UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549



                                    FORM 10-Q


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

     For  the  quarterly  period  ended  April  30,  2001

                                       OR

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

     For  the  transition  period  from              to
                                        -------------   -------------

                       Commission file number:  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 Identification No.)
of Incorporation or Organization)


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

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

     Indicate  by  check  mark whether the registrant: (1) has filed all reports
required  to  be  filed by Section 13 or 15(d) of the Securities Exchange Act of
1934  during  the  preceding  12  months  (or  for  such shorter period that the
registrant  was required to file such reports), and (2) has been subject to such
filing  requirements  for  the  past  90  days.
Yes  X    No
    ----     ----

     The number of shares of Common Stock, par value $.01 per share, outstanding
on  May  31,  2001  was  14,412,011.


<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, 2001 (unaudited)        4-5
               and  July  31,  2000

               Consolidated  Statements  of  Operations  for  the  three  months
               and  nine  months  ended  April  30,  2001  and 2000 (unaudited)       6

               Consolidated  Statements  of  Cash  Flows  for  the  nine months
               ended  April  30,  2001  and  2000  (unaudited)                        7

               Notes  to  Consolidated  Financial  Statements  (unaudited)           8-25

          2.   Management's  Discussion  and  Analysis  of  Financial  Condition
               and  Results  of  Operations                                         26-38

          3.   Quantitative  and  Qualitative  Disclosures About Market Risk         38

Part II   1.   Legal  Proceedings                                                    39

          2.   Changes  in  Securities  and  Use  of  Proceeds                       39

          3.   Defaults  Upon  Senior  Securities                                    39

          4.   Submission  of  Matters  to  a  Vote  of  Security  Holders           39

          5.   Other  Information                                                    39

          6.   Exhibits  and  Reports  on  Form  8-K                               39-40

          7.   Signatures                                                           41
</TABLE>


                                        2
<PAGE>



             Independent Certified Public Accountants' Review Report


Board  of  Directors  and  Shareholders
Penn  Octane  Corporation

We  have  reviewed  the  accompanying  consolidated balance sheet of Penn Octane
Corporation  and  subsidiaries  (Company)  as of April 30, 2001, and the related
consolidated statements of operations for the three months and nine months ended
April  30,  2001  and 2000 and the consolidated statements of cash flows for the
nine  months  ended April 30, 2001 and 2000.  These financial statements are the
responsibility  of  the  Company's  management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A  review  of  interim financial
information  consists principally of applying analytical procedures to financial
data  and  making  inquiries of persons responsible for financial and accounting
matters.  It  is  substantially  less  in  scope  than  an  audit  conducted  in
accordance  with  auditing  standards generally accepted in the United States of
America,  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 review, we are not aware of any material modifications that should
be  made  to  the accompanying financial statements for them to be in conformity
with  accounting  principles generally accepted in the United States of America.

We  have  previously  audited,  in  accordance with auditing standards generally
accepted  in  the United States of America, the consolidated balance sheet as of
July  31,  2000,  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 29, 2000, we expressed an unqualified
opinion  on  those  consolidated  financial  statements.   Our  report  letter
contained  a  paragraph stating that conditions existed which raised substantial
doubt  about  the  Company's  ability  to  continue as a going concern.   In our
opinion,  the  information  set  forth  in the accompanying consolidated balance
sheet  as  of  July  31,  2000,  is  fairly stated, in all material respects, in
relation  to  the  consolidated  balance  sheet  from which it has been derived.


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

Brownsville,  Texas
June  5,  2001


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

                              PENN OCTANE CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED BALANCE SHEETS

                                               ASSETS


                                                                           April 30,
                                                                              2001       July 31,
                                                                          (Unaudited)      2000
                                                                          ------------  -----------
<S>                                                                       <C>           <C>
Current Assets
     Cash                                                                 $    145,518  $    25,491
     Trade accounts receivable, less allowance for doubtful accounts of
       $562,950 and $562,950                                                12,957,452    3,816,685
     Notes receivable                                                          433,760      770,016
     Inventories                                                             7,135,244    7,323,209
     Prepaid expenses and other current assets                                 638,834      338,187
     Property held for sale                                                          -    1,908,000
                                                                          ------------  -----------
        Total current assets                                                21,310,808   14,181,588
Property, plant and equipment - net                                         17,895,047   16,756,816
Lease rights (net of accumulated amortization of $604,496 and $570,150)        549,543      583,889
Mortgage receivable                                                          1,925,596            -
Other non-current assets                                                        21,120       14,870
                                                                          ------------  -----------
            Total assets                                                  $ 41,702,114  $31,537,163
                                                                          ============  ===========
</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,
                                                                              2001         July 31,
                                                                           (Unaudited)       2000
                                                                          -------------  ------------
<S>                                                                       <C>            <C>
Current Liabilities

   Current maturities of long-term debt                                   $    877,252    $3,859,266
   Short-term debt                                                           5,147,068     4,980,872
   Revolving line of credit                                                  7,923,001     3,538,394
   LPG trade accounts payable                                               11,299,867     5,226,958
   Other accounts payable and accrued liabilities                            3,108,397     2,833,434
                                                                          -------------  ------------
     Total current liabilities                                              28,355,585    20,438,924

Long-term debt, less current maturities                                      3,457,117     1,464,984

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, 2001 and July 31, 2000              -             -

   Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
   5,000,000 shares authorized; no shares issued and outstanding at April
   30, 2001 and July 31, 2000                                                        -             -

   Common stock - $.01 par value, 25,000,000 shares authorized;
   14,412,011 and 13,435,198 shares issued and outstanding at April 30,
   2001 and July 31, 2000                                                      144,120       134,352

   Additional paid-in capital                                               25,798,435    21,782,638

   Notes receivable from officers of the Company and a related party for
   exercise of warrants, less reserve of $569,849 and $496,077 at April 30,
   2001 and July 31, 2000                                                   (3,761,350)   (3,263,350)

   Accumulated deficit                                                     (12,291,793)   (9,020,385)
                                                                          -------------  ------------
   Total stockholders' equity                                                9,889,412     9,633,255
                                                                          -------------  ------------
       Total liabilities and stockholders' equity                          $41,702,114   $31,537,163
                                                                          =============  ============
</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,
                                                   2001          2000          2001           2000
                                               ------------  ------------  -------------  ------------
<S>                                            <C>           <C>           <C>            <C>
Revenues                                       $38,116,259   $25,683,797   $124,134,679   $60,661,528
Cost of goods sold                              37,838,026    25,873,726    122,223,000    58,661,806
                                               ------------  ------------  -------------  ------------
     Gross profit (loss)                           278,233      (189,929)     1,911,679     1,999,722
Selling, general and administrative expenses
     Legal and professional fees                   217,404       179,396        867,337       801,446
     Salaries and payroll related expenses         295,897       436,456        871,878       981,563
     Travel                                         53,107        36,669        153,560       124,652
     Other                                         228,008       191,660        579,039       515,897
                                               ------------  ------------  -------------  ------------
                                                   794,416       844,121      2,471,814     2,423,558
                                               ------------  ------------  -------------  ------------
       Operating (loss)                           (516,183)   (1,034,050)      (560,135)     (423,836)
Other income (expense)
     Interest expense                             (923,688)     (732,601)    (2,584,478)   (1,036,598)
     Interest income                                 8,728        23,470         31,019        29,856
     Settlement of litigation                      (34,000)            -       (148,173)            -
     Award from litigation, net                          -             -              -     3,036,638
                                               ------------  ------------  -------------  ------------
          Income (loss) before taxes            (1,465,143)   (1,743,181)    (3,261,767)    1,606,060
Provision for income taxes                           9,641        10,042          9,641        80,042
                                               ------------  ------------  -------------  ------------
               Net income (loss)               $(1,474,784)  $(1,753,223)  $ (3,271,408)  $ 1,526,018
                                               ============  ============  =============  ============

Net income (loss) per common share             $     (0.10)  $     (0.13)  $      (0.23)  $      0.12
                                               ============  ============  =============  ============
Net income (loss) per common share assuming
dilution                                       $     (0.10)  $     (0.13)  $      (0.23)  $      0.10
                                               ============  ============  =============  ============
Weighted average common shares outstanding      14,410,842    13,092,040     14,057,336    12,815,511
                                               ============  ============  =============  ============
</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,
                                                                                   2001             2000
                                                                              ---------------  --------------
<S>                                                                           <C>              <C>
Increase (Decrease) In Cash
Cash flows from operating activities:
Net income  (loss)                                                            $(   3,271,408)  $   1,526,018
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
     Depreciation and amortization                                                   577,983         174,033
     Amortization of lease rights                                                     34,346          34,346
     Amortization of loan discount                                                 1,384,080         566,062
     Other                                                                           255,054          93,333
Changes in current assets and liabilities:
     Trade accounts receivable                                                    (9,140,768)     (1,925,942)
     Inventories                                                                     187,965      (4,648,171)
     Prepaid and other current assets                                                 32,062         (55,581)
     LPG trade accounts payable                                                    6,072,909       4,089,897
     Other assets and liabilities, net                                                (6,250)              -
     Other accounts payable and accrued liabilities                                  284,853         279,147
                                                                              ---------------  --------------
          Net cash provided by (used in) operating activities                   (  3,589,174)        133,142
Cash flows from investing activities:
     Capital expenditures                                                         (2,026,102)     (7,624,625)
     Investment in leased interests                                                        -    (  3,000,000)
     Payments on note receivable                                                           -          40,000
                                                                              ---------------  --------------
        Net cash used in investing activities                                     (2,026,102)    (10,584,625)
Cash flows from financing activities:
     Revolving credit facilities                                                   4,384,607       1,280,900
     Costs of registration                                                        (   83,674)              -
     Issuance of debt                                                                991,000       7,659,743
     Debt issuance costs                                                          (  326,232)      ( 370,530)
     Issuance of common stock                                                      1,439,329       2,402,202
     Reduction in debt                                                              (669,727)       (312,250)
     Preferred stock dividends                                                             -         (45,370)
                                                                              ---------------  --------------
        Net cash provided by financing activities                                  5,735,303      10,614,695
                                                                              ---------------  --------------
            Net increase in cash                                                     120,027         163,212
Cash at beginning of period                                                           25,491       1,032,265
                                                                              ---------------  --------------
Cash at end of period                                                         $      145,518   $   1,195,477
                                                                              ===============  ==============
Supplemental disclosures of cash flow information:
     Cash paid during the period for:
     Interest (including capitalized interest of $120,000 in 2001)            $    1,240,983   $     309,400
                                                                              ===============  ==============
Supplemental disclosures of noncash transactions:
     Common stock and warrants issued                                         $    3,551,802   $   2,191,282
                                                                              ===============  ==============
     Note receivable exchanged for common stock                               $ (    555,661)  $           -
                                                                              ===============  ==============
     Capital lease obligations                                                $            -   $   1,992,000
                                                                              ===============  ==============
     Mortgage receivable                                                      $    1,925,596   $           -
                                                                              ===============  ==============
</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 (the Brownsville
     Terminal  Facility)  and  owns  a  LPG  terminal  facility  in  Matamoros,
     Tamaulipas,  Mexico (the Matamoros Terminal Facility) and pipelines (the 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  (the  Leased  Pipeline) which
     connects  Exxon Mobil 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 (the ECCPL), which connects
     Exxon's  Viola  valve  station  in Nueces County, Texas to the inlet of the
     King  Ranch  Gas Plant (see note M). In connection with the Company's lease
     agreement  for the Leased Pipeline, the Company may access up to 21,000,000
     gallons of storage, as defined in the Company's lease agreement, located in
     Markham, Texas (the Markham Storage), as well as potential propane pipeline
     exchange 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  also  a subsidiary of Petroleos Mexicanos, the
     state-owned Mexican oil company (PEMEX). The LPG purchased from the Company
     is  distributed  by  PMI  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  77% of the Company's total
     revenues  for  the  nine  months  ended  April  30,  2001.

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

     The  accompanying consolidated financial statements include the Company and
     its  United  States  subsidiaries,  Penn  Octane  International,  L.L.C.,
     PennWilson  CNG, Inc. and Penn CNG Holdings, Inc. and subsidiaries, and its
     Mexican  subsidiaries,  Penn  Octane  de Mexico, S.A. de C.V. (PennMex) and
     Termatsal,  S.A.  de  C.V.  (Termatsal)  (collectively  the  Company).  All
     significant  intercompany  accounts  and  transactions  are  eliminated.

     The  unaudited  consolidated  balance  sheet  as  of  April  30,  2001, the
     unaudited  consolidated  statements  of operations for the three months and
     nine  months  ended April 30, 2001 and 2000, and the unaudited consolidated
     statements of cash flows for the nine months ended April 30, 2001 and 2000,
     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, 2001, the unaudited consolidated results of operations for
     the  three and nine months ended April 30, 2001 and 2000, and the unaudited
     consolidated  cash flows for the nine months ended April 30, 2001 and 2000.

     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,  2000.


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION  -  CONTINUED

     Certain  reclassifications have been made to prior year 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 (see note G for
     the  warrants):

<TABLE>
<CAPTION>
                                       For the three months ended  April  30, 2001   For the three months ended April 30, 2000
                                        ------------------------------------------  -------------------------------------------
                                        Income (loss)      Shares       Per-Share   Income (loss)       Shares       Per-Share
                                         (Numerator)    (Denominator)    Amount      (Numerator)    (Denominator)     Amount
                                        --------------  -------------  -----------  --------------  --------------  -----------
<S>                                     <C>             <C>            <C>          <C>             <C>             <C>
Net income (loss)                       $  (1,474,784)              -           -   $  (1,753,223)               -           -
Less:  Dividends on preferred  stock                -               -           -               -                -           -
                                        --------------                              --------------
BASIC EPS
Net income (loss) available to common
  stockholders                             (1,474,784)     14,410,842  $   ( 0.10)     (1,753,223)      13,092,040  $    (0.13)
                                                                       ===========                                  ===========
EFFECT OF DILUTIVE SECURITIES
Warrants                                            -   N/A                     -               -   N/A                      -
Convertible Preferred Stock                         -   N/A                     -               -   N/A                      -
                                        --------------  -------------               --------------  --------------
DILUTED EPS
Net income (loss) available to common
   stockholders                         $         N/A   N/A            $      N/A   $         N/A   $          N/A  $      N/A
                                        ==============  =============  ===========  ==============  ==============  ===========
</TABLE>


<TABLE>
<CAPTION>
                                         For the nine months ended April 30, 2001    For the nine months ended April 30, 2000
                                        ------------------------------------------  -----------------------------------------
                                        Income (loss)      Shares       Per Share   Income (loss)      Shares      Per-Share
                                         (Numerator)    (Denominator)    Amount      (Numerator)    (Denominator)    Amount
                                        --------------  -------------  -----------  --------------  -------------  ----------
<S>                                     <C>             <C>            <C>          <C>             <C>            <C>
Net income (loss)                       $(  3,271,408)              -           -   $   1,526,018               -           -
Less:  Dividends on preferred stock                 -               -           -       (  45,370)              -           -
                                        --------------                              --------------
BASIC EPS
Net income (loss) available to common
  Stockholders                             (3,271,408)     14,057,336  $   ( 0.23)      1,480,648      12,815,511  $     0.12
                                                                       ===========                                 ==========
EFFECT OF DILUTIVE SECURITIES
Warrants                                            -   N/A                     -               -       1,739,260           -
Convertible Preferred Stock                         -   N/A                     -               -          55,839           -
                                        --------------  -------------               --------------  -------------
DILUTED EPS
Net income (loss) available to common
   Stockholders                         $         N/A   N/A            $      N/A   $   1,480,648      14,610,610  $     0.10
                                        ==============  =============  ===========  ==============  =============  ==========
</TABLE>


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  C  -  SALE  OF  CNG  ASSETS

     On  September  10, 2000, the Board of Directors approved the repayment by a
     related  party  (the  Buyer) of the $900,000 promissory note to the Company
     (the  Buyer  was  entitled  to discounts for early payment of approximately
     $344,000  as  prescribed under the promissory note) through the exchange of
     78,373  shares  (shares  were subsequently canceled) of common stock of the
     Company  owned  by  Buyer,  which were previously pledged to the Company in
     connection with the promissory note. The exchanged shares had a fair market
     value  of  approximately  $556,000  at  the time of the transaction and the
     promissory  note  had a net book value of $640,000 at that time. Therefore,
     the  Company  recorded  a  loss of approximately $84,000 as a result of the
     discount  taken  by the Buyer. Such amount was included in the consolidated
     statement  of operations at July 31, 2000. The remaining note has a balance
     of  $214,355  and  is collateralized by the CNG assets and 60,809 shares of
     the  Company's  common  stock owned by the Buyer. As of April 30, 2001, the
     Buyer  has  not  made  all  of  the  payments  as  required under the note.


NOTE  D  -  PROPERTY,  PLANT  AND  EQUIPMENT

<TABLE>
<CAPTION>
     Property,  plant and equipment consists of the following (see notes F, H and
I):

                                                         April 30,     July 31,
                                                           2001          2000
                                                       ------------  ------------
<S>                                                    <C>           <C>

LPG:
     Brownsville Terminal Facility:
        Building                                       $   173,500   $   173,500
        Terminal facilities                              3,426,440     3,426,440
        Tank Farm                                          370,845       370,845
        Midline pump station                             2,189,042             -
        Leasehold improvements                             487,467       291,409
        Capital construction in progress                    56,229     1,295,825
        Equipment                                          467,164       393,462
                                                       ------------  ------------
                                                         7,170,687     5,951,481
     US - Mexico Pipelines and Matamoros Terminal
     Facility                                           12,541,463    12,074,716

     Saltillo Terminal Facility                            799,309       785,699
                                                       ------------  ------------
                 Total LPG                              20,511,459    18,811,896
                                                       ------------  ------------
Other:
     Automobile                                             10,800        10,800
     Office equipment                                       56,266        39,615
                                                       ------------  ------------
                                                            67,066        50,415
                                                       ------------  ------------
                                                        20,578,525    18,862,311
     Less:  accumulated depreciation and amortization   (2,683,478)   (2,105,495)
                                                       ------------  ------------

                                                       $17,895,047   $16,756,816
                                                       ============  ============
</TABLE>


                                       10
<PAGE>
<TABLE>
<CAPTION>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  INVENTORIES

     Inventories  consist  of  the  following:

                                             April  30,  2001          July  31,  2000
                                             ----------------          ---------------
                                           Gallons        Cost       Gallons       Cost
                                         -----------  -----------  -----------  -----------
<S>                                      <C>          <C>          <C>          <C>
     LPG:
       Leased Pipeline and US-
         Mexico Pipelines                  1,688,778  $   938,020    1,361,850  $   736,485
       Storage:
         Brownsville Terminal Facility,
          Matamoros Terminal Facility
          and railcars leased by the
          Company                          1,035,674      575,257    1,037,290      560,964
         Markham Storage and other        10,121,586    5,621,967   11,176,125    6,025,760
                                         -----------  -----------  -----------  -----------

                                          12,846,038  $ 7,135,244   13,575,265  $ 7,323,209
                                         ===========  ===========  ===========  ===========
</TABLE>



NOTE  F  -  DEBT  OBLIGATIONS

     SHORT-TERM  DEBT
     ----------------

     Restructuring  of  Notes
     ------------------------

     From  December  10, 1999 through January 18, 2000, and on February 2, 2000,
     the  Company  completed a series of related transactions in connection with
     the  private  placement  of  $4,944,000  and  $710,000,  respectively,  of
     subordinated notes (Notes) which were due the earlier of December 15, 2000,
     or  upon  the  receipt  of  proceeds by the Company from any future debt or
     equity  financing  in  excess of $2,250,000 (see below). Interest at 9% was
     due  and  paid  on June 15, 2000, and December 15, 2000. In connection with
     the  Notes,  the  Company  granted  the  holders  of  the  Notes,  warrants
     (Warrants)  to  purchase  a  total of 706,763 shares of common stock of the
     Company  at  an  exercise  price  of  $4.00  per share, exercisable through
     December  15,  2002.

     During  December  2000,  the  Company  entered  into  agreements  (the
     Restructuring  Agreements)  with  the  holders  of  $5,409,000 in principal
     amount  of  the  Notes  providing  for the restructuring of such Notes (the
     Restructuring).  The  remaining  $245,000  balance  of  the Notes was paid.

     Under  the  terms  of  the  Restructuring Agreements, the due dates for the
     restructured  notes  (the Restructured Notes) were extended to December 15,
     2001, subject to earlier repayment upon the occurrence of certain specified
     events  provided  for  in  the  Restructured Notes. Additionally, beginning
     December  16,  2000, the annual interest rate on the Restructured Notes was
     increased to 13.5% (subject to the adjustments referred to below). Interest
     payments  are  due  quarterly  beginning  March  15,  2001.


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

Under the terms of the Restructuring Agreements, the holders of the Restructured
Notes also received warrants to purchase up to 676,125 shares of common stock of
the  Company  at  an  exercise  price  of  $3.00 per share and exercisable until
December  15,  2003  (the  New Warrants).  The Company also agreed to modify the
exercise prices of the Warrants to purchase up to 676,137 shares of common stock
of  the  Company  previously  issued to the holders of the Restructured Notes in
connection  with their original issuance from $4.00 per share to $3.00 per share
and extend the exercise dates of the Warrants from December 15, 2002 to December
15,  2003.  In addition, the Company is required to reduce the exercise price of
the  Warrants  and  the  New  Warrants issued to the holders of the Restructured
Notes from $3.00 per share to $2.50 per share in the event that the Restructured
Notes  are  not  fully  repaid  by  June  15,  2001  (see  note  N).

In  connection with the Restructuring Agreements, the Company has also agreed to
register the shares of common stock which may be acquired in connection with the
exercise  of  the  New Warrants (the Exercisable Shares).  In the event that the
Company  did  not  have an effective registration statement under the Securities
Act  of  1933, as amended, covering the Exercisable Shares by March 31, 2001 (or
April  30, 2001, if, at the time, the Company was ineligible to utilize Form S-3
for  purposes  of such registration), or if any effective registration statement
ceases  to  be  effective  during  any  period  in  which  such effectiveness is
required,  the  Company  will  be  required  to  pay  additional interest on the
Restructured  Notes  at  the  rate  of  4% per annum for the period in which the
deficiency  continues  to  exist.  In  connection with the Company's obligations
under  the  Restructured  Notes, the Company's registration statement containing
the  Exercisable  Shares  was  declared  effective  on  March  14,  2001.

Under the terms of the Restructuring Agreements, the Company is also required to
provide  the  holders  of  the  Restructured Notes with collateral to secure the
Company's  payment  obligations  under  the  Restructured  Notes consisting of a
senior  interest  in substantially all of the Company's assets which are located
in  the United States (the US Assets) and Mexico (the Mexican Assets), excluding
inventory,  accounts  receivable  and  sales contracts with respect to which the
Company  is  required  to  grant  a subordinated security interest (collectively
referred  to  as  the  Collateral).  The  Company's  President  has also pledged
2,000,000 shares of common stock of the Company held by the President (1,000,000
shares to be released when the required security interests in the US Assets have
been  granted  and  perfected  and all of the shares are to be released when the
required  security  interests  in  all  of  the Collateral have been granted and
perfected).  Under the terms of the Restructured Notes, if the required security
interests  in  all of the Collateral had not been granted and perfected by March
15,  2001,  the  Company was required to pay additional interest at a rate of 3%
per annum from March 16, 2001 until such time as the required security interests
in  all  of  the  Collateral  have  been granted and perfected. The granting and
perfection  of the security interests in the Collateral, as prescribed under the
Restructured  Notes,  have  not  been finalized.  Accordingly, the interest rate
under  the  Restructured  Notes  increased  to 16.5% on March 16, 2001, and will
continue  until  such  time  as  the  required  security  interest in all of the
Collateral  has been granted and perfected.  In connection with the granting and
perfection of the security interests in the Collateral, the Company is currently
negotiating with the holders of the Restructured Notes and New Notes (see below)
an additional amendment which would provide for modifications to the Collateral.
The  Collateral  is  also being pledged in connection with the issuance of other
indebtedness by the Company (see note I).  PMG Capital Corp. (PMG) has agreed to
serve  as  the  collateral  agent.


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

     PMG  acted  as  financial  advisor  for  the restructuring of $4,384,000 in
     principal amount of the Restructured Notes. PMG received fees consisting of
     $131,520  in cash and warrants to purchase 50,000 shares of common stock of
     the  Company  with  terms  similar  to  the  terms of the New Warrants. The
     Company  also  agreed to modify and extend the exercise date of warrants to
     purchase 114,375 shares of common stock of the Company originally issued to
     PMG  in  connection  with  the original issuance of the Notes with the same
     terms  as  those which were modified in the Warrants in connection with the
     Restructuring  Agreements.

     In  connection  with  the  Restructuring Agreements, the Company recorded a
     discount  of  $1,597,140  related  to  the  fair  value of the New Warrants
     issued,  fair value related to the modifications of the Warrants, fees paid
     to  PMG (including cash, new warrants granted and modifications to warrants
     previously  granted  to PMG in connection with the original issuance of the
     Notes)  and other costs associated with the Restructuring Agreements, to be
     amortized over the life of the Restructured Notes. The remaining portion of
     the  unamortized  discount  was  $1,002,041  at  April  30,  2001.  Total
     amortization  of  discounts related to the Notes and the Restructured Notes
     and  included  in  the  unaudited consolidated statements of operations was
     $389,440  and  $1,285,477  for the three months and nine months ended April
     30,  2001,  respectively.

     Issuance  of  New  Promissory  Notes
     ------------------------------------

     On  January  31,  2001,  the Company completed the placement of $991,000 in
     principal amount of promissory notes (the New Notes) due December 15, 2001.
     The  holders  of  the New Notes received warrants to purchase up to 123,875
     shares of common stock of the Company (the New Note Warrants). The terms of
     the  New  Notes  and  New Note Warrants are substantially the same as those
     contained  in  the Restructured Notes and New Warrants issued in connection
     with  the  Restructuring  described  above;  and  the  Company's  payment
     obligations  under the New Notes will also be secured by the Collateral and
     the  shares  of  the  Company  which  are  being  pledged  by the Company's
     President  as  described  above.

     Net  proceeds  from  the  New Notes were used for working capital purposes.

     In  connection  with  the  New  Notes, PMG acted as placement agent for the
     Company and received cash fees totaling $69,370 and reimbursement of out of
     pocket  expenses.

     In connection with the issuance of the New Notes and New Note Warrants, the
     Company  recorded  a  discount of $349,494 related to the fair value of the
     New  Note Warrants issued, fees paid to PMG and other costs associated with
     the  private placement, to be amortized over the life of the New Notes. The
     remaining  portion  of  the  unamortized discount was $250,891 at April 30,
     2001. Total amortization of discounts related to the New Notes and included
     in  the unaudited consolidated statements of operations was $98,603 for the
     three  and  nine  months  ended  April  30,  2001.


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

LONG-TERM  DEBT
---------------


Long-term debt consists of the following:
                                                                                             April 30,    July 31,
                                                                                                2001        2000
                                                                                             ----------  ----------
<S>                                                                                          <C>         <C>
Capitalized lease obligations in connection with the US - Mexico Pipelines and the
Matamoros Terminal Facility (see note I).                                                    $        -  $5,070,500

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility (see note I).                                             1,373,143           -

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility (see note I).                                               878,130           -

Promissory note issued in connection with the purchase of property (see notes H and I).       1,925,596           -

Contract for Bill of Sale which was extended in April 1999; due in monthly payments of
3,000, including interest at 10%; due in February 2001; collateralized by a building. Paid
during November 2000.                                                                                 -      14,347

Noninterest-bearing note payable, discounted at 7%, for legal services; due in February
2001.                                                                                           157,500     202,750

Other long-term debt                                                                                  -      36,653
                                                                                             ----------  ----------
                                                                                              4,334,369   5,324,250
Current maturities                                                                              877,252   3,859,266
                                                                                             ----------  ----------
                                                                                             $3,457,117  $1,464,984
                                                                                             ==========  ==========
</TABLE>

     In connection with the note payable for legal services, the Company has not
     made  all  of the required payments. The Company provided a "Stipulation of
     Judgment" to the creditor in the event that the Company defaulted under the
     settlement  agreement.


NOTE  G  -  STOCKHOLDERS'  EQUITY

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

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

     During August 2000 and September 2000, the Company issued 12,500 shares and
     100,000  shares of common stock of the Company, respectively, in connection
     with  the  settlement  of  litigation.

     During  September  2000,  a  director  and officer of the Company exercised
     warrants  to  purchase 200,000 shares of common stock of the Company, at an
     exercise  price  of  $2.50 per share. The consideration for the exercise of
     the  warrants  included  $2,000 in cash and a $498,000 promissory note. The
     principal  amount  of  the  note plus accrued interest at an annual rate of
     10.5% was due on April 30, 2001. The director and officer of the Company is
     personally liable with full recourse to the Company and has provided 60,809
     shares  of  common  stock of the Company as collateral. The promissory note
     has been recorded as a reduction of stockholders' equity during the quarter
     ending  April  30,  2001.  Interest on the promissory note will be recorded
     when  the  cash  is  received.


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

     COMMON  STOCK  -  Continued
     -------------

     During October 2000, warrants to purchase a total of 7,500 shares of common
     stock  of  the  Company  were  exercised, resulting in cash proceeds to the
     Company  of  $11,250.

     During  November  2000,  warrants  to purchase a total of 200,000 shares of
     common  stock  of the Company were exercised, resulting in cash proceeds to
     the  Company  of  $602,500.

     During  November 2000, the Company agreed to reduce the exercise price from
     $2.50  to $2.00 per share for warrants to purchase 500,000 shares of common
     stock  of  the  Company  as  an  inducement  for the holder of the warrants
     (Holder)  to  exercise  the warrants. The consideration for the exercise of
     the  warrants  included  $5,000 in cash and a $995,000 promissory note. The
     principal  amount  of  the  note plus accrued interest at an annual rate of
     10.5%  was due on April 30, 2001. During January 2001, the Company received
     $795,000  as  partial payment of the promissory note. The remaining balance
     of  $200,000  on  this  note has not been paid by the Holder. The Holder is
     liable with full recourse to the Company and is required to provide 500,000
     shares  of common stock of the Company as collateral. The Company agreed to
     allow  the  Holder  to  pledge the 500,000 shares in connection with a bank
     loan of $795,000 for which the entire loan proceeds were used by the Holder
     to  partially  pay  the  Company.

     During  December  2000, the Company issued 14,500 shares of common stock of
     the  Company  to certain employees of the Company as a bonus. In connection
     with the issuance of the shares, the Company recorded an expense of $43,500
     based  on  the  market  value  of  the  stock  issued.

     The  amounts  due  from  notes  issued by officers, directors and a related
     party  for  the exercise of warrants totaling $3,761,350 plus interest have
     not  been  paid  as  required  by  the  terms  of the notes to the Company.

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

     Under  the Company's 1997 Stock Award Plan (Plan), the Company has reserved
     for  issuance  150,000  shares  of  common  stock  of the Company, of which
     107,470  shares  were  unissued  as  of  April  30,  2001,  to  compensate
     consultants who have rendered significant services to the Company. The Plan
     is  administered by the Compensation Committee of the Board of Directors of
     the  Company which has complete authority to select participants, determine
     the  awards of common stock of the Company to be granted and the times such
     awards will be granted, interpret and construe the Plan for purposes of its
     administration and make determinations relating to the Plan, subject to its
     provisions,  which  are  in  the  best  interests  of  the  Company and its
     stockholders.  Only  consultants  who  have  rendered  significant advisory
     services  to  the  Company  are eligible to be participants under the Plan.
     Other eligibility criteria may be established by the Compensation Committee
     as  administrator  of  the  Plan.

     In  August  2000,  the  Company  issued 6,500 shares of common stock of the
     Company  to  a  consultant  in payment for services rendered to the Company
     valued  at  $41,438.

     In  November  2000,  the Company issued 4,716 shares of common stock of the
     Company  to  a  consultant  in payment for services rendered to the Company
     valued  at  $23,583.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

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

     In  December  2000, the Company entered into an agreement with a consultant
     whereby  the  Company  agreed  to issue 2,000 shares of common stock of the
     Company  pursuant  to  the  Plan for each month of service for a minimum of
     three  months.  At January 31, 2001, the Company issued 2,000 shares of its
     common  stock  in  connection  with  this  agreement. In February 2001, the
     agreement  was terminated and the Company issued the remaining 4,000 shares
     of  common  stock  of  the  Company  due  to  the  consultant.

     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.

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

     The  Board  of Directors (Board) granted warrants to purchase 10,000 shares
     of  common  stock of the Company at an exercise price of $6.94 per share to
     those  outside  directors  previously  elected  and serving on the Board at
     August  1,  2000. In addition, the Board granted to newly elected directors
     warrants  to  purchase  60,000 shares of common stock of the Company, at an
     exercise  price  of $6.69 per share, with the vesting period to commence on
     August  7,  2000. The exercise prices per share of the warrants issued were
     equal  to  or  greater  than  the  quoted  market  prices  per share at the
     measurement  dates.  Based  on  the  provisions  of APB 25, no compensation
     expense  was  recorded  for  these  warrants.

     As  a bonus to a director and officer of the Company, during November 2000,
     the  Company granted warrants to purchase 200,000 shares of common stock of
     the  Company  at  an exercise price of $7.00 per share exercisable for five
     years. The exercise price per share of the warrants was equal to or greater
     than  the  quoted  market price per share at the measurement date. Based on
     the  provisions  of  APB 25, no compensation expense was recorded for these
     bonus  warrants.

     OTHER
     -----

     In  connection  with  a  consulting  agreement  between  the  Company and a
     director of the Company, during August 2000, the director received warrants
     to  purchase  100,000  shares of common stock of the Company at an exercise
     price  of  $6.38 per share exercisable through August 6, 2005. The warrants
     will  vest  ratably on a quarterly basis over four years. The warrants were
     accounted for under the provisions of SFAS 123 and the resulting expense is
     being  amortized  over  the  vesting  period.

     For  warrants  granted to non-employees, the Company applies the provisions
     of  SFAS  123  to determine the fair value of the warrants issued. Warrants
     granted  to  non-employees  simultaneously  with  the  issuance of debt are
     accounted  for  based  on  the guidance provided by APB 14, "Accounting for
     Convertible  Debt  and  Debt  Issued  with  Stock  Purchase  Warrants".

     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.


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION  -  CPSC

     On  March  14,  2000,  CPSC International, Inc. (CPSC) filed for protection
     under  Chapter 11 of the United States Bankruptcy Code in the United States
     Bankruptcy  Court  (Court),  Southern  District  of  Texas,  Corpus Christi
     Division.

     On  April  27,  2000,  the  Company filed a complaint in the 107th Judicial
     District  Court  of  Cameron County, Texas, against Cowboy Pipeline Service
     Company,  Inc. (Cowboy) and the sole shareholder of Cowboy (Owner) alleging
     (i)  fraud,  (ii)  aiding  and  abetting  a breach of fiduciary duty, (iii)
     negligent  misrepresentation,  and (iv) conspiracy to defraud in connection
     with  the  construction  of  the US-Mexico Pipelines and Matamoros Terminal
     Facility  and  the  underlying agreements thereto. The Company also alleges
     that Cowboy was negligent in performing its duties. The Company was seeking
     actual  and  exemplary  damages  and  other relief. On June 9, 2000, Cowboy
     removed  the  case  to  the  Court.

     On  May  8, 2000, CPSC filed an adversary proceeding against the Company in
     the  Court  seeking  (i)  prevention  of the Company against the use of the
     US-Mexico  Pipelines  and  escrow  of  all  income  related  to  use of the
     US-Mexico  Pipelines,  (ii)  sequestering  all proceeds related to the sale
     from  any collateral originally pledged to CPSC, (iii) the avoidance of the
     Addendum  agreement  between the Company and CPSC, and (iv) damages arising
     from  the  Company's  breach  of  the Lease Agreements (see note I) and the
     September  1999  Agreements.

     During  May  2000,  the  Company  filed  a motion with the Court seeking to
     appoint  a  Chapter  11 Trustee and the Company also filed a complaint with
     the  Court  seeking a declaratory judgment stating that the US Pipelines be
     held  in  trust  for  the  benefit  of  the  Company and that the US-Mexico
     Pipelines  are  no  longer  the  assets  of  the  bankruptcy  estate.

     On  June  2,  2000,  additional  litigation was filed in the 138th Judicial
     District  Court  of  Cameron  County, Texas, against Cowboy and the Company
     alleging that Cowboy and the Company had illegally trespassed in connection
     with  the  construction of the US Pipelines and seeking declaratory relief,
     including  damages,  exemplary  damages  and  injunctive  relief preventing
     Cowboy  and  the  Company from utilizing the US Pipelines. On June 9, 2000,
     CPSC  intervened and removed the case to the Court. During August 2000, the
     litigation  was  settled  through  a court ordered mediation by the Company
     agreeing  to  acquire  land  for  which substantially all of the costs were
     provided  for  as offsets against the purchase price in connection with the
     Settlement  (see  below).  The  settlement  is subject to completion of the
     settlement  documents.

     During  March  2001, the Company, Cowboy and the Owner reached a settlement
     (the  Settlement)  whereby the Company purchased the remaining 50% interest
     owned  by CPSC in the Lease Agreements and related assets resulting in 100%
     ownership  by  the  Company. Under the terms of the Settlement, the parties
     provided  mutual  general  releases  with  respect to previous disputes and
     claims  among  the  parties  (see  note  I).

     LITIGATION  -  OTHER

     On  October  12,  1999,  a Demand for Arbitration (Arbitration) of $780,767
     (subsequently  amended to $972,515) was filed by A.E. Schmidt Environmental
     (Schmidt)  against Amwest Surety Insurance Company (Amwest), PennWilson and
     Penn  Octane  Corporation on a performance bond pursuant to a CNG contract.
     The  Company  filed  a  response  with  the  court opposing the petition by
     Schmidt to compel Penn Octane Corporation to participate in the Arbitration
     pursuant  to  an  alter  ego  theory.  During  April 2000, the court denied
     Schmidt's  petition to compel Penn Octane Corporation to participate in the
     Arbitration.  PennWilson


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

LITIGATION  -  OTHER  -  Continued

had  countersued Schmidt in connection with overruns under the CNG contract.  In
November  2000,  the litigation was settled in mediation without admission as to
fault whereby PennWilson agreed to pay Schmidt $100,000 and Amwest agreed to pay
Schmidt $350,000.  PennWilson and Penn Octane Corporation both gave and received
mutual  general  releases of all known and unknown claims pursuant to California
Civil  Code  Section 1654 with exception only for unknown latent deficiencies as
defined  in  California  Civil  Procedure  Code  Section  337.15 and third party
indemnity  claims  for  injury,  death  or  property  damage.

On  February 24, 2000, litigation was filed in the 357th Judicial District Court
of  Cameron  County,  Texas,  against Cowboy, CPSC and the Company (collectively
referred  to  as  the  Defendants)  alleging  that  the Defendants had illegally
trespassed in connection with the construction of the US Pipelines and seeking a
temporary  restraining  order  against  the Defendants from future use of the US
Pipelines.  On  March 20, 2000, the Company acquired the portion of the property
which  surrounds  the  area  where the US Pipelines were constructed for cash of
$1,908,000,  which  was  paid  during  April  2000,  and  debt  in the amount of
$1,908,000  (Debt).  As  a result, the litigation was dismissed.  The Debt bears
interest  at  10%  per annum, payable monthly in amounts equal to the minimum of
$15,000  or  $.001  for  each  gallon that flows through the US Pipelines with a
balloon  payment  due  during  April  2003  (see  note  I).

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

CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER

As  of  April  30,  2001, the Company has a $20,000,000 credit facility with RZB
Finance  L.L.C. (RZB) for demand loans and standby letters of credit (RZB Credit
Facility)  to  finance the Company's purchase of LPG. In connection with the RZB
Credit  Facility,  RZB  entered  into  a participation agreement with Bayerische
Hypo-und  Vereinsbank Aktiengeselischaft, New York Branch (HVB), whereby RZB and
HVB  will  each  participate up to $10,000,000 toward the total credit facility.
Under  the  RZB  Credit  Facility,  the  Company pays a fee with respect to each
letter  of credit thereunder in an amount equal to the greater of (i) $500, (ii)
2.5%  of  the maximum face amount of such letter of credit, or (iii) such higher
amount as may be agreed to between the Company and RZB.  Any amounts outstanding
under  the RZB Credit Facility shall accrue interest at a rate equal to the rate
announced  by the Chase Manhattan Bank as its prime rate plus 2.5%.  Pursuant to
the  RZB  Credit Facility, RZB has sole and absolute discretion to terminate the
RZB  Credit  Facility  and  to  make  any  loan  or  issue  any letter of credit
thereunder.  RZB  also  has  the  right to demand payment of any and all amounts
outstanding  under  the RZB Credit Facility at any time.  In connection with the
RZB  Credit  Facility,  the  Company  granted  a mortgage, security interest and
assignment  in any and all of the Company's real property, buildings, pipelines,
fixtures  and  interests  therein  or  relating  thereto,  including,  without
limitation, the lease with the Brownsville Navigation District of Cameron County
for  the  land  on which the Company's Brownsville Terminal Facility is located,
the  Pipeline  Lease, and in connection therewith agreed to enter into leasehold
deeds  of  trust,  security  agreements, financing statements and assignments of
rent,  in forms satisfactory to RZB.  Under the RZB Credit Facility, the Company
may  not  permit to exist any lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of
RZB,  without  the  consent  of  RZB  (see  notes  F  and  I).


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER  -  Continued

     The  Company's  President,  Chairman  and  Chief  Executive  Officer  has
     personally guaranteed all of the Company's payment obligations with respect
     to  the  RZB  Credit  Facility.

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

     As  of  April  30, 2001, letters of credit established under the RZB Credit
     Facility  in  favor  of  Exxon,  PG&E,  Duke  and Koch for purchases of LPG
     totaled  $13,751,368  of  which $11,299,867 was being used to secure unpaid
     purchases.  In  addition,  as  of  April 30, 2001, the Company had borrowed
     $7,923,001  from its revolving line of credit under the RZB Credit Facility
     for  purchases  of  LPG.  In  connection with these purchases, at April 30,
     2001,  the  Company  had unpaid invoices due from PMI totaling $11,913,111,
     cash  balances  maintained in the RZB Credit Facility collateral account of
     $162,983  and  inventory  held  in  storage of $5,621,967 (see note E). The
     Company's ability to use the cash held by RZB is subject to restrictions as
     provided  for  in  the  RZB  Credit  Facility.


NOTE  I  -  ACQUISITION  OF  PIPELINE  INTERESTS

     In  connection  with  the  construction  of the US-Mexico Pipelines and the
     Matamoros Terminal Facility, the Company and CPSC entered into two separate
     Lease  /  Installation Purchase Agreements, as amended, (Lease Agreements),
     whereby  CPSC  was  required  to  construct  and  operate  the  US - Mexico
     Pipelines  (including  an  additional  pipeline  to  accommodate  refined
     products) and the Matamoros Terminal Facility and lease these assets to the
     Company.  Under the terms of the Lease Agreements, the Company was required
     to  pay  monthly  rental  payments of approximately $157,000, beginning the
     date  that  the  US - Mexico Pipelines and Matamoros Terminal Facility were
     physically  capable  of  transporting  and receiving LPG in accordance with
     technical  specifications  required  (Substantial  Completion  Date).  In
     addition,  the  Company  agreed to provide a lien on certain assets, leases
     and  contracts  which  were  pledged to RZB (Liens), which Liens would have
     required  the  consent  of RZB, and agreed to provide CPSC with a letter of
     credit  of  approximately  $1,000,000.  The  Company also had the option to
     purchase  the  US - Mexico Pipelines and the Matamoros Terminal Facility at
     the  end  of  the  10th  year  anniversary  and  15th  year anniversary for
     $5,000,000  and  $100,000,  respectively.  Under  the  terms  of  the Lease
     Agreements,  CPSC was required to pay all costs associated with the design,
     construction  and  maintenance  of  the US - Mexico Pipelines and Matamoros
     Terminal  Facility.

     During  September  1999,  December  1999 and February 2000, the Company and
     CPSC  amended the Lease Agreements whereby the Company agreed to acquire up
     to  a 100% interest in the Lease Agreements which, the Company had acquired
     a  50%  interest for $3,000,000 pursuant to the December 1999 amendment and
     provided  for  the substitution of the letter of credit requirement through
     the agreement by the Company's President to pledge 500,000 shares of common
     stock  of  the  Company  owned  by  him.  During February 2000, the Company
     determined  that  CPSC  did  not  comply with certain obligations under the
     Lease Agreements. In March 2000, CPSC filed for protection under Chapter 11
     of the United States Bankruptcy Code. Since that date, the Company had also
     determined  that  CPSC  did  not comply with other obligations provided for
     under the Lease Agreements. Until the Settlement was completed (see below),
     the  Company  recorded the remaining 50% portion of the US-Mexico Pipelines
     and  Matamoros  Terminal Facility as a capital lease (see notes D, F, H and
     K).


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  I  -  ACQUISITION  OF  PIPELINE  INTERESTS  -  CONTINUED

     On March 30, 2001, the Company completed a settlement with CPSC and Cowboy,
     which  provides  the Company with the remaining 50% interest (100% in total
     as  a  result  of  the Company's prior acquisition of a 50% interest in the
     Lease  Agreements  and  the assets underlying such Lease Agreements) in the
     portion  of  the  pipelines, terminal facility and related land, permits or
     easements (the Acquired Assets) previously constructed and/or owned by CPSC
     and  leased  to the Company under the Lease Agreements between CPSC and the
     Company.  The Court entered an order approving the Settlement. The Acquired
     Assets  generally  consist  of a LPG terminal facility in Matamoros, Mexico
     and  pipelines which connect the Company's Brownsville Terminal Facility to
     the  Matamoros  Terminal  Facility. In addition, as part of the Settlement,
     the  Company  conveyed to CPSC all of its rights to a certain property (the
     Sold  Asset). The foregoing is more fully discussed below. The terms of the
     Settlement  did  not  deviate  in  any  material  respect  from  the  terms
     previously  reported  except  that the fair value of the warrants issued in
     connection  with  the  Settlement  (see below) was reduced from $600,000 to
     $300,000  as a result of the reduction of the market value of the Company's
     common  stock.

     In  connection  with  the  Settlement,  the  Company  agreed  to  pay  CPSC
     $5,800,000  (the  Purchase Price) for the Acquired Assets, less agreed upon
     credits  and  offsets  in  favor  of  the  Company totaling $3,237,500. The
     remaining  $2,562,500  was  paid at the closing of the Settlement by a cash
     payment  of $200,000 to CPSC and the issuance to or for the benefit of CPSC
     of  two  promissory  notes  in  the  amounts  of $1,462,500 (the CPSC Note)
     (payable  in  36  monthly  installments of approximately $46,000, including
     interest  at  9%  per  annum)  and $900,000 (the Other Note) (payable in 36
     equal  monthly installments of approximately $29,000, including interest at
     9%).  The  $200,000 payment was provided from the Company's working capital
     and  the  Company  expects  to  pay  the  CPSC Note and Other Note from the
     Company's  working  capital.  The  Other  Note is collateralized by a first
     priority  security interest in the U.S. portion of the pipelines comprising
     the Acquired Assets. The CPSC Note is collateralized by a security interest
     in  the U.S. portion of the pipelines comprising the Acquired Assets, which
     security  interest  is  subordinated to the security interest which secures
     the  Other  Note. In addition, the security interest granted under the CPSC
     Note  is  shared  on a pari passu basis with certain other creditors of the
     Company  (see  note  F).  Under  the terms of the CPSC Note, the Company is
     entitled  to  certain offsets related to future costs which may be incurred
     by  the  Company in connection with the Acquired Assets. In addition to the
     payments  described above, the Company agreed to assume certain liabilities
     which  were  previously owed by CPSC in connection with construction of the
     Acquired  Assets.  CPSC  also  transferred to the Company any right that it
     held to any amounts owing from Termatsal for cash and/or equipment provided
     by  CPSC  to  Termatsal  including  approximately  $2,600,000  of  cash, in
     connection with construction of the Mexican portion of the Acquired Assets.

     The  Sold  Asset  transferred  to  CPSC  in  connection with the Settlement
     consisted  of  real  estate  of  the  Company  with an original cost to the
     Company  of  $3,800,000  and  with  a  remaining  book  value  totaling
     approximately  $1,908,000  (after  giving effect to credits provided to the
     Company included in the financial terms described above). CPSC agreed to be
     responsible  for  payments  required in connection with the Debt related to
     the  original  purchase  by  the  Company  of  the  Sold  Asset  totaling
     approximately  $1,908,000. CPSC's obligations under the Debt are to be paid
     by  the  Company  to  the extent that there are amounts owed by the Company
     under the CPSC Note, through direct offsets by the Company against the CPSC
     Note.  After  the  CPSC Note is fully paid, the Company will no longer have
     any  payment  obligation to CPSC in connection with the Debt and therefore,
     CPSC  will  then  be  fully  responsible  to  the Company for any remaining
     obligations in connection with the Debt (the Remaining Obligations). CPSC's
     obligations  to  the  Company  in  respect of the Remaining Obligations are
     collateralized  by  a  deed  of  trust lien granted by CPSC in favor of the
     Company  against  the  Sold Asset. CPSC also granted the Company a pipeline
     related  easement  on  the  Sold  Asset.  The  principal of $1,908,000 plus
     accrued  and  unpaid  interest  is  included  in  long-term  debt  and  the
     corresponding  amounts  required  to be paid by CPSC has been recorded as a
     mortgage  receivable (see note F). In addition to the Purchase Price above,
     CPSC  received  warrants  to purchase 175,000 shares of common stock of the
     Company  at


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  I  -  ACQUISITION  OF  PIPELINE  INTERESTS  -  CONTINUED

     an  exercise  price  of $4.00 per share exercisable through March 30, 2004,
     such  shares  having  a  fair  value  totaling approximately $300,000. This
     amount  has  been  included  in  the  accompanying  unaudited  consolidated
     financial  statements  at  April  30,  2001.

     Until  the  security  interests  as  described  above  are  perfected,  the
     Company's  President  is  providing  a  personal guarantee for the punctual
     payment  and  performance  under  the  CPSC  Note.

     In  connection  with  the  above,  the  Company  may  be  required  to fund
     additional  capital  expenditures to complete the US - Mexico Pipelines and
     Matamoros  Terminal  Facility, which amount cannot presently be determined.
     Pursuant to the terms of the Settlement, such amounts may be offset against
     the  CPSC  Note.


NOTE  J  -  ACQUISITION  OF  MEXICAN  SUBSIDIARIES

     Effective  April 1, 2001, the Company completed the purchase of 100% of the
     outstanding  common  stock  of  both  Termatsal  and  PennMex  (Mexican
     Subsidiaries),  previous  affiliates  of the Company which were principally
     owned  by  an  officer  and  director.  The Company paid a nominal purchase
     price. As a result of the acquisition, the Company has included the results
     of  the  Mexican  Subsidiaries  in  its  unaudited  consolidated  financial
     statements at April 30, 2001. Since inception the operations of the Mexican
     Subsidiaries  have been funded by the Company and included in the Company's
     consolidated  financial  statements.  Therefore,  there  were  no  material
     differences  between the amounts previously reported by the Company and the
     amounts  that  would  have  been  reported  by  the Company had the Mexican
     Subsidiaries  been  consolidated  since  inception.


NOTE  K  -  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  Mexican Subsidiaries own, lease, or are in the process of
     obtaining  the  land  or  rights  of  way  used  in the construction of the
     US-Mexico  Pipelines, and own the assets comprising the US-Mexico Pipelines
     and  Matamoros  Terminal Facility. The Company's Mexican affiliate, Tergas,
     S.A. de C.V. (Tergas), has been granted the permit to operate the Matamoros
     Terminal Facility. Tergas is owned 90% by Jorge Bracamontes, an officer and
     director  of  the  Company.  The  Company  is negotiating an agreement with
     Tergas  to provide services at the Matamoros Terminal Facility and Saltillo
     Terminal  Facility (see below) for actual costs incurred by Tergas plus 5%.

     Termatsal has completed construction of an additional LPG terminal facility
     in  Saltillo,  Mexico (Saltillo Terminal Facility) for an estimated cost of
     $800,000. The Saltillo Terminal Facility is capable of off loading LPG from
     railcars  to  trucks.  The  Saltillo  Terminal Facility contains storage to
     accommodate  approximately  90,000  gallons  of LPG with additional storage
     planned  for  180,000  gallons.  The  Saltillo  Terminal Facility has three
     railcar off loading racks and three truck loading racks. As a result of the
     Saltillo  Terminal  Facility,  the  Company  can transport LPG directly via
     railcar  from  the  Brownsville  Terminal Facility to the Saltillo Terminal
     Facility.  The  Saltillo  Terminal Facility has not begun operations due to
     concerns  by  local  residents  in  Saltillo.  If  such  concerns cannot be
     resolved,  the  Company  may  relocate  the  tangible assets comprising the
     Saltillo  Terminal  Facility  to  a  more remote location. The cost of such
     relocation  is  not  expected  to be material to the Company's consolidated
     financial  statements.


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  K  -  MEXICAN  OPERATIONS  -  CONTINUED

     Tergas  leases  the land on which the Saltillo Terminal Facility is located
     and  has been granted the permit to operate the Saltillo Terminal Facility.
     Termatsal  owns  the  assets comprising the Saltillo Terminal Facility. The
     land  is  leased through January 2003 for $69,000 annually. Under the terms
     of  the land lease agreement, any leasehold improvements at the termination
     of  the  lease  may  be  removed.

     In  connection  with  the  planned  operations  of  the  Saltillo  Terminal
     Facility,  Termatsal had entered into lease agreements for approximately 50
     railcars to transport LPG between the Brownsville Terminal Facility and the
     Saltillo Terminal Facility. The railcars are leased through August 2001 for
     $297,000  annually.  The Saltillo Terminal Facility is not operational. The
     Company has utilized a portion of the rail cars in connection with sales of
     LPG  to  U.S.  and  Canadian  customers.

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

NOTE  L  -  REALIZATION  OF  ASSETS

     The  accompanying  unaudited  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,  has  used  cash in operations, and has 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 New Notes, the RZB Credit Facility and the
     notes related to the Settlement. The Company is currently negotiating final
     documents  with  the  creditors  for  the  required security agreements. In
     addition,  the Company entered into supply agreements for quantities of LPG
     totaling  approximately  23,000,000  gallons per month although a new sales
     agreement  with  PMI has not been consummated (see note M). As discussed in
     note  A,  the  Company  has  historically depended heavily on sales to PMI.

     In view of the matters described in the preceding paragraph, recoverability
     of  a  major  portion  of  the  recorded  asset  amounts  as  shown  in the
     accompanying  unaudited  consolidated  balance sheets is dependent upon the
     Company's  ability  to  obtain additional financing, repay, renew or extend
     the  Restructured  Notes  and  the  New  Notes referred to in the preceding
     paragraph  and  to  raise  additional equity capital, resolve uncertainties
     related  to the Saltillo Terminal Facility and the success of the Company's
     future  operations.  The unaudited 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  taking  steps  to (i) increase sales to its
     current  customers  including  consummation  of the Proposed Agreement (see
     note  M),  (ii)  increase  its  customer  base upon deregulation of the LPG
     industry  in  Mexico,  (iii) extend the terms of the Pipeline Lease and the
     Brownsville  Terminal  Facility,  (iv) expand its product lines, (v) obtain
     additional  letters  of  credit  financing,  and (vi) raise additional debt
     and/or  equity  capital  and (vii) resolve the uncertainties related to the
     Saltillo  Terminal  Facility.

     At  July  31,  2000,  the  Company had net operating loss carryforwards for
     federal  income  tax  purposes  of approximately $5,600,000. The ability to
     utilize  such net operating loss carryforwards may be significantly limited
     by  the application of the "change of ownership" rules under Section 382 of
     the  Internal  Revenue  Code.


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS

     LPG  BUSINESS  -  SALES  AGREEMENT  -  PMI

     The  Company  entered  into  sales  agreements with PMI for the period from
     April  1, 2000 through March 31, 2001 (Old Agreements), for the annual sale
     of  a  combined  minimum  of  151,200,000  gallons  of  LPG,  mixed  to PMI
     specifications, subject to seasonal variability, which was delivered to PMI
     at  the  Company's  terminal  facilities  in Matamoros, Tamaulipas, Mexico,
     Saltillo,  Coahuila,  Mexico  or  alternative delivery points as prescribed
     under  the  Old  Agreements.

     On  October  11,  2000,  the  Old  Agreements  were amended to increase the
     minimum  amount of LPG to be purchased during the period from November 2000
     through  March 2001 by 7,500,000 gallons resulting in a new annual combined
     minimum  commitment  of  158,700,000  gallons.  Under  the terms of the Old
     Agreements,  sales  prices  were  indexed  to  variable  posted  prices.

     The Old Agreements expired March 31, 2001. On April 26, 2001, PMI confirmed
     to  the  Company  in  writing  (Confirmation)  the following terms of a new
     agreement  (Proposed Agreement) subject to revisions to be provided by PMI.
     The Confirmation provides for minimum monthly volumes of 19,000,000 gallons
     at  indexed  variable  posted prices plus premiums that provide the Company
     with annual fixed margins which increase annually over a three year period.
     Since  April  2001,  the  Company  and  PMI  have  operated under the terms
     provided  for  in the Confirmation. During April 2001, the Company sold PMI
     19,000,000 gallons of which, at the request of PMI, approximately 5,500,000
     gallons  were delivered to Markham Storage and the balance was delivered to
     the  Matamoros  Terminal  Facility.  In  addition  to the above prices, the
     Company  received  additional  fees relating to storage and delivery of the
     5,500,000  gallons  to Markham storage. The Company and PMI are negotiating
     the  revisions  of  the  Proposed  Agreement.

     PMI  currently  uses  the  Matamoros  Terminal  Facility  to  load  all LPG
     purchased  from  the  Company  for  distribution  in  Mexico.  The  Company
     continues  to  use the Brownsville Terminal Facility in connection with LPG
     delivered  by  railcar  or  as  an  alternative  terminal  in the event the
     Matamoros  Terminal  Facility  cannot  be  used.

     In  connection with the Old Agreements, the Company believes that it is due
     an additional $10,050,000 (plus other incremental costs incurred), of which
     $5,607,000  has  been  billed  to  PMI  through  April  30, 2001, resulting
     principally  from  shortfalls  in  the  minimum  volume  requirements
     (approximately  13,158,000 gallons) and other price adjustments as provided
     for  under  the  Old  Agreements  based  on the Company's interpretation of
     certain  of the provisions of those agreements. PMI has not paid the amount
     billed. The Company will not record in its unaudited consolidated financial
     statements,  revenues,  if  any, related to the above-mentioned $10,050,000
     (plus  other incremental costs incurred) until the amounts are agreed to by
     PMI  or  the  validity  of the Company's claim can be otherwise determined.

     Sales  to  PMI  totaled approximately $95,200,000 for the nine months ended
     April  30, 2001, representing approximately 76.8% of total revenues for the
     period.

     LPG  BUSINESS  -  SALES  AGREEMENT  -  OTHER

     Beginning May 1, 2001 the Company entered into an agreement for the sale of
     propane  which provides for the sale of approximately 3,700,000 - 5,000,000
     gallons  per  month  during the period from May 2001 through September 2001
     and approximately 1,300,000 - 2,600,000 gallons per month from October 2001
     through  March  2002.  The  sales price is based on indexed variable posted
     prices.


                                       23
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  CONTINUED

     LPG  SUPPLY  AGREEMENTS

     Effective  October  1,  1999, the Company and Exxon entered into a ten year
     LPG  supply contract, as amended (Exxon Supply Contract), whereby Exxon has
     agreed  to supply and the Company has agreed to take, 100% of Exxon's owned
     or  controlled volume of propane and butane available at Exxon's King Ranch
     Gas  Plant (Plant) up to 13,900,000 gallons per month blended in accordance
     with  required  specifications  (Plant  Commitment).  The purchase price is
     indexed  to  variable  posted  prices.

     In  addition,  under  the  terms  of  the Exxon Supply Contract, Exxon made
     operational  its Corpus Christi Pipeline (ECCPL) during September 2000. The
     ability  to  utilize  the ECCPL allows the Company to acquire an additional
     supply of propane from other propane suppliers located near Corpus Christi,
     Texas  (Additional Propane Supply), and bring the Additional Propane Supply
     to  the  Plant  (ECCPL  Supply)  for  blending to the proper specifications
     outlined  under  the  Old  Agreements  and  then  delivered into the Leased
     Pipeline. In connection with the ECCPL Supply, the Company agreed to supply
     a minimum of 7,700,000 gallons into the ECCPL during the first quarter from
     the  date  that  the  ECCPL  became  operational,  approximately 92,000,000
     gallons the following year and 122,000,000 gallons each year thereafter and
     continuing  for four years. The Company is required to pay additional costs
     associated  with  the  use  of  the  ECCPL.

     In  September  1999,  the Company and PG&E entered into a three year supply
     agreement (PG&E Supply Agreement) whereby PG&E has agreed to supply and the
     Company  has  agreed  to  take,  a  monthly average of 2,500,000 gallons of
     propane  (PG&E  Supply)  beginning  in  October 1999. The purchase price is
     indexed  to  variable  posted  prices.

     Under  the  terms  of  the  PG&E  Supply Agreement, the PG&E Supply will be
     delivered  to  either  the  Leased Pipeline or, in the future, to the ECCPL
     (after  PG&E  completes construction of an interconnection), and blended to
     the  required  specifications.

     In  March  2000,  the  Company  and  Koch  entered into a three year supply
     agreement  (Koch Supply Contract) whereby Koch has agreed to supply and the
     Company  has  agreed  to take, a monthly average of 8,200,000 gallons (Koch
     Supply)  of  propane beginning April 1, 2000, subject to the actual amounts
     of propane purchased by Koch from the refinery owned by its affiliate, Koch
     Petroleum  Group,  L.P.  The  purchase  price is indexed to variable posted
     prices.  Furthermore,  the  Company  is  required to pay additional charges
     associated  with  the  construction of a new pipeline interconnection to be
     paid  through  additional  adjustments  to  the  purchase  price  (totaling
     approximately  $1,000,000)  which allows deliveries of the Koch Supply into
     the  ECCPL  (approximately  $400,000 has been paid through April 30, 2001).

     In  connection  with  the  delivery of the Koch Supply, the Company did not
     accept  the  Koch  Supply  because  the  ECCPL  was  not  operational until
     September  2000. Accordingly, the Company arranged for the sale of the Koch
     Supply  to  third  parties  (Unaccepted  Koch  Supply  Sales).  The Company
     incurred additional costs in connection with the disposal of the Unaccepted
     Koch  Supply  Sales.

     Under  the  terms of the Koch Supply Contract, the Koch Supply is delivered
     into  the  ECCPL  and  blended  to  the  proper  specifications.


                                       24
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  CONTINUED

     LPG  SUPPLY  AGREEMENTS  -  Continued

     During  March  2000,  the Company and Duke entered into a three year supply
     agreement  (Duke Supply Contract) whereby Duke has agreed to supply and the
     Company  has  agreed  to take, a monthly average of 1,900,000 gallons (Duke
     Supply)  of  propane  or  propane/butane  mix, beginning April 1, 2000. The
     purchase  price  is  indexed  to  variable  posted  prices.

     Pursuant  to  the  terms  of  the  Duke Supply Contract, the Company paid a
     minimal  amount for modifications related to the interconnections necessary
     to  allow  the  Duke  Supply  to  be  delivered  into  the  Leased Pipeline
     facilities.

     The  delivery  of the PG&E Supply or the Koch Supply will satisfy a portion
     or  all  of  the ECCPL Supply requirements under the Exxon Supply Contract.

     The  Company is currently purchasing LPG from the above-mentioned suppliers
     (Suppliers).  The  Company's  costs  to  purchase  LPG (less any applicable
     adjustments)  are  below  the sales prices of LPG sold to its two customers
     beginning  in  April  2001.

     The  Company  has  entered  into  supply  agreements  for quantities of LPG
     totaling  approximately  23,000,000  gallons per month although a new sales
     agreement  with  PMI  has  not  been  consummated.


NOTE  N  -  SUBSEQUENT  EVENT  -  NOT  SUBJECT  TO  INDEPENDENT CERTIFIED PUBLIC
     ACCOUNTANTS'  REVIEW  REPORT

     RESTRUCTURED  NOTES  AND  NEW  NOTES

     As  of  June  15,  2001, the Restructured Notes and New Notes have not been
     paid.  Therefore,  the exercise price of the Warrants, the New Warrants and
     the  New  Note Warrants issued to the holders of the Restructured Notes and
     New  Notes  was  reduced  from  $3.00  per  share  to  $2.50  per  share.


                                       25
<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.

FORWARD-LOOKING  STATEMENTS

     Statements  in  this  report  regarding  future  events  or  conditions are
forward-looking  statements.  Actual  results, performance or achievements could
differ  materially  due to, among other things, factors discussed in this report
and  in  Part  I of the Company's Annual Report on Form 10-K for the fiscal year
ended  July  31,  2000.  These  forward-looking  statements include, but are not
limited to, statements regarding anticipated future revenues, sales, operations,
demand, competition, capital expenditures, the deregulation of the LPG market in
Mexico,  the operations of the Saltillo Terminal Facility, other upgrades to our
facilities,  short-term  obligations  and  credit  arrangements,  outcome  of
litigation,  and  other  statements  regarding  matters  that are not historical
facts,  and  involves  predictions  which  are  based  upon  a  number of future
conditions that ultimately may prove to be inaccurate.  We caution you, however,
that  this  list  of  factors  may  not  be  complete.

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 also sells LPG
to  U.S.  and  Canadian  customers.

     During  the  nine months ended April 30, 2001, the Company derived 76.8% of
its  revenues  from  sales  of  LPG  to  PMI,  its  primary  customer.

     The  Company  provides  products  and  services  through  a  combination of
fixed-margin  and  fixed-price contracts.  Costs included in cost of goods sold,
other  than  the  purchase  price  of LPG, may affect actual profits from sales,
including  costs  relating  to  transportation, storage, leases and maintenance.
Mismatches in volumes of LPG purchased from suppliers and volumes sold to PMI or
others  could  result  in  gains  during  periods of rising LPG prices or losses
during  periods  of  declining  LPG prices as a result of holding inventories or
disposing  of  excess  inventories.

LPG  SALES

     The  following table shows the Company's volume sold in gallons and average
sales prices of LPG for the three and nine months ended April 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                     Three Months Ended April 30,  Nine Months Ended April 30,
                                     ----------------------------  ---------------------------
                                           2001          2000           2001          2000
                                     --------------  ------------  -------------  ------------
<S>                                  <C>             <C>           <C>            <C>
Volume Sold

  LPG (millions of gallons) - PMI             46.8          31.7          136.8          102.1
  LPG (millions of gallons) - Other           16.3          14.4           49.1           14.4
                                     --------------  ------------  -------------  ------------
                                              63.1          46.1          185.9          116.5
</TABLE>


                                       26
<PAGE>
RESULTS  OF  OPERATIONS

THREE  MONTHS  ENDED  APRIL  30, 2001 COMPARED WITH THREE MONTHS ENDED APRIL 30,
2000

     Revenues.  Revenues  for  the three months ended April 30, 2001, were $38.1
million  compared  with $25.7 million for the three months ended April 30, 2000,
an  increase  of  $12.4  million  or 48.41%.  Of this increase, $9.5 million was
attributable  to  increased volumes of LPG sold to PMI in the three months ended
April  30, 2001, $1.7 million was attributable to increased average sales prices
of LPG sold to PMI in the three months ended April 30, 2001 and $1.2 million was
attributable  to sales of LPG to customers other than PMI in connection with the
Company's  desire  to  reduce  quantities  of  inventory.

     Cost  of  goods  sold.  Cost of goods sold for the three months ended April
30,  2001,  was  $37.8  million compared with $25.9 million for the three months
ended April 30, 2000, an increase of $11.9 million or 46.24%.  Of this increase,
$8.6  million  was  attributable  to increased volumes of LPG sold to PMI in the
three  months ended April 30, 2001, $488,289 was attributable to the increase in
the  cost  of  LPG  sold  to PMI for the three months ended April 30, 2001, $2.5
million  was  attributable  to  cost  of LPG sold to customers other than PMI in
connection  with  the  Company's desire to reduce quantities of inventory during
the  three  months  ended  April  30,  2001,  and  $351,533  was attributable to
increased  operating  costs  associated  with  LPG during the three months ended
April  30,  2001.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses were $794,416 for the three months ended April 30, 2001
compared  with $844,121 for the three months ended April 30, 2000, a decrease of
$49,705  or  5.9%.

     Other  income  (expense).  Other  (expense)  was  $(948,960)  for the three
months  ended April 30, 2001 compared with $(709,131) for the three months ended
April  30, 2000, an increase of $239,829.  The increase in other expense was due
primarily  to increased interest costs and amortization of discounts of $205,829
associated  with  the  issuance  of debt during the three months ended April 30,
2001.

     Income  tax.   The  Company  had  a net operating loss carryforward of $5.6
million  at  July  31,  2000 which expires in the years 2010 to 2018, and may be
significantly  limited  by  the  application  of the "change in ownership" rules
under  Section  382  of  the  Internal  Revenue  Code.

NINE  MONTHS ENDED APRIL 30, 2001 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2000

     Revenues.  Revenues  for  the nine months ended April 30, 2001, were $124.1
million compared with $60.7 million for the nine months ended April 30, 2000, an
increase  of  $63.4  million  or  104.6%.  Of  this  increase, $24.1 million was
attributable  to  increased  volumes of LPG sold to PMI in the nine months ended
April 30, 2001, $17.9 million was attributable to increased average sales prices
of LPG sold to PMI in the nine months ended April 30, 2001 and $21.4 million was
attributable  to sales of LPG to customers other then PMI in connection with the
Company's  desire  to  reduce  quantities  of  inventory.

     Cost of goods sold.  Cost of goods sold for the nine months ended April 30,
2001,  was  $122.2 million compared with $58.7 million for the nine months ended
April 30, 2000, an increase of $63.6 million or 108.4%.  Of this increase, $22.3
million  was  attributable  to  increased volumes of LPG sold to PMI in the nine
months  ended April 30, 2001,  $16.5 million was attributable to the increase in
the  cost  of  LPG  sold  to PMI for the nine months ended April 30, 2001, $23.4
million  was  attributable  to  cost  of LPG sold to customers other than PMI in
connection  with  the  Company's desire to reduce quantities of inventory during
the  nine  months  ended  April  30,  2001, and $1.4 million was attributable to
increased operating costs associated with LPG during the nine months ended April
30,  2001.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $2.5 million for the nine months ended April 30,
2001  compared  with  $2.4  million for the nine months ended April 30, 2000, an
increase  of  $48,256  or  2.0%.


                                       27
<PAGE>
     Other  income (expense).  Other income (expense) was $(2.7) million for the
nine  months ended April 30, 2001 compared with $2.0 million for the nine months
ended  April 30, 2000, a decrease of $4.7 million.  The decrease in other income
was  due  primarily to increased interest costs and amortization of discounts of
$1.5  million  associated with the issuance of debt during the nine months ended
April  30,  2001  and  a  decrease  of  $3.0  million  related to the award from
litigation,  which  was  recorded  during  the nine months ended April 30, 2000.

     Income  tax.   The  Company  had  a net operating loss carryforward of $5.6
million  at  July  31, 2000, which expires in the years 2010 to 2018, and may be
significantly  limited  by  the  application  of the "change in ownership" rules
under  Section  382  of  the  Internal  Revenue  Code.


LIQUIDITY  AND  CAPITAL  RESOURCES

     General.  The Company has had an accumulated deficit since its inception in
1992, has used cash in operations, and has 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  New  Notes,  the  RZB  Credit Facility and the notes related to the
Settlement.  The  Company  is  currently  negotiating  final  documents with the
creditors  for  the  required  security  agreements.  The  Company  may  need to
increase  its credit facility for the purchase of quantities of LPG in excess of
current quantities sold and/or to finance future price increases of LPG, if any.
Further, the Company may find it necessary to liquidate inventories at a loss to
provide  working  capital,  to  reduce  outstanding  balances  under  its credit
facility  or due to storage limitations at Markham Storage.  The Company depends
heavily  on  sales to one major customer for which a new sales agreement has not
been  consummated.  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.

     The  following  summary  table reflects comparative cash flows for the nine
months  ended  April  30,  2001  and  2000.  All  information  is  in thousands.

                                                        Nine Months Ended
                                                       -------------------
                                                      April 30,     April 30,
                                                        2001          2000
                                                     -----------  -----------
Net cash provided by (used in) operating activities  $  ( 3,589)  $      133
Net cash used in investing activities . . . . . . .     ( 2,026)     (10,585)
Net cash provided by financing activities . . . . .       5,735       10,615
                                                     -----------  -----------
Net increase in cash. . . . . . . . . . . . . . . .  $      120   $      163
                                                     ===========  ===========

     Sales  Agreement - PMI.  The Company entered into sales agreements with PMI
for the period from April 1, 2000 through March 31, 2001 (the "Old Agreements"),
for the annual sale of a combined minimum of 151.2 million gallons of LPG, mixed
to  PMI  specifications, subject to seasonal variability, which was delivered to
PMI  at  the  Company's terminal facilities in Matamoros, Tamaulipas, Mexico and
Saltillo,  Coahuila,  Mexico  or alternative delivery points as prescribed under
the  Old  Agreements.

     On  October  11,  2000,  the  Old  Agreements  were amended to increase the
minimum  amount  of  LPG  to  be  purchased during the period from November 2000
through  March  2001  by  7.5 million gallons resulting in a new annual combined
minimum  commitment  of  158.7  million  gallons.  Under  the  terms  of the Old
Agreements,  sales  prices  were  indexed  to  variable  posted  prices.


                                       28
<PAGE>
     The  Old  Agreements  expired  March  31,  2001.  On  April  26,  2001, PMI
confirmed  to  the  Company in writing ("Confirmation") the following terms of a
new agreement ("Proposed Agreement") subject to revisions to be provided by PMI.
The Confirmation provides for minimum monthly volumes of 19.0 million gallons at
indexed  variable  posted  prices  plus  premiums  that provide the Company with
annual  fixed  margins which increase annually over a three year period.   Since
April  2001,  the  Company and PMI have operated under the terms provided for in
the  Confirmation.  During April 2001, the Company sold PMI 19.0 million gallons
of  which,  at  the  request  of  PMI,  approximately  5.5  million gallons were
delivered  to  Markham  Storage  and  the balance was delivered to the Matamoros
Terminal  Facility.  In  addition  to  the  above  prices,  the Company received
additional  fees  relating to storage and delivery of the 5.5 million gallons to
Markham  storage.  The  Company  and  PMI  are  negotiating the revisions of the
Proposed  Agreement.

     PMI  currently  uses  the  Matamoros  Terminal  Facility  to  load  all LPG
purchased from the Company for distribution in Mexico.  The Company continues to
use  the  Brownsville  Terminal  Facility  in  connection  with LPG delivered by
railcar  or  as  an  alternative  terminal  in  the event the Matamoros Terminal
Facility  cannot  be  used.

     In  connection with the Old Agreements, the Company believes that it is due
an  additional  $10.1  million (plus other incremental costs incurred), of which
$5.6  million  has  been  billed  to  PMI  through  April  30,  2001,  resulting
principally  from  shortfalls  in the minimum volume requirements (approximately
13.2  million gallons) and other price adjustments as provided for under the Old
Agreements based on the Company's interpretation of certain of the provisions of
those  agreements.  PMI  has  not  paid  the amount billed. The Company will not
record  in  its  unaudited  consolidated financial statements, revenues, if any,
related  to  the  above-mentioned  $10.1  million  (plus other incremental costs
incurred)  until  the  amounts  are  agreed  to  by  PMI  or the validity of the
Company's  claim  can  be  otherwise  determined.

     Sales  to PMI totaled approximately $95.2 million for the nine months ended
April  30,  2001,  representing  approximately  76.8%  of total revenues for the
period.

     Sales  Agreement - Other. Beginning May 1, 2001 the Company entered into an
agreement  for  the sale of propane which provides for the sale of approximately
3.7  -  5.0  million  gallons  per month during the period from May 2001 through
September  2001  and  approximately  1.3  -  2.6  million gallons per month from
October  2001  through  March 2002. The sales price is based on indexed variable
posted  prices.

     LPG  Supply  Agreements.  Effective  October 1, 1999, the Company and Exxon
entered  into  a  ten  year  LPG  supply contract, as amended (the "Exxon Supply
Contract"),  whereby  Exxon  has  agreed to supply and the Company has agreed to
take, 100% of Exxon's owned or controlled volume of propane and butane available
at  Exxon's  King  Ranch  Gas Plant (the "Plant") up to 13.9 million gallons per
month  blended  in  accordance  with  required  specifications  (the  "Plant
Commitment").  The  purchase  price  is  indexed  to  variable  posted  prices.

     In  addition,  under  the  terms  of  the Exxon Supply Contract, Exxon made
operational  its  Corpus  Christi  Pipeline (the "ECCPL") during September 2000.
The  ability  to  utilize  the ECCPL allows the Company to acquire an additional
supply  of  propane  from  other  propane suppliers located near Corpus Christi,
Texas (the "Additional Propane Supply"), and bring the Additional Propane Supply
to  the  Plant  (the  "ECCPL  Supply") for blending to the proper specifications
outlined  under  the Old Agreements and then delivered into the Leased Pipeline.
In  connection  with the ECCPL Supply, the Company agreed to supply a minimum of
7.7  million  gallons into the ECCPL during the first quarter from the date that
the  ECCPL  became operational, approximately 92.0 million gallons the following
year  and  122.0  million  gallons  each year thereafter and continuing for four
years.  The  Company is required to pay additional costs associated with the use
of  the  ECCPL.

     In  September  1999,  the  Company  and  PG&E  NGL Marketing, L.P. ("PG&E")
entered into a three year supply agreement (the "PG&E Supply Agreement") whereby
PG&E  has agreed to supply and the Company has agreed to take, a monthly average
of 2.5 million gallons of propane (the "PG&E Supply") beginning in October 1999.
The  purchase  price  is  indexed  to  variable  posted  prices.


                                       29
<PAGE>
     Under  the  terms  of  the  PG&E  Supply Agreement, the PG&E Supply will be
delivered to either the Leased Pipeline or, in the future, the ECCPL (after PG&E
completes  construction  of  an  interconnection),  and  blended to the required
specifications.

     In  March  2000,  the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed  to  supply  and the Company has agreed to take, a monthly average of 8.2
million  gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to  the  actual  amounts of propane purchased by Koch from the refinery owned by
its  affiliate,  Koch  Petroleum  Group,  L.P.  The purchase price is indexed to
variable  posted  prices. Furthermore, the Company is required to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid  through  additional  adjustments  to  the  purchase  price  (totaling
approximately  $1.0 million) which allows deliveries of the Koch Supply into the
ECCPL  (approximately  $400,000  has  been  paid  through  April  30,  2001).

     In  connection  with  the  delivery of the Koch Supply, the Company did not
accept  the  Koch  Supply  because the ECCPL was not operational until September
2000.  Accordingly,  the  Company  arranged  for  the sale of the Koch Supply to
third  parties  (the  "Unaccepted  Koch  Supply  Sales").  The  Company incurred
additional  costs  in connection with the disposal of the Unaccepted Koch Supply
Sales.

     Under  the  terms of the Koch Supply Contract, the Koch Supply is delivered
into  the  ECCPL  and  blended  to  the  proper  specifications.

     During  March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered  into a three year supply agreement (the "Duke Supply Contract") whereby
Duke  has agreed to supply and the Company has agreed to take, a monthly average
of  1.9  million  gallons  (the "Duke Supply") of propane or propane/butane mix,
beginning  April  1,  2000.   The  purchase  price is indexed to variable posted
prices.

     Pursuant  to  the  terms  of  the  Duke Supply Contract, the Company paid a
minimal  amount  for  modifications related to the interconnections necessary to
allow  the  Duke  Supply  to  be  delivered into the Leased Pipeline facilities.

     The  delivery  of the PG&E Supply or the Koch Supply will satisfy a portion
or  all  of  the  ECCPL  Supply  requirements  under  the Exxon Supply Contract.

     The  Company  has  entered  into  supply  agreements  for quantities of LPG
totaling  approximately  23.0  million  gallons  per  month although a new sales
agreement  with  PMI  has  not  been  consummated.

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,  PG&E  Supply, Koch Supply or Duke Supply over actual sales volumes.
Under  the  terms  of  the Supply Contracts, the Company must provide letters of
credit  in  amounts  equal  to  the  cost  of  the  product to be purchased.  In
addition,  the  cost of the product purchased is tied directly to overall market
conditions.  As  a  result, the Company's existing letter of credit facility may
not  be  adequate to meet the letter of credit requirements under the agreements
with  the  Suppliers  or other suppliers due to increases in costs of LPG or LPG
volumes purchased by PMI.  Upon the implementation of Deregulation, if ever, the
Company  anticipates  entering  into  contracts  with Mexican distributors which
require  payments  in  pesos.  Furthermore,  there  can  be  no  assurance  that
Deregulation  would  be  as  favorable to the Company.  In addition, the Mexican
distributors  may  be  limited  in  their  ability to obtain adequate financing.

     The  ability  of  the  Company  to increase sales of LPG into Mexico in the
future  is  largely  dependent  on  the  Company's  ability  to negotiate future
contracts  with  PMI  and/or  with local Mexican distributors if Deregulation in
Mexico  is implemented.  In addition, there can be no assurance that the Company
will  be  able to obtain terms equal to or more favorable than those experienced
in  the  past.  In the event that the Company is unable to meet its intended LPG
sales  objectives,  then  the  Company  may  incur  significant  losses.

     Breakdowns  along the planned distribution route for the LPG once purchased
from  the  Suppliers,  may limit the ability of the Company to accept or deliver
the  Plant  Commitment,  the ECCPL Supply, the PG&E Supply, the Koch Supply, and
the  Duke  Supply.


                                       30
<PAGE>
     As  a  result  of the Exxon Supply Contract, the PG&E Supply Agreement, the
Koch  Supply Contract and the Duke Supply Contract, the Company has more than an
adequate  supply  of  LPG  to satisfy the requirements of the Proposed Agreement
with  PMI  and  sales  to  other customers. However, from September 2002 through
March  2003,  some  of  the above contractual supply agreements will expire. The
Company  believes  it  will  be  able  to  extend  these  contracts.

     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 beginning January
1,  2001 until its expiration is $1.0 million.  The Company is required to pay a
minimum  charge  for  storage of $300,000 per year (based on reserved storage of
8.4  million  gallons).  In  connection  with the Pipeline Lease the Company may
reserve  up to 12.6 million gallons of storage through December 31, 2001 and may
reserve  up  to  21.0  million  gallons  each  year thereafter provided that the
Company notifies Seadrift in advance.  In addition, 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.  The
Company  has  made  all  payments  required  under the Pipeline Lease Amendment.

     Upgrades.  The  Company  intends to further contract in the near future for
design, construction and installation of several projects which, when completed,
will  increase  its  current pipeline and storage capacity, enhance its existing
pipeline  and terminal facilities or expand its ability to accept or deliver LPG
supply  (the  "Upgrades").

     Acquisition  of  Pipeline  Interests.  On  March  30,  2001,  the  Company
completed  a  settlement  with  CPSC  International,  Inc.  ("CPSC")  and Cowboy
Pipeline  Service  Company, Inc. ("Cowboy"), which provides the Company with the
remaining  50%  interest  (100%  in  total  as  a  result of the Company's prior
acquisition  of  a  50% interest in the two separate Lease/Installation Purchase
Agreements,  as  amended (the "Lease Agreements") and the assets underlying such
Lease Agreements) in the portion of the pipelines, terminal facility and related
land, permits or easements (the "Acquired Assets") previously constructed and/or
owned  by CPSC and leased to the Company under the Lease Agreements between CPSC
and  the  Company.  The  Court  entered  an order approving the Settlement.  The
Acquired  Assets  generally  consist  of  a  LPG terminal facility in Matamoros,
Mexico  and  pipelines which connect the Company's Brownsville Terminal Facility
to the Matamoros Terminal Facility.  In addition, as part of the Settlement, the
Company  conveyed  to  CPSC  all  of its rights to a certain property (the "Sold
Asset").  The  foregoing  is  more  fully  discussed  below.  The  terms  of the
Settlement  did  not  deviate  in any material respect from the terms previously
reported  except  that  the fair value of the warrants issued in connection with
the  Settlement (see below) was reduced from $600,000 to $300,000 as a result of
the  reduction  of  the  market  value  of  the  Company's  common  stock.

     In  connection  with  the  Settlement,  the Company agreed to pay CPSC $5.8
million (the "Purchase Price") for the Acquired Assets, less agreed upon credits
and  offsets  in favor of the Company totaling $3.2 million.  The remaining $2.6
million  was paid at the closing of the Settlement by a cash payment of $200,000
to  CPSC  and the issuance to or for the benefit of CPSC of two promissory notes
in  the  amounts  of  $1.5  million  (the  "CPSC  Note")  (payable in 36 monthly
installments  of  approximately $46,000, including interest at 9% per annum) and
$900,000  (the  "Other  Note")  (payable  in  36  equal  monthly installments of
approximately  $29,000,  including  interest  at  9%).  The $200,000 payment was
provided  from  the Company's working capital and the Company expects to pay the
CPSC  Note and Other Note from the Company's working capital.  The Other Note is
collateralized  by a first priority security interest in the U.S. portion of the
pipelines  comprising the Acquired Assets.  The CPSC Note is collateralized by a
security  interest  in the U.S. portion of the pipelines comprising the Acquired
Assets,  which  security interest is subordinated to the security interest which
secures  the  Other  Note.  In addition, the security interest granted under the
CPSC  Note  is  shared on a pari passu basis with certain other creditors of the
Company  (see  note  F).  Under  the  terms  of  the  CPSC  Note,


                                       31
<PAGE>
the  Company is entitled to certain offsets related to future costs which may be
incurred  by the Company in connection with the Acquired Assets.  In addition to
the  payments  described above, the Company agreed to assume certain liabilities
which  were  previously  owed  by  CPSC  in  connection with construction of the
Acquired Assets.  CPSC also transferred to the Company any right that it held to
any  amounts  owing from Termatsal for cash and/or equipment provided by CPSC to
Termatsal  including  approximately  $2.6  million  of  cash, in connection with
construction  of  the  Mexican  portion  of  the  Acquired  Assets.

     The  Sold  Asset  transferred  to  CPSC  in  connection with the Settlement
consisted  of real estate of the Company with an original cost to the Company of
$3.8 million and with a remaining book value totaling approximately $1.9 million
(after  giving  effect  to  credits  provided  to  the  Company  included in the
financial  terms  described above).   CPSC agreed to be responsible for payments
required  in  connection  with  the Debt related to the original purchase by the
Company  of  the  Sold  Asset  totaling  approximately  $1.9  million.  CPSC's
obligations  under  the  Debt  are  to be paid by the Company to the extent that
there  are  amounts  owed  by  the  Company  under the CPSC Note, through direct
offsets  by  the  Company  against  the CPSC Note.  After the CPSC Note is fully
paid,  the  Company  will  no  longer  have  any  payment  obligation to CPSC in
connection  with  the Debt and therefore, CPSC will then be fully responsible to
the  Company  for  any  remaining  obligations  in connection with the Debt (the
"Remaining  Obligations").  CPSC's  obligations to the Company in respect of the
Remaining Obligations are collateralized by a deed of trust lien granted by CPSC
in favor of the Company against the Sold Asset.  CPSC also granted the Company a
pipeline  related  easement  on  the Sold Asset.   The principal of $1.9 million
plus  accrued  and  unpaid  interest  is  included  in  long-term  debt  and the
corresponding  amounts  required  to  be  paid  by  CPSC  has been recorded as a
mortgage receivable (see note F).  In addition to the Purchase Price above, CPSC
received  warrants  to purchase 175,000 shares of common stock of the Company at
an  exercise  price  of $4.00 per share exercisable through March 30, 2004, such
shares  having  a  fair  value totaling approximately $300,000.  This amount has
been included in the accompanying unaudited consolidated financial statements at
April  30,  2001.

     Until  the  security  interests  as  described  above  are  perfected,  the
Company's  President  is providing a personal guarantee for the punctual payment
and  performance  under  the  CPSC  Note.

     In  connection  with  the  above,  the  Company  may  be  required  to fund
additional  capital  expenditures  to  complete  the  US  - Mexico Pipelines and
Matamoros  Terminal  Facility,  which  amount  cannot  presently  be determined.
Pursuant  to the terms of the Settlement, such amounts may be offset against the
CPSC  Note.

     Acquisition of Mexican Subsidiaries.   Effective April 1, 2001, the Company
completed the purchase of 100% of the outstanding common stock of both Termatsal
and  PennMex  (the  "Mexican  Subsidiaries"), previous affiliates of the Company
which  were  principally  owned  by an officer and director.  The Company paid a
nominal  purchase  price.  As  a  result  of  the  acquisition,  the Company has
included  the  results of the Mexican Subsidiaries in its unaudited consolidated
financial  statements  at April 30, 2001.  Since inception the operations of the
Mexican  Subsidiaries  have  been  funded  by  the  Company.

     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
consolidated  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  Mexican Subsidiaries own, lease, or are in the
process  of  obtaining the land or rights of way used in the construction of the
US-Mexico  Pipelines,  and own the assets comprising the US-Mexico Pipelines and
Matamoros  Terminal  Facility.  The Company's Mexican affiliate, Tergas, S.A. de
C.V.  (Tergas),  has  been  granted the permit to operate the Matamoros Terminal
Facility.  Tergas  is owned 90% by Jorge Bracamontes, an officer and director of
the  Company.  The  Company  is  negotiating an agreement with Tergas to provide
services  at  the Matamoros Terminal Facility and Saltillo Terminal Facility for
actual  costs  incurred  by  Tergas  plus  5%.

     Termatsal has completed construction of an additional LPG terminal facility
in  Saltillo, Mexico (the "Saltillo Terminal Facility") for an estimated cost of
$800,000.  The  Saltillo  Terminal  Facility  is capable of off loading LPG from
railcars  to  trucks.  The  Saltillo  Terminal  Facility  contains  storage  to
accommodate  approximately 90,000 gallons of LPG with additional storage planned
for  180,000  gallons.  The  Saltillo  Terminal


                                       32
<PAGE>
Facility  has three railcar off loading racks and three truck loading racks.  As
a  result  of  the  Saltillo  Terminal  Facility,  the Company can transport LPG
directly  via  railcar  from  the  Brownsville Terminal Facility to the Saltillo
Terminal  Facility.  The Saltillo Terminal Facility has not begun operations due
to  concerns  by  local  residents  in  Saltillo.  If  such  concerns  cannot be
resolved,  the  Company may relocate the tangible assets comprising the Saltillo
Terminal Facility to a more remote location.  The cost of such relocation is not
expected  to  be  material  to  the Company's consolidated financial statements.

     Tergas  leases  the land on which the Saltillo Terminal Facility is located
and  has  been  granted  the  permit  to operate the Saltillo Terminal Facility.
Termatsal  owns  the assets comprising the Saltillo Terminal Facility.  The land
is  leased  through  January  2003 for $69,000 annually.  Under the terms of the
land lease agreement, any leasehold improvements at the termination of the lease
may  be  removed.

     In  connection  with  the  planned  operations  of  the  Saltillo  Terminal
Facility,  Termatsal  had  entered  into  lease  agreements for approximately 50
railcars  to  transport  LPG  between  the Brownsville Terminal Facility and the
Saltillo  Terminal  Facility.  The  railcars  are leased through August 2001 for
$297,000  annually.  The  Saltillo  Terminal  Facility  is not operational.  The
Company  has  utilized a portion of the railcars in connection with sales of LPG
to  U.S.  and  Canadian  customers.

     The  operations  of  the Mexican Subsidiaries and Tergas are subject to the
tax  laws of Mexico which, among other things, require that Mexican Subsidiaries
of  foreign  entities  comply with transfer pricing rules, the payment of income
and/or  asset  taxes, and possibly taxes on distributions in excess of earnings.
In  addition,  distributions  to  foreign  corporations, including dividends and
interest  payments  may  be  subject  to  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  will  be prohibited from participating in the distribution of
LPG  in  Mexico.  Upon  the completion of Deregulation, Mexican entities will be
able  to import LPG into Mexico.  Under Mexican law a consolidated entity is not
permitted  to  participate  in  more  than  one  of  the  defined LPG activities
(transportation,  storage  and  distribution).  The  Company expects to sell LPG
directly  to  independent  Mexican  distributors  as  well  as PMI.  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.

     The  point  of sale for LPG which flows through the US-Mexico Pipelines for
delivery  to the Matamoros Terminal Facility is sold at the United States-Mexico
border.

     Credit  Arrangements. As of April 30, 2001, the Company has a $20.0 million
credit  facility  with  RZB  Finance L.L.C. ("RZB") for demand loans and standby
letters  of  credit ("RZB Credit Facility") to finance the Company's purchase of
LPG.  In  connection  with  the  RZB  Credit  Facility,  RZB  entered  into  a
participation agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft,
New  York  Branch ("HVB"), whereby RZB and HVB will each participate up to $10.0
million  toward  the  total  credit facility. Under the RZB Credit Facility, the
Company  pays  a  fee  with  respect  to  each letter of credit thereunder in an


                                       33
<PAGE>
amount equal to the greater of (i) $500, (ii) 2.5% of the maximum face amount of
such  letter  of credit, or (iii) such higher amount as may be agreed to between
the  Company  and  RZB.  Any  amounts  outstanding under the RZB Credit Facility
shall  accrue  interest  at  a  rate  equal  to  the rate announced by the Chase
Manhattan  Bank  as  its  prime  rate  plus  2.5%.  Pursuant  to  the RZB Credit
Facility,  RZB  has  sole  and  absolute  discretion to terminate the RZB Credit
Facility and to make any loan or issue any letter of credit thereunder. RZB also
has the right to demand payment of any and all amounts outstanding under the RZB
Credit  Facility  at  any time.  In connection with the RZB Credit Facility, the
Company  granted  a mortgage, security interest and assignment in any and all of
the  Company's  real  property,  buildings,  pipelines,  fixtures  and interests
therein  or  relating thereto, including, without limitation, the lease with the
Brownsville  Navigation  District  of  Cameron  County for the land on which the
Company's  Brownsville  Terminal Facility is located, the Pipeline Lease, and in
connection  therewith  agreed  to  enter into leasehold deeds of trust, security
agreements,  financing statements and assignments of rent, in forms satisfactory
to  RZB.  Under the RZB Credit Facility, the Company may not permit to exist any
lien,  security interest, mortgage, charge or other encumbrance of any nature on
any  of its properties or assets, except in favor of RZB, without the consent of
RZB  (see  notes F, H and I to the unaudited consolidated financial statements).

     The  Company's  President,  Chairman  and  Chief  Executive  Officer  has
personally  guaranteed  all of the Company's payment obligations with respect to
the  RZB  Credit  Facility.

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

     As  of  April  30, 2001, letters of credit established under the RZB Credit
Facility  in  favor  of  Exxon, PG&E, Duke and Koch for purchases of LPG totaled
$13.8  million of which $11.3 million was being used to secure unpaid purchases.
In  addition,  as  of April 30, 2001, the Company had borrowed $7.9 million from
its revolving line of credit under the RZB Credit Facility for purchases of LPG.
In  connection  with  these purchases, at April 30, 2001, the Company had unpaid
invoices  due  from  PMI totaling $11.9 million, cash balances maintained in the
RZB Credit Facility collateral account of $162,983 and inventory held in storage
of $5.6 million (see note E to the unaudited consolidated financial statements).
The  Company's ability to use the cash held by RZB is subject to restrictions as
provided  for  in  the  RZB  Credit  Facility. The RZB Credit Facility funds the
Company  based on the value of cash, accounts receivable and inventory in excess
of supplier obligations in connection with its LPG activities ("Net Assets"). In
the  event  that  the  Company maintains inventory during periods of falling LPG
prices,  to  the  extent that the Net Assets are less than zero, the Company may
not  receive additional funds from the RZB Credit Facility until such deficit is
restored  and/or  the  Company  may  be  obligated  to pay RZB the amount of the
shortfall.

     Private  Placements and Other Transactions.  From December 10, 1999 through
January  18,  2000,  and  on February 2, 2000, the Company completed a series of
related  transactions  in  connection with the private placement of $4.9 million
and  $710,000,  respectively, of subordinated notes (the "Notes") which were due
the earlier of December 15, 2000, or upon the receipt of proceeds by the Company
from  any future debt or equity financing in excess of $2.3 million (see below).
Interest  at  9%  was  due and paid on June 15, 2000, and December 15, 2000.  In
connection  with  the  Notes,  the  Company  granted  the  holders of the Notes,
warrants  (the "Warrants") to purchase a total of 706,763 shares of common stock
of  the  Company  at  an  exercise price of $4.00 per share, exercisable through
December  15,  2002.

     During  December  2000,  the  Company  also  entered  into  agreements (the
"Restructuring Agreements") with the holders of $5.4 million in principal amount
of  the  Notes  providing  for  the  restructuring  of such remaining Notes (the
"Restructuring").  The  remaining  $245,000  balance  of  the  Notes  was  paid.

     Under  the  terms  of  the  Restructuring Agreements, the due dates for the
restructured  notes  (the  "Restructured  Notes")  were extended to December 15,
2001,  subject  to  earlier  repayment  upon the occurrence of certain specified
events  provided for in the Restructured Notes. Additionally, beginning December
16,  2000,  the  annual interest rate on the Restructured Notes was increased to
13.5%  (subject to the adjustments referred to below). Interest payments are due
quarterly  beginning  March  15,  2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the  holders of the
Restructured  Notes  also  received warrants to purchase up to 676,125 shares of
common  stock  of  the  Company  at  an  exercise  price  of $3.00 per share and
exercisable  until  December  15,  2003  (the  "New Warrants"). The Company also
agreed  to  modify the exercise prices of the Warrants to purchase up to 676,137
shares  of  common  stock of the Company previously issued to the holders of the


                                       34
<PAGE>
Restructured  Notes  in  connection  with their original issuance from $4.00 per
share  to  $3.00  per  share  and extend the exercise dates of the Warrants from
December  15, 2002 to December 15, 2003. In addition, the Company is required to
reduce  the  exercise  price  of the Warrants and the New Warrants issued to the
holders of the Restructured Notes from $3.00 per share to $2.50 per share in the
event  that  the Restructured Notes are not fully repaid by June 15, 2001. As of
June  15,  2001,  the  Restructured  Notes  and  New  Notes  have not been paid.
Therefore, the exercise price of the Warrants, the New Warrants and the New Note
Warrants  issued  to  the  holders  of  the Restructured Notes and New Notes was
reduced  from  $3.00  per  share  to  $2.50  per  share.

     In  connection  with  the  Restructuring  Agreements,  the Company has also
agreed  to  register  the  shares  of  common  stock  which  may  be acquired in
connection  with the exercise of the New Warrants (the "Exercisable Shares"). In
the  event  that  the  Company  did not have an effective registration statement
under the Securities Act of 1933, as amended, covering the Exercisable Shares by
March  31,  2001 (or April 30, 2001, if, at the time, the Company was ineligible
to  utilize  Form  S-3  for  purposes of such registration), or if any effective
registration  statement  ceases  to be effective during any period in which such
effectiveness  is  required,  the  Company  will  be  required to pay additional
interest on the Restructured Notes at the rate of 4% per annum for the period in
which  the  deficiency  continues  to  exist.  In  connection with the Company's
obligations  under  the Restructured Notes, the Company's registration statement
containing  the  Exercisable  Shares  was  declared effective on March 14, 2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the Company is also
required  to  provide  the  holders of the Restructured Notes with collateral to
secure the Company's payment obligations under the Restructured Notes consisting
of  a  senior  interest  in  substantially all of the Company's assets which are
located  in  the  United  States  (the  "US  Assets")  and  Mexico (the "Mexican
Assets"),  excluding  inventory,  accounts  receivable  and sales contracts with
respect  to  which  the  Company  is  required  to grant a subordinated security
interest  (collectively  referred  to  as  the  "Collateral").  The  Company's
President  has  also  pledged  2.0 million shares of common stock of the Company
held  by  the  President  (1.0  million  shares to be released when the required
security  interests  in the US Assets have been granted and perfected and all of
the shares are to be released when the required security interests in all of the
Collateral  have  been  granted  and  perfected).  Under  the  terms  of  the
Restructured  Notes, if the required security interests in all of the Collateral
had  not  been granted and perfected by March 15, 2001, the Company was required
to  pay  additional interest at a rate of 3% per annum from March 16, 2001 until
such  time as the required security interests in all of the Collateral have been
granted  and perfected. The granting and perfection of the security interests in
the  Collateral,  as  prescribed  under  the  Restructured  Notes, have not been
finalized.  Accordingly,  the  interest  rate  under  the  Restructured  Notes
increased  to  16.5% on March 16, 2001, and will continue until such time as the
required  security  interest  in  all  of  the  Collateral  has been granted and
perfected.  In  connection  with  the  granting  and  perfection of the security
interests  in  the  Collateral,  the  Company  is currently negotiating with the
holders  of  the  Restructured  Notes  and  New  Notes (see below) an additional
amendment  which  would  provide  for  modifications  to  the  Collateral.  The
Collateral  is  also  being  pledged  in  connection  with the issuance of other
indebtedness  by the Company (see note I to the unaudited consolidated financial
statements).  PMG  Capital  Corp.  (PMG)  has  agreed to serve as the collateral
agent.

     During August 2000 and September 2000, the Company issued 12,500 shares and
100,000  shares of common stock of the Company, respectively, in connection with
the  settlement  of  litigation.

     In  August  2000  the  Company  issued  6,500  shares  of Common Stock to a
consultant  in  payment  for services rendered to the Company valued at $41,438.

     The  Board  of Directors (Board) granted warrants to purchase 10,000 shares
of  common stock of the Company at an exercise price of $6.94 per share to those
outside directors previously elected and serving on the Board at August 1, 2000.
In  addition,  the Board granted to newly elected directors warrants to purchase
60,000  shares of common stock of the Company, at an exercise price of $6.69 per
share,  with  the  vesting  period  to  commence  on  August  7,  2000.


                                       35
<PAGE>
     In  connection  with  a  consulting  agreement  between  the  Company and a
director  of  the Company, during August 2000, the director received warrants to
purchase  100,000  shares of common stock of the Company at an exercise price of
$6.38  per  share  exercisable  through  August  6, 2005. The warrants will vest
ratably  on  a  quarterly  basis  over  four  years.

     During  September  2000,  a  director  and officer of the Company exercised
warrants  to  purchase  200,000  shares  of  common  stock of the Company, at an
exercise  price  of  $2.50  per share. The consideration for the exercise of the
warrants  included  $2,000 in cash and a $498,000 promissory note. The principal
amount  of  the note plus accrued interest at an annual rate of 10.5% was due on
April  30,  2001.  The  director and officer of the Company is personally liable
with full recourse to the Company and has provided 60,809 shares of common stock
of  the  Company  as  collateral.  The  promissory  note  has been recorded as a
reduction  of  stockholders'  equity  during  the quarter ending April 30, 2001.
Interest  on  the  promissory  note  will be recorded when the cash is received.

     During October 2000, warrants to purchase a total of 7,500 shares of common
stock  of  the Company were exercised, resulting in cash proceeds to the Company
of  $11,250.

     During  November  2000,  warrants  to purchase a total of 200,000 shares of
common  stock  of  the Company were exercised, resulting in cash proceeds to the
Company  of  $602,500.

     In  November  2000,  the Company issued 4,716 shares of common stock of the
Company  to  a consultant in payment for services rendered to the Company valued
at  $23,583.

     During  November 2000, the Company agreed to reduce the exercise price from
$2.50 to $2.00 per share for warrants to purchase 500,000 shares of common stock
of  the  Company  as  an  inducement  for the holder of the warrants (Holder) to
exercise  the  warrants.  The  consideration  for  the  exercise of the warrants
included $5,000 in cash and a $995,000 promissory note.  The principal amount of
the  note  plus accrued interest at an annual rate of 10.5% was due on April 30,
2001.  During  January 2001, the Company received $795,000 as partial payment of
the  promissory  note.   The  remaining balance of $200,000 on this note has not
been  paid  by  the  Holder.   The  Holder  is  liable with full recourse to the
Company and is required to provide 500,000 shares of common stock of the Company
as  collateral.  The  Company  agreed  to allow the Holder to pledge the 500,000
shares  in  connection  with  a  bank loan of $795,000 for which the entire loan
proceeds  were  used  by  the  Holder  to  partially  pay  the  Company.

     As  a bonus to a director and officer of the Company, during November 2000,
the  Company  granted warrants to purchase 200,000 shares of common stock of the
Company at an exercise price of $7.00 per share exercisable for five years.  The
exercise price per share of the warrants was equal to or greater than the quoted
market  price per share at the measurement date.  Based on the provisions of APB
25,  no  compensation  expense  was  recorded  for  these  bonus  warrants.

     During  December  2000, the Company issued 14,500 shares of common stock of
the  Company  to certain employees of the Company as a bonus. In connection with
the  issuance of the shares, the Company recorded an expense of $43,500 based on
the  market  value  of  the  stock  issued.

     In  December  2000, the Company entered into an agreement with a consultant
whereby the Company agreed to issue 2,000 shares of Common Stock pursuant to the
Plan  for  each  month  of service for a minimum of three months. At January 31,
2001,  the  Company  issued 2,000 shares of common stock in connection with this
agreement. In February 2001, the agreement was terminated and the Company issued
the  remaining  4,000  shares  of  common  stock  due  to  the  consultant.

     The  amounts  due  from  notes  issued by officers, directors and a related
party  for the exercise of warrants totaling $3.8 million plus interest have not
been  paid  as  required  by  the  terms  of  the  notes  to  the  Company.


                                       36
<PAGE>
     In  connection  with  warrants previously issued by the Company, certain of
these  warrants  contain  a  call provision whereby the Company has the right to
purchase the warrants for a nominal price if the holder of the warrants does not
elect  to  exercise  the  warrants  during  the  call  provision  period.

     Settlement  of  Litigation  - CPSC.  On June 2, 2000, additional litigation
was filed in the 138th Judicial District Court of Cameron County, Texas, against
Cowboy  Pipeline  Service Company, Inc. ("Cowboy") and the Company alleging that
Cowboy  and  the  Company  had  illegally  trespassed  in  connection  with  the
construction  of  the  US  Pipelines  and  seeking declaratory relief, including
damages,  exemplary  damages  and  injunctive  relief  preventing Cowboy and the
Company  from utilizing the US Pipelines.   On June 9, 2000, CPSC International,
Inc. ("CPSC") intervened and removed the case to the Court.  During August 2000,
the  litigation  was  settled  through  a court ordered mediation by the Company
agreeing  to acquire land for which substantially all of the costs were provided
for as offsets against the purchase price in connection with the Settlement (see
below).  The  settlement  is  subject to completion of the settlement documents.

     During  March  2001, the Company, Cowboy and the Owner reached a settlement
(the  "Settlement")  whereby  the  Company  purchased the remaining 50% interest
owned  by  CPSC  in  the  Lease  Agreements and related assets resulting in 100%
ownership  by  the  Company.  Under  the  terms  of  the Settlement, the parties
provided  mutual  general  releases with respect to previous disputes and claims
among  the  parties  (see  note  I  to  the  unaudited  consolidated  financial
statements).

     Other  Litigation.  On February 24, 2000, litigation was filed in the 357th
Judicial  District  Court of Cameron County, Texas, against Cowboy, CPSC and the
Company  (collectively  referred  to  as  the  "Defendants")  alleging  that the
Defendants  had  illegally trespassed in connection with the construction of the
US  Pipelines  and  seeking a temporary restraining order against the Defendants
from  future  use  of the US Pipelines.  On March 20, 2000, the Company acquired
the portion of the property which surrounds the area where the US Pipelines were
constructed for cash of $1.9 million, which was paid during April 2000, and debt
in  the  amount  of  $1.9  million  ("Debt").  As  a  result, the litigation was
dismissed.  The Debt bears interest at 10% per annum, payable monthly in amounts
equal  to the minimum of $15,000 or $.001 for each gallon that flows through the
US  Pipeline  with  a  balloon  payment due during April 2003 (see note I to the
unaudited  consolidated  financial  statements).

      In  November  2000  the Amwest litigation was settled in mediation whereby
PennWilson  agreed  to  pay  Schmidt  $100,000  and Amwest agreed to pay Schmidt
$350,000.  PennWilson  and Penn Octane Corporation both gave and received mutual
general  releases with exception only for unknown latent deficiencies as defined
in  California  Civil  Procedure  Code  Section 337.15 and third party indemnity
claims  for  injury,  death  or  property  damage  (see  note H to the unaudited
consolidated  financial  statements).

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

     Realization  of  Assets.  The  Company has had an accumulated deficit since
inception,  has  used  cash  in  operations,  and  has  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 New Notes, the RZB Credit Facility and the notes related
to the Settlement. The Company is currently negotiating final documents with the
creditors for the required security agreements. The Company may need to increase
its  credit  facility for the purchase of quantities of LPG in excess of current
quantities  sold  and/or  to  finance  future  price  increases  of LPG, if any.
Further, the Company may find it necessary to liquidate inventories at a loss to
provide  working  capital,  to  reduce  outstanding  balances  under  its credit
facility  or  due  to  storage  limitations at Markham storage. In addition, the
Company  entered  into  supply  agreements  for  quantities  of  LPG  totaling
approximately 23.0 million gallons per month although a new sales agreement with
PMI has not been consummated (see note M to the unaudited consolidated financial
statements).  As  discussed  in  note  A to the unaudited consolidated financial
statements,  the  Company  has  historically  depended  heavily on sales to PMI.

     In view of the matters described in the preceding paragraph, recoverability
of  a  major  portion of the recorded asset amounts as shown in the accompanying
unaudited consolidated balance sheets is dependent upon the Company's ability to
obtain  additional  financing, repay, renew or extend the Restructured Notes and
the  New

                                       37
<PAGE>
Notes  referred  to  in  the  preceding paragraph and to raise additional equity
capital, resolve uncertainties related to the Saltillo Terminal Facility and the
success  of  the  Company's  future  operations.  The  unaudited  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 taking steps to (i) increase sales to its current
customers  including  consummation  of the Proposed Agreement (see note M to the
unaudited  consolidated  financial  statements), (ii) increase its customer base
upon  deregulation  of the LPG industry in Mexico, (iii) extend the terms of the
Pipeline  Lease  and  the Brownsville Terminal Facility, (iv) expand its product
lines,  (v) obtain additional letters of credit financing, (vi) raise additional
debt  and/or  equity  capital and (vii) resolve the uncertainties related to the
Saltillo  Terminal  Facility.

     At  July  31,  2000,  the  Company had net operating loss carryforwards for
federal  income  tax  purposes  of  approximately  $5.6 million.  The ability to
utilize  such  net  operating loss carryforwards may be significantly limited by
the  application  of  the  "change  of ownership" rules under Section 382 of the
Internal  Revenue  Code.

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.

     To  the  extent that the Company maintains quantities of LPG inventory, the
Company  is  exposed  to  market  risk  related to the volatility of LPG prices.
During periods of falling LPG prices, the Company may incur losses.  The Company
may  sell  excess  inventory  to  customers to reduce or limit the risk of these
negative  price  fluctuations.


                                       38
<PAGE>
PART  II

ITEM 1.   LEGAL  PROCEEDINGS

          See  Note  H  to  the  accompanying  unaudited  consolidated financial
          statements  and Note M to the Company's Annual Report on Form 10-K for
          the  fiscal  year  ended  July  31,  2000.

ITEM 2.   CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

          See  Note  G  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,  2000,  for information concerning
          certain  sales  of  Securities.

          In  connection with the Restructured Notes and the New Notes discussed
          in  note  F  to  the  accompanying  unaudited  consolidated  financial
          statements,  the transactions were effected 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  SECURITIES  HOLDERS.

          None

ITEM 5.   OTHER  INFORMATION

          None.

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

     a.   Exhibits  and  Financial  Statement  Schedules

     THE  FOLLOWING  EXHIBITS  ARE  INCORPORATED  HEREIN  BY  REFERENCE:

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

       10.150  Promissory  Note  and  Pledge  and  Security  Agreement  dated
               September  10,  2000,  between  Ian  Bothwell and the Registrant.
               (Incorporated by reference to the Company's Annual Report on Form
               10-K  for  the  year  ended  July 31, 2000, filed on November 14,
               2000,  SEC  File  No.  000-24394).

       10.151  Promissory  Share  Transfer  Agreement  to  purchase  shares  of
               Termatsal,  S.A.  de  C.V. dated November 13, 2000, between Jorge
               Bracamontes  and  the  Company  (Translation  from  Spanish).
               (Incorporated by reference to the Company's Annual Report on Form
               10-K  for  the  year  ended  July 31, 2000, filed on November 14,
               2000,  SEC  File  No.  000-24394).

       10.152  Promissory  Share  Transfer  Agreement  to  purchase  shares  of
               Termatsal,  S.A.  de  C.V. dated November 13, 2000, between Pedro
               Prado  and  the Company (Translation from Spanish). (Incorporated
               by  reference to the Company's Annual Report on Form 10-K for the
               year  ended  July  31, 2000, filed on November 14, 2000, SEC File
               No.  000-24394).

       10.153  Promissory  Share  Transfer  Agreement  to  purchase  shares  of
               Termatsal,  S.A.  de  C.V. dated November 13, 2000, between Pedro
               Prado  and  Penn  Octane  International, L.L.C. (Translation from
               Spanish).  (Incorporated  by  reference  to  the Company's Annual
               Report  on  Form  10-K for the year ended July 31, 2000, filed on
               November  14,  2000,  SEC  File  No.  000-24394).

       10.154  Promissory  Share  Transfer  Agreement to purchase shares of Penn
               Octane  de  Mexico, S.A. de C.V. dated November 13, 2000, between
               Jorge  Bracamontes  and  the  Company (Translation from Spanish).
               (Incorporated by reference to the Company's Annual Report on Form
               10-K  for  the  year  ended  July 31, 2000, filed on November 14,
               2000,  SEC  File  No.  000-24394).


                                       39
<PAGE>
       10.155  Promissory Share  Transfer  Agreement  to purchase shares of Penn
               Octane  de  Mexico, S.A. de C.V. dated November 13, 2000, between
               Juan  Jose  Navarro  Plascencia and the Company (Translation from
               Spanish).  (Incorporated  by  reference  to  the Company's Annual
               Report  on  Form  10-K for the year ended July 31, 2000, filed on
               November  14,  2000,  SEC  File  No.  000-24394).

       10.156  Promissory  Share  Transfer  Agreement to purchase shares of Penn
               Octane  de  Mexico, S.A. de C.V. dated November 13, 2000, between
               Juan  Jose  Navarro  Plascencia  and  Penn  Octane International,
               L.L.C.  (Translation from Spanish). (Incorporated by reference to
               the  Company's Annual Report on Form 10-K for the year ended July
               31,  2000,  filed  on November 14, 2000, SEC File No. 000-24394).

       10.157  Promissory  Note  and  Pledge  and  Security  Agreement  dated
               November 30, 2000, between Western Wood Equipment Corporation and
               the  Registrant.  (Incorporated  by  reference  to  the Company's
               Annual  Report  on  Form  10-K  for the year ended July 31, 2000,
               filed  on  November  14,  2000,  SEC  File  No.  000-24394).

     b.   Reports  on  Form  8-K

               Reference  is made to the Company's Form 8-K filed on February 9,
               2001,  regarding the restructuring of promissory notes originally
               due  December  15, 2000 and the issuance of additional promissory
               notes  on  January  31,  2001  (see  note  F  to the accompanying
               unaudited  consolidated  financial  statements).

               Reference  is  made  to  the Company's Form 8-K filed on April 6,
               2001,  regarding  the Company's Settlement with CPSC on March 30,
               2001  which  provides  for  the  Company's  acquisition  of  the
               remaining  50%  interest  in  the  US  -  Mexican  Pipelines  and
               Matamoros  Terminal  Facility  (see  note  I  to the accompanying
               unaudited  consolidated  financial  statements).


                                       40
<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



June 19, 2001              By:   /s/Ian  T.  Bothwell
                                 -----------------------------------------------
                                 Ian  T.  Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                     Chief  Financial  Officer


                                       41
<PAGE>