       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 April 30,
   2004 and July 31, 2003                                                     (  2,728,000)    (  2,897,520)

   Accumulated deficit                                                       (   9,066,432)   (  11,033,791)
                                                                            ---------------  ---------------

   Total stockholders' equity                                                   16,819,391       14,519,737
                                                                            ---------------  ---------------

       Total liabilities and stockholders' equity                           $   30,033,643   $   27,837,742
                                                                            ===============  ===============
</TABLE>

    The accompanying notes and accountants' report are an integral part of these
                                   statements.


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

                                             CONSOLIDATED STATEMENTS OF OPERATIONS

                                                          (UNAUDITED)


                                                                        Three Months Ended                 Nine Months Ended
                                                           -----------------------------------------  ----------------------------
                                                                April 30,             April 30,         April 30,      April 30,
                                                                   2004                 2003              2004           2003
                                                           --------------------  -------------------  -------------  -------------
<S>                                                        <C>                   <C>                  <C>            <C>

Revenues                                                   $        42,798,287   $       45,454,607   $131,957,252   $126,517,197
Cost of goods sold                                                  40,577,382           43,377,776    124,378,138    118,541,576
                                                           --------------------  -------------------  -------------  -------------
    Gross profit                                                     2,220,905            2,076,831      7,579,114      7,975,621
Selling, general and administrative expenses
    Legal and professional fees                                        363,859              403,511      1,542,254      1,497,618
    Salaries and payroll related expenses                              613,601              462,515      1,747,941      1,432,348
    Other                                                              210,476              289,257        992,756        755,883
                                                           --------------------  -------------------  -------------  -------------
                                                                     1,187,936            1,155,283      4,282,951      3,685,849

    Estimated reduction in value of assets held for sale                     -                    -       (500,000)             -
                                                           --------------------  -------------------  -------------  -------------
      Operating income                                               1,032,969              921,548      2,796,163      4,289,772
Other income (expense)
    Interest and LPG financing expense                                (332,796)            (591,535)    (1,047,380)    (1,385,570)
    Interest income                                                      9,817                6,829         54,992         89,272
    Other income                                                             -                    -        210,000              -
                                                           --------------------  -------------------  -------------  -------------
    Income before taxes                                                709,990              336,842      2,013,775      2,993,474
Benefit (provision) for income tax                                     (34,986)                   -        (46,414)       100,000
                                                           --------------------  -------------------  -------------  -------------
        Net income                                         $           675,004   $          336,842   $  1,967,361   $  3,093,474
                                                           ====================  ===================  =============  =============

Net income per common share                                $              0.04   $             0.02   $       0.13   $       0.21
                                                           ====================  ===================  =============  =============
Net income per common share assuming dilution              $              0.04   $             0.02   $       0.13   $       0.21
                                                           ====================  ===================  =============  =============
Weighted average common shares outstanding                          15,285,245           15,131,455     15,312,301     14,954,499
                                                           ====================  ===================  =============  =============
</TABLE>



    The accompanying notes and accountants' report are an integral part of these
                                   statements.


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

                             CONSOLIDATED STATEMENTS OF CASH FLOWS

                                          (UNAUDITED)

                                                                         Nine months Ended
                                                                    --------------------------
                                                                      April 30,     April 30,
                                                                        2004          2003
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Cash flows from operating activities:
Net income                                                          $ 1,967,361   $ 3,093,474
Adjustments to reconcile net income to net cash (used in) provided
  by operating activities:
   Depreciation and amortization                                        699,312       743,218
   Amortization of lease rights                                          34,347        34,347
   Non-employee stock based costs                                        93,651       135,318
   Amortization of loan discount related to detachable warrants         113,042       194,002
   Interest expense associated with exchange of debt                          -        68,000
   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                                                  -      (231,925)
Changes in current assets and liabilities:
   Trade accounts receivable                                         (2,709,597)   (3,143,439)
   Inventories                                                           49,284       146,542
   Prepaid and other current assets                                     198,761      (648,775)
   LPG trade accounts payable                                         1,717,814      (222,185)
   Other accounts payable and accrued liabilities                    (1,048,062)   (1,645,851)
   Foreign taxes payable                                                (16,086)            -
                                                                    ------------  ------------
     Net cash provided by (used in) operating activities              1,567,493    (1,544,515)
Cash flows from investing activities:
   Proceeds from the sale of equipment                                  220,000       276,000
   Capital expenditures                                                 (14,876)     (300,901)
   (Increase) decrease in other non-current assets                        1,784       101,828
                                                                    ------------  ------------
    Net cash provided by investing activities                           206,908        76,927
Cash flows from financing activities:
   (Increase) decrease in restricted cash                            (1,322,063)       24,044
   Revolving credit facilities                                                -     2,150,788
   Issuance of common stock                                             122,188             -
   Issuance of debt                                                     366,238       584,712
   Reduction in debt                                                   (994,258)   (1,382,965)
                                                                    ------------  ------------
    Net cash (used in) provided by financing activities              (1,827,895)    1,376,579
                                                                    ------------  ------------
        Net decrease in cash                                            (53,494)      (91,009)
Cash at beginning of period                                              71,064       130,954
                                                                    ------------  ------------
Cash at end of period                                               $    17,570   $    39,945
                                                                    ============  ============

Supplemental disclosures of cash flow information:
   Cash paid during the period for:
   Interest and LPG financing                                       $   944,108   $ 1,132,224
                                                                    ============  ============
Supplemental disclosures of noncash transactions:
   Equity-common stock and warrants issued                          $   501,654   $ 1,314,665
                                                                    ============  ============
   Mortgage receivable/ note payable                                $         -   $(1,935,723)
                                                                    ============  ============
   Equipment exchanged for note receivable                          $         -   $   720,000
                                                                    ============  ============
   Stock exchanged for note receivable                              $   169,520   $         -
                                                                    ============  ============
</TABLE>

    The accompanying notes and accountants' report are an integral part of these
                                  statements.


                                        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 84.5% and 83.8% of the Company's
     total  revenues  for  the  three  and  nine  months  ended  April 30, 2004,
     respectively.  See  notes  J,  K  and  M.

     During  June  2004,  the Company began operations as a reseller of gasoline
     and  diesel  fuel  through  access to certain pipeline and terminal systems
     located  in  California,  Arizona,  Nevada  and  Texas (Reseller Business).

     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  April  30,  2004, the
     unaudited  consolidated  statements  of operations for the three months and
     nine  months  ended  April 30, 2004 and 2003 and the unaudited consolidated
     statements of cash flows for the nine months ended April 30, 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 April 30, 2004, the unaudited consolidated results of operations for
     the  three  months  and  nine  months ended April 30, 2004 and 2003 and the
     unaudited  consolidated  statement  of cash flows for the nine months ended
     April  30,  2004  and  2003.


                                        8
<PAGE>
                    Penn Octane Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE A - ORGANIZATION - CONTINUED

     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.


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 April 30, 2004
                                        -----------------------------------------
                                        Income (Loss)      Shares      Per-Share
                                         (Numerator)    (Denominator)    Amount
                                        --------------  -------------  ----------
<S>                                     <C>             <C>            <C>
Net income (loss)                       $      675,004

BASIC EPS
Net income (loss) available to common
   stockholders                                675,004     15,285,245  $     0.04
                                                                       ==========

EFFECT OF DILUTIVE SECURITIES
Warrants                                             -              -
                                        --------------  -------------

DILUTED EPS
Net income (loss) available to common
stockholders                            $      675,004     15,285,245  $     0.04
                                        ==============  =============  ==========
</TABLE>


<TABLE>
<CAPTION>
                                        For the three months ended April 30, 2003
                                        -----------------------------------------
                                         Income (Loss)      Shares      Per-Share
                                           (Numerator)    (Denominator)    Amount
                                        --------------  -------------  ----------
<S>                                     <C>             <C>            <C>
Net income (loss)                       $      336,842

BASIC EPS
Net income (loss) available to common
   stockholders                                336,842     15,131,455  $     0.02
                                                                       ==========

EFFECT OF DILUTIVE SECURITIES
Warrants                                                         -        152,312
                                        --------------  -------------

DILUTED EPS
Net income (loss) available to common
   stockholders                         $      336,842     15,283,767  $     0.02
                                        ==============  =============  ==========
</TABLE>


                                        9
<PAGE>
                    Penn Octane Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
NOTE B - INCOME (LOSS) PER COMMON SHARE - CONTINUED


                                        For the nine months ended April 30, 2004
                                        -----------------------------------------
                                         Income (Loss)      Shares      Per-Share
                                           (Numerator)    (Denominator)    Amount
                                        --------------  -------------  ----------
<S>                                     <C>             <C>            <C>
Net income (loss)                       $    1,967,361

BASIC EPS
Net income (loss) available to common
   stockholders                              1,967,361     15,312,301  $     0.13
                                                                       ==========

EFFECT OF DILUTIVE SECURITIES
Warrants                                             -          7,266
                                        --------------  -------------

DILUTED EPS
Net income (loss) available to common
stockholders                            $    1,967,361     15,319,567  $     0.13
                                        ==============  =============  ==========
</TABLE>


<TABLE>
<CAPTION>
                                        For the nine months ended April 30, 2003
                                        -----------------------------------------
                                          Income (Loss)      Shares      Per-Share
                                          (Numerator)    (Denominator)    Amount
                                        --------------  -------------  ----------
<S>                                     <C>             <C>            <C>
Net income (loss)                       $    3,093,474

BASIC EPS
Net income (loss) available to common
   stockholders                              3,093,474     14,954,499  $     0.21
                                                                       ==========

EFFECT OF DILUTIVE SECURITIES
Warrants                                             -        107,481
                                        --------------  -------------

DILUTED EPS
Net income (loss) available to common
stockholders                            $    3,093,474     15,061,980  $     0.21
                                        ==============  =============  ==========
</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       Nine months Ended
                                                           --------------------  -------------------------
                                                          April 30,    April 30,   April 30,     April 30,
                                                             2004       2003        2004          2003
                                                           ---------  ---------  -----------  ------------
<S>                                                        <C>        <C>        <C>          <C>

Net income, as reported                                    $675,004   $336,842   $1,967,361   $ 3,093,474
Less:  Total stock-based employee compensation expense
   determined under fair value based method for all
   awards, net of related tax effects                       (14,587)   (96,743)     (82,360)   (1,282,534)
                                                           ---------  ---------  -----------  ------------
Net income, pro forma                                      $660,417   $240,099   $1,885,001   $ 1,810,940
                                                           =========  =========  ===========  ============


Net income per common share, as reported                   $   0.04   $   0.02   $     0.13   $      0.21
                                                           =========  =========  ===========  ============

Net income per common share, pro forma                     $   0.04   $   0.02   $     0.12   $      0.12
                                                           =========  =========  ===========  ============

Net income per common share assuming dilution, as
reported                                                   $   0.04   $   0.02   $     0.13   $      0.21
                                                           =========  =========  ===========  ============

Net income per common share assuming dilution, pro
forma                                                      $   0.04   $   0.02   $     0.12   $      0.12
                                                           =========  =========  ===========  ============
</TABLE>

     The  following assumptions were used for grants of warrants to employees in
     the  nine  months  ended  April  30, 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  nine  months  ended  April  30, 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>
                                                              April 30,      July 31,
                                                                2004          2003
                                                            ------------  ------------
<S>                                                         <C>           <C>
LPG:
    Midline pump station                                    $ 2,326,984   $ 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             -
                                                            ------------  ------------
                                                              7,156,758     7,247,794
                                                            ------------  ------------
    US - Mexico Pipelines and Matamoros Terminal
    Facility: (a)

    U.S. Pipelines and Rights of Way
    Mexico Pipelines and Rights of Way                        6,775,242     6,680,242
    Matamoros Terminal Facility                                 993,300       993,300
    Saltillo Terminal                                         5,107,514     5,107,514
    Land                                                      1,027,267     1,027,267
                                                                856,358       856,358
                                                            ------------  ------------
         Total LPG                                           14,759,681    14,664,681
                                                            ------------  ------------
Other:                                                       21,916,439    21,912,475
                                                            ------------  ------------
    Office equipment
    Software                                                    102,412        93,201
                                                                 77,590        75,890
                                                            ------------  ------------
                                                                180,002       169,091
                                                            ------------  ------------
    Less:  accumulated depreciation and amortization         22,096,441    22,081,566
                                                             (5,103,049)   (4,403,736)
                                                            ------------  ------------

                                                            $16,993,392   $17,677,830
                                                            ============  ============
<FN>

(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
     $6,205,724 and $6,427,387 of costs, located in Mexico at April 30, 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>
                                       April  30, 2004        July 31, 2003
                                    -------------------  ----------------------
                                     Gallons     LCM      Gallons      LCM
                                    ---------  --------  ---------  -----------
<S>                                 <C>        <C>       <C>        <C>
LPG:
  Leased Pipeline                   1,175,958  $728,358  1,175,958  $   638,623
  Brownsville Terminal Facility,
    Matamoros Terminal Facility
    and railcars                      162,164   100,440    440,771      239,368
                                    ---------  --------  ---------  -----------
  Markham Storage and other                 -          -       168           91
                                    1,338,122  $828,798  1,616,897  $   878,082
                                    =========  ========  =========  ===========
</TABLE>


<TABLE>
<CAPTION>
NOTE G - DEBT OBLIGATIONS

Debt consists of the following:
                                                                                         April 30,    July 31,
                                                                                            2004        2003
                                                                                         ----------  ----------
<S>                                                                                      <C>         <C>

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility.                                                     $        -  $  284,731

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility.                                                              -     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                                                     1,647,177   1,744,128

Other debt.                                                                                  84,237     186,524
                                                                                         ----------  ----------

              Total debt                                                                  1,868,914   2,551,061

Less:  Current maturities                                                                   162,694     746,933

          Short term debt                                                                         -   1,744,128
                                                                                         ----------  ----------

              Long-term debt                                                             $1,706,220  $   60,000
                                                                                         ==========  ==========
</TABLE>


                                       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  $194,245  related  to  the  fair  value  of  the newly issued, modified
     warrants  and  fees  of  which $36,420 has been amortized through April 30,
     2004.  In  addition, $76,622 of discount was amortized which related to the
     New  Accepting Noteholders' Notes, Additional Note and $250,000 Note during
     the nine months ended April 30, 2004. The Company is not obligated to issue
     the  Rio Vista warrants if the Spin-Off discussed in note M does not occur.
     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,  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. 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
     unsecured  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).


                                       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  April  30, 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
     and  gasoline  and  diesel  fuel  in connection with the Reseller Business.
     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.

     The  RZB  Credit Facility was to be reduced from $15,000,000 to $12,000,000
     after  January  31,  2004. However, from February 1, 2004 through April 30,
     2004,  the  RZB  Credit  Facility  remained  at  $15,000,000  pursuant  to
     month-to-month  extensions.  On  April 30, 2004, RZB agreed to maintain the
     RZB  Credit Facility at $15,000,000 through September 30, 2004. The Company
     and  RZB  are  currently in negotiations to maintain the credit facility at
     $15,000,000 for a longer term. In addition, RZB also approved the Company's
     use  of  the  RZB  Credit  Facility to purchase gasoline and diesel fuel in
     connection  with  the  Reseller  Business.

     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, 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  April  30,  2004 totaled approximately $9,800,000.

     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
     $4,274,275  at April 30, 2004). At April 30, 2004, the Company's borrowings
     and  commitments  were  less  than  the  amount  of  the  Assets.

     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.

     In  connection with the Company's Reseller Business, the Company has issued
     bonds  totaling  $662,000  to the states of California, Nevada, Arizona and
     Texas  (Bonds)  to  secure  payments of excise taxes due in connection with
     sales  of  gasoline  and  diesel  fuel.  The Bonds are partially secured by
     letters  of  credit  totaling $452,600. In addition, in connection with the
     Reseller  Business,  the  Company  issued a letter of credit of $284,000 in
     connection  with  the Company's use of pipeline and terminal systems from a
     third  party. The letters of credit issued have all been secured by cash in
     the  amount  of  $736,600  which  is  included  in  restricted  cash in the
     Company's  balance  sheet at April 30, 2004. No excise taxes were due as of
     April  30,  2004.


                                       17
<PAGE>
                    Penn Octane Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

     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.

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 is to
     be  reduced from $15,000,000 to $12,000,000 after September 30, 2004 unless
     a  further  extension  is  obtained.  The  Company and RZB are currently in
     negotiations  to  maintain  the credit facility at $15,000,000 for a longer
     term.  Since April 1, 2004 the Company has been operating on month-to-month
     contracts  with  PMI  (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,  if the Spin-Off occurs, 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.

     During  the  months  of April 2004, May 2004 and June 2004, the Company and
     PMI  have entered into monthly agreements for the sale of LPG (Monthly 2004
     Contracts).  Under  the  terms  of  the Monthly 2004 Contracts, the minimum
     monthly  quantity  of  LPG  to  be  purchased by PMI is 13,000,000 gallons.
     During  the  months  of  April  2004 and May 2004, the actual amount of LPG
     purchased  by  PMI  was  approximately  13,100,000  gallons  and 13,400,000
     gallons,  respectively.

     The  Company is continuing to negotiate for the extension and/or renewal of
     the  Contract.  There  is  no  assurance that the Contract will be extended
     and/or  renewed,  and  if so, that the terms will be more or less favorable
     than those of the Contract. Until the terms of a new long-term contract are
     reached,  the  Company  expects  to enter into monthly agreements with PMI.

     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's  long-term  supply agreements (Supply Contracts) provide for
     minimum  quantities  of  LPG  totaling approximately 22,100,000 gallons per
     month  although  the  Monthly 2004 Contracts provide for lesser quantities.
     The  actual  amounts  supplied  under  the  Supply  Contracts  averaged
     approximately  18,000,000  gallons per month during the period January 2004
     through  May  2004.

     During  December  2003,  the  Company  and  Koch Hydrocarbon Company (Koch)
     entered  into a new three year supply agreement (Koch Supply). The terms of
     the agreement are similar to the agreement previously in effect between the
     parties.  A  previous  supply agreement with Duke Energy NGL Services, Inc.
     which  expired  in  March  2004  was  not  renewed.

     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 or Koch 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.


                                       19
<PAGE>
                    Penn Octane Corporation and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


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.

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.  An  amended Form 10 was filed in May 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  April  30, 2004 the amount of
     stockholders'  equity  reflected  in  the  Company's pro forma consolidated
     balance  sheet  would have been reduced by approximately $14,700,000 with a
     corresponding  credit  to  minority  interest.  This would have resulted in
     stockholders'  equity  of  approximately  $2,100,000.

     Had  the  transaction  been consummated as of August 1, 2003, the Company's
     pro  forma consolidated net income for the nine months ended April 30, 2004
     would  have  decreased to a net loss of approximately $778,000 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
     $(0.05).


                                       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 nine months ended April 30, 2004, the Company derived
85%  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.

     During  June  2004,  the Company began operations as a reseller of gasoline
and  diesel fuel through access to certain pipeline and terminal systems located
in  California,  Arizona,  Nevada  and  Texas  (the  "Reseller  Business").


                                       22
<PAGE>
LPG SALES

     The  following  table  shows  the  Company's  volume  sold and delivered in
gallons  and  average  sales price for the three months ended April 30, 2004 and
2003;

<TABLE>
<CAPTION>
                                         2004   2003
                                        -----  -----
<S>                                    <C>    <C>

Volume Sold

     LPG (millions of gallons) - PMI     50.7   51.0
     LPG (millions of gallons) - Other   10.9   14.9
                                        -----  -----
                                         61.6   65.9
                                        =====  =====

Average sales price

    LPG (per gallon) - PMI              $0.71  $0.71
    LPG (per gallon) - Other             0.61   0.62
</TABLE>


RESULTS OF OPERATIONS

THREE  MONTHS  ENDED  APRIL  30, 2004 COMPARED WITH THREE MONTHS ENDED APRIL 30,
2003

     Revenues.  Revenues  for  the  three months ended April 30, 2004 were $42.8
million compared with $45.5 million for the three months ended April 30, 2003, a
decrease of $2.7 million or 5.8%. Of this decrease, $240,233 was attributable to
decreased  average  sales  prices of LPG sold to customers other than PMI during
the  three  months  ended  April  30,  2004,  $2.4  million  was attributable to
decreased  volumes  of  LPG  sold  to  customers other than PMI during the three
months  ended  April 30, 2004 and $166,548 was attributable to decreased volumes
of  LPG  sold  to  PMI  during  the three months ended April 30, 2004, partially
offset by $280,404 attributable to increases in average sales prices of LPG sold
to  PMI  during  the  three  months  ended  April  30,  2004.

     Cost of goods sold. Cost of goods sold for the three months ended April 30,
2004  was  $40.6  million compared with $43.4 million for the three months ended
April  30,  2003, a decrease of $2.8 million or 6.5%. Of this decrease, $296,648
was  attributable  to  decreases in the cost of LPG sold to PMI during the three
months  ended  April  30, 2004, $147,172 was attributable to decreased volume of
LPG  sold  to  PMI  during  the  three  months ended April 30, 2004, $45,287 was
attributable  to  decreased costs of LPG sold to customers other than PMI during
the  three  months  ended  April  30, 2004, and $2.5 million was attributable to
decreased volume of LPG sold to customers other than PMI during the three months
ended  April  30,  2004.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were $1.2 million for the three months ended April 30,
2004  compared  with  $1.2 million for the three months ended April 30, 2003, an
increase  of  $32,563  or 2.8%. The increase during the three months ended April
30, 2004 was principally due to increased salary related costs, partially offset
by reduced legal and other professional fees related to the Spin-Off and reduced
ad  valorem  and  asset  taxes.

     Other income (expense). Other income (expense) was $(322,979) for the three
months ended April 30, 2004, compared with $(584,706) for the three months ended
April  30,  2003.  The  decrease  in other expenses was due primarily to reduced
interest  and  LPG  financing  costs  resulting  from reduced debt and lower LPG
purchases  and decreased amortization of discounts on outstanding debt incurred.

     Income  tax.  The  Company  increased its estimate of Mexican income tax by
$34,986 and recorded U.S. federal income taxes of $10,000 related to alternative
minimum  taxes  for  the  three  months  ended  April  30,  2004.


                                       23
<PAGE>
NINE MONTHS ENDED APRIL 30, 2004 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2003

     Revenues.  Revenues  for  the  nine months ended April 30, 2004 were $131.9
million  compared  with $126.5 million for the nine months ended April 30, 2003,
an  increase  of  $5.4  million  or  4.3%.  Of  this increase, $11.3 million was
attributable  to increases in average sales prices of LPG sold to PMI during the
nine months ended April 30, 2004, and $3.3 million was attributable to increased
average  sales  prices  of  LPG sold to customers other than PMI during the nine
months  ended  April  30, 2004, partially offset by $2.7 million attributable to
decreased volumes of LPG sold to PMI during the nine months ended April 30, 2004
and  $6.3  million  attributable  to  decreased volumes of LPG sold to customers
other  than  PMI  during  the  nine  months  ended  April  30,  2004.

     Cost  of goods sold. Cost of goods sold for the nine months ended April 30,
2004  was  $124.4 million compared with $118.5 million for the nine months ended
April  30,  2003,  an  increase of $5.8 million or 4.9%. Of this increase, $10.6
million  was attributable to increases in the cost of LPG sold to PMI during the
nine  months ended April 30, 2004 and $3.9 million was attributable to increased
costs of LPG sold to customers other than PMI during the nine months ended April
30,  2004,  partially offset by $6.5 million attributable to decreased volume of
LPG sold to customers other than PMI during the nine months ended April 30, 2004
and  $2.4 million attributable to decreased volume of LPG sold to PMI during the
nine  months  ended  April  30,  2004.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $4.3 million for the nine months ended April 30,
2004  compared  with  $3.7  million for the nine months ended April 30, 2003, an
increase  of  $597,102 or 16.2%. The increase during the nine months ended April
30, 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) and estimated reduction in value of assets held for
sale.  Other income (expense) was $(1.3) million for the nine months ended April
30, 2004, compared with $(1.3) million for the nine months ended April 30, 2003.
Included  in  other  expenses was additional costs associated with the estimated
reduction  in  value  of assets held for sale of $500,000 during the nine months
ended  April 30, 2004, partially offset by reduced interest costs resulting from
reduced  debt,  decreased amortization of discounts on outstanding debt incurred
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  $16,086  and  recorded  U.S.  federal  income  taxes  of  $62,500 related to
alternative  minimum  taxes  for  the  nine  months  ended  April  30,  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 Notes
and the RZB Credit Facility. The RZB Credit Facility is to be reduced from $15.0
million  to $12.0 million after September 30, 2004 unless a further extension is
obtained.  The  Company  and  RZB  are currently in negotiations to maintain the
credit  facility  at  $15.0  million  for a longer term. 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.  Since April 1, 2004 the Company has been operating on
month-to-month  contracts  with  PMI  (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.


                                       24
<PAGE>
     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 nine months
ended  April  30,  2004,  and  2003.  All  information  is  in  thousands.

<TABLE>
<CAPTION>
                                                            2004      2003
                                                          --------  --------
<S>                                                       <C>       <C>

Net cash provided by (used in) operating activities. . .  $ 1,567   $(1,544)

Net cash provided by investing activities. . . . . . . .      207        77

Net cash (used in) provided by financing activities. . .   (1,828)    1,376
                                                          --------  --------

Net increase (decrease) in cash . . . . . . . . . .       $   (54)  $   (91)
                                                          ========  ========
</TABLE>

     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 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.

     During  the  months  of April 2004, May 2004 and June 2004, the Company and
PMI  have  entered  into  monthly  agreements for the sale of LPG ("Monthly 2004
Contracts").  Under the terms of the Monthly 2004 Contracts, the minimum monthly
quantity  of  LPG  to  be  purchased  by PMI is 13.0 million gallons. During the
months of April 2004 and May 2004, the actual amount of LPG purchased by PMI was
approximately  13.1  million  gallons  and  13.4  million gallons, respectively.

     The  Company is continuing to negotiate for the extension and/or renewal of
the  Contract.  There  is no assurance that the Contract will be extended and/or
renewed,  and if so, that the terms will be more or less favorable than those of
the  Contract.  Until  the  terms  of  a new long-term contract are reached, the
Company  expects  to  enter  into  monthly  agreements  with  PMI.

     The  Company  believes  that  the reduction of volume commitments for April
2004 and May 2004 is based on additional LPG production by PEMEX being generated
from  the Burgos Basin field in Reynosa, Mexico, an area within the proximity of
the  Company's  Mexican  terminal  facilities.

     The change in volumes from 17.0 million gallons to 13.0 million gallons for
April  2004  had  the impact of reducing gross profit by approximately $340,000,
which  was partially offset by reduced variable costs of approximately $100,000.
In  addition,  the Company was also able to negotiate more favorable terms under
its  LPG supply contracts during the quarter ended April 30, 2004 which amounted
to  savings  of  approximately $115,000 per month and will provide an additional
benefit  of approximately $40,000 per month beginning October 2004. Furthermore,
the  termination of certain other supply agreements during the nine months ended
April  30,  2004 totaling approximately 4.4 million gallons per month allows the
Company  to  reduce  losses  from  the  disposal  of  excess  inventory.

     The impact of further reductions in volume purchases, if any, below amounts
provided  for  under  the  Monthly  2004  Contracts,  would  impact  the Company
unfavorably  to  the  extent  that  the  Company  is unable to obtain additional
favorable  price and/or volume concessions from LPG suppliers and the Company is
forced  to  accept  similar  or  lower  prices  for  sales  to  PMI.


                                       25
<PAGE>
     If  LPG  sales to PMI are made with terms, volumes and/or margins which are
significantly  less  favorable  than  the current amounts provided for under the
Monthly  2004  Contracts and the Company is unable to obtain further benefits as
described  above,  the Company would suffer material adverse consequences to its
business,  financial  condition  and  results  of  operations.

     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's  long-term  supply agreements (the
"Supply Contracts") provide for minimum quantities of LPG totaling approximately
22.1  million  gallons per month although the Monthly 2004 Contracts provide for
lesser  quantities.  The  actual  amounts  supplied  under  the Supply Contracts
averaged  approximately 18.0 million gallons per month during the period January
2004  through  May  2004.

     During  December  2003,  the  Company and Koch Hydrocarbon Company ("Koch")
entered into a new three year supply agreement (the "Koch Supply"). The terms of
the  agreement  are  similar  to  the agreement previously in effect between the
parties.  A  previous supply agreement with Duke Energy NGL Services, Inc. which
expired  in  March  2004  was  not  renewed.

     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  or  Koch  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.

     Proceeds  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".


                                       26
<PAGE>
     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  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.

     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.


                                       27
<PAGE>
     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.

     Reseller  Business. 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 fuel. The Company commenced operations during
June  2004.

     Credit  Arrangements. As of April 30, 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  and gasoline and diesel fuel in connection with the Reseller
Business.  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 (the "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. . The RZB Credit Facility was to be reduced from $15.0 million
to  $12.0 million after January 31, 2004. However, from February 1, 2004 through
April  30,  2004, the RZB Credit Facility has remained at $15.0 million pursuant
to  month-to-month extensions. On April 30, 2004, RZB agreed to maintain the RZB
Credit Facility at $15.0 million through September 30, 2004. The Company and RZB
are  currently  in negotiations to maintain the credit facility at $15.0 million
for  a  longer term. In addition, RZB also approved the Company's use of the RZB
Credit  Facility  to  purchase  gasoline  and diesel fuel in connection with the
Reseller  Business.

     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, Koch and/or
other  suppliers,  letters  of  credit  are  issued  on a monthly basis based on
anticipated  purchases.  Outstanding letters of credit at April 30, 2004 totaled
approximately  $9.8  million.


                                       28
<PAGE>
     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 $4.3 million
at  April 30, 2004). At April 30, 2004, the Company's borrowings and commitments
were  less  than  the  amount  of  the  Assets.

     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.

     In  connection with the Company's Reseller Business, the Company has issued
bonds  totaling  $662,000 to the states of California, Nevada, Arizona and Texas
(the "Bonds") to secure payments of excise taxes due in connection with sales of
gasoline  and  diesel fuel. The Bonds are partially secured by letters of credit
totaling  $452,600.  In  addition, in connection with the Reseller Business, the
Company  issued  a letter of credit of $284,000 in connection with the Company's
use  of  pipeline and terminal systems from a third party. The letters of credit
issued have all been secured by cash in the amount of $736,600 which is included
in  restricted  cash in the Company's balance sheet at April 30, 2004. No excise
taxes  were  due  as  of  April  30,  2004.

     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.

     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,  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. 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.

     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.


                                       29
<PAGE>
     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  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.

     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.

     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 is to be
reduced  from  $15.0  million to $12.0 million after September 30, 2004 unless a
further extension is obtained. The Company and RZB are currently in negotiations
to  maintain the credit facility at $15.0 million for a longer term. Since April
1, 2004 the Company has been operating on month-to-month contracts with PMI (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,
if  the  Spin-Off  occurs,  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.


                                       30
<PAGE>
     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. (the "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.

     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. An amended
Form  10  was  filed  in  May  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  to  the  unaudited  consolidated  financial
statements)  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.


                                       31
<PAGE>
     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.

     Had  the  transaction  been  consummated  on  April  30, 2004 the amount of
stockholders'  equity  reflected in the Company's pro forma consolidated balance
sheet  would  have  been  reduced  by  approximately  $14.7  million  with  a
corresponding  credit  to  minority  interest.  This  would  have  resulted  in
stockholders'  equity  of  approximately  $2.1  million.

     Had  the  transaction  been consummated as of August 1, 2003, the Company's
pro forma consolidated net income for the nine months ended April 30, 2004 would
have  decreased to a net loss of approximately $(778,000) 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  $(0.05).

     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 April 30, 2004. Where applicable, LPG prices are
based  on  the  April 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                      11.8      1.4              2.8     2.6       5.0

LPG Purchase Obligations             633.0    142.3            261.0   190.1      39.6

Other Long-Term Obligations              -        -                -       -         -
                                    ------  -------  ---------------  ------  --------

Total Contractual Cash Obligations  $644.8  $ 143.7  $         263.8  $192.7  $   44.6
                                    ======  =======  ===============  ======  ========
</TABLE>


<TABLE>
<CAPTION>
                                               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 Year
-------------------------------  -------------  ------------  --------  --------  -------
<S>                              <C>            <C>           <C>       <C>       <C>

Lines of Credit                  $        -     $      -      $      -  $      -  $     -

Standby Letters of Credit                  9.8           9.8         -         -        -

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   $     9.8     $     9.8     $     -   $     -   $     -
                                  ============  ============  ========  ========  =======
</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 it 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 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).

10.05     Employee  contract  entered into and effective May 13, 2003, between
          the  Company  and Richard Shore, Jr. (Incorporated by reference to the
          Company's  Quarterly  Report  on Form 10-Q /A for the quarterly period
          ended January 31, 2004 filed on May 21, 2004, SEC File No. 000-24394).


                                       35
<PAGE>
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

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

          Company's  Current  Report  on Form 8-K filed on May 7, 2004 regarding
          the  Company's issuance of a press release regarding the expiration of
          its prior contract with P.M.I. Trading Limited ("PMI") and new monthly
          contracts  entered  into  with  PMI  for  April  and  May  2004.


                                       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



July 23, 2004        By:     /s/ Ian T.  Bothwell
                             --------------------
                             Ian T. Bothwell
                             Vice President, Treasurer, Assistant Secretary,
                               Chief Financial Officer


                                       37
<PAGE>