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,  2000

                                       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  June  13,  2000  was  13,435,198.


<PAGE>
                             PENN OCTANE CORPORATION
                                TABLE OF CONTENTS

        ITEM                                                            PAGE NO.
        ----                                                            --------
Part I   1.  Financial  Statements

             Report on Review by Independent Certified Public Accountants      3

             Consolidated Balance Sheets as of April 30, 2000 (unaudited)
             and  July  31,  1999                                            4-5


             Consolidated  Statements  of  Operations for the three
             and  nine months ended April 30, 2000 and 1999 (unaudited)        6

             Consolidated  Statements  of  Cash  Flows  for  the  nine
             months ended  April  30,  2000  and  1999  (unaudited)            7

             Notes  to  Consolidated  Financial Statements (unaudited)      8-27

         2.  Management's Discussion and Analysis of Financial
             Condition and  Results  of  Operations                        28-40

         3.  Quantitative and Qualitative Disclosures About Market Risk       41

Part II  1.  Legal  Proceedings                                               42

         2.  Changes  in  Securities                                          42

         3.  Defaults  Upon  Senior  Securities                               42

         4.  Submission of Matters to a Vote of Security Holders              42

         5.  Other  Information                                               42

         6.  Exhibits, Financial Statement Schedules, and Reports on
             Form 8-K                                                         43

         7.  Signatures                                                       44


                                        2
<PAGE>
               Review by Independent Certified Public Accountants


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, 2000, and the related
consolidated  statements  of  operations  and cash flows for the three-month and
nine-month  period  ended  April  30,  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 generally accepted auditing standards, the objective of which is
the  expression  of  an  opinion  regarding  the financial statements taken as a
whole.  Accordingly,  we  do  not  express  such  an  opinion.

Based  on our 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  generally  accepted  accounting  principles.

We  have  previously  audited,  in  accordance  with generally accepted auditing
standards,  the  consolidated balance sheet as of July 31, 1999, 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 October 8,
1999,  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, 1999, is fairly stated,
in  all  material  respects,  in relation to the consolidated balance sheet from
which  it  has  been  derived.



Brownsville,  Texas
June  19,  2000


                                        3
<PAGE>


PART  I
ITEM  1.


<TABLE>
<CAPTION>
                             PENN OCTANE CORPORATION AND SUBSIDIARIES
                                   CONSOLIDATED BALANCE SHEETS
                                              ASSETS


                                                                           April 30,
                                                                             2000        July 31,
                                                                          (Unaudited)     1999
                                                                          -----------  ----------
<S>                                                                       <C>          <C>
Current Assets
     Cash                                                                 $ 1,195,477  $1,032,265
     Trade accounts receivable, less allowance for doubtful accounts of     4,431,858   2,505,915
     $521,067 and $521,067
     Notes receivable (note F)                                                122,764      77,605
     Inventories (note D)                                                   5,263,327     615,156
     Prepaid expenses and other current assets                                361,615      42,517
     Property held for sale (see note I)                                    1,908,000           -
                                                                          -----------  ----------
          Total current assets                                             13,283,041   4,273,458
Property, plant and equipment - net (note C)                               15,614,242   3,171,650
Lease rights (net of accumulated amortization of $558,701 and $524,355)       595,338     629,684
Notes receivable, net (note F)                                                737,038     822,196
Other non-current assets                                                       14,870      11,720
                                                                          -----------  ----------
          Total assets                                                    $30,244,529  $8,908,708
                                                                          ===========  ==========

     The  accompanying  notes  are  an  integral  part  of  these  statements.
</TABLE>


                                        4
<PAGE>
<TABLE>
<CAPTION>
                                      PENN  OCTANE  CORPORATION  AND  SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS - CONTINUED
                                          LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                                      April 30,
                                                                                        2000              July 31,
                                                                                     (Unaudited)            1999
                                                                                  -----------------  ------------------
<S>                                                                               <C>                <C>
Current Liabilities
     Current maturities of long-term debt (note G)                                $      7,919,167   $         365,859
     Revolving line of credit (note I)                                                   1,280,900                   -
     LPG trade accounts payable (note I)                                                 6,940,094           2,850,197
     Other accounts payable and accrued liabilities                                      1,661,790           1,382,603
                                                                                  -----------------  ------------------
          Total current liabilities                                                     17,801,951           4,598,659
Long-term debt, less current maturities (note G)                                         2,843,266             258,617
Commitments and contingencies (note I)                                                           -                   -
Stockholders' Equity (note H)
     Series A -  Preferred stock-$.01 par value, 5,000,000 shares authorized;                    -                   -
No shares issued and outstanding at April 30, 2000 and July 31, 1999
     Series B  - Senior preferred stock-$.01 par value, $10 liquidation value,                   -                 900
5,000,000 shares authorized; 0 and 90,000 shares issued and outstanding at
April 30, 2000 and July 31, 1999
     Common stock-$.01 par value, 25,000,000 shares authorized; 13,377,949                 133,780             118,456
and 11,845,497 shares issued and outstanding at April 30, 2000 and July 31,
                                                                                              1999
     Additional paid-in capital                                                         21,686,030          17,133,222
     Notes receivable from the president and an officer of the Company and a       (     3,265,350)   (      2,765,350)
note receivable from a related party for exercise of warrants, less reserve of
624,726 and $451,141 at April 30, 2000 and July 31, 1999
     Accumulated deficit                                                           (     8,955,148)   (     10,435,796)
                                                                                  -----------------  ------------------
          Total stockholders' equity                                                     9,599,312           4,051,432
                                                                                  -----------------  ------------------
               Total liabilities and stockholders' equity                         $     30,244,529   $       8,908,708
                                                                                  =================  ==================

                              The accompanying notes are an integral part of these statements.
</TABLE>


                                        5
<PAGE>
<TABLE>
<CAPTION>
                                           PENN OCTANE CORPORATION AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                                         (UNAUDITED)

                                                                        Three Months Ended              Nine Months Ended
                                                                   ----------------------------  ----------------------------
                                                                     April 30,      April 30,      April 30,      April 30,
                                                                        2000           1999           2000           1999
                                                                   --------------  ------------  --------------  ------------
<S>                                                                <C>             <C>           <C>             <C>
Revenues                                                           $  25,683,797   $ 8,841,244   $  60,661,528   $23,672,837
Cost of goods sold                                                    25,873,726     7,933,161      58,661,806    21,256,379
                                                                   --------------  ------------  --------------  ------------
 Gross profit (loss)                                                   ( 189,929)      908,083       1,999,722     2,416,458
                                                                   --------------  ------------  --------------  ------------
Selling, general and administrative expenses
 Legal and professional fees                                             179,396       117,404         801,446       544,103
 Salaries and payroll related expenses                                   436,456       233,467         981,563       640,165
 Travel                                                                   36,669        31,679         124,652       111,784
 Other                                                                   191,600       191,279         515,897       449,479
                                                                   --------------  ------------  --------------  ------------
                                                                         844,121       563,829       2,423,558     1,745,531
                                                                   --------------  ------------  --------------  ------------
 Operating income (loss)                                            (  1,034,050)      344,254      (  423,836)      670,927
Other income (expense)
 Interest expense                                                     (  732,601)   (  134,951)   (  1,036,598)   (  428,025)
 Interest income                                                          23,470         1,442          29,856         2,739
 Award from litigation, net (note M)                                           -             -       3,036,638       987,114
                                                                   --------------  ------------  --------------  ------------
   Income (loss) from continuing                                    (  1,743,181)      210,745       1,606,060     1,232,755
     operations before taxes
Provision for income taxes                                                10,042             -          80,042             -
                                                                   --------------  ------------  --------------  ------------
                   Income (loss) from continuing                    (  1,753,223)      210,745       1,526,018     1,232,755
                     operations
Discontinued operations, net of taxes (note E)
           Income (loss) from operations of CNG                                -      ( 72,666)              -     ( 275,488)
                                                                   --------------  ------------  --------------  ------------
             segment
   Net income (loss)                                                 ($1,753,223)  $   138,079   $   1,526,018   $   957,267
                                                                   ==============  ============  ==============  ============
Income (loss) from continuing operations                                  ($0.13)  $      0.01   $        0.12   $      0.11
                                                                   ==============  ============  ==============  ============
 per common share (note B)
Net income (loss) per common share (note B)                               ($0.13)  $      0.00   $        0.12   $      0.08
                                                                   ==============  ============  ==============  ============
Income (loss) from continuing operations per                              ($0.13)  $      0.01   $        0.10   $      0.10
                                                                   ==============  ============  ==============  ============
 common share assuming dilution (note B)
Net income (loss) per common share assuming                               ($0.13)  $      0.00   $        0.10   $      0.08
                                                                   ==============  ============  ==============  ============
 dilution (note B)
Weighted average common shares outstanding                            13,092,040    10,983,467      12,815,511    10,466,197
                                                                   ==============  ============  ==============  ============


The accompanying notes are an integral part of these statements.
</TABLE>


                                        6
<PAGE>
<TABLE>
<CAPTION>
                                      PENN  OCTANE  CORPORATION  AND  SUBSIDIARIES
                                        CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
                                                         (UNAUDITED)

                                                                                           Nine Months Ended
                                                                                 ------------------------------------
                                                                                      April 30,          April 30,
                                                                                        2000               1999
                                                                                 -------------------  ---------------
<S>                                                                              <C>                  <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income                                                                       $        1,526,018   $      957,267
Adjustments to reconcile net income to net cash used in (provided by) operating
      activities:
     Depreciation and amortization                                                          174,033          187,144
     Amortization of lease rights                                                            34,346           34,345
     Amortization of loan discount                                                          566,062          141,382
     Award from litigation                                                                        -    (     987,114)
     Other                                                                                   93,333                -

Changes in current assets and liabilities:
     Trade accounts receivable                                                      (     1,925,942)   (     978,639)
     Inventories                                                                    (     4,648,171)   (     106,700)
     Prepaid and other assets                                                       (        55,581)          20,800
     Construction and trade accounts payable                                                      -    (     326,927)
     LPG trade accounts payable                                                           4,089,897        1,305,571
     Other accounts payable and accrued liabilities                                         279,147          496,258
                                                                                 -------------------  ---------------
          Net cash provided by operating activities                                         133,142          743,387

Cash flows from investing activities:
     Capital expenditures                                                           (     7,624,625)   (     337,475)
     Investment in leased interests                                                 (     3,000,000)               -
     Payments on note receivable                                                             40,000                -
                                                                                 -------------------  ---------------

          Net cash used in investing activities                                     (    10,584,625)   (     337,475)

Cash flows from financing activities:
     Revolving credit facilities                                                          1,280,900    (     991,823)
     Issuance of debt                                                                     7,659,743                -
     Preferred stock dividends                                                      (        45,370)               -
     Issuance of common stock                                                             2,031,672        1,152,500
     Reduction in debt                                                              (       312,250)   (      48,298)
                                                                                 -------------------  ---------------
          Net cash provided by financing activities                                      10,614,695          112,379
                                                                                 -------------------  ---------------

               Net increase in cash                                                         163,212          518,291
Cash at beginning of period                                                               1,032,265          157,513
                                                                                 -------------------  ---------------
Cash at end of period                                                            $        1,195,477   $      675,804
                                                                                 ===================  ===============
Supplemental disclosures of cash flow information:
     Cash paid during the period for:
          Interest                                                               $          309,400   $      320,710
                                                                                 ===================  ===============
Supplemental disclosures of non-cash transactions:                               $        2,191,282   $    1,385,385
                                                                                 ===================  ===============
     Common stock and warrants issued
          Capital lease obligations                                              $        1,992,000   $            -
                                                                                 ===================  ===============

                           The accompanying notes are an integral part of these statements.
</TABLE>


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  A  -  ORGANIZATION

     Penn  Octane  Corporation,   formerly   International   Energy  Development
     Corporation  ("IEDC")  and The Russian  Fund, a Delaware  corporation,  was
     incorporated  on August 27, 1992.  On October 21, 1993,  IEDC acquired Penn
     Octane Corporation,  a Texas corporation,  whose primary asset was a liquid
     petroleum gas ("LPG")  pipeline  lease  agreement  ("Pipeline  Lease") with
     Seadrift Pipeline Corporation  ("Seadrift"),  a subsidiary of Union Carbide
     Corporation  ("Union Carbide").  On January 6, 1995, the Board of Directors
     approved the change of IEDC's name to Penn Octane Corporation  ("Company").
     The  Company  is  engaged   primarily  in  the   business  of   purchasing,
     transporting  and selling LPG.  Prior to March 1999,  PennWilson  CNG, Inc.
     ("PennWilson"),   a  subsidiary  of  the  Company,  provided  services  and
     equipment to the compressed natural gas ("CNG") industry.  The Company owns
     and  operates a  terminal  facility  in  Brownsville,  Texas  ("Brownsville
     Terminal  Facility")  and owns a 50% interest and leases the  remaining 50%
     interest in a LPG terminal facility in Matamoros,  Tamaulipas,  Mexico (the
     "Matamoros  Terminal  Facility") and pipelines (the "US-Mexico  Pipelines")
     which connects the Brownsville  Terminal Facility to the Matamoros Terminal
     Facility. The Company has a long-term lease agreement for approximately 132
     miles of  pipeline  from  certain  gas  plants in Texas to the  Brownsville
     Terminal  Facility.  The  Company  sells LPG  primarily  to P.M.I.  Trading
     Limited ("PMI").  PMI is the exclusive  importer of LPG into Mexico. PMI is
     also a  subsidiary  of Petroleos  Mexicanos,  the  state-owned  Mexican oil
     company  ("PEMEX").  PMI  distributes the LPG purchased from the Company in
     the northeastern region of Mexico.

     The Company commenced operations during the fiscal year ended July 31, 1995
     upon construction of the Brownsville Terminal Facility. Prior to such time,
     the  Company  was  in  the  "development  stage"  until  the  business  was
     established.  Since the Company began operations,  the primary customer for
     LPG has been PMI.  Sales of LPG to PMI accounted for  approximately  88% of
     the Company's total revenues for the nine months ended April 30, 2000.

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

     The  accompanying   financial   statements  include  the  Company  and  its
     subsidiaries  (hereinafter  referred to as the "Company").  All significant
     intercompany accounts and transactions are eliminated.

     The  unaudited  consolidated  balance  sheet  as of  April  30,  2000,  the
     unaudited  consolidated  statements  of  operations  for the three and nine
     months  ended  April 30,  2000 and  1999,  and the  unaudited  consolidated
     statements  of cash flows for the nine months ended April 30, 2000 and 1999
     have  been  prepared  by the  Company  without  audit.  In the  opinion  of
     management, the financial statements include all adjustments (which include
     only  normal  recurring   adjustments)  necessary  to  present  fairly  the
     unaudited  consolidated  financial  position of the Company as of April 30,
     2000,  the unaudited  consolidated  results of operations for the three and
     nine months ended April 30, 2000 and 1999,  and the unaudited  consolidated
     cash flows for the nine months ended April 30, 2000 and 1999.

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

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


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE

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

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

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


<TABLE>
<CAPTION>
                                     For the three months ended April 30, 2000    For the three months ended April 30,1999
                                    -------------------------------------------  ------------------------------------------
                                    Income (Loss)       Shares       Per-Share   Income (Loss)      Shares       Per-Share
                                     (Numerator)    (Denominator)     Amount      (Numerator)    (Denominator)    Amount
                                    --------------  --------------  -----------  --------------  -------------  -----------
<S>                                 <C>             <C>             <C>          <C>             <C>            <C>
Income (loss) from continuing         ($1,753,223)               -           -   $     210,745               -           -
 Operations
Income (loss) from discontinued                 -                -           -       (  72,666)              -           -
                                    --------------                               --------------
operations
Net income (loss)                    (  1,753,223)               -           -         138,079               -           -
Less:  Dividends on preferred                   -                -           -      (  132,162)              -           -
 stock
BASIC EPS
Income (loss) from continuing        (  1,753,223)      13,092,040      ($0.13)         78,583      10,983,467  $     0.01
                                                                    ===========                                 ===========
 operations available to
 common stockholders
Income (loss) from   discontinued               -       13,092,040  $     0.00       (  72,666)     10,983,467      ($0.01)
                                    --------------                  ===========  --------------                 ===========
operations
Net income (loss) available to       (  1,753,223)      13,092,040      ($0.13)          5,917      10,983,467  $     0.00
                                                                    ===========                                 ===========
  common stockholders
EFFECT OF DILUTIVE SECURITIES
Warrants                                        -                -           -               -          96,167           -
Convertible Preferred Stock                     -                -           -               -         237,273           -
DILUTED EPS
Income (loss) from continuing       N/A             N/A             $      N/A          78,583      11,316,907  $     0.01
                                                                    ===========                                 ===========
 operations available to
 common stockholders
Income (loss) from discontinued     N/A             N/A             $      N/A     (    72,666)     11,316,907      ($0.01)
                                    --------------                  ===========  --------------                 ===========
operations
Net income (loss) available to      $         N/A   $          N/A  $      N/A   $       5,917      11,316,907  $     0.00
                                    ==============  ==============  ===========  ==============  =============  ===========
  common stockholders
</TABLE>


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

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

<TABLE>
<CAPTION>
                                    For the nine months ended April 30, 2000    For the nine months ended April 30,1999
                                    -----------------------------------------  ------------------------------------------
                                    Income (Loss)      Shares      Per-Share   Income (Loss)      Shares       Per-Share
                                     (Numerator)    (Denominator)    Amount     (Numerator)    (Denominator)    Amount
                                    --------------  -------------  ----------  --------------  -------------  -----------
<S>                                 <C>             <C>            <C>         <C>             <C>            <C>
Income (loss) from continuing
 Operations                         $   1,526,018               -           -  $   1,232,755               -           -
Income (loss) from   discontinued
operations                                      -               -           -     (  275,488)              -           -
                                    --------------                             --------------
Net income (loss)                       1,526,018               -           -        957,267               -           -
Less:  Dividends on preferred
 stock                                  (  45,370)              -           -     (  132,162)              -           -
BASIC EPS
Income (loss) from continuing
 operations available to
 common stockholders                    1,480,648      12,815,511  $     0.12      1,100,593      10,466,197  $     0.11
                                                                   ==========                                 ===========
Income (loss) from   discontinued
operations                                      -      12,815,511  $     0.00     (  275,488)     10,466,197      ($0.03)
                                    --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders                   1,480,648      12,815,511  $     0.12        825,105      10,466,197  $     0.08
                                                                   ==========                                 ===========
EFFECT OF DILUTIVE SECURITIES
Warrants                                        -       1,356,324           -              -          58,341           -
Convertible Preferred Stock                     -               -           -              -          76,765           -
DILUTED EPS
Income (loss) from continuing
 operations available to
 common stockholders                    1,480,648      14,171,835  $     0.10      1,100,593      10,601,303  $     0.10
                                                                   ==========                                 ===========
Income (loss) from   discontinued
Operations                                      -      14,171,835  $     0.00     (  275,488)     10,601,303    ($0.02  )
                                    --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders               $   1,480,648      14,171,835  $     0.10  $     825,105      10,601,303  $     0.08
                                    ==============  =============  ==========  ==============  =============  ===========
</TABLE>


                                       10
<PAGE>

                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  C  -  PROPERTY,  PLANT  AND  EQUIPMENT


     Property, plant and equipment consists of the following (see notes G, I
and  J):


<TABLE>
<CAPTION>
                                                         April 30,       July 31,
                                                           2000           1999
                                                      --------------  --------------
<S>                                                   <C>             <C>


LPG:                                                  $     173,500   $     173,500
  Brownsville Terminal Facility:                          3,426,440       3,426,440
    Building                                                292,568               -
    Terminal facilities                                     291,409         291,409
    Tank Farm                                               557,244               -
    Leasehold improvements                                  393,461         378,039
    Capital construction in progress
    Equipment                                             5,134,622       4,269,388
                                                      --------------  --------------




  US-Mexico Pipelines and Matamoros Terminal              3,000,000               -
  Facility:                                               7,194,464         512,000
    Purchase of 50% interest in the Lease Agreements      1,558,726          60,774
                                                      --------------  --------------
    Capitalized leases                                   11,753,190         572,774
                                                      --------------  --------------
    Other costs paid by the Company
                                                            568,396               -
                                                      --------------  --------------

   Saltillo Terminal Facility
                                                             10,800          10,800
Other:                                                       38,317          35,738
  Automobile
  Office Equipment                                           49,117          46,538
                                                      --------------  --------------

                                                         17,505,325       4,888,700

                                                       (  1,891,083)   (  1,717,050)

  Less:  accumulated depreciation and amortization    $  15,614,242   $   3,171,650
                                                      ==============  ==============
</TABLE>


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  D  -  INVENTORIES

     Inventories  consist  of  the  following:

<TABLE>
<CAPTION>
                                              April  30,  2000            July  31,  1999
                                          ------------------------   ------------------------
                                           Gallons        Cost       Gallons        Cost
                                          ----------  ------------  ---------  --------------
<S>                                       <C>         <C>           <C>        <C>
LPG:                                       1,361,850  $    648,445  1,175,958  $      434,987
   Pipeline and US-Mexico Pipelines
   Storage:
      Brownsville Terminal Facility and      552,628       263,134    487,076         180,169
         Matamoros Terminal  Facility      8,889,833     4,351,748          -               -
                                          ----------  ------------  ---------  --------------
      Union Carbide (see notes I and L)
                                          10,804,311  $  5,263,327  1,663,034  $      615,156
                                          ==========  ============  =========  ==============
</TABLE>

NOTE  E  -  DISCONTINUED  OPERATIONS

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

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

NOTE  F  -  SALE  OF  CNG  ASSETS

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

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

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


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  G  -  LONG-TERM  DEBT

     ISSUANCE 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 (the  "Notes")  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.  Interest at 9% is due on June 15, 2000,
     and December 15, 2000 (or the maturity  date,  if earlier).  In  connection
     with the Notes,  as of April 30, 2000,  the Company has granted the holders
     of the Notes,  warrants  (the  "Warrants")  to  purchase a total of 662,387
     shares of common  stock of the  Company at an  exercise  price of $4.00 per
     share,  exercisable  through  December  15,  2002  and  during  May 2000 in
     accordance  with the Notes,  the Company  granted the holders of the Notes,
     additional  warrants  (the  "Additional  Warrants")  to purchase a total of
     44,376 shares of common stock of the Company at an exercise  price of $4.00
     per share,  exercisable  through  December 15,  2002.  The Company was also
     required to register the shares issuable in connection with exercise of the
     Warrants and the Additional  Warrants on or before April 15, 2000,  subject
     to certain conditions (see note H).

     Net proceeds  from the Notes were used for the purchase of the 50% interest
     in the US-Mexico Pipelines and Matamoros Terminal Facility (see notes C and
     J) and for working capital purposes.

     Under  the terms of the  Notes,  the  Company  has  agreed  to  pledge  the
     Company's  interests in the US-Mexico  Pipelines and the Matamoros Terminal
     Facility.

     In connection  with the issuance of  $3,869,000  and $710,000 of Notes from
     December  10,  1999  through   January  18,  2000  and  February  2,  2000,
     respectively,  the Company  paid a fee equal to a cash  payment of $270,830
     and  $49,700 and  warrants to purchase a total of 96,725  shares and 17,750
     shares,  respectively,  of common stock of the Company at an exercise price
     of $4.00 per share,  exercisable for three years.  The Company also granted
     piggy back  registration  rights to the holders of the warrants  issued for
     fees.

     Upon the  issuance  of the  Notes,  the  Company  recorded  a  discount  of
     $1,675,598  related to the fair value of the  Warrants  and the  Additional
     Warrants  issued  and other  costs,  to be  amortized  over the life of the
     Notes.

     CAPITALIZED LEASE
     -----------------

     The Company  began  utilizing  the US- Mexico  Pipelines  and the Matamoros
     Terminal  Facility during April 2000. The amounts related to the Settlement
     discussed  in note I,  have been  recorded  in the  accompanying  financial
     statements as property,  plant and equipment and capital lease  obligations
     included in long-term debt.


                                       13
<PAGE>
<TABLE>
<CAPTION>
                                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                (UNAUDITED)

NOTE  G  -  LONG-TERM  DEBT  -  CONTINUED

     Long-term debt consists of the following:
                                                                                            April 30,   July 31,
                                                                                              2000        1999
                                                                                           -----------  ---------
<S>                                                                                        <C>          <C>
                                                                                           $ 4,528,844          -
     5,654,000 in promissory notes, less unamortized discount of $1,125,156;
     principal due December 15, 2000, or upon earlier receipt of proceeds from any
     public offering of debt or equity of the Company resulting in net proceeds to
     the Company in excess of $2,250,000; interest at 9.0% (effective interest rate of
     approximately 45% after consideration of the discount and loan fees) on the
     principal amount of the promissory notes is due June 15, 2000 and December
                                                                                             15, 2000.
     Capitalized lease obligations in connection with the US-Mexico Pipelines and the        5,808,000          -
     Matamoros Terminal Facility (see notes I and J).
     Contract for Bill of Sale which was extended in April 1999; due in monthly                 23,347  $  50,347
     payments of $3,000, including interest at 10%; due in February 2001; collateralized
     by a building.
     Noninterest bearing note payable, discounted at 7%, for legal services, due in            262,750    387,129
     monthly installments of $20,000 through January 2001 with a final payment of
     110,000 in February 2001.

     Note payable for legal services in connection with litigation; payable in monthly          31,750    127,000
     installments of $11,092, including interest at 6.9% (see note I).

     Other long-term debt.                                                                     107,742     60,000
                                                                                           -----------  ---------
                                                                                            10,762,433    624,476
     Current maturities.                                                                     7,919,167    365,859
                                                                                           -----------  ---------
                                                                                           $ 2,843,266  $ 258,617
                                                                                           ===========  =========
</TABLE>


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


NOTE  H  -  STOCKHOLDERS'  EQUITY

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

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

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

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


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

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

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

     During  October  1999,  warrants to  purchase a total of 163,636  shares of
     common stock of the Company were  exercised,  resulting in cash proceeds to
     the  Company of  $390,951.  The  proceeds of such  exercises  were used for
     working capital purposes.

     During  January 2000,  the Company  issued 17,000 shares of common stock of
     the Company in exchange for services performed.

     During  February  2000,  warrants to  purchase a total of 95,000  shares of
     common stock of the Company were  exercised,  resulting in cash proceeds to
     the  Company of  $308,750.  The  proceeds of such  exercises  were used for
     working capital purposes.

     During March 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 note
     accrues  interest  at the prime rate per annum and is payable  October  31,
     2000.  The  director  and officer has also  agreed to  personally  guaranty
     repayment of the promissory note. The promissory note is  collateralized by
     200,000  shares of common  stock of the Company  owned by the  director and
     officer  of  the  Company  and  has  been   recorded  as  a  reduction   of
     stockholders' equity. Interest on the promissory note will be recorded when
     the cash is received.

     On April 19, 2000, the Company issued 181,818 shares of common stock of the
     Company for an amount of  $1,000,000.  Net proceeds from the sale were used
     for working capital purposes. The Company has agreed to register the shares
     issued by July 15, 2000.

     During  May 2000 and June  2000,  warrants  to  purchase  a total of 48,750
     shares of common  stock of the Company  were  exercised,  resulting in cash
     proceeds to the Company of $120,000.  The proceeds of such  exercises  were
     used for working capital purposes.

     During June 2000,  the Company  issued  8,499 shares of common stock of the
     Company in exchange for fees due.

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

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

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


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

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

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

     INCENTIVE PLAN
     --------------

     During  December  1999,  the  Board  authorized  the  implementation  of  a
     management  incentive program whereby officers and directors of the Company
     received  warrants  to  purchase  1,400,000  shares of common  stock of the
     Company  and  warrants to purchase  100,000  shares of common  stock of the
     Company were received by other members of management and  consultants  (the
     "Incentive Warrants").  The Incentive Warrants have an exercise price equal
     to $4.60 per share and will vest  ratably  on a monthly  basis  over  three
     years or immediately upon a change in control in the Company.

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

     In connection  with the issuance of shares and warrants by the Company (the
     "Shares"),  the  Company  has on numerous  instances  granted  registration
     rights to the holders of the Shares,  including  those  shares which result
     from  the  exercise  of  warrants  (the  "Registrable   Securities").   The
     obligations  of the  Company  with  respect to the  Registrable  Securities
     include demand  registration  rights and/or piggy-back  registration rights
     and/or the Company is required to file an effective  registration by either
     September 19, 1999,  December 1, 1999,  January 31, 2000, April 15, 2000 or
     July 15, 2000 (the "Registration").  In connection with the Registration of
     the  Registrable  Securities,  the Company is required to provide notice to
     the holder of the  Registrable  Securities,  who may or may not elect to be
     included in the  Registration.  The Company is  obligated  to register  the
     Registrable  Securities  even  though  the  Registrable  Securities  may be
     tradable under Rule 144. The Company did not file a registration  statement
     for the shares agreed to be  registered by September 19, 1999,  December 1,
     1999,  January 31, 2000 or April 15,  2000.  The Company has also  received
     notice  of a  demand  for  registration  for  certain  of the  Shares.  The
     registration rights agreements do not contain provisions for damages if the
     Registration  is not  completed  except  for those  Shares  required  to be
     registered on December 1, 1999, whereby for each monthly  anniversary after
     December 1, 1999 if the  Company  fails to have an  effective  registration
     statement,  the Company  will be required to pay a penalty of $80,000 to be
     paid in cash and/or  common stock of the Company  based on the then current
     trading price of the common stock of the Company. Through May 31, 2000, the
     Company  has  issued  8,499  shares  of  common  stock  of the  Company  in
     connection  with certain  penalties  incurred.  The Company has received an
     extension  of time to file  the  registration  statement  with  respect  to
     certain of the Shares  required  to be  registered  on December 1, 1999 and
     April 15, 2000.

     The total amount of shares and warrants subject to registration at June 13,
     2000, are as follows:

<TABLE>
<CAPTION>
                                                               Unexercised
                                                     Shares     Warrants
                                                    ---------  -----------
<S>                                                 <C>        <C>
Demand Registration Rights*                         2,014,976      883,013
Piggy-Back Registration Rights                      1,241,667      701,975
                                                    ---------  -----------
Total Registrable Securities                        3,256,643    1,584,988
                                                    =========  ===========
Registration Rights Subject To
     Penalty*                                         400,000      200,000

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


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY-  CONTINUED

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

     Under the  Company's  1997 Stock Award Plan (the "Stock Award  Plan"),  the
     Company has reserved for issuance  150,000 shares of Common Stock, of which
     124,686   shares  were  unissued  as  of  April  30,  2000,  to  compensate
     consultants  who have  rendered  significant  services to the Company.  The
     Stock Award Plan is administered by the Compensation Committee of the Board
     of  Directors  of the  Company  which  has  complete  authority  to  select
     participants,  determine  the awards of Common  Stock to be granted and the
     times such awards will be granted,  interpret  and construe the Stock Award
     Plan for purposes of its administration and make determinations relating to
     the Stock  Award  Plan,  subject to its  provisions,  which are in the best
     interests of the Company and its  stockholders.  Only  consultants who have
     rendered  significant  advisory  services to the Company are eligible to be
     participants under the Stock Award Plan. Other eligibility  criteria may be
     established by the  Compensation  Committee as  administrator  of the Stock
     Award Plan.


NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION

     On March 16,  1999,  the Company  settled in  mediation a lawsuit  with its
     former chairman of the board,  Jorge V. Duran. In connection  therewith and
     without admitting or denying liability, the Company agreed to pay Mr. Duran
     $250,000 in cash and the issuance of 100,000  shares of common stock of the
     Company of which $100,000 is to be paid by the Company's insurance carrier.
     The total  settlement  costs  recorded  by the Company at July 31, 1999 was
     $456,300.  The Company has agreed to register the common stock  issuable in
     the future.  The parties  have agreed to extend the date which the payments
     required in connection with the  settlement,  including the issuance of the
     common stock, are to be made.

     On October 14,  1998,  a  complaint  was filed by Amwest  Surety  Insurance
     Company ("Amwest") naming as defendants,  among others,  PennWilson and the
     Company  seeking  reimbursement  for  payments  made to date by  Amwest  of
     approximately  $160,000 on claims made against the  performance and payment
     bonds in connection with services provided by suppliers, laborers and other
     materials and work to complete the NYDOT contract (Vendors).  These amounts
     were previously  recorded in the Company's balance sheet at the time of the
     complaint.  In addition,  Amwest was seeking  pre-judgment  for any amounts
     ultimately  paid by Amwest  relating to claims  presented to Amwest against
     the performance and payment bonds, but have not yet been authorized or paid
     to date by  Amwest.  In May 1999,  the  Company  and  PennWilson  reached a
     settlement agreement with Amwest whereby Amwest will be reimbursed $160,000
     by PennWilson for the payments made to the Vendors, with the Company acting
     as guarantor.  Upon satisfactory  payment,  Amwest will dismiss its pending
     claims  related to the  payment  bond.  On October 12,  1999,  a Demand for
     Arbitration  (the  "Arbitration")  of  $780,767  was filed by A.E.  Schmidt
     Environmental ("Schmidt") against Amwest, PennWilson and the Company on the
     performance  bond  pursuant  to the NYDOT  contract.  The  Company  filed a
     response  with the court  opposing  the  petition by Schmidt to compel Penn
     Octane  Corporation  to participate  in the  Arbitration  and during April,
     2000, the Court denied Schmidt's petition to compel Penn Octane Corporation
     to participate in the Arbitration. The Company is currently considering its
     legal  options and  intends to  vigorously  defend  against the claims made
     against the performance bond but not yet paid by Amwest.


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     On January  28,  2000,  a complaint  was filed by WIN  Capital  Corporation
     ("WIN") in the Supreme Court of the State of New York,  County of New York,
     against the Company for breach of contract seeking specific performance and
     declaratory relief in connection with an investment  banking agreement.  In
     connection  with  the  lawsuit,  WIN is  seeking  damages  of no less  than
     $1,500,000, issuance of warrants to purchase 150,000 shares of common stock
     of the Company at an exercise price of $1.75 per share exercisable for five
     years from  November 10, 1998 and issuance of warrants to purchase  225,000
     shares of common  stock of the  Company  at a  exercise  price of $3.25 per
     share  exercisable for five years from November 10, 1998. In addition,  WIN
     is demanding  that the warrants to be issued be  registered by the Company.
     The Company  believes the allegations are without merit and does not expect
     a material adverse result from the allegations made by WIN.

     On February 24, 2000,  litigation was filed in the 357th Judicial  District
     Court of Cameron County,  Texas,  against Cowboy Pipeline  Service Company,
     Inc.  ("Cowboy"),  CPSC  International,   Inc.  ("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  to be  paid at the
     commencement of operations of the US Pipelines (paid during April 2000) and
     debt  in  the  amount  of  $1,908,000.  As a  result,  the  litigation  was
     dismissed.  The debt bears  interest at 10% per annum,  payable  monthly in
     minimum installments of $15,000 with a balloon payment due at the end of 36
     months from the date of commencement of operations of the US Pipelines. The
     $1,908,000 is included in capital lease obligations (see note G).

     On March 14, 2000, CPSC filed for protection under Chapter 11 of the United
     States  Bankruptcy  Code  United  States  Bankruptcy  Court (the  "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  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
     Pipelines and Matamoros  Terminal  Facility and the  underlying  agreements
     thereto.  The Company also alleges that Cowboy was  negligent in performing
     its duties.  The Company is 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
     Pipelines and escrow of all income related to use of the US Pipelines, (ii)
     sequestering   all  proceeds  related  to  the  sale  from  any  collateral
     originally  pledged to CPSC,  (iii) the voidance of the Addendum  agreement
     between the Company and CPSC,  and (iv) damages  arising from the Company's
     breach of the Lease Agreements 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 Pipelines  are
     no longer the assets of the bankruptcy estate. The motion and the complaint
     are still pending.

     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. The Company is currently
     reviewing its legal options and does not expect a material  adverse  result
     from this litigation.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     On June 19,  2000,  the  Company,  CPSC,  Cowboy  and the  Owner  reached a
     settlement  (the  "Settlement")  whereby the Company has agreed to purchase
     the remaining 50% interest in the assets  associated with Lease  Agreements
     for a  promissory  note,  transfer  of the  property  owned by the  Company
     referred to above and warrants to acquire  common stock of the Company.  In
     addition, CPSC will assume the Company's debt issued in connection with the
     acquisition of the property.  The  accompanying  financial  statements have
     been adjusted to reflect the Settlement. The Settlement is subject to final
     documentation and approval of the Court.

     As a result of the  aforementioned,  the Company may incur additional costs
     to complete the US-Mexico  Pipelines and Matamoros Terminal  Facility,  the
     amount of which cannot presently be determined.

     As a result of the foregoing,  there is no certainty that the Company will;
     (i) acquire the  remaining  50%  interest in the  US-Mexico  Pipelines  and
     Matamoros  Terminal  Facility,  (ii) utilize the  US-Mexico  Pipelines  and
     Matamoros Terminal Facility or (iii) realize its recorded investment in the
     Lease  Agreements  or in the US-Mexico  Pipelines  and  Matamoros  Terminal
     Facility (see note C).

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

     CREDIT FACILITY, LETTERS OF CREDIT AND OTHER

     As of April 30, 2000,  the Company had a $10,000,000  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. 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. 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.


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     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"),  the
     Company  issues  letters of credit on a monthly basis based on  anticipated
     purchases.

     As of April 30, 2000,  letters of credit  established  under the RZB Credit
     Facility  in favor of  Exxon,  PG&E,  Duke  and Koch for  purchases  of LPG
     totaled  $8,912,821  of which  $6,940,094  was being used to secure  unpaid
     purchases.  In  addition,  as of April 30,  2000,  the Company had borrowed
     $1,280,900  from its revolving line of credit under the RZB Credit Facility
     for  purchases of LPG. In  connection  with these  purchases,  at April 30,
     2000,  the Company had unpaid  invoices due from PMI  totaling  $4,332,336,
     cash balances  maintained in the RZB Credit Facility  collateral account of
     $35,902 and inventory held in storage of $4,351,748 (see note D).

     During May 2000,  the  Company  and RZB  amended  the RZB  Credit  Facility
     whereby  the  RZB  Credit  Facility  was  increased  to  $20,000,000   from
     $10,000,000.   In  connection  with  the  increase,   RZB  entered  into  a
     participation    agreement    with    Bayerische    Hypo-und    Vereinsbank
     Aktiengesellschaft,  New York Branch ("HVB"), whereby RZB and HVB will each
     participate up to $10,000,000 toward the total credit facility.

     OPERATING LEASE COMMITMENTS

     The Pipeline Lease currently  expires on December 31, 2013,  pursuant to an
     amendment (the "Pipeline Lease Amendment") entered into between the Company
     and  Seadrift on May 21, 1997,  which  became  effective on January 1, 1999
     (the "Effective Date"). The Pipeline Lease Amendment provides,  among other
     things,  for additional  storage access and  inter-connection  with another
     pipeline  controlled by Seadrift,  which the Company  believes will provide
     greater  access to and from the  Pipeline.  Pursuant to the Pipeline  Lease
     Amendment,  the Company's  fixed annual fee associated  with the use of the
     Pipeline was  increased by $350,000  less  certain  adjustments  during the
     first two years from the Effective  Date and the Company is required to pay
     for a minimum volume of storage of $300,000 per year  beginning  January 1,
     2000. In addition,  the Pipeline Lease Amendment also provides for variable
     rental  increases based on monthly  volumes  purchased and flowing into the
     Pipeline and storage utilized.


NOTE  J  -  LPG  EXPANSION  PROGRAM

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

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


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  CONTINUED

     In addition to the Expansion,  the Company (i) has begun  construction of a
     midline pump station on the Pipeline  (estimated cost of $1,500,000),  (ii)
     has begun an expansion of the  Brownsville  Terminal  Facility to allow for
     the loading and unloading of railcars,  (iii) has begun  construction of an
     additional  LPG  terminal  facility  in  Saltillo,  Mexico  (the  "Saltillo
     Terminal  Facility")  at an  estimated  cost  of  $500,000,  and  (iv)  has
     completed  the  purchase  of a tank farm for a purchase  price of  $195,000
     (plus  costs  related  to the  clean  up of the  tank  farm),  which  after
     additional improvements will be capable of storing and distributing refined
     products. The Saltillo Terminal Facility, when complete, will allow for the
     distribution  of LPG by railcars,  which will  directly  link the Company's
     Brownsville  Terminal  Facility and the  Saltillo  Terminal  Facility.  The
     Saltillo   Terminal   Facility   will   contain   storage  to   accommodate
     approximately  100,000  gallons of LPG. In connection  with the purchase of
     the tank farm, the Company entered into a lease agreement for rental of the
     land  which the tank farm  occupies  and for the use of a refined  products
     pipeline connecting the tank farm with public dock facilities.

     In  connection  with the  Expansion,  the Company and CPSC entered into two
     separate Lease / Installation Purchase Agreements,  as amended, (the "Lease
     Agreements"),  whereby CPSC agreed to construct  and maintain the US-Mexico
     Pipelines   (including  an  additional   pipeline  to  accommodate  refined
     products)  and the  Matamoros  Terminal  Facility and agreed to lease these
     assets to the Company. Under the terms of the Lease Agreements, the Company
     is required to make  monthly  rental  payments of  approximately  $157,000,
     beginning  the date that the US-Mexico  Pipelines  and  Matamoros  Terminal
     Facility  reach  substantial   completion,   as  defined  under  the  Lease
     Agreements (the "Substantial  Completion Date").  During January 2000, CPSC
     notified the Company that the Substantial  Completion Date had occurred. In
     addition,  the  Company  has agreed to  provide a lien on  certain  assets,
     leases and contracts  which are currently  pledged to RZB, and provide CPSC
     with a letter  of credit  of  approximately  $1,000,000  (the  "LOC").  The
     Company is currently in  negotiations  with RZB and CPSC  concerning  RZB's
     subordination  of RZB's lien on certain assets,  leases and contracts.  The
     Company also has the option to purchase  the  US-Mexico  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 is required to pay all costs associated
     with the design,  construction  and maintenance of the US-Mexico  Pipelines
     and Matamoros Terminal Facility.

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

     During  December  1999, the Company and CPSC amended (the  "Addendum")  the
     Lease  Agreements,  which modified  certain terms of the Lease  Agreements,
     including all prior  amendments,  modifications,  options,  extensions  and
     renewals,  which were  entered  into from the date of the Lease  Agreements
     until  the date of the  Addendum.  In  connection  with the  Addendum,  the
     Company  purchased  50% of the US-Mexico  Pipelines and Matamoros  Terminal
     Facility,  including a 50% interest in the underlying  Lease Agreements for
     $3,000,000  and the right to receive a minimum  per month of the greater of
     $62,800 or 40% of the monthly net income from the Lease Agreements.


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  CONTINUED

     In  addition,  under the  Addendum,  the Company  received an option  until
     December 15, 2000 to acquire the remaining  50% of the US-Mexico  Pipelines
     and Matamoros  Terminal  Facility,  including the remaining 50% interest in
     the Lease  Agreements  for  $6,000,000  and the issuance of (i) warrants to
     purchase  200,000  shares of common  stock of the Company  exercisable  for
     three  years at an  exercise  price of $4.00  per  share if the  option  is
     exercised by June 15, 2000 or (ii) warrants to purchase  300,000  shares of
     common  stock of the  Company  exercisable  for three  years at an exercise
     price of $4.00 per share if the option is exercised thereafter.

     In connection with the Addendum, the Company is also entitled to offset any
     amounts  which have been paid by the  Company on behalf of CPSC  related to
     the completion of CPSC's obligations under the Lease Agreements, except for
     the $3,000,000  paid for the 50% interest,  described  herein,  against the
     Company's  future  rental  obligations  under the Lease  Agreements  and/or
     against the option  price of  $6,000,000  to  purchase  the  remaining  50%
     interest  in the  US-Mexico  Pipelines  and  Matamoros  Terminal  Facility,
     including a 50% interest in the underlying  Lease  Agreements.  The Company
     may also  offset  against  its  monthly  rent  obligations  under the Lease
     Agreements  any  amounts to be  received  from its  interests  in the Lease
     Agreements  so long as the Company is current on all of the lease  payments
     required under the Lease Agreements.

     On  February  21,  2000,  the  Company  and CPSC  entered  into a letter of
     agreement (the "Letter  Agreement")  whereby the Company modified the terms
     associated  with  acquiring  the  remaining  50% interest in the  US-Mexico
     Pipelines and Matamoros Terminal Facility, whereby the Company will only be
     required to make a cash payment of $4,500,000  ($2,000,000 to be paid on or
     prior to March 3, 2000, $1,000,000 payable on or before August 21, 2000 and
     $1,500,000 payable in twelve equal monthly installments beginning March 31,
     2000) and  warrants  to  purchase  200,000  shares  of common  stock of the
     Company  exercisable  for  three  years at an  exercise  price of $4.00 per
     share. In addition,  the Company agreed to pay Cowboy $150,000 on or before
     June 1,  2000 as full  satisfaction  of a  disputed  claim  arising  from a
     previous consulting  agreement entered into between Cowboy and the Company.
     The Company also agreed that all payments  made by the Company on behalf of
     CPSC in  connection  with the  Lease  Agreements  would be  assumed  by the
     Company.

     In connection  with the  Settlement  (see note I), the Company has acquired
     100% of the interests in the Lease Agreements.  Accordingly, the Company is
     no longer  required  to make  lease  payments,  provide  a lien on  certain
     assets,  provide the LOC, and the  President of the Company is not required
     to provide the  Collateral as  prescribed  under the Lease  Agreements  and
     amendments thereto.

     For financial accounting purposes, the Lease Agreements are capital leases.
     Therefore, the assets and related liabilities determined as a result of the
     Settlement  have been recorded in the  accompanying  balance sheet at April
     30, 2000 (see notes C and G).

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

     In  connection  with  the  construction  of the  Mexico  Pipelines  and the
     Matamoros  Terminal  Facility,  CPSC  provided all payments and delivery of
     equipment through Termatsal,  S.A. de C.V., a Mexican company ("Termatsal")
     (see below).


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  CONTINUED

     PennMex,  Tergas or Termatsal are currently the owners of the land which is
     being utilized for the Mexican  Pipeline and Matamoros  Terminal  Facility,
     have entered into leases  associated with the Saltillo  Terminal  Facility,
     have been  granted the permit for the Mexican  Pipeline,  have been granted
     and/or are expected to be granted permits to operate the Matamoros Terminal
     Facility and the Saltillo  Terminal  Facility,  or have title to the assets
     associated  with the  Mexican  Pipeline  and  Matamoros  Terminal  Facility
     acquired  by the  Company,  which were  funded by the Company and CPSC (see
     notes C and I). In  addition,  the Company  has  advanced  funds  (totaling
     $1,558,726 at April 30, 2000) to PennMex, Tergas or Termatsal in connection
     with the  purchase of property,  plant and  equipment  associated  with the
     construction of the Mexican Pipeline,  Matamoros  Terminal Facility and the
     Saltillo  Terminal  Facility,  which are  included in  property,  plant and
     equipment as "other costs paid by the Company"  (see note C).  Furthermore,
     the Company intends to fund PennMex, Tergas or Termatsal for any additional
     costs required in connection with the Mexican Pipeline,  Matamoros Terminal
     Facility and the Saltillo Terminal Facility.

     During the years ended July 31, 1998 and 1999 and for the nine months ended
     April 30, 2000,  the Company paid  PennMex,  Tergas or Termatsal  $181,000,
     $125,000 and $171,000,  respectively,  for Mexico related expenses incurred
     by those  corporations  on the  Company's  behalf.  Such  amounts have been
     expensed.

     PennMex,  Tergas and Termatsal are Mexican  companies  which are owned 90%,
     90% and 98%,  respectively,  by Jorge R.  Bracamontes  ("Bracamontes"),  an
     officer and director of the Company,  and the balance by other  citizens of
     Mexico.

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

     In October  1999,  the Company  received a verbal  opinion from the Foreign
     Investment Section of the Department of Commerce and Industrial Development
     ("SECOFI")  that  the  operation  of the  Mexican  Pipeline  and  Matamoros
     Terminal  Facility  would be  considered  a  transportation  rather  than a
     distribution  activity,  and  therefore,  could be  performed  by a foreign
     entity or through a foreign-owned  Mexican  entity.  The Company intends to
     request a ruling from SECOFI confirming the verbal opinion.  On November 4,
     1999, the Company and Bracamontes and the other shareholders entered into a
     purchase  agreement to acquire up to 75% of the common stock of PennMex for
     a nominal amount.  The purchase agreement is subject to among other things,
     the receipt of the aforementioned  ruling. The Company intends to formalize
     contracts among the Company,  PennMex, Tergas and Termatsal for services to
     be performed in connection with the operations of the Mexican Pipeline, the
     Matamoros Terminal Facility and the Saltillo Terminal Facility.

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

     The  transfer  of any of  the  interests  acquired  by the  Company  or the
     formalization of any contractual  arrangements  related to assets which are
     located in Mexico are  dependent  upon the  determination  of the  ultimate
     legal structure of the ownership of such assets.


                                       23
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  K  -  REALIZATION  OF  ASSETS

     The accompanying financial statements have been prepared in conformity with
     generally accepted accounting principles, which contemplate continuation of
     the Company as a going concern.  The Company has had an accumulated deficit
     since  inception,  has used cash in  operations,  and has had a deficit  in
     working capital.  In addition,  the Company is involved in litigation,  the
     outcome of which cannot be  determined  at the present time and has entered
     into supply  agreements  for quantities of LPG  substantially  in excess of
     minimum  quantities  under the New  Agreement  (see note L).  Although  the
     Company  has  entered  into  the  Settlement,   there  exists   significant
     uncertainties  related to the US-Mexico  Pipelines  and Matamoros  Terminal
     Facility. In addition,  the acquisition of the interests in PennMex and the
     operating agreements among the Company,  Tergas,  PennMex or Termatsal have
     yet to be consummated. As discussed in note A, the Company has historically
     depended heavily on sales to one major customer.

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

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

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


NOTE  L  -  CONTRACTS

     LPG  BUSINESS  -  SALES  AGREEMENT

     The  Company  had  entered  into  a  sales   agreement,   as  amended  (the
     "Agreement"),  with PMI, its major  customer,  to provide a minimum monthly
     volume of LPG to PMI through  March 31, 2000.  Effective  April 1, 2000 the
     Company entered into a new sales  agreement with PMI (the "New  Agreement")
     for the  annual  sale of a  minimum  of  168,000,000  gallons  of LPG to be
     delivered to Matamoros, Tamaulipas, Mexico and Saltillo, Coahuila, Mexico.

     The New  Agreement  represents  an  increase  of 119% over  annual  minimum
     contract volumes under the Agreement.  Under the term of the New Agreement,
     sale prices are indexed to variable  posted prices.  The New Agreement also
     provides for higher fixed margins above the variable posted prices over the
     Agreement  based on the final  delivery  point of the LPG. Sales to PMI for
     the nine  months  ended  April 30, 2000  totaled  $53,174,645  representing
     approximately 88% of total revenues for the period.

     Under the terms of the New  Agreement,  the Company will sell LPG to PMI in
     Brownsville,  Texas at the United States-Mexican border and deliver the LPG
     to  PMI  at the  Matamoros  Terminal  Facility  or  the  Saltillo  Terminal
     Facility.


                                       24
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  L  -  CONTRACTS  -  CONTINUED

     The New  Agreement  also  provides  for  interim  trucking  of LPG from its
     Brownsville  Terminal  Facility  to the  Matamoros  Terminal  Facility  (or
     designated  locations  within the area) and from the  Brownsville  Terminal
     Facility  or the  Matamoros  Terminal  Facility  to the  Saltillo  Terminal
     Facility (or  designated  locations  within the area) in the event that (i)
     the Company is unable to transport  LPG through the US - Mexico  Pipelines,
     (ii) the  Saltillo  Terminal  Facility  or  railcars  to deliver LPG to the
     Saltillo  Terminal  Facility  are not  operating  or  (iii)  PMI has yet to
     recognize the Matamoros Terminal Facility or the Saltillo Terminal Facility
     as fully  operational.  Under the terms of the New Agreement,  in the event
     interim trucking is utilized,  the amount of sales prices received shall be
     reduced by the  corresponding  trucking  charges.  During  April 2000,  the
     Company began partially shipping LPG through the US - Mexico Pipelines.

     LPG BUSINESS - SUPPLY AGREEMENTS

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

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

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

     Under  the  terms  of the PG&E  Supply  Agreement,  when  the CCPL  becomes
     operational,  the PG&E Supply will be delivered  to the CCPL,  as described
     above, and blended to the proper  specifications  as outlined under the New
     Agreement.  Prior to the  completion of the CCPL,  the Company will receive
     delivery of the PG&E Supply through the  facilities  provided for under the
     Pipeline Lease Amendment.


                                       25
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  L  -  CONTRACTS  -  Continued

     In March  2000,  the  Company  and 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 8,200,000  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  has  agreed  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 would allow deliveries of
     the Koch Supply into the CCPL. Koch has not yet begun construction.

     In connection  with the delivery of the Koch Supply,  Exxon has yet to make
     operational the CCPL.  Accordingly,  the Company will not be able to accept
     the Koch Supply until the  completion of the CCPL.  During the period April
     1, 2000 to the date the CCPL is completed, the Company will arrange for the
     sale of the Koch  Supply to third  parties  (the  "Unaccepted  Koch  Supply
     Sales").  The  Company  anticipates  that  the net cost to the  Company  in
     connection  with the Unaccepted Koch Supply Sales will be between $0.00 per
     gallon and $.0275 per gallon.

     Under  the  terms  of the Koch  Supply  Contract,  when  the  CCPL  becomes
     operational,  the Koch Supply will be delivered into the CCPL, as described
     above, and blended to the proper  specifications  as outlined under the New
     Agreement.

     During  March 2000,  the Company and 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 1,900,000  gallons
     (the "Duke Supply") of propane or  propane/butane  mix,  beginning April 1,
     2000. The purchase price is indexed to variable posted prices.

     Under the terms of the Duke Supply  Contract,  the Company will be required
     to pay for  modifications  related to the connections  necessary to bring a
     portion of the Duke Supply into the  Pipeline  facilities.  These costs are
     expected to be minimal.  All other Duke  Supply will be  delivered  through
     facilities provided for under the Pipeline Lease Amendment,  and blended to
     the proper specifications as outlined under the New Agreement.

     In addition,  upon  completion of the CCPL, the delivery of the PG&E Supply
     or the Koch  Supply  would  satisfy  a  portion  or all of the CCPL  Supply
     requirements under the Exxon Supply Contract.

     The Company is currently  purchasing  LPG from major  suppliers to meet the
     minimum monthly volumes required in the New Agreement.  The Company's costs
     to purchase LPG (less any applicable adjustments) are below the sales price
     provided for in the New Agreement.

     The Exxon  Supply  Contract,  the PG&E  Supply  Agreement,  the Koch Supply
     Contract and the Duke Supply  Contract  currently  require that the Company
     purchase  a  minimum  supply of LPG,  which is  significantly  higher  than
     committed sales volumes under the New Agreement.

     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.  Furthermore,  the  Company's  existing  letter  of  credit
     facility may not be adequate and the Company may require additional sources
     of  financing  to meet the  letter of credit  requirements  under the Exxon
     Supply Contract, the PG&E Supply Agreement, the Koch Supply Contract or the
     Duke Supply Contract.


                                       26
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  M  -  AWARD  FROM  LITIGATION

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

     In connection  with the lawsuit,  IBC-Brownsville  filed an appeal with the
     Texas  Court of Appeals on January  21,  1997.  The  Company  responded  on
     February 14, 1997. On September 18, 1997, the appeal was heard by the Texas
     Court of Appeals and on June 18,  1998,  the Texas Court of Appeals  issued
     its  opinion  in the  case,  ruling  essentially  in favor of the  Company.
     IBC-Brownsville  sought a  rehearing  of the case on  August  3,  1998.  On
     December  30,  1998,  the Court  denied  the  IBC-Brownsville  request  for
     rehearing. On February 16, 1999, IBC-Brownsville (the "Petitioner") filed a
     petition  for review with the Supreme  Court of Texas.  On May 10, 1999 the
     Company  responded to the Supreme  Court of Texas'  request for response of
     the Petitioner's petition for review. On May 27, 1999, the Petitioner filed
     a reply with the Supreme  Court of Texas to the  Company's  response of the
     Petitioner's  petition for review.  On June 10, 1999,  the Supreme Court of
     Texas denied the  Petitioner's  petition for review.  During July 1999, the
     Petitioner  filed an appeal with the  Supreme  Court of Texas to rehear the
     Petitioner's  petition for review. On August 26, 1999, the Supreme Court of
     Texas  upheld its  decision to deny the  Petitioner's  petition for review.
     During  November  1999,  the  Petitioner  filed  a  petition  for  writ  of
     certiorari  with the United States Supreme Court.  On January 24, 2000, the
     United States Supreme Court denied the Petitioner's  request for review and
     the  Judgment  became final and  binding.  During  March 2000,  the Company
     received  a cash  payment  from  IBC-Brownsville  of  $4,254,347  of  which
     approximately  $1,300,000  was paid for legal  fees and for other  expenses
     associated with the Judgment.

     For the quarter  ended  January 31,  1999,  the Company  recorded a gain of
     approximately $987,000,  which represented the amount of the Judgment which
     was recorded as a liability on the Company's  balance sheet at December 31,
     1998 (non-cash).  The cash portion of the Judgment received by the Company,
     net of all  contingent  expenses,  has been  recorded  as a gain during the
     three months ended January 31, 2000.


                                       27
<PAGE>
ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
RESULTS  OF  OPERATIONS

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

FORWARD-LOOKING  STATEMENTS

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

OVERVIEW

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

     Historically,  the  Company  has  derived substantially all of its revenues
from  sales  of  LPG to PMI, its primary customer.  During the nine months ended
April 30, 2000, the Company derived approximately 88% of its revenues from sales
of  LPG  to  PMI.

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

LPG  SALES

     The  following table shows the Company's volume sold in gallons and average
sales  price of LPG for the three and nine months ended April 30, 2000 and 1999.


<TABLE>
<CAPTION>
                                       Three  Months  Ended     Nine  Months  Ended
                                       ----------------------  ----------------------
                                       April 30,   April 30,   April 30,   April 30,
                                          2000        1999        2000        1999
                                       ----------  ----------  ----------  ----------
<S>                                    <C>         <C>         <C>         <C>
Volume Sold
                                             31.7        30.7       102.1        84.7
     LPG (millions of gallons) - PMI         14.4           -        14.4           -
                                       ----------  ----------  ----------  ----------
     LPG (million of gallons) - Other        46.1        30.7       116.5        84.7


Average sales price
                                       $     0.58  $     0.29  $     0.52  $     0.28
     LPG (per gallon) - PMI                  0.51           -        0.51           -
     LPG (per gallon) - Other
</TABLE>


                                       28
<PAGE>
RESULTS  OF  OPERATIONS

     THREE  MONTHS  ENDED  APRIL  30,  2000 COMPARED WITH THE THREE MONTHS ENDED
APRIL  30,  1999

     Revenues.  Revenues  for  the  three months ended April 30, 2000 were $25.7
million compared with $8.9 million for the three months ended April 30, 1999, an
increase of $16.8 million or 190.5%.  Of this increase $556,453 was attributable
to  increased  volumes  of  LPG  sold to PMI in the three months ended April 30,
2000,  $8.8  million  was  attributable to increased average sales prices of LPG
sold  to  PMI  in  the  three  months  ended April 30, 2000 and $7.4 million was
attributable  to sales of LPG to customers other then PMI in connection with the
Company's  desire  to  reduce  outstanding  inventory  balances.

     Cost of sales.  Cost of sales for the three months ended April 30, 2000 was
$25.9  million  compared  with $7.9 million for the three months ended April 30,
1999,  an  increase  of $17.9 million or 226.2%.  Of this increase  $536,503 was
attributable to increased volumes of LPG purchased for sales to PMI in the three
months ended April 30, 2000,  $9.7 million was attributable to increased average
sales  prices  of LPG purchased for sales to PMI in the three months ended April
30,  2000, $7.4 million was attributable to sales of LPG to customers other then
PMI  in  connection  with  the  Company's desire to reduce outstanding inventory
balances  and  $343,079 was attributable to increased operating costs associated
with  LPG  during  the  three  months  ended  April  30,  2000.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses were $844,121 for the three months ended April 30, 2000
compared with $563,829 for the three months ended April 30, 1999, an increase of
$280,292  or  49.7%.  This  increase  was  primarily  attributable to additional
professional  fees and payroll related expenses incurred during the three months
ended  April  30,  2000.

     Other  income and expense, net.  Other income (expense), net was ($709,131)
for the three months ended April 30, 2000 compared with ($133,509) for the three
months  ended  April  30, 1999, a decrease of ($575,622).  The decrease in other
income,  net  was  due primarily to increased interest costs and amortization of
discounts  associated  with  the issuance of debt, which was recorded during the
three  months  ended  April  30,  2000.

     Income  tax.   During  the  three  months ended April 30, 2000, the Company
recorded  a  provision for income taxes of $10,042, representing the alternative
minimum  tax due.  Due to the net loss for the three months ended April 30, 2000
and  the  availability of net operating loss carryforwards ($8.0 million at July
31,  1999),  the  Company did not incur any additional income tax expense during
the three months ended April 30, 2000.  Due to the availability of net operating
loss  carryforwards  at  June  31, 1998 of $8.8 million, there was no income tax
expense  recorded during the three months ended April 30, 1999.   The ability to
use  such  net  operating  loss carryforwards, which expire in the years 2009 to
2018,  may  be  significantly  limited  by  the  application  of  the "change in
ownership"  rules  under  Section 382 of the Internal Revenue Code.  The Company
can  receive a credit against any future tax payments due to the extent of prior
alternative  minimum  taxes  paid.

     NINE  MONTHS ENDED APRIL 30, 2000 COMPARED WITH THE NINE MONTHS ENDED APRIL
30,  1999

     Revenues.  Revenues  for  the  nine  months ended April 30, 2000 were $60.7
million compared with $23.7 million for the nine months ended April 30, 1999, an
increase  of  $37.0  million  or  156.3%.  Of  this  increase  $9.1  million was
attributable  to  increased  volumes of LPG sold to PMI in the nine months ended
April 30, 2000, $20.6 million was attributable to increased average sales prices
of  LPG sold to PMI in the nine months ended April 30, 2000 and $7.4 million was
attributable  to sales of LPG to customers other then PMI in connection with the
Company's  desire  to  reduce  outstanding  inventory  balances.

     Cost  of sales.  Cost of sales for the nine months ended April 30, 2000 was
$58.7  million  compared  with $21.3 million for the nine months ended April 30,
1999, an increase of $37.4 million or 176.0%.  Of this increase $8.4 million was
attributable  to  increased  volumes  of  LPG purchased in the nine months ended
April 30, 2000, $20.9 million was attributable to increased average sales prices
of  LPG purchased for sales to PMI in the nine months ended April 30, 2000, $7.4
million  was  attributable  to  sales  of  LPG  to  customers  other then PMI in
connection  with  the  Company's desire to reduce outstanding inventory balances
and  $775,930  was attributable to increased operating costs associated with LPG
during  the  nine  months  ended  April  30,  2000.


                                       29
<PAGE>
     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $2.4 million for the nine months ended April 30,
2000  compared  with  $1.7  million for the nine months ended April 30, 1999, an
increase  of  $678,027  or  38.8%.  This  increase was primarily attributable to
additional  professional  fees  and payroll related expenses incurred during the
nine  months  ended  April  30,  2000.

     Other  income  and  expense,  net.  Other  income  (expense),  net was $2.0
million  for the nine months ended April 30, 2000 compared with $561,828 for the
nine  months ended April 30, 1999, an increase of $1.5 million.  The increase in
other  income,  net  was  due  primarily to increased income from the award from
litigation of $2.0 million which was recorded during the nine months ended April
30, 2000 compared with the award from litigation recorded during the nine months
ended  April  30,  2000,  partially  offset  by  increased  interest  costs  and
amortization  of  discounts  associated  with  the  issuance  of debt, which was
recorded  during  the  nine  months  ended  April  30,  2000.

     Income  tax.   During  the  nine  months  ended April 30, 2000, the Company
recorded  a  provision for income taxes of $80,042, representing the alternative
minimum  tax  due.  Due  to the availability of net operating loss carryforwards
($8.0 million at July 31, 1999), the Company did not incur any additional income
tax  expense  during  the  nine  months  ended  April  30,  2000.  Due  to  the
availability  of  net  operating  loss  carryforwards  at  June 31, 1998 of $8.8
million,  there  was no income tax expense recorded during the nine months ended
April  30,  1999.   The  ability  to  use such net operating loss carryforwards,
which  expire  in  the  years  2009 to 2018, may be significantly limited by the
application of the "change in ownership" rules under Section 382 of the Internal
Revenue  Code.  The Company can receive a credit against any future tax payments
due  to  the  extent  of  prior  alternative  minimum  taxes  paid.

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,  the Company is involved in litigation, the outcome of which cannot be
determined at the present time.  Although the Company has entered into the Lease
Agreements,  significant  uncertainties  exist  related  to  the  substantial
completion  of the US-Mexico Pipelines and Matamoros Terminal Facility (see note
J  to  the  unaudited  consolidated  financial statements).  The Company depends
heavily  on sales to one major customer.  The Company's sources of liquidity and
capital  resources  historically  have  been  provided  by  sales  of  LPG  and
CNG-related  equipment,  proceeds  from the issuance of short-term and long-term
debt,  revolving  credit facilities and credit arrangements, sale or issuance of
preferred  and  common  stock  of  the Company and proceeds from the exercise of
warrants  to  purchase  shares  of  the  Company's  common  stock.

     The  following  summary  table reflects comparative cash flows for the nine
months  ended  April  30,  2000  and  1999.  All  information  is  in thousands.


<TABLE>
<CAPTION>
                                              Nine months Ended
                                           ------------------------
                                            April 30,     April 30,
                                              2000          1999
                                           -----------  -----------
<S>                                        <C>          <C>
Net cash provided by operating activities  $      133   $      743
Net cash (used in) investing                (  10,585)   (     337)
     Activities
Net cash provided by financing activities      10,615          112
                                           -----------  -----------
Net increase in cash                       $       163  $      518
                                           ===========  ===========
</TABLE>


          New  Agreement.  The  Company  had  entered into a sales agreement, as
amended  (the  "Agreement"),  with PMI, its major customer, to provide a minimum
monthly volume of LPG to PMI through March 31, 2000. Effective April 1, 2000 the
Company  entered  into  a new sales agreement with PMI (the "New Agreement") for
the  annual sale of a minimum of 168.0 million gallons of LPG to be delivered to
Matamoros,  Tamaulipas,  Mexico  and  Saltillo,  Coahuila,  Mexico.

     The  New  Agreement  represents  an  increase  of  119% over annual minimum
contract  volumes  under  the  Agreement.   Under the term of the New Agreement,
sale  prices  are  indexed  to  variable  posted prices.  The New Agreement also
provides  for  higher  fixed  margins above the variable posted prices  over the
Agreement  based  on  the final delivery point of the LPG.  Sales to PMI for the


                                       30
<PAGE>
nine  months  ended  April  30,  2000  totaled  $53.2  million  representing
approximately  88%  of  total  revenues  for  the  period.

     Under  the  terms of the New Agreement, the Company will sell LPG to PMI in
Brownsville,  Texas  at  the United States-Mexican border and deliver the LPG to
PMI  at  the  Matamoros  Terminal  Facility  or  the Saltillo Terminal Facility.

     The  New  Agreement  also  provides  for  interim  trucking of LPG from its
Brownsville  Terminal Facility to the Matamoros Terminal Facility (or designated
locations  within  the  area)  and from the Brownsville Terminal Facility or the
Matamoros  Terminal  Facility  to  the Saltillo Terminal Facility (or designated
locations  within  the  area)  in  the  event  that (i) the Company is unable to
transport  LPG  through  the  US  - Mexico Pipelines, (ii) the Saltillo Terminal
Facility  or  railcars  to deliver LPG to the Saltillo Terminal Facility are not
operating  or  (iii) PMI has yet to recognize the Matamoros Terminal Facility or
the Saltillo Terminal Facility as fully operational.  Under the terms of the New
Agreement, in the event interim trucking is utilized, the amount of sales prices
received  shall  be reduced by the corresponding trucking charges.  During April
2000, the Company began partially shipping LPG through the US - Mexico Pipelines
and  expects  to have full service available by July 31, 2000.  The Company also
expects  to  have  the  Saltillo  Terminal  Facility completed by July 31, 2000.

     LPG  Supply  Agreements.  During  October  1998, the Company entered into a
monthly  supply  agreement  with  Exxon  Mobil Corporation ("Exxon") pursuant to
which  Exxon  agreed to supply minimum volumes of LPG to the Company.  Effective
November  1,  1998,  the  Company  entered into a supply agreement with Exxon to
purchase  minimum  monthly  volumes  of  LPG  through  September  1999.

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

     In  addition,  under  the  terms  of  the  Exxon  Supply Contract, Exxon is
required to make operational its Corpus Christi Pipeline (the "CCPL") which will
allow  the Company to acquire an additional supply of propane from other propane
suppliers  located near Corpus Christi, Texas (the "Additional Propane Supply"),
and  bring  the  Additional  Propane Supply to the Plant (the "CCPL Supply") for
blending  to the proper specifications outlined under the New Agreement and then
delivered  into  the  Pipeline.  In connection with the CCPL Supply, the Company
has  agreed  to supply a minimum of 7.7 million gallons into the CCPL during the
first  quarter  from  the  date that the CCPL is operational, approximately 92.0
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 CCPL.   The CCPL has yet to be
completed.

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

     Under  the  terms  of  the  PG&E  Supply  Agreement,  when the CCPL becomes
operational,  the PG&E Supply will be delivered to the CCPL, as described above,
and  blended  to  the proper specifications as outlined under the New Agreement.
Prior  to  the  completion of the CCPL, the Company will receive delivery of the
PG&E  Supply  through  the  facilities  provided  for  under  the Pipeline Lease
Amendment.

     In  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 has agreed to pay additional
charges associated with the construction of a new pipeline interconnection to be
paid  through  additional  adjustments  to  the  purchase  price  (totaling


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<PAGE>
approximately $1.0 million) which would allow deliveries of the Koch Supply into
the  CCPL.   Koch  has  not  yet  begun  construction.

     In  connection  with the delivery of the Koch Supply, Exxon has yet to make
operational  the  CCPL.  Accordingly, the Company will not be able to accept the
Koch  Supply  until the completion of the CCPL.  During the period April 1, 2000
to  the date the CCPL is completed, the Company will arrange for the sale of the
Koch  Supply to third parties (the "Unaccepted Koch Supply Sales").  The Company
anticipates  that  the net cost to the Company in connection with the Unaccepted
Koch  Supply  Sales  will  be  between  $0.00  per gallon and $.0275 per gallon.

     Under  the  terms  of  the  Koch  Supply  Contract,  when  the CCPL becomes
operational,  the  Koch  Supply  will  be  delivered into the CCPL, as described
above,  and  blended  to  the  proper  specifications  as outlined under the New
Agreement.

     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.

     Under  the  terms of the Duke Supply Contract, the Company will be required
to pay for modifications related to the connections necessary to bring a portion
of the Duke Supply into the Pipeline facilities.  These costs are expected to be
minimal.  All  other  Duke  Supply will be delivered through facilities provided
for under the Pipeline Lease Amendment, and blended to the proper specifications
as  outlined  under  the  New  Agreement.

     In  addition,  upon completion of the CCPL, the delivery of the PG&E Supply
or  the  Koch  Supply  would  satisfy  a  portion  or  all  of  the  CCPL Supply
requirements  under  the  Exxon  Supply  Contract.

     The  Company  is  currently purchasing LPG from major suppliers to meet the
minimum  monthly  volumes required in the New Agreement.  The Company's costs to
purchase  LPG  (less  any  applicable  adjustments)  are  below  the sales price
provided  for  in  the  New  Agreement.

     The  Exxon  Supply  Contract,  the  PG&E  Supply Agreement, the Koch Supply
Contract  and  the  Duke  Supply  Contract  currently  require  that the Company
purchase  a  minimum supply of LPG, which is significantly higher than committed
sales  volumes  under  the  New  Agreement.

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.
Furthermore,  the  Company's  existing  letter  of  credit  facility  may not be
adequate and the Company may require additional sources of financing to meet the
letter  of  credit requirements under the Exxon Supply Contract, the PG&E Supply
Agreement,  the  Koch  Supply  Contract  or  the  Duke  Supply  Contract.

     The  Company believes that the terms of the Exxon Supply Contract, the PG&E
Supply  Agreement,  the  Koch  Supply  Contract and the Duke Supply Contract are
commensurate  with  the anticipated future demand for LPG in Mexico and that any
additional  costs  associated  with the Excess Supply as well as the increase in
the  costs  for  LPG  over  previous  agreements during fiscal year 1999 will be
offset  by  increased sales margins on LPG sold to the Company's customers.  The
Company  further  believes that any additional costs incurred in connection with
the Plant Commitment, the CCPL Supply, the PG&E Supply, the Koch Supply, and the
Duke  Supply,  if  any,  will  be  short-term  in  nature.

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


                                       32
<PAGE>
purchase  requirements  under  the  Exxon  Supply  Contract,  the  PG&E  Supply
Agreement, the Koch Supply Contract and the Duke Supply Contract or the costs of
LPG  may  be  in  excess  of  prices  received  on  sales  of  LPG.

     Furthermore,  until  the  US-Mexico  Pipelines  and  the Matamoros Terminal
Facility  and the Saltillo Terminal Facility are completed and begin to be fully
utilized,  the  Company  will  be  required  to  deliver a portion or all of the
minimum  monthly  volumes  from the Brownsville Terminal Facility (see note J to
the  unaudited  consolidated  financial statements).  Historically, sales of LPG
from  the  Brownsville  Terminal Facility have not exceeded 12.7 million gallons
per month.  In addition, breakdowns along the planned distribution route for the
LPG  once purchased from Exxon, PG&E, Koch or Duke or other suppliers, may limit
the  ability of the Company to accept the Plant Commitment, the CCPL Supply, the
PG&E  Supply,  the  Koch  Supply,  and  the  Duke  Supply.

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

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

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

     Pipeline  Lease.      The  Pipeline Lease currently expires on December 31,
2013,  pursuant  to  an amendment  (the "Pipeline Lease Amendment") entered into
between  the  Company  and  Seadrift  on May 21, 1997, which became effective on
January  1, 1999 (the "Effective Date").  The Pipeline Lease Amendment provides,
among  other  things,  for  additional  storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from  the  Pipeline.  Pursuant  to  the  Pipeline Lease Amendment, the Company's
fixed  annual  fee  associated  with  the  use  of the Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date  and  the  Company  is  required  to pay for a minimum volume of storage of
$300,000  per  year  beginning  January 1, 2000. In addition, the Pipeline Lease
Amendment  provides  for  variable  rental  increases  based  on monthly volumes
purchased  and  flowing  into  the  Pipeline  and storage utilized.  The Company
believes  that  the  Pipeline  Lease  Amendment  provides  the Company increased
flexibility  in  negotiating  sales and supply agreements with its customers and
suppliers.

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

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

          Management  believes  that  as  a result of the Expansion, the Company
will  have  additional  strengths  due  to its ability to penetrate further into
Mexico,  provide  greater  volumes  of  LPG  as a result of reduced cross border


                                       33
<PAGE>
trucking  delays  and  greater  access to Mexican distribution resources and the
potential  to  achieve  greater  margins  on  its  LPG  sales.

     In  addition  to the Expansion, the Company (i) has begun construction of a
midline  pump station on the Pipeline (estimated cost of $1.5 million), (ii) has
begun an expansion of the Brownsville Terminal Facility to allow for the loading
and  unloading  of  railcars,  (iii) has begun construction of an additional LPG
terminal  facility  in Saltillo, Mexico (the "Saltillo Terminal Facility") at an
estimated  cost of $500,000, and (iv)  has completed the purchase of a tank farm
for a purchase price of $195,000 (plus costs related to the clean up of the tank
farm),  which  after  additional  improvements  will  be  capable of storing and
distributing  refined  products.  The Saltillo Terminal Facility, when complete,
will allow for the distribution of LPG by railcars, which will directly link the
Company's Brownsville Terminal Facility and the Saltillo Terminal Facility.  The
Saltillo  Terminal  Facility  will  contain storage to accommodate approximately
100,000  gallons  of LPG.  In connection with the purchase of the tank farm, the
Company  entered  into  a  lease agreement for rental of the land which the tank
farm occupies and for the use of a refined products pipeline connecting the tank
farm  with  public  dock  facilities.

          In  connection  with  the Expansion, the Company and CPSC entered into
two  separate  Lease / Installation Purchase Agreements, as amended, (the "Lease
Agreements"),  whereby  CPSC  agreed  to  construct  and  maintain the US-Mexico
Pipelines (including an additional pipeline to accommodate refined products) and
the Matamoros Terminal Facility and agreed to lease these assets to the Company.
Under the terms of the Lease Agreements, the Company is required to make monthly
rental payments of approximately $157,000, beginning the date that the US-Mexico
Pipelines  and  Matamoros  Terminal  Facility  reach  substantial completion, as
defined  under the Lease Agreements (the "Substantial Completion Date").  During
January 2000, CPSC notified the Company that the Substantial Completion Date had
occurred.  In  addition,  the  Company  has  agreed to provide a lien on certain
assets,  leases  and  contracts  which are currently pledged to RZB, and provide
CPSC  with  a  letter  of credit of approximately $1.0 million (the "LOC").  The
Company  is  currently  in  negotiations  with  RZB  and  CPSC  concerning RZB's
subordination  of  RZB's  lien  on  certain  assets,  leases and contracts.  The
Company  also  has  the  option  to  purchase  the  US-Mexico  Pipelines and the
Matamoros  Terminal  Facility  at  the end of the 10th year anniversary and 15th
year  anniversary  for $5.0 million and $100,000, respectively.  Under the terms
of  the  Lease Agreements, CPSC is required to pay all costs associated with the
design,  construction  and  maintenance of the US-Mexico Pipelines and Matamoros
Terminal  Facility.

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

          During  December  1999,  the Company and CPSC amended (the "Addendum")
the  Lease  Agreements,  which  modified  certain terms of the Lease Agreements,
including all prior amendments, modifications, options, extensions and renewals,
which  were entered into from the date of the Lease Agreements until the date of
the Addendum.  In connection with the Addendum, the Company purchased 50% of the
US-Mexico Pipelines and Matamoros Terminal Facility, including a 50% interest in
the  underlying  Lease  Agreements  for  $3.0 million and the right to receive a
minimum  per  month  of  the greater of $62,800 or 40% of the monthly net income
from  the  Lease  Agreements.

          In  addition, under the Addendum, the Company received an option until
December  15,  2000  to acquire the remaining 50% of the US-Mexico Pipelines and
Matamoros  Terminal  Facility, including the remaining 50% interest in the Lease
Agreements for $6.0 million and the issuance of (i) warrants to purchase 200,000
shares of common stock of the Company exercisable for three years at an exercise
price  of  $4.00  per  share if the option is exercised by June 15, 2000 or (ii)
warrants  to  purchase 300,000 shares of common stock of the Company exercisable
for  three  years  at  an  exercise  price  of  $4.00 per share if the option is
exercised  thereafter.

     In connection with the Addendum, the Company is also entitled to offset any
amounts  which  have  been  paid by the Company on behalf of CPSC related to the
completion of CPSC's obligations under the Lease Agreements, except for the $3.0
million  paid  for  the  50%  interest,  described herein, against the Company's
future  rental  obligations under the Lease Agreements and/or against the option
price  of  $6.0  million to purchase the remaining 50% interest in the US-Mexico


                                       34
<PAGE>
Pipelines  and  Matamoros  Terminal  Facility,  including  a 50% interest in the
underlying  Lease  Agreements.  The  Company may also offset against its monthly
rent  obligations under the Lease Agreements any amounts to be received from its
interests  in  the  Lease Agreements so long as the Company is current on all of
the  lease  payments  required  under  the  Lease  Agreements.

          On  February  21,  2000, the Company and CPSC entered into a letter of
agreement  (the  "Letter  Agreement")  whereby  the  Company  modified the terms
associated  with acquiring the remaining 50% interest in the US-Mexico Pipelines
and  Matamoros  Terminal  Facility, whereby the Company will only be required to
make  a  cash  payment  of  $4.5 million ($2.0 million to be paid on or prior to
March  3,  2000,  $1.0  million  payable  on  or before August 21, 2000 and $1.5
million  payable  in twelve equal monthly installments beginning March 31, 2000)
and  warrants  to  purchase  200,000  shares  of  common  stock  of  the Company
exercisable  for  three  years  at  an  exercise  price  of $4.00 per share.  In
addition, the Company agreed to pay Cowboy $150,000 on or before June 1, 2000 as
full  satisfaction  of  a  disputed  claim  arising  from  a previous consulting
agreement  entered into between Cowboy and the Company.  The Company also agreed
that  all  payments made by the Company on behalf of CPSC in connection with the
Lease  Agreements  would  be  assumed  by  the  Company.

     In connection with the Settlement (see note I to the unaudited consolidated
financial  statements),  the  Company  has acquired 100% of the interests in the
Lease  Agreements.  Accordingly, the Company is no longer required to make lease
payments,  provide  a lien on certain assets, provide the LOC, and the President
of the Company is not required to provide the Collateral as prescribed under the
Lease  Agreements  and  amendments  thereto.

     For financial accounting purposes, the Lease Agreements are capital leases.
Therefore,  the  assets  and  related  liabilities determined as a result of the
Settlement,  have been recorded in the Company's balance sheet at April 30, 2000
(see  notes  C  and  G  to  the  unaudited  consolidated  financial statements).

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

     In  connection  with  the  construction  of  the  Mexico  Pipelines and the
Matamoros  Terminal  Facility,  CPSC  provided  all  payments  and  delivery  of
equipment  through Termatsal, S.A. de C.V., a Mexican company ("Termatsal") (see
below).

     PennMex,  Tergas or Termatsal are currently the owners of the land which is
being  utilized  for  the Mexican Pipeline and Matamoros Terminal Facility, have
entered  into  leases  associated with the Saltillo Terminal Facility, have been
granted  the  permit  for  the  Mexican  Pipeline,  have been granted and/or are
expected  to  be  granted permits to operate the Matamoros Terminal Facility and
the  Saltillo Terminal Facility, or have title to the assets associated with the
Mexican  Pipeline and Matamoros Terminal Facility acquired by the Company, which
were  funded  by  the  Company  and  CPSC  (see  notes  C and I to the unaudited
consolidated financial statements).  In addition, the Company has advanced funds
(totaling  $1.6  million  at  April 30, 2000) to PennMex, Tergas or Termatsal in
connection  with  the  purchase of property, plant and equipment associated with
the  construction  of  the Mexican Pipeline, Matamoros Terminal Facility and the
Saltillo  Terminal Facility, which are included in property, plant and equipment
as  "other  costs paid by the Company" (see note C to the unaudited consolidated
financial  statements).  Furthermore,  the  Company  intends  to  fund PennMex,,
Tergas  or  Termatsal  for  any additional costs required in connection with the
Mexican  Pipeline,  Matamoros  Terminal  Facility  and  the  Saltillo  Terminal
Facility.

     During the years ended July 31, 1998 and 1999 and for the nine months ended
April 30, 2000, the Company paid PennMex, Tergas or Termatsal $181,000, $125,000
and  $171,000,  respectively,  for  Mexico  related  expenses  incurred by those
corporations  on  the  Company's  behalf.  Such  amounts  have  been  expensed.

     Foreign  Ownership  of  LPG  Operations.  PennMex, Tergas and Termatsal are
Mexican  companies  which  are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes  ("Bracamontes"),  an  officer  and  director of the Company and the
balance  by  other  citizens  of  Mexico.


                                       35
<PAGE>
Under current Mexican law, foreign ownership of Mexican entities involved in the
distribution of LPG and the operation of LPG terminal facilities are prohibited.
However,  transportation  and  storage  of  LPG  by  foreigners  is  permitted.

     In  October  1999,  the  Company received a verbal opinion from the Foreign
Investment  Section  of  the  Department  of Commerce and Industrial Development
("SECOFI")  that  the  operation  of the Mexican Pipeline and Matamoros Terminal
Facility  would  be  considered  a  transportation  rather  than  a distribution
activity,  and  therefore,  could  be performed by a foreign entity or through a
foreign-owned  Mexican  entity.  The  Company  intends  to request a ruling from
SECOFI  confirming  the  verbal  opinion.  On  November 4, 1999, the Company and
Bracamontes  and  the  other  shareholders  entered into a purchase agreement to
acquire  up  to  75%  of  the common stock of PennMex for a nominal amount.  The
purchase  agreement  is  subject  to  among  other  things,  the  receipt of the
aforementioned  ruling.  The  Company  intends  to formalize contracts among the
Company,  PennMex,  Tergas  and  Termatsal  for  services  to  be  performed  in
connection  with  the operations of the Mexican Pipeline, the Matamoros Terminal
Facility  and  the  Saltillo  Terminal  Facility.

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

     The  transfer  of  any  of  the  interests  acquired  by the Company or the
formalization  of  any  contractual  arrangements  related  to  assets which are
located  in  Mexico  are  dependent upon the determination of the ultimate legal
structure  of  the  ownership  of  such  assets.

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

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

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

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


                                       36
<PAGE>
     Credit Arrangements.  As of April 30, 2000, the Company has a $10.0 million
credit  facility  with  RZB  Finance  L.L.C.  (RZB) for demand loans and standby
letters  of  credit  (RZB  Credit Facility) to finance the Company's purchase of
LPG.  Under the RZB Credit Facility, the Company pays a fee with respect to each
letter  of credit thereunder in an amount equal to the greater of (i) $500, (ii)
2.5%  of  the maximum face amount of such letter of credit, or (iii) such higher
amount as may be agreed to between the Company and RZB.  Any amounts outstanding
under  the RZB Credit Facility shall accrue interest at a rate equal to the rate
announced  by the Chase Manhattan Bank as its prime rate plus 2.5%.  Pursuant to
the  RZB  Credit Facility, RZB has sole and absolute discretion to terminate the
RZB  Credit  Facility  and  to  make  any  loan  or  issue  any letter of credit
thereunder.  RZB  also  has  the  right to demand payment of any and all amounts
outstanding  under  the RZB Credit Facility at any time.  In connection with the
RZB  Credit  Facility,  the  Company  granted  a mortgage, security interest and
assignment  in any and all of the Company's real property, buildings, pipelines,
fixtures  and  interests  therein  or  relating  thereto,  including,  without
limitation, the lease with the Brownsville Navigation District of Cameron County
for  the  land  on which the Company's Brownsville Terminal Facility is located,
the  Pipeline  Lease, and in connection therewith agreed to enter into leasehold
deeds  of  trust,  security  agreements, financing statements and assignments of
rent,  in forms satisfactory to RZB.  Under the RZB Credit Facility, the Company
may  not  permit to exist any lien, security interest, mortgage, charge or other
encumbrance of any nature on any of its properties or assets, except in favor of
RZB,  without  the  consent  of RZB. The Company's President, Chairman and Chief
Executive  Officer  has  personally  guaranteed  all  of  the  Company's payment
obligations  with  respect  to  the  RZB  Credit  Facility.

     In  connection  with  the Company's purchases of LPG from Exxon, PG&E, Duke
and/or  Koch,  the  Company issues letters of credit on a monthly basis based on
anticipated  purchases.

     As  of  April  30, 2000, letters of credit established under the RZB Credit
Facility  in  favor  of  Exxon, PG&E, Duke and Koch for purchases of LPG totaled
$8.9  million  of  which $6.9 million was being used to secure unpaid purchases.
In  addition,  as  of April 30, 2000, the Company had borrowed $1.3 million from
its revolving line of credit under the RZB Credit Facility for purchases of LPG.
In  connection  with  these purchases, at April 30, 2000, the Company had unpaid
invoices due from PMI totaling $4.3 million, cash balances maintained in the RZB
Credit  Facility  collateral account of $35,902 and inventory held in storage of
$4.4  million  (see  note D to the unaudited consolidated financial statements).

During May 2000, the Company and RZB amended the RZB Credit Facility whereby the
RZB  Credit  Facility  was  increased  to  $20,000,000  from  $10,000,000.  In
connection  with  the  increase, RZB entered into a participation agreement with
Bayerische  Hypo-und  Vereinsbank  Aktiengesellschaft,  New York Branch ("HVB"),
whereby  RZB  and  HVB  will each participate up to $10,000,000 toward the total
credit  facility.

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

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

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

During  October  1999,  warrants to purchase a total of 163,636 shares of common
stock  of  the Company were exercised, resulting in cash proceeds to the Company
of  $390,951.  The  proceeds  of  such  exercises  were used for working capital
purposes.

     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") 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


                                       37
<PAGE>
$2.3 million.  Interest at 9% is due on June 15, 2000, and December 15, 2000 (or
the  maturity  date, if earlier).  In connection with the Notes, as of April 30,
2000,  the  Company  has  granted  the  holders  of  the  Notes,  warrants  (the
"Warrants") to purchase a total of 662,387 shares of common stock of the Company
at  an  exercise price of $4.00 per share, exercisable through December 15, 2002
and  during  May  2000  in  accordance  with  the Notes, the Company granted the
holders  of  the  Notes,  additional  warrants  (the  "Additional  Warrants") to
purchase  a total of 44,376 shares of common stock of the Company at an exercise
price  of  $4.00  per share, exercisable through December 15, 2002.  The Company
was also required to register the shares issuable in connection with exercise of
the Warrants and the Additional Warrants on or before April 15, 2000, subject to
certain  conditions  (see  note  H  to  the  unaudited  consolidated  financial
statements).

Net  proceeds  from  the Notes were used for the purchase of the 50% interest in
the  US-Mexico  Pipelines  and Matamoros Terminal Facility (see notes C and J to
the  unaudited  consolidated  financial  statements)  and  for  working  capital
purposes.

Under  the  terms  of  the Notes, the Company has agreed to pledge the Company's
interests  in  the  US-Mexico  Pipelines  and  the  Matamoros Terminal Facility.

In  connection  with  the  issuance  of  $3.9 million and $710,000 of Notes from
December  10,  1999 through January 18, 2000 and February 2, 2000, respectively,
the  Company  paid  a  fee  equal  to a cash payment of $270,830 and $49,700 and
warrants  to  purchase a total of 96,725 shares and 17,750 shares, respectively,
of  common  stock  of  the  Company  at  an  exercise  price of $4.00 per share,
exercisable  for  three years.  The Company also granted piggy back registration
rights  to  the  holders  of  the  warrants  issued  for  fees.

     During  January  2000,  the Company issued 17,000 shares of common stock of
the  Company  in  exchange  for  services  performed.

During  February  2000,  warrants to purchase a total of 95,000 shares of common
stock  of  the Company were exercised, resulting in cash proceeds to the Company
of  $308,750.  The  proceeds  of  such  exercises  were used for working capital
purposes.

     During March 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 note accrues interest at the
prime  rate per annum and is payable October 31, 2000.  The director and officer
has  also  agreed  to personally guaranty repayment of the promissory note.  The
promissory  note  is  collateralized  by  200,000  shares of common stock of the
Company  owned  by the director and officer of the Company and has been recorded
as a reduction of stockholders' equity.  Interest on the promissory note will be
recorded  when  the  cash  is  received.

On  April  19,  2000,  the  Company issued 181,818 shares of common stock of the
Company for an amount of $1.0 million.  Net proceeds from the sale were used for
working  capital purposes.  The Company has agreed to register the shares issued
by  July  15,  2000.

     During  May  2000  and  June  2000,  warrants to purchase a total of 48,750
shares of common stock of the Company were exercised, resulting in cash proceeds
to  the  Company  of  $120,000.  The  proceeds  of  such exercises were used for
working  capital  purposes.

During June 2000, the Company issued 8,499 shares of common stock of the Company
in  exchange  for  fees  due.

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

     In  connection with the issuance of shares and warrants by the Company (the
"Shares"),  the Company has on numerous instances granted registration rights to
the holders of the Shares, including those shares which result from the exercise
of warrants (the "Registrable Securities").  The obligations of the Company with
respect  to the Registrable Securities include demand registration rights and/or
piggy-back  registration  rights  and/or  the  Company  is  required  to file an
effective  registration  by either September 19, 1999, December 1, 1999, January
31,  2000,  April 15, 2000 or July 15, 2000 (the "Registration").  In connection


                                       38
<PAGE>
with  the Registration of the Registrable Securities, the Company is required to
provide  notice  to the holder of the Registrable Securities, who may or may not
elect  to be included in the Registration.  The Company is obligated to register
the  Registrable  Securities  even  though  the  Registrable  Securities  may be
tradable under Rule 144.   The Company did not file a registration statement for
the  shares  agreed  to  be  registered by September 19, 1999, December 1, 1999,
January  31,  2000 or April 15, 2000.  The Company has also received notice of a
demand  for  registration  for  certain  of the Shares.  The registration rights
agreements  do  not  contain  provisions  for damages if the Registration is not
completed except for those Shares required to be registered on December 1, 1999,
whereby  for  each  monthly  anniversary  after  December 1, 1999 if the Company
fails  to have an effective registration statement, the Company will be required
to  pay  a  penalty  of  $80,000  to  be paid in cash and/or common stock of the
Company  based  on  the  then  current  trading price of the common stock of the
Company.  Through  May  31,  2000, the Company has issued 8,499 shares of common
stock  of  the  Company  in  connection  with  certain penalties incurred.   The
Company  has  received  an  extension of time to file the registration statement
with  respect  to certain of the Shares required to be registered on December 1,
1999  and  April  15,  2000.

     Judgment  in favor of the Company.  During March 2000, the Company received
the  cash  portion of the Judgment from IBC-Brownsville of $4.3 million of which
approximately  $1.3  million  was  paid  for  legal  fees and for other expenses
associated  with  the  Judgment.

     Settlement  of  Litigation.  On  March  16,  1999,  the  Company settled in
mediation  a  lawsuit with its former chairman of the board, Jorge V. Duran.  In
connection  therewith  and  without  admitting  or denying liability the Company
agreed  to  pay Mr. Duran $250,000 in cash and the issuance of 100,000 shares of
common  stock  of  the  Company of which $100,000 is to be paid by the Company's
insurance  carrier.  The Company has agreed to register the stock in the future.
The  parties  have  agreed  to  extend  the  date which the payments required in
connection  with the settlement, including the issuance of the common stock, are
to  be  made.

     On  February  24, 2000, litigation was filed in the 357th Judicial District
Court  of  Cameron County, Texas, against  Cowboy Pipeline Service Company, Inc.
("Cowboy"),  CPSC  International,  Inc.  ("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  to  be paid at the commencement of operations of the US Pipelines
(paid  during  April 2000) and debt in the amount of $1.9 million.  As a result,
the litigation was dismissed.  The debt bears interest at 10% per annum, payable
monthly in minimum installments of $15,000 with a balloon payment due at the end
of  36  months  from the date of commencement of operations of the US Pipelines.
The  $1.9  million  is included in capital lease obligations  (see note G to the
unaudited  consolidated  financial  statements).

     On  June  19,  2000,  the  Company,  CPSC,  Cowboy  and the Owner reached a
settlement  (the  "Settlement")  whereby  the Company has agreed to purchase the
remaining  50%  interest  in  the  assets associated with Lease Agreements for a
promissory note, transfer of the property owned by the Company referred to above
and  warrants  to  acquire  common stock of the Company.  In addition, CPSC will
assume  the  Company's  debt  issued  in  connection with the acquisition of the
property.  The unaudited consolidated financial statements have been adjusted to
reflect  the  Settlement.  The  Settlement is subject to final documentation and
approval  of  the  Court.

As  a  result  of  the aforementioned, the Company may incur additional costs to
complete  the US-Mexico Pipelines and Matamoros Terminal Facility, the amount of
which  cannot  presently  be  determined.

As  a  result of the foregoing, there is no certainty that the Company will; (i)
acquire  the  remaining  50%  interest  in the US-Mexico Pipelines and Matamoros
Terminal  Facility,  (ii) utilize the US-Mexico Pipelines and Matamoros Terminal
Facility  or (iii) realize its recorded investment in the Lease Agreements or in
the  US-Mexico  Pipelines  and  Matamoros  Terminal  Facility (see note C to the
unaudited  consolidated  financial  statements).

Other  Litigation.   The  Company  and  its  subsidiaries are also involved with
other  proceedings, lawsuits and claims.  The Company is of the opinion that the


                                       39
<PAGE>
liabilities,  if  any,  ultimately resulting from such proceedings, lawsuits and
claims  should  not  materially  affect its consolidated financial position (see
note  I  to  the  unaudited  consolidated  financial  statements).

     Realization  of  Assets.  Recoverability of a major portion of the recorded
asset  amounts as shown in the Company's consolidated balance sheet is dependent
upon  (i)  the  Company's  ability  to  obtain  additional  financing  and raise
additional  equity  capital,  (ii) the completion of the transactions related to
the  US-Mexico  Pipelines,  the  Matamoros  Terminal  Facility  and the Saltillo
Terminal  Facility,  (iii)  the  success  of the Company's future operations and
Expansion Program, and (iv) the consummation of the acquisition of the interests
in  PennMex  and  the operating agreements among the Company, PennMex, Tergas or
Termatsal.

     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,  (ii) increase its customer base, (iii) extend the terms and capacity
of  the  Pipeline  Lease  and the Brownsville Terminal Facility, (iv) expand its
product  lines,  (v)  increase  its  source  of LPG supply and at more favorable
terms,  (vi)  obtain  additional  letters  of  credit  financing,  (vii)  raise
additional  debt  and/or equity capital and (viii) resolve the issues related to
the  US-Mexico  Pipelines, Matamoros Terminal Facility and the Saltillo Terminal
Facility.   See  note  K  to  the  unaudited  consolidated financial statements.

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

FINANCIAL  ACCOUNTING  STANDARDS

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

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

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  upon  their  review  accompanies  the  consolidated
financial  statements  included  in  Item  1  of  Part  I.


                                       40
<PAGE>
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 sell excess inventory to
customers  to  reduce  the  risk  of  these  price  fluctuations.


                                       41
<PAGE>
PART  II

ITEM  1.     LEGAL  PROCEEDINGS

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

ITEM  2.     CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

See  Notes G and H to the unaudited Consolidated Financial Statements and Note L
to  the  Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1999  for  information  concerning  certain  sales  of  Securities.

The  Notes,  Warrants,  Additional  Warrants  and  other  securities were issued
without  registration  under the Securities Act of 1933, as amended, in reliance
upon  the  exemptions  from  the  registration  provisions thereof, contained in
Section  4(2)  and  Section  4(6)  and  Rule  506  of  Regulation  D promulgated
thereunder.

Pennsylvania  Merchant  Group  acted  as  placement  agent  for  the  Company in
connection  with  certain  of  the  transactions.

ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES

     None.

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

The  2000 Annual Meeting of Stockholders of the Company (the "Meeting") was held
on  April  28, 2000 at the Company's executive offices.  The record date for the
Meeting  was  March 7, 2000.  Proxies for the meeting were solicited pursuant to
Regulation  14A under the Exchange Act.  There was no solicitation in opposition
to  management's two proposals, and all of the nominees for election as director
were  elected.  The  results of the voting by the stockholders for each proposal
are  presented  below.

     Proposal  #1     Election  of  Directors

     Name  of  Director  Elected          Votes  For     Votes  Withheld
     ---------------------------          ----------     ---------------
          Jerome  B.  Richter             8,943,361          7,278
          Ian  T.  Bothwell               8,943,361          7,278
          Jorge  R.  Bracamontes          8,943,361          7,278
          Jerry  L.  Lockett              8,943,361          7,278
          Kenneth  G.  Oberman            8,943,361          7,278
          Stewart  J.  Paperin            8,943,361          7,278

     Proposal #2 Proposal to ratify the appointment of Burton McCumber & Cortez,
                 L.L.P.  as  the  independent  auditors  of  the  Company.

          For          Against     Abstain
          ---          -------     -------

          8,903,109     44,400     3,130


ITEM  5.     OTHER  INFORMATION

     None.


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<PAGE>
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.
------------

10.140     Transfer  of  Shares  Agreement  dated November 4, 1999 between Jorge
           Bracamontes  and  the  Company.  (Incorporated  by  reference  to the
           Company's Quarterly  report  on Form 10-Q for the quarterly period
           ended October 31, 1999, filed on December  14,  1999,  SEC  File  No.
           000-24394).

10.141     Transfer of Shares Agreement dated November 4, 1999 between Juan Jose
           Navarro  Plascencia and the Company. (Incorporated by reference to
           the Company's Quarterly  report on Form 10-Q for the quarterly period
           ended October 31, 1999, filed  on  December 14,  1999, SEC  File  No.
           000-24394).

10.142     Addendum dated December 15, 1999 between CPSC International, Inc. and
           the Company.  (Incorporated  by  reference to the Company's Quarterly
           report on Form 10-Q for  the quarterly period ended January 31, 2000,
           filed on March 21, 2000,  SEC  File  No.  000-24394).

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

10.143     LPG  Mix Purchase Contract (DTIR-010-00) dated March 31, 2000 between
           PMI  Trading  Limited  and  the  Company.

10.144     LPG  Mix Purchase Contract (DTIR-011-00) dated March 31, 2000 between
           PMI  Trading  Limited  and  the  Company.

10.145     Product  Sales  Agreement  dated  February  23,  2000  between  Koch
           Hydrocarbon  Company  and  the  Company.

10.146     First  Amendment  Line Letter dated May  2000 between RZB Finance LLC
           and  the  Company

  27.1     Financial  Data  Schedule.

b.     Reports  on  Form  8-K.

     None.

                                       43
<PAGE>
                                      SIGNATURES

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


     PENN  OCTANE  CORPORATION



June  19,  2000     By:     /s/Ian  T.  Bothwell
                            --------------------
                             Ian  T.  Bothwell
                             Vice  President,  Treasurer,  Assistant  Secretary,
                                 Chief  Financial  Officer


                                       44
<PAGE>