UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549



                                    FORM 10-Q


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

     For  the  quarterly  period  ended  October 31, 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 of                             (I.R.S. Employer
 Incorporation or Organization)                            Identification No.)

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

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

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

The  number  of shares of Common Stock, par value $.01 per share, outstanding on
December 08, 2000 was 14,391,511.


                                        1
<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 October 31, 2000
               (unaudited) and  July  31,  2000                              4-5

               Consolidated  Statements  of  Operations  for the
               three months ended October 31, 2000 and 1999 (unaudited)        6

               Consolidated  Statements  of  Cash  Flows for the
               three months ended October 31, 2000 and 1999 (unaudited)        7

               Notes to Consolidated Financial Statements (unaudited)       8-23

          2.   Management's Discussion and Analysis of Financial
               Condition and  Results  of  Operations                      24-35

          3.   Quantitative and Qualitative Disclosures About Market Risk     35

Part II   1.   Legal  Proceedings                                             36

          2.   Changes  in  Securities                                        36

          3.   Defaults  Upon  Senior  Securities                             36

          4.   Submission of Matters to a Vote of Security Holders            36

          5.   Other Information                                              36

          6.   Exhibits, Financial Statement Schedules, and Reports
               on Form 8-K                                                 36-37

          7.   Signatures                                                     38


                                        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 October 31, 2000, and the related
consolidated  statements of operations and cash flows for the three month period
ended  October  31,  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, 2000, and the related
consolidated  statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein) and in our report dated September 29,
2000,  we  expressed  an  unqualified  opinion  on  those consolidated financial
statements.   Our  report  letter  contained a paragraph stating that conditions
existed  which  raised substantial doubt about the Company's ability to continue
as  a  going  concern.   In  our  opinion,  the  information  set  forth  in the
accompanying  consolidated  balance sheet as of July 31, 2000, is fairly stated,
in  all  material  respects,  in relation to the consolidated balance sheet from
which  it  has  been  derived.




Brownsville,  Texas
December  5,  2000


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

                         PENN  OCTANE  CORPORATION  AND  SUBSIDIARIES

                                    CONSOLIDATED BALANCE SHEETS

                                               ASSETS


                                                                          October 31,
                                                                              2000       July  31,
                                                                          (Unaudited)      2000
                                                                          ------------  -----------
<S>                                                                       <C>           <C>
Current Assets

     Cash                                                                 $    551,658  $    25,491

     Trade accounts receivable, less allowance for doubtful accounts of      6,281,243    3,816,685
        $562,950 and $562,950 (note H)

     Notes receivable (note C)                                                 214,355      770,016

     Inventories (note E)                                                   10,889,648    7,323,209

     Prepaid expenses and other current assets                                 296,723      338,187
     Property held for sale (note H)                                         1,908,000    1,908,000
                                                                          ------------  -----------

        Total current assets                                                20,141,627   14,181,588

Property, plant and equipment - net (note D)                                17,589,230   16,756,816

Lease rights (net of accumulated amortization of $581,599 and $570,150)        572,440      583,889

Other non-current assets                                                        21,120       14,870
                                                                          ------------  -----------

             Total assets                                                 $ 38,324,417  $31,537,163
                                                                          ============  ===========


     The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>


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

                                     CONSOLIDATED BALANCE SHEETS - CONTINUED

                                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                                   October 31,
                                                                                       2000          July 31,
                                                                                    (Unaudited)        2000
                                                                                  --------------  --------------
<S>                                                                               <C>             <C>
Current Liabilities

     Current maturities of long-term debt (note F)                                $   3,810,863   $   3,859,266

     Short-term debt (note F)                                                         5,415,649       4,980,872

     Revolving line of credit (note H)                                                3,019,597       3,538,394

     LPG trade accounts payable (note H)                                             10,554,979       5,226,958

     Deferred revenues (note M)                                                       1,685,250               -

     Other accounts payable and accrued liabilities                                   3,212,333       2,833,434
                                                                                  --------------  --------------

          Total current liabilities                                                  27,698,671      20,438,924

Long-term debt, less current maturities (note F)                                      1,464,984       1,464,984

Commitments and contingencies (notes G and H)                                                 -               -

Stockholders' Equity (note G)

     Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
     no shares issued and outstanding at October 31, 2000 and July 31, 2000                   -               -

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

     Common  stock  -  $.01  par  value,  25,000,000  shares  authorized;
     13,686,795 and 13,435,198 shares issued and outstanding at October 31,
     2000 and July 31, 2000                                                             136,868         134,352

     Additional paid-in capital                                                      21,796,224      21,782,638

     Notes receivable from officers of the Company and a related party for
     exercise of warrants, less reserve of $516,762 and $496,077 at October
     31, 2000 and July 31, 2000                                                    (  3,761,350)   (  3,263,350)

     Accumulated deficit                                                           (  9,010,980)   (  9,020,385)
                                                                                  --------------  --------------

     Total stockholders' equity                                                       9,160,762       9,633,255
                                                                                  --------------  --------------

               Total liabilities and stockholders' equity                         $  38,324,417   $  31,537,163
                                                                                  ==============  ==============


          The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>


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

                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                    (UNAUDITED)

                                                            Three Months Ended
                                                        --------------------------
                                                        October 31,    October 31,
                                                            2000          1999
                                                        ------------  ------------
<S>                                                     <C>           <C>
Revenues                                                $38,381,119   $15,970,900

Cost of goods sold                                       36,792,694    14,965,012
                                                        ------------  ------------

     Gross profit                                         1,588,425     1,005,888

Selling, general and administrative expenses

     Legal and professional fees                            204,514       165,729

     Salaries and payroll related expenses                  257,473       209,792

     Travel                                                  35,160        58,020

     Other (note K)                                         178,253       133,897
                                                        ------------  ------------

                                                            675,400       567,438
                                                        ------------  ------------

         Operating income                                   913,025       438,450

Other income (expense)

     Interest expense (note F)                           (  806,157)    (  66,027)

     Interest income                                          2,537         3,528

       Settlement of litigation (note H)                 (  100,000)            -
                                                        ------------  ------------

          Income before taxes                                 9,405       375,951

Provision for income taxes                                        -             -
                                                        ------------  ------------

               Net income                               $     9,405   $   375,951
                                                        ============  ============

Net income per common share (note B)                    $      0.00   $      0.03
                                                        ============  ============

Net income per common share assuming dilution (note B)  $      0.00   $      0.02
                                                        ============  ============

Weighted average common shares outstanding               13,583,756    12,476,371
                                                        ============  ============


The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>

                     PENN  OCTANE  CORPORATION  AND  SUBSIDIARIES


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

                                            CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                         (UNAUDITED)
                                                                                       Three Months Ended
                                                                                       ------------------
                                                                                    October 31,   October 31,
                                                                                      2000           1999
                                                                                   -------------  -----------
<S>                                                                                <C>            <C>
Increase (Decrease) In Cash
Cash flows from operating activities:
Net income                                                                          $     9,405   $  375,951
Adjustments to reconcile net income to net cash  provided by operating
activities:
     Depreciation and amortization                                                      184,309       58,374
     Amortization of lease rights                                                        11,449       11,449
     Loan discount                                                                      452,027            -
     Other                                                                               63,291            -
Changes in current assets and liabilities:
     Trade accounts receivable                                                     (  2,464,558)  (  870,599)
     Deferred revenues                                                                1,685,250            -
     Inventories                                                                   (  3,566,439)  (  493,076)
     Prepaid and other current assets                                                    41,464        1,465
     LPG trade accounts payable                                                       5,328,021    1,652,778
     Other assets and liabilities, net                                             (      6,250)  (   52,550)
     Other accounts payable and accrued liabilities                                     378,899   (  446,592)
                                                                                   -------------  -----------
     Net cash provided by operating activities                                        2,116,868      237,200
Cash flows from investing activities:
     Capital expenditures                                                          (  1,016,723)  (  409,197)
     Payments on note receivable                                                              -       20,000
                                                                                   -------------  -----------
          Net cash used in investing activities                                    (  1,016,723)  (  389,197)
Cash flows from financing activities:
     Revolving credit facilities                                                   (    518,797)           -
     Costs of registration                                                         (     35,276)           -
     Issuance of common stock                                                            45,748    1,067,200
     Reduction in debt                                                             (     65,653)  (   90,750)
     Preferred stock dividends                                                                -   (   45,370)
                                                                                   -------------  -----------
        Net cash (used in) provided by financing activities                        (    573,978)     931,080
                                                                                   -------------  -----------
            Net increase in cash                                                        526,167      779,083
Cash at beginning of period                                                              25,491    1,032,265
                                                                                   -------------  -----------
Cash at end of period                                                              $    551,658   $1,811,348
                                                                                   =============  ===========
Supplemental disclosures of cash flow information:
     Cash paid during the period for:
     Interest (including capitalized interest of $45,000 in 2000)                  $    270,849   $   57,677
                                                                                   =============  ===========
Supplemental disclosures of noncash transactions:
     Common stock and warrants issued  (note G)                                    $    561,290            -
                                                                                   =============  ===========
     Note receivable exchanged for common stock (note C)                           $  ( 555,661)  $        -
                                                                                   =============  ===========


               The accompanying notes and accountant's report are an integral part of these statements.
</TABLE>


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION

     Penn Octane  Corporation  was  incorporated in Delaware in August 1992. The
     Company has been principally  engaged in the purchase,  transportation  and
     sale of  liquefied  petroleum  gas (LPG).  From 1997 until March 1999,  the
     Company was also involved in the provision of equipment and services to the
     compressed  natural gas (CNG)  industry.  The Company  owns and  operates a
     terminal facility in Brownsville, Texas (the 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  connect the
     Brownsville Terminal Facility to the Matamoros Terminal Facility. The lease
     of the remaining 50% interest has been capitalized for financial  statement
     reporting  purposes.  The  Company  has a  long-term  lease  agreement  for
     approximately  132 miles of pipeline (the Leased  Pipeline)  which connects
     Exxon Mobil  Corporation's  (Exxon) King Ranch Gas Plant in Kleberg County,
     Texas and Duke Energy's La Gloria Gas Plant in Jim Wells County,  Texas, to
     the Company's Brownsville Terminal Facility.  In addition,  the Company has
     access to a twelve-inch  pipeline (the ECCPL), which connects Exxon's Viola
     valve  station in Nueces  County,  Texas to the inlet of the King Ranch Gas
     Plant (see note M). In connection  with the Company's  lease  agreement for
     the  Leased  Pipeline,  the  Company  has access to  21,000,000  gallons of
     storage located in Markham,  Texas, as well as potential  propane  pipeline
     exchange suppliers, via approximately 155 miles of pipeline located between
     Markham,  Texas and the Exxon King Ranch Gas Plant.  The Company  sells LPG
     primarily to P.M.I. Trading Limited (PMI). PMI is the exclusive importer of
     LPG into Mexico.  PMI is also a  subsidiary  of  Petroleos  Mexicanos,  the
     state-owned Mexican oil company (PEMEX). The LPG purchased from the Company
     is distributed by PMI in the northeastern region of Mexico.

     The  Company  commenced  operations  during the fiscal  year ended July 31,
     1995, upon construction of the Brownsville Terminal Facility. 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  71% of
     the Company's total revenues for the three months ended October 31, 2000.

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

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

     The  unaudited  consolidated  balance  sheet as of October  31,  2000,  the
     unaudited consolidated  statements of operations for the three months ended
     October 31, 2000 and 1999,  and the  unaudited  consolidated  statements of
     cash flows for the three months ended October 31, 2000 and 1999,  have been
     prepared by the Company  without audit.  In the opinion of management,  the
     unaudited  consolidated financial statements include all adjustments (which
     include only normal recurring  adjustments) necessary to present fairly the
     unaudited  consolidated financial position of the Company as of October 31,
     2000, the unaudited consolidated results of operations for the three months
     ended October 31, 2000 and 1999, and the unaudited  consolidated cash flows
     for the three months ended October 31, 2000 and 1999.

     Certain  information  and  footnote  disclosures  normally  included in the
     consolidated  financial  statements  prepared in accordance  with generally
     accepted   accounting   principles  have  been  omitted.   These  unaudited
     consolidated  financial  statements  should be read in conjunction with the
     consolidated  financial  statements  and  notes  thereto  included  in  the
     Company's  Annual  Report on Form 10-K for the  fiscal  year ended July 31,
     2000.


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION  -  CONTINUED

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


NOTE  B  -  INCOME  PER  COMMON  SHARE

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

     The following tables present  reconciliations  from income per common share
     to income per common share assuming dilution (see note G for the warrants):

<TABLE>
<CAPTION>
                                                    For the three months ended October 31, 2000
                                                    -------------------------------------------
                                                         Income         Shares      Per-Share
                                                      (Numerator)    (Denominator)    Amount
                                                     --------------  -------------  ----------
<S>                                                  <C>             <C>            <C>
       Net income                                    $       9,405               -           -

       Less:  Dividends on preferred stock                       -               -           -
                                                     --------------

       BASIC EPS
       Net income available to common stockholders           9,405      13,583,756  $     0.00
                                                                                    ==========

       EFFECT OF DILUTIVE SECURITIES
       Warrants                                                  -       1,239,425           -
       Convertible Preferred Stock                               -               -           -
                                                     --------------  -------------  ----------

       DILUTED EPS
       Net income available to common stockholders   $       9,405      14,823,181  $     0.00
                                                     ==============  =============  ==========



                                                    For the three months ended October 31, 1999
                                                    -------------------------------------------
                                                         Income         Shares      Per-Share
                                                      (Numerator)    (Denominator)    Amount
                                                     --------------  -------------  ----------
       Net income                                    $     375,951               -           -
       Less:  Dividends on preferred stock                ( 45,370)              -           -
                                                     --------------

       BASIC EPS
       Net income available to common stockholders         330,581      12,476,371  $     0.03
                                                                                    ==========

       EFFECT OF DILUTIVE SECURITIES
       Warrants                                                  -         640,847           -
       Convertible Preferred Stock                               -         166,304           -
                                                     --------------  -------------  ----------
       DILUTED EPS
       Net income available to common stockholders   $     330,581      13,283,522  $     0.02
                                                     ==============  =============  ==========
</TABLE>


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  C  -  SALE  OF  CNG  ASSETS

     On September 10, 2000, the Board of Directors approved the repayment by the
     Buyer (a related party) of the $900,000 promissory note to the Company (the
     Buyer was entitled to discounts for early payment of approximately $344,000
     as  prescribed  under the  promissory  note) through the exchange of 78,373
     shares (shares were  subsequently  canceled) of common stock of the Company
     owned by Buyer,  which were previously pledged to the Company in connection
     with the promissory  note. The exchanged  shares had a fair market value of
     approximately  $556,000 at the time of the  transaction  and the promissory
     note had a net book value of $640,000 at that time. Therefore,  the Company
     recorded a loss of approximately  $84,000 as a result of the discount taken
     by the Buyer.  Such amount was  included in the  consolidated  statement of
     operations at July 31, 2000.  The remaining  note has a balance of $214,355
     and is  collateralized by the CNG assets and 60,809 shares of the Company's
     common stock owned by the Buyer.


NOTE  D  -  PROPERTY,  PLANT  AND  EQUIPMENT

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

                                                           October 31,       July 31,
                                                              2000            2000
                                                         --------------  --------------
<S>                                                      <C>             <C>
LPG:
    Brownsville Terminal Facility:
       Building                                          $     173,500   $     173,500
       Terminal facilities                                   3,426,440       3,426,440
       Tank Farm                                               370,855         370,845
       Leasehold improvements                                  291,409         291,409
       Capital construction in progress                      1,840,941       1,295,825
       Equipment                                               476,203         393,462
                                                         --------------  --------------
                                                             6,579,348       5,951,481
                                                         --------------  --------------

    US - Mexico Pipelines and Matamoros Terminal
    Facility:
        Purchase of 50% interest in the Lease Agreements
        Capitalized leases                                   3,000,000       3,000,000
        Other costs paid by the Company                      6,400,000       6,400,000
                                                             3,046,757       2,674,716
                                                         --------------  --------------
                                                            12,446,757      12,074,716
                                                         --------------  --------------
    Saltillo Terminal Facility
                                                               799,309         785,699
                                                         --------------  --------------
Other:
    Automobile
    Office equipment                                            10,800          10,800
                                                                42,820          39,615
                                                         --------------  --------------
                                                                53,620          50,415
                                                         --------------  --------------

    Less:  accumulated depreciation and amortization,       19,879,034      18,862,311
       including amounts related to the capital lease of
       282,839 and $157, 489 during the three months ended
       October 31, 2000 and the year ended July 31, 2000,
       respectively.                                      (  2,289,804)   (  2,105,495)
                                                         --------------  --------------

                                                         $  17,589,230   $  16,756,816
                                                         ==============  ==============
</TABLE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  INVENTORIES

     Inventories  consist  of  the  following:

                                         October 31, 2000          July 31, 2000
                                         ----------------          -------------
                                        Gallons      Cost        Gallons      Cost
                                      ----------  -----------  ----------  ----------
<S>                                   <C>         <C>          <C>         <C>
LPG:
   Leased Pipeline and US-Mexico
      Pipelines                        1,688,778  $ 1,056,980   1,361,850  $  736,485
   Storage:
      Brownsville Terminal Facility,
         Matamoros Terminal  Facility
         and railcars leased by the
         Company                         907,392      567,922   1,037,290     560,964
   Markham and other                  15,327,693    9,264,746  11,176,125   6,025,760
                                      ----------  -----------  ----------  ----------

                                      17,923,863  $10,889,648  13,575,265  $7,323,209
                                      ==========  ===========  ==========  ==========
</TABLE>


NOTE  F  -  DEBT  OBLIGATIONS
-----------------------------

     SHORT-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  (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,  the  Company  granted  the  holders of the Notes  warrants
     (Warrants)  to  purchase a total of 706,763  shares of common  stock of the
     Company  at an  exercise  price of $4.00  per  share,  exercisable  through
     December  15,  2002.  The Company was also  required to register the shares
     issuable in connection  with exercise of the Warrants on or before July 15,
     2000, subject to certain conditions (see note G).

     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 D
     and I) and for working capital purposes.

     Under  the terms of the  Notes,  the  Company  has  agreed  to  pledge  the
     Company's  owned  interest  (50%)  in the US -  Mexico  Pipelines  and  the
     Matamoros Terminal Facility.  RZB (see note H) has consented to subordinate
     its senior interest in these assets in connection with the Notes.

     Upon the  issuance  of the  Notes,  the  Company  recorded  a  discount  of
     $1,675,598  related  to the fair  value of the  Warrants  issued  and other
     costs,  to be amortized over the life of the Notes.  The amount of discount
     amortized during three months ended October 31, 2000 was $452,027.

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

     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 H have been  recorded in the  accompanying  consolidated
     financial  statements  as property,  plant and  equipment and capital lease
     obligations.


                                       11
<PAGE>
<TABLE>
<CAPTION>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

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

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

     Contract for Bill of Sale which was extended in April 1999; due in monthly                  5,347      14,347
     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            200,000     202,750
     monthly installments of $20,000 through January 2001; final payment of $110,000
     due in February 2001.


     Other long-term debt.                                                                           -      36,653
                                                                                          ------------  ----------
                                                                                             5,275,847   5,324,250

     Current maturities.                                                                     3,810,863   3,859,266
                                                                                          ------------  ----------

                                                                                          $  1,464,984  $1,464,984
                                                                                          ============  ==========
</TABLE>


     In connection with the notes payable for legal services, the Company agreed
     to provide a  "Stipulation  of  Judgment" to the creditor in the event that
     the Company defaults under the settlement agreements.


NOTE  G  -  STOCKHOLDERS'  EQUITY

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

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

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

     During  September  2000,  a director  and officer of the Company  exercised
     warrants to purchase  200,000 shares of common stock of the Company,  at an
     exercise price of $2.50 per share.  The  consideration  for the exercise of
     the warrants  included $2,000 in cash and a $498,000  promissory  note. The
     principal  amount of the note plus  accrued  interest  at an annual rate of
     10.5% is due on April 30, 2001.  The director and officer of the Company is
     personally liable with full recourse to the Company and has provided 60,809
     shares of common stock of the Company as collateral.  The  promissory  note
     has been recorded as a reduction of stockholders' equity during the quarter
     ending October 31, 2000.  Interest on the promissory  note will be recorded
     when the cash is received.

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

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


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY

     COMMON  STOCK-  CONTINUED
     -------------

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

     During  November 2000, the Company agreed to reduce the exercise price from
     $2.50 to $2.00 per share for warrants to purchase  500,000 shares of common
     stock of the  Company as an  inducement  for the holder of the  warrants to
     exercise the warrants.  The  consideration for the exercise of the warrants
     included  $5,000 in cash and a  $995,000  promissory  note.  The  principal
     amount of the note plus accrued  interest at an annual rate of 10.5% is due
     on April 30, 2001.  The holder of the note is liable with full  recourse to
     the Company and has provided  500,000 shares of common stock of the Company
     as collateral.

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

     In  connection  with the  issuance  of shares and  warrants  by the Company
     (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 (Registrable Securities). The Company was obligated to
     register the Registrable  Securities even though the Registrable Securities
     may have been tradable under Rule 144. The registration  rights  agreements
     generally did not contain  provisions for damages if the  Registration  was
     not  completed,  except for certain  Shares  required to be  registered  on
     December 1, 1999,  whereby  the  Company  was  required to pay a penalty of
     $80,000  in cash  and/or  common  stock  of the  Company  based on the then
     current  trading  price of the common stock of the Company.  In  connection
     with the requirement, the Company issued 11,977 shares of its common stock.
     On July 14, 2000, the Company filed a registration statement which included
     the Shares. The registration  statement was subsequently declared effective
     on October 6, 2000.

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

     Under the Company's 1997 Stock Award Plan (Plan),  the Company has reserved
     for issuance  150,000 shares of Common Stock,  of which 118,186 shares were
     unissued  as of  October  31,  2000,  to  compensate  consultants  who have
     rendered  significant  services to the Company. The Plan is administered by
     the  Compensation  Committee of the Board of Directors of the Company which
     has complete  authority  to select  participants,  determine  the awards of
     Common  Stock to be granted  and the times  such  awards  will be  granted,
     interpret and construe the Plan for purposes of its administration and make
     determinations  relating to the Plan, subject to its provisions,  which are
     in the best interests of the Company and its stockholders. Only consultants
     who have rendered significant advisory services to the Company are eligible
     to be  participants  under  the Plan.  Other  eligibility  criteria  may be
     established by the Compensation Committee as administrator of the Plan.

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

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

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

     Board  Compensation  Plan
     -------------------------

     The Board of Directors  (Board) granted  warrants to purchase 10,000 shares
     of common  stock at an exercise  price of $6.94 per share to those  outside
     directors previously elected and serving on the Board at August 1,


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

     Board  Compensation  Plan-  Continued
     -------------------------

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

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


     Other
     -----

     In  connection  with a  consulting  agreement  between  the  Company  and a
     director of the Company, during August 2000, the director received warrants
     to purchase 70,000 shares of common stock at an exercise price of $6.38 per
     share exercisable through August 6, 2005. The warrants will vest ratably on
     a quarterly  basis over four years.  The warrants were  accounted for under
     the  provisions  of SFAS 123 and the resulting  expense is being  amortized
     over the vesting period.

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

     In connection  with  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.


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION

     On October 12, 1999,  a Demand for  Arbitration  (Arbitration)  of $780,767
     (subsequently  amended to $972,515) was filed by A.E. Schmidt Environmental
     (Schmidt) against Amwest Surety Insurance Company (Amwest),  PennWilson and
     Penn Octane  Corporation on a performance  bond pursuant to a CNG contract.
     The  Company  filed a response  with the court  opposing  the  petition  by
     Schmidt to compel Penn Octane Corporation to participate in the Arbitration
     pursuant  to an alter ego  theory.  During  April  2000,  the court  denied
     Schmidt's  petition to compel Penn Octane Corporation to participate in the
     Arbitration. PennWilson had countersued Schmidt in connection with overruns
     under the CNG contract.  In November  2000,  the  litigation was settled in
     mediation  whereby  PennWilson  agreed to pay Schmidt  $100,000  and Amwest
     agreed to pay Schmidt $350,000.  PennWilson  and  Penn  Octane  Corporation
     both  gave  and  received  mutual  general releases with exception only for
     unknown  latent  deficiencies as defined in California Civil Procedure Code
     Section  337.15  and  third  party  indemnity  claims  for injury, death or
     property damage.


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION - CONTINUED

     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  (see note I) and seeking a temporary  restraining  order against
     the Defendants from future use of the US Pipelines.  On March 20, 2000, the
     Company acquired the portion of the property which surrounds the area where
     the US Pipelines were  constructed  for cash of $1,908,000,  which was paid
     during April 2000, and debt in the amount of $1,908,000.  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
     during April 2003. The liability of $1,908,000 is included in capital lease
     obligations (see note F).

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

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

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

     During  May 2000,  the  Company  filed a motion  with the Court  seeking to
     appoint a Chapter 11 Trustee  and the Company  also filed a complaint  with
     the Court seeking a declaratory  judgment  stating that the US Pipelines be
     held in trust  for the  benefit  of the  Company  and  that  the  US-Mexico
     Pipelines are no longer the assets of the bankruptcy estate. 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. During August, 2000, the
     litigation  was settled  through a court  ordered  mediation by the Company
     agreeing to acquire land for which  substantially  all of the costs will be
     offset against the balance of the promissory  note due to CPSC (see below).
     The settlement is subject to completion of the settlement documents.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     On June 19,  2000,  the  Company,  CPSC,  Cowboy  and the  Owner  reached a
     settlement  (Settlement)  whereby the  Company  has agreed to purchase  the
     remaining 50% interest in the assets  associated with the Lease  Agreements
     for cash,  two  promissory  notes,  transfer of the  property  owned by the
     Company  purchased  on March 20, 2000,  referred to above,  and warrants to
     acquire  common stock of the Company  together with a release of all claims
     and  proceedings  between them. The  promissory  notes are for $900,000 and
     $1,462,500 and both bear interest at 9%. Principal and interest are payable
     monthly  with the notes due in three years.  In addition,  CPSC will assume
     the  Company's  debt  issued  in  connection  with the  acquisition  of the
     property.  On July 19, 2000,  the  Settlement  expired  without the parties
     completing final  documentation  as provided for in the Settlement.  During
     November 2000, the parties negotiated a settlement of all disputes and have
     submitted a settlement agreement to the Court for approval which has yet to
     be received.  The accompanying  unaudited consolidated financial statements
     have been  adjusted to reflect the  Settlement.  If the  Settlement  is not
     finalized, the Company will continue to pursue its legal remedies.

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

     In addition,  there is no  certainty  that the Company will (i) acquire the
     remaining 50% interest in the US - Mexico Pipelines and Matamoros  Terminal
     Facility,  (ii) continue to 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 D).

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

     CREDIT FACILITY, LETTERS OF CREDIT AND OTHER

     As of October 31, 2000, the Company has a $20,000,000  credit facility with
     RZB Finance  L.L.C.  (RZB) for demand  loans and standby  letters of credit
     (RZB  Credit  Facility)  to  finance  the  Company's  purchase  of LPG.  In
     connection with the RZB Credit  Facility,  RZB entered into a participation
     agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft, New York
     Branch (HVB),  whereby RZB and HVB will each  participate up to $10,000,000
     toward  the total  credit  facility.  Under the RZB  Credit  Facility,  the
     Company pays a fee with respect to each letter of credit  thereunder  in an
     amount  equal to the  greater of (i) $500,  (ii) 2.5% of the  maximum  face
     amount of such  letter of  credit,  or (iii) such  higher  amount as may be
     agreed to between the Company and RZB.  Any amounts  outstanding  under the
     RZB  Credit  Facility  shall  accrue  interest  at a rate equal to the rate
     announced by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant
     to the RZB  Credit  Facility,  RZB has  sole  and  absolute  discretion  to
     terminate the RZB Credit  Facility and to make any loan or issue any letter
     of credit  thereunder.  RZB also has the right to demand payment of any and
     all  amounts  outstanding  under the RZB Credit  Facility  at any time.  In
     connection  with the RZB Credit  Facility,  the Company granted a mortgage,
     security  interest  and  assignment  in any and all of the  Company's  real
     property, buildings,  pipelines, fixtures and interests therein or relating
     thereto,  including,  without  limitation,  the lease with the  Brownsville
     Navigation  District of Cameron  County for the land on which the Company's
     Brownsville  Terminal  Facility  is located,  the  Pipeline  Lease,  and in
     connection  therewith  agreed  to enter  into  leasehold  deeds  of  trust,
     security agreements, financing statements and assignments of rent, in forms
     satisfactory  to RZB.  Under the RZB Credit  Facility,  the Company may not
     permit to exist  any lien,  security  interest,  mortgage,  charge or other
     encumbrance  of any nature on any of its  properties  or assets,  except in
     favor of RZB, without the consent of RZB (see notes F and I).


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

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

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

     As of October 31, 2000,  letters of credit established under the RZB Credit
     Facility  in favor of  Exxon,  PG&E,  Duke  and Koch for  purchases  of LPG
     totaled  $15,133,126 of which  $10,554,979  was being used to secure unpaid
     purchases.  In addition,  as of October 31, 2000,  the Company had borrowed
     $3,019,597  from its revolving line of credit under the RZB Credit Facility
     for purchases of LPG. In connection  with these  purchases,  at October 31,
     2000,  the Company had unpaid  invoices due from PMI  totaling  $6,185,565,
     cash balances  maintained in the RZB Credit Facility  collateral account of
     $385,361 and inventory held in storage of $9,264,746 (see note E).


NOTE  I  -  CAPITAL  LEASE

     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 (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)
     [Refined Products].

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

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


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  I  -  CAPITAL  LEASE  -  CONTINUED

     During  September  1999,  December 1999 and February  2000, the Company and
     CPSC amended the Lease Agreements  whereby the Company agreed to acquire up
     to a 100% interest in the Lease  Agreements  which, as of October 31, 2000,
     the Company had  acquired a 50%  interest  pursuant  to the  December  1999
     amendment.  During February 2000, the Company  determined that CPSC did not
     comply with certain obligations under the Lease Agreements.  In March 2000,
     CPSC filed for protection under Chapter 11 of the United States  Bankruptcy
     Code.  Since that date, the Company has also  determined  that CPSC did not
     comply with other obligations provided for under the Lease Agreements.  The
     Settlement would provide for 100% ownership of the US-Mexico  Pipelines and
     Matamoros  Terminal Facility by the Company or its affiliates and eliminate
     the  requirement  for the Liens.  Until the  Settlement is  completed,  the
     Company will  continue to record the remaining 50% portion of the US-Mexico
     Pipelines and Matamoros  Terminal Facility as a capital lease (see notes D,
     F, H and K).

     With the  completion  of the US-Mexico  Pipelines  and  Matamoros  Terminal
     Facility, the Company has established a pipeline infrastructure that allows
     it to transport LPG from the United States to Mexico.

     The Company or its Mexican  affiliates own, lease, or are in the process of
     obtaining  the  land  or  rights  of way  used in the  construction  of the
     U.S.-Mexico  Pipelines,   and  own  the  assets  comprising  the  US-Mexico
     Pipelines and Matamoros Terminal Facility. The Company's Mexican affiliate,
     Tergas,  S.A. de C.V. (Tergas),  has been granted the permit to operate the
     Matamoros Terminal Facility.


NOTE  J  -  UPGRADES

     The Company is  currently  completing a mid-line  pump  station  which will
     include the installation of additional piping,  meters,  valves,  analyzers
     and pumps along the Leased  Pipeline to increase the capacity of the Leased
     Pipeline and make the Leased  Pipeline  bi-directional.  The mid-line  pump
     station will increase the capacity of the Leased Pipeline to  approximately
     360,000,000  gallons per year.  The total  estimated  cost to complete  the
     project is approximately  $2,000,000 of which approximately  $1,600,000 has
     been incurred through October 31, 2000.

     The Company has employed a firm to provide the  engineering for the design,
     installation   and   construction  of  pipelines  which  will  connect  the
     Brownsville   Terminal  Facility  to  the  water  dock  facilities  at  the
     Brownsville Ship Channel and install additional storage capacity.  The cost
     of this project is expected to approximate $2,000,000.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  K  -  MEXICAN  OPERATIONS

     Termatsal,  S.A.  de C.V.  (Termatsal)  has  completed  construction  of an
     additional LPG terminal  facility in Saltillo,  Mexico  (Saltillo  Terminal
     Facility) for an estimated cost of $800,000. The Saltillo Terminal Facility
     is  capable of off  loading  LPG from  railcars  to  trucks.  The  Saltillo
     Terminal  Facility  contains  storage to accommodate  approximately  90,000
     gallons of LPG with  additional  storage planned for 180,000  gallons.  The
     Saltillo  Terminal  Facility has three  railcar off loading racks and three
     truck loading racks.  As a result of the Saltillo  Terminal  Facility,  the
     Company  can  directly  transport  LPG via  railcar  from  the  Brownsville
     Terminal Facility to the Saltillo Terminal Facility.  The Saltillo Terminal
     Facility will begin  operations  upon final approval from local  government
     authorities.

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

     In  connection  with  the  planned  operations  of  the  Saltillo  Terminal
     Facility,  Termatsal has leased  approximately 50 railcars to transport LPG
     between  the  Brownsville  Terminal  Facility  and  the  Saltillo  Terminal
     Facility. The lease amount is $297,000 annually and expires in August 2001.

     PennMex,  Tergas and Termatsal are Mexican companies,  which are owned 90%,
     90% and 98%, respectively, by Jorge R. Bracamontes, an officer and director
     of the  Company  (Bracamontes)  and the balance by other  Mexican  citizens
     (Minority  Shareholders).  Under current Mexican law, foreign  ownership of
     Mexican  entities  involved in the  distribution of LPG or the operation of
     LPG terminal  facilities is prohibited.  Foreign  ownership is permitted in
     the  transportation  and storage of LPG.  Mexican law also  provides that a
     single  entity  is not  permitted  to  participate  in more than one of the
     defined LPG activities (transportation, storage or distribution).

     During   November   2000,  the  Company,   Bracamontes   and  the  Minority
     Shareholders  entered into agreements whereby the Company may acquire up to
     100% of the  outstanding  shares of  PennMex  and  Termatsal  for a nominal
     amount subject to, among other things, the Settlement.  Because the Company
     participates  in one of the defined  LPG  activities,  Tergas is  providing
     services to the Company at the Matamoros Terminal Facility and the Saltillo
     Terminal Facility.

     In  connection  with  the  construction  of the  Mexican  Pipeline  and the
     Matamoros  Terminal  Facility,  CPSC  provided all payments and delivery of
     equipment through Termatsal.

     PennMex,  Tergas or Termatsal (i) have entered into leases  associated with
     the Saltillo Terminal  Facility,  (ii) have been granted the permit for the
     Mexican Pipeline,  (iii) have been granted permits to operate the Matamoros
     Terminal  Facility and the Saltillo Terminal  Facility,  (iv) own, lease or
     are in the  process  of  obtaining  the land or  rights  of way used in the
     construction  of the Mexican  Pipeline,  Matamoros  Terminal  Facility  and
     Saltillo  Terminal  Facility and (v) own the assets  comprising the Mexican
     Pipeline,  Matamoros Terminal Facility and Saltillo Terminal Facility,  all
     of which were  funded by the  Company or CPSC (see note D). The  portion of
     funds which were  advanced by the Company  (totaling  $3,800,000 at October
     31,  2000) to PennMex or  Termatsal  are  included in  property,  plant and
     equipment.  Furthermore,  the  Company  is  committed  to fund  PennMex  or
     Termatsal for any additional  costs required in connection with the Mexican
     Pipeline, Matamoros Terminal Facility and the Saltillo Terminal Facility.

     During the three months ended  October 31, 2000 and 1999,  the Company paid
     PennMex, Tergas or Termatsal $140,000 and $61,000, respectively, for Mexico
     related expenses  incurred by those  corporations on the Company's  behalf.
     Such amounts have been expensed.


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  K  -  MEXICAN  OPERATIONS  -  Continued

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


NOTE  L  -  REALIZATION  OF  ASSETS

     The  accompanying  unaudited  consolidated  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.  The  Company  presently  lacks
     sufficient  cash to pay the principal  amounts of the Notes due on December
     15,  2000.  The Company is  currently  negotiating  with the holders of the
     Notes to renew or extend the due date and is also pursuing other  financing
     alternatives.  The failure of the Company to pay, renew or extend the Notes
     may cause an event of default  under the Notes  (see note F). In  addition,
     the  Company   entered  into  supply   agreements  for  quantities  of  LPG
     substantially in excess of minimum  quantities under the New Agreement (see
     note M). Although the Company has entered into the Settlement (see note H),
     significant  uncertainties  exist related to the US - Mexico  Pipelines and
     Matamoros  Terminal  Facility.  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,  renew or extend the Notes referred
     to in the preceding  paragraph,  raise additional equity capital,  complete
     the transactions  related to the US-Mexico  Pipelines,  Matamoros  Terminal
     Facility  and  the  Saltillo  Terminal  Facility  and  the  success  of the
     Company's  future   operations.   The  unaudited   consolidated   financial
     statements do not include any adjustments related to the recoverability and
     classification  of recorded asset amounts or amounts and  classification of
     liabilities  that  might be  necessary  should  the  Company  be  unable to
     continue in existence.

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

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


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                  NOTES  TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS

     LPG  BUSINESS  -  SALES  AGREEMENT

     The Company entered into a new sales agreement with PMI for the period from
     April 1, 2000 through March 31, 2001 (New  Agreement),  for the annual sale
     of a minimum of 151,200,000  gallons of LPG,  mixed to PMI  specifications,
     subject to seasonal  variability,  to be delivered to PMI at the  Company's
     terminal  facilities  in  Matamoros,   Tamaulipas,   Mexico  and  Saltillo,
     Coahuila, Mexico.

     On October 11, 2000,  the New Agreement was amended to increase the minimum
     amount of LPG to be purchased  during the period from November 2000 through
     March  2001  by  7,500,000  gallons  resulting  in  a  new  annual  minimum
     commitment of 158,700,000 gallons.

     The New Agreement,  as amended,  represents an increase of 130% over annual
     minimum  contract  volumes under the previous sales  agreement with PMI for
     the period from April 1, 1999 through March 31, 2000.  Actual sales volumes
     to PMI during the period from April 1, 1999 through March 31, 2000 exceeded
     the  minimum  contractual  volumes  by  95%.  Under  the  terms  of the New
     Agreement,  sales  prices are indexed to variable  posted  prices.  The New
     Agreement also provides for higher fixed margins above the variable  posted
     prices over the previous sales  agreements  with PMI depending on the final
     delivery point of the LPG. Sales to PMI totaled  approximately  $27,200,000
     for the three months ended October 31, 2000, representing approximately 71%
     of total revenues for the period.

     The New  Agreement  also  provides for  trucking of LPG from the  Company's
     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 utilized or (iii) until the  Matamoros
     Terminal Facility or the Saltillo Terminal Facility are fully  operational.
     Under  the terms of the New  Agreement,  in the  event  that the  US-Mexico
     Pipelines or railcars  are not used,  the sales  prices  received  shall be
     reduced by the  corresponding  trucking  charges.  During  April 2000,  the
     Company began shipping LPG through the US-Mexico Pipelines.  During October
     2000,  approximately  78% of the LPG sold to PMI was delivered  through the
     US-Mexico  Pipelines to the Matamoros Terminal Facility.  As of October 31,
     2000, the Saltillo Terminal Facility had not commenced operations.

     As part of the volume requirements under the New Agreement, the Company has
     committed to sell to PMI  3,150,000  gallons of propane at a sales price of
     approximately  $0.60 per gallon,  to be delivered  during December 2000 and
     February 2001. A portion of the sales price of $1,685,250 has been received
     by PMI as of October 31, 2000 and is included in the unaudited consolidated
     balance sheet as deferred revenue.

     LPG SUPPLY AGREEMENTS

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


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  Continued

     LPG SUPPLY AGREEMENTS - Continued

     In  addition,  under the terms of the Exxon  Supply  Contract,  Exxon  made
     operational its Corpus Christi  Pipeline (ECCPL) during September 2000. The
     ability to utilize the ECCPL  allows the  Company to acquire an  additional
     supply of propane from other propane suppliers located near Corpus Christi,
     Texas (Additional Propane Supply),  and bring the Additional Propane Supply
     to the Plant  (ECCPL  Supply)  for  blending  to the proper  specifications
     outlined  under  the New  Agreement  and then  delivered  into  the  Leased
     Pipeline.  In connection  with the ECCPL Supply,  the Company has agreed to
     supply a minimum  of  7,700,000  gallons  into the ECCPL  during  the first
     quarter  from  the  date  that  the  ECCPL  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 ECCPL.

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

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

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

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

     Under  the  terms of the Koch  Supply  Contract,  the Koch  Supply  will be
     delivered  into the ECCPL  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 (Duke Supply Contract)  whereby Duke has agreed to supply and the
     Company has agreed to take, a monthly  average of 1,900,000  gallons  (Duke
     Supply) of propane or  propane/butane  mix,  beginning  April 1, 2000.  The
     purchase price is indexed to variable posted prices.

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

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


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  Continued

     LPG SUPPLY AGREEMENTS - Continued

     The Company is currently purchasing LPG from the above-mentioned  suppliers
     (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 prices provided for in the New Agreement.

     The  agreements  with the  Suppliers  currently  require  that the  Company
     purchase  a  minimum  supply of LPG,  which is  significantly  higher  than
     committed sales volumes under the New Agreement.


                                       23
<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  2000)  refer  to  the  Company's  fiscal  year  ended  July  31.

FORWARD-LOOKING  STATEMENTS

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

OVERVIEW

     The  Company  has  been principally engaged in the purchase, transportation
and  sale  of  LPG  and, from 1997 to March 1999, the provision of equipment and
services  to  the  CNG  industry.  Since  operations  commenced, the Company has
bought and sold LPG for distribution into northeast Mexico and the United States
Rio  Grande  Valley.

     During  the  three months ended October 31, 2000, the Company derived 71.0%
of  its  revenues  from  sales  of  LPG  to  PMI,  its  primary  customer.

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


                                       24
<PAGE>
LPG  SALES

     The  following table shows the Company's volume sold in gallons and average
sales  prices  of  LPG  for  the  three  months ended October 31, 2000 and 1999.

                                        Three Months Ended October 31,
                                         -----------------------------
                                         2000                     1999
                                         ----                     ----

Volume Sold

      LPG (millions of gallons) - PMI     40.0                    33.8
      LPG (millions of gallons) - Other   20.1                       -
                                         -----                   -----
                                          60.1                    33.8

Average sales price

      LPG (per gallon) - PMI             $0.68                   $0.47
      LPG (per gallon) - Other            0.56                       -



RESULTS  OF  OPERATIONS

THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
1999

     Revenues.  Revenues for the three months ended October 31, 2000, were $38.4
million  compared with $16.0 million for the three months ended October 31,1999,
an  increase  of  $22.4  million  or 140.3%.  Of this increase, $4.2 million was
attributable  to  increased volumes of LPG sold to PMI in the three months ended
October  31,  2000,  $7.0  million  was  attributable to increased average sales
prices  of  LPG sold to PMI in the three months ended October 31, 2000 and $11.2
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  goods sold.  Cost of sales for the three months ended October 31,
2000,  was  $36.8 million compared with $15.0 million for the three months ended
October  31,  1999,  an  increase of $21.8 million or 145.9%.  Of this increase,
$3.7 million was attributable to increased volumes of LPG purchased for sales to
PMI  in  the  three  months  ended  October  31,  2000,  $5.9  million  (net  of
approximately  $924,000  of lower priced LPG sold to PMI during the three months
ended  October  31,  2000 from the Company's inventory balances held at July 31,
2000)  was  attributable  to increased average sales prices of LPG purchased for
sales  to  PMI  in  the  three  months ended October 31, 2000, $11.5 million was
attributable  to sales of LPG to customers other than PMI in connection with the
Company's  desire  to  reduce  outstanding  inventory  balances during the three
months  ended  October  31,  2000  and  $634,089  was  attributable to increased
operating  costs  associated  with LPG during the three months ended October 31,
2000.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $675,400  for the three months ended October 31,
2000  compared  with  $567,438  for  the three months ended October 31, 1999, an
increase  of  $107,962  or  19.0%.  This  increase was primarily attributable to
additional  professional  fees  and payroll related expenses incurred during the
three  months  ended  October  31,  2000.

     Other  income  (expense).  Other  income  (expense)  was $(903,620) for the
three months ended October 31, 2000 compared with $(62,499) for the three months
ended  October  31,  1999,  a  change  of  $841,121.  The change in other income
(expense)  was  due  primarily  to  increased interest costs and amortization of
discounts  of  $740,000  associated with the issuance of debt and an increase of
$100,000  related to the settlement of litigation, which was recorded during the
three  months  ended  October  31,  2000.


                                       25
<PAGE>
     Income  tax.   Due  to the availability of net operating loss carryforwards
($5.6  million  and  $8.0  million  at  July  31,  2000  and  July  31,  1999,
respectively),  the  Company  did  not  incur  any additional income tax expense
during  the  three  months  ended October 31, 2000 and 1999.  The ability to use
such  net  operating loss carryforwards, which expire in the years 2010 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.
The  Company presently lacks sufficient cash to pay the principal amounts of the
Notes  due  on December 15, 2000.  The Company is currently negotiating with the
holders  of the Notes to renew or extend the due date and is also pursuing other
financing  alternatives.  The failure of the Company to pay, renew or extend the
Notes  may  cause an event of default under the Notes.  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 Settlement, significant
uncertainties  exist related to the US - Mexico Pipelines and Matamoros Terminal
Facility  (see  note H 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,  proceeds  from  the  issuance  of short-term and long-term debt, revolving
credit  facilities  and  credit  arrangements, sale or issuance of preferred and
common  stock  of  the  Company  and  proceeds  from the exercise of warrants to
purchase  shares  of  the  Company's  common  stock.

     The  following  summary table reflects comparative cash flows for the three
months  ended  October  31,  2000  and  1999.  All  information is in thousands.

<TABLE>
<CAPTION>
                                                             Three Months Ended
                                                             ------------------
                                                        October 31,       October 31
                                                           2000             1999
                                                     -----------------  ---------------
<S>                                                  <C>                <C>
Net cash provided by operating activities . . . . .  $          2,117   $          237
Net cash used in investing activities . . . . . . .   (         1,017)   (         389)
Net cash (used in) provided by financing activities   (           574)             931
                                                     -----------------  ---------------
Net increase in cash. . . . . . . . . . . . . . . .  $            526   $          779
                                                     =================  ===============
</TABLE>

     New Agreement.  The Company entered into a new sales agreement with PMI for
the  period from April 1, 2000 through March 31, 2001 (the "New Agreement"), for
the  annual  sale  of  a  minimum  of 151.2 million gallons of LPG, mixed to PMI
specifications,  subject  to seasonal variability, to be delivered to PMI at the
Company's  terminal  facilities  in  Matamoros, Tamaulipas, Mexico and Saltillo,
Coahuila,  Mexico.

     On October 11, 2000,  the New Agreement was amended to increase the minimum
amount of LPG to be purchased during the period from November 2000 through March
2001 by 7.5 million  gallons  resulting in a new annual  minimum  commitment  of
158.7 million gallons.

     The New Agreement,  as amended,  represents an increase of 130% over annual
minimum  contract  volumes under the previous  sales  agreement with PMI for the
period from April 1, 1999 through  March 31, 2000.  Actual sales  volumes to PMI
during the period  from  April 1, 1999  through  March 31,  2000,  exceeded  the
minimum contractual volumes by 95%. Under the terms of the New Agreement,  sales
prices are indexed to variable  posted  prices.  The New Agreement also provides
for higher  fixed  margins  above the variable  posted  prices over the previous
sales  agreements  with PMI  depending on the final  delivery  point of the LPG.
Sales to PMI totaled  approximately  $27.2  million for the three  months  ended
October 31, 2000,  representing  approximately  71.0% of total  revenues for the
period.


                                       26
<PAGE>
     The  New  Agreement  also  provides  for trucking of LPG from the Company's
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
utilized or (iii) until the Matamoros Terminal Facility or the Saltillo Terminal
Facility  are  fully  operational.  Under the terms of the New Agreement, in the
event  that  the  US-Mexico  Pipelines or railcars are not used, the sales price
received  shall  be reduced by the corresponding trucking charges.  During April
2000, the Company began  shipping LPG through the US - Mexico Pipelines.  During
October  2000,  approximately  78% of the LPG sold to PMI was  delivered through
the  US-Mexico  Pipelines to the Matamoros Terminal Facility.  As of October 31,
2000,  the  Saltillo  Terminal  Facility  had  not  commenced  operations.

     As part of the volume requirements under the New Agreement, the Company has
committed  to  sell  PMI  3.2  million  gallons  of  propane at a sales price of
approximately  $0.60  per  gallon,  to  be  delivered  during  December 2000 and
February  2001.

     Historically, the Company and PMI have renewed the existing sales agreement
prior  to its expiration.  The Company intends to negotiate a renewal of the New
Agreement  prior  to  its  expiration.

     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, as amended (the "Exxon Supply Contract"), whereby Exxon has
agreed  to  supply  and the Company has agreed to take, 100% of Exxon's owned or
controlled  volume  of  propane  and  butane available at Exxon's King Ranch Gas
Plant  (the  "Plant") up to 13.9 million gallons per month blended in accordance
with  the  specifications  as  outlined  under  the  New  Agreement  (the "Plant
Commitment").  The  purchase  price  is  indexed  to  variable  posted  prices.

     In  addition,  under  the  terms  of  the Exxon Supply Contract, Exxon made
operational  its  Corpus  Christi  Pipeline (the "ECCPL") during September 2000.
The  ability  to  utilize  the ECCPL allows the Company to acquire an additional
supply  of  propane  from  other  propane suppliers located near Corpus Christi,
Texas (the "Additional Propane Supply"), and bring the Additional Propane Supply
to  the  Plant  (the  "ECCPL  Supply") for blending to the proper specifications
outlined  under  the  New Agreement and then delivered into the Leased Pipeline.
In  connection with the ECCPL Supply, the Company has agreed to supply a minimum
of  7.7  million  gallons  into the ECCPL during the first quarter from the date
that  the ECCPL 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  ECCPL.

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

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

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

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


                                       27
<PAGE>
     Under  the  terms  of  the  Koch  Supply  Contract, the Koch Supply will be
delivered  into  the  ECCPL 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.

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

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

     The  Company is currently purchasing LPG from the above-mentioned suppliers
(the  "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  prices  provided for in the New Agreement.

     The  agreements  with  the  Suppliers  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.  Under the terms of the Supply  Contracts,  the  Company  must  provide
letters of credit in amounts  equal to the cost of the product to be  purchased.
In  addition,  the cost of the  product  purchased  is tied  directly to overall
market conditions. As a result, the Company's existing letter of credit facility
may not be  adequate  to meet  the  letter  of  credit  requirements  under  the
agreements  with the  Suppliers or other  suppliers due to increases in costs of
LPG or LPG volumes  purchased by PMI. Upon the  implementation  of Deregulation,
the Company anticipates  entering into contracts with Mexican distributors which
require payments in pesos. In addition,  the Mexican distributors may be limited
in their ability to obtain adequate financing.

     The  ability  of  the  Company  to increase sales of LPG into Mexico in the
future  is  largely  dependent  on  the  Company's  ability  to negotiate future
contracts  with  PMI and/or with local Mexican distributors once Deregulation in
Mexico  is implemented.  In addition, there can be no assurance that the Company
will  be  able  to obtain terms equal to or more favorable than those in 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.

     Furthermore,  the  Company  currently  utilizes  the  Brownsville  Terminal
Facility and may be required to deliver a portion or all of the minimum  monthly
volumes  from the  Brownsville  Terminal  Facility in the future.  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 the Suppliers,  may limit the
ability  of the  Company to accept or deliver  the Plant  Commitment,  the ECCPL
Supply, the PG&E Supply, the Koch Supply, and the Duke Supply.

     As a result of the Exxon Supply Contract,  the PG&E Supply  Agreement,  the
Koch Supply Contract and the Duke Supply  Contract,  the Company has an adequate
supply of LPG to satisfy the requirements of PMI under the New Agreement. Due to
the strategic location of the Company's pipelines and terminal  facilities,  the
Company  believes that it will be able to enter into future sales  agreements to
utilize the excess volumes committed to under the contracts with the Suppliers.


                                       28
<PAGE>
     Pipeline  Lease.     The  Pipeline  Lease currently expires on December 31,
2013,  pursuant  to  an amendment  (the "Pipeline Lease Amendment") entered into
between  the  Company  and  Seadrift  on May 21, 1997, which became effective on
January  1, 1999 (the "Effective Date").  The Pipeline Lease Amendment provides,
among  other  things,  for  additional  storage access and inter-connection with
another pipeline controlled by Seadrift, thereby providing greater access to and
from  the  Leased  Pipeline.  Pursuant  to  the  Pipeline  Lease  Amendment, the
Company's  fixed annual rent for the use of the Leased Pipeline was increased by
$350,000, less certain adjustments during the first two years from the Effective
Date,  and  the  Company  is  required  to  pay  a minimum charge for 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  Leased  Pipeline  and storage utilized.  The
Company  believes  that  the  Pipeline  Lease  Amendment  provides  the  Company
increased  flexibility  in  negotiating  sales  and  supply  agreements with its
customers  and  suppliers.  The Company has made all payments required under the
Pipeline  Lease  Amendment.

     Present  Pipeline  capacity  is approximately 250 million gallons per year.
During  the  three months ended October 31, 2000, the Company sold approximately
40  million gallons of LPG, substantially all of which flowed through the Leased
Pipeline.  The  Company  can increase the Leased Pipeline's capacity through the
installation  of  additional  pumping  equipment  (see  "Upgrades"  below).

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

     The  Company  is  currently  completing  a mid-line pump station which will
include  the  installation  of  additional piping, meters, valves, analyzers and
pumps  along the Leased Pipeline to increase the capacity of the Leased Pipeline
and  make  the  Leased  Pipeline bi-directional.  The mid-line pump station will
increase  the  capacity  of  the  Leased  Pipeline  to approximately 360 million
gallons  per  year.  The  total  estimated  cost  to  complete  the  project  is
approximately $2.0 million of which approximately $1.6 million has been incurred
through  October  31,  2000.

     The  Company has employed a firm to provide the engineering for the design,
installation  and  construction  of pipelines which will connect the Brownsville
Terminal  Facility  to the water dock facilities at the Brownsville Ship Channel
and  install  additional storage capacity.  The cost of this project is expected
to  approximate  $2.0  million.

     Lease  Agreements.  In connection  with the  construction  of the US-Mexico
Pipelines  and  the   Matamoros   Terminal   Facility,   the  Company  and  CPSC
International,  Inc.  ("CPSC")  entered into two separate  Lease /  Installation
Purchase  Agreements,  as amended,  ("the Lease  Agreements"),  whereby CPSC was
required  to  construct  and  operate the US - Mexico  Pipelines  (including  an
additional  pipeline to accommodate Refined Products) and the Matamoros Terminal
Facility  and lease these  assets to the  Company.  Under the terms of the Lease
Agreements,  the Company was  required to pay monthly  rentals of  approximately
$157,000,  beginning  the  date  that the US - Mexico  Pipelines  and  Matamoros
Terminal  Facility are physically  capable of transporting  and receiving LPG in
accordance with technical  specifications  required (the "Substantial Completion
Date").  In addition,  the Company  agreed to provide a lien on certain  assets,
leases and  contracts  which are currently  pledged to RZB (Liens),  which Liens
would  require the consent of RZB,  and provide  CPSC with a letter of credit of
approximately $1.0 million. The Company also had the option to purchase the US -
Mexico  Pipelines  and 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 was required to pay
all costs  associated with the  construction  and maintenance of the US - Mexico
Pipeline and Matamoros Terminal Facility.


                                       29
<PAGE>
     During  September  1999,  December 1999 and February  2000, the Company and
CPSC amended the Lease Agreements  whereby the Company agreed to acquire up to a
100% interest in the Lease Agreements which, as of July 31, 2000 the Company had
acquired a 50% interest pursuant to the December 1999 amendment. During February
2000, the Company  determined that CPSC did not comply with certain  obligations
under the Lease  Agreements.  In March  2000,  CPSC filed for  protection  under
Chapter 11 of the United States  Bankruptcy  Code.  Since that date, the Company
has also determined that CPSC did not comply with other obligations provided for
under the Lease  Agreements.  The Settlement would provide for 100% ownership of
the US - Mexico Pipelines and Matamoros  Terminal Facility by the Company or its
affiliates and eliminate the requirement for the Liens.  Until the Settlement is
completed,  the Company will continue to record the remaining 50% portion of the
US - Mexico  Pipelines and Matamoros  Terminal  Facility as a capital lease (see
notes D, F, H and K to the unaudited consolidated financial statements).

     FOREIGN  OWNERSHIP OF LPG  OPERATIONS.  PennMex,  Tergas and  Termatsal are
Mexican companies,  which are owned 90%, 90% and 98%, respectively,  by Jorge R.
Bracamontes,  an officer and  director of the  Company  ("Bracamontes")  and the
balance by other  Mexican  citizens  ("Minority  Shareholders").  Under  current
Mexican  law (see  "Deregulation  of the LPG Market in Mexico"  below),  foreign
ownership of Mexican  entities  involved in the distribution of LPG or operation
of LPG terminal facilities is prohibited.  Foreign ownership is permitted in the
transportation  and  storage of LPG.  Mexican  law also  provides  that a single
entity is not  permitted  to  participate  in more than one of the  defined  LPG
activities (transportation, storage or distribution).

     During   November   2000,  the  Company,   Bracamontes   and  the  Minority
Shareholders  entered into agreements whereby the Company may acquire up to 100%
of the outstanding  shares of PennMex and Termatsal for a nominal amount subject
to, among other things, the Settlement.  Because the Company participates in one
of the defined LPG activities (see above),  the Company intends to contract with
Tergas for services to be performed by Tergas at the Matamoros Terminal Facility
and the Saltillo Terminal Facility.

     In  connection  with  the  construction  of the  Mexican  Pipeline  and the
Matamoros  Terminal  Facility,  CPSC  provided  all  payments  and  delivery  of
equipment through Termatsal.

     PennMex,  Tergas or Termatsal (i) have entered into leases  associated with
the  Saltillo  Terminal  Facility,  (ii) have been  granted  the  permit for the
Mexican  Pipeline,  (iii) have been  granted  permits to operate  the  Matamoros
Terminal Facility and the Saltillo Terminal Facility,  (iv) own, lease or intend
to  obtain  the land or rights of way used in the  construction  of the  Mexican
Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility and (v) own
the assets  comprising the Mexican  Pipeline,  Matamoros  Terminal  Facility and
Saltillo Terminal Facility, all of which were funded by the Company or CPSC (see
notes D and K to the unaudited consolidated  financial statements).  The portion
of funds which were  advanced by the Company  (totaling  $3.8 million at October
31, 2000) to PennMex or Termatsal are included in property, plant and equipment.
Furthermore, the Company intends to fund PennMex or Termatsal for any additional
costs  required in  connection  with the Mexican  Pipeline,  Matamoros  Terminal
Facility and the Saltillo Terminal Facility.

     During the three months ended  October 31, 2000,  the Company paid PennMex,
Tergas or  Termatsal  $140,000  for Mexico  related  expenses  incurred by those
corporations on the Company's behalf. Such amounts have been expensed.

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

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


                                       30
<PAGE>
     Beginning  in  1995,  as  part of a  national  privatization  program,  the
Regulatory  Law was amended to permit private  entities to transport,  store and
distribute  natural gas with the approval of the Ministry of Energy.  As part of
this  national  privatization  program,  the Mexican  Government  is expected to
deregulate the LPG market ("Deregulation"). In June 1999, the Regulatory Law for
LPG was changed to permit foreign entities to participate  without limitation in
the defined LPG  activities  related to  transportation  and  storage.  However,
foreign  entities will be prohibited from  participating  in the distribution of
LPG in Mexico.  Upon the completion of  Deregulation,  Mexican  entities will be
able to  import  LPG into  Mexico.  Under  Mexican  law a single  entity  is not
permitted  to  participate  in  more  than  one of the  defined  LPG  activities
(transportation,  storage and  distribution).  The  Company  expects to sell LPG
directly  to  independent  Mexican  distributors  as well as  PMI.  The  Company
anticipates that the independent Mexican distributors will be required to obtain
authorization  from  the  Mexican  government  for the  importation  of LPG upon
Deregulation prior to entering into contracts with the Company.

     Pursuant to the New Agreement,  upon  Deregulation of the LPG market by the
Mexican  government,  the  Company  will have the right to  renegotiate  the New
Agreement.  Depending  on the  outcome of any such  renegotiations,  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
or at the United States-Mexico border for LPG product destined for the Matamoros
Terminal  Facility or the Saltillo Terminal  Facility.  Upon  Deregulation,  the
Company  intends to sell to independent  Mexican LPG  distributors as well as to
PMI at its Brownsville Terminal Facility or at the United States-Mexico border.

     Credit  Arrangements.  As of October  31,  2000,  the  Company  has a $20.0
million  credit  facility  with RZB Finance  L.L.C.  (RZB) for demand  loans and
standby  letters  of credit  (RZB  Credit  Facility)  to finance  the  Company's
purchase of LPG. In connection with the RZB Credit Facility,  RZB entered into a
participation agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft,
New York Branch ("HVB"),  whereby RZB and HVB will each  participate up to $10.0
million toward the total credit  facility.  Under the RZB Credit  Facility,  the
Company pays a fee with respect to each letter of credit thereunder in an 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  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.


                                       31
<PAGE>
     As of October 31, 2000,  letters of credit established under the RZB Credit
Facility in favor of Exxon,  PG&E,  Duke and Koch for  purchases  of LPG totaled
$15.1 million of which $10.6 million was being used to secure unpaid  purchases.
In addition,  as of October 31, 2000, the Company had borrowed $3.0 million from
its revolving line of credit under the RZB Credit Facility for purchases of LPG.
In connection with these purchases,  at October 31, 2000, the Company had unpaid
invoices due from PMI totaling $6.2 million, cash balances maintained in the RZB
Credit Facility  collateral account of $385,361 and inventory held in storage of
$9.3 million (see note E to the unaudited consolidated financial statements).

     Private Placements and Other  Transactions.  From December 10, 1999 through
January 18,  2000,  and on February 2, 2000,  the Company  completed a series of
related  transactions in connection  with the private  placement of $4.9 million
and $710,000,  respectively, of subordinated notes (the "Notes") due the earlier
of December  15,  2000,  or upon the receipt of proceeds by the Company from any
future debt or equity financing in excess of $2.3 million. Interest at 9% is due
on June 15, 2000, and December 15, 2000, (or the maturity date, if earlier).  In
connection  with the  Notes,  the  Company  granted  the  holders  of the Notes,
warrants (the  "Warrants") to purchase a total of 706,763 shares of common stock
of the  Company at an  exercise  price of $4.00 per share,  exercisable  through
December 15, 2002. The Company was also required to register the shares issuable
in connection with exercise of the Warrants on July 15, 2000, subject to certain
conditions (see note G 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 D, F and
I 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  owned interest  (50%) in the US - Mexico  Pipelines and the Matamoros
Terminal Facility. RZB has consented to subordinate its senior interest in these
assets in connection with the Notes.

     The Company presently lacks sufficient cash to pay the principal amounts of
the Notes due on December 15, 2000.  The Company is currently  negotiating  with
the  holders  of the Notes to renew or extend  the due date.  In  addition,  the
Company is pursuing other financing alternatives.  The failure of the Company to
pay, renew or extend the Notes may cause an event of default under the Notes.

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

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

     During  September  2000,  a director  and officer of the Company  exercised
warrants  to  purchase  200,000  shares of  common  stock of the  Company  at an
exercise  price of $2.50 per share.  The  consideration  for the exercise of the
warrants  included $2,000 in cash and a $498,000  promissory note. The principal
amount of the note plus  accrued  interest  at an annual rate of 10.5% is due on
April 30, 2001.  The director  and officer of the Company is  personally  liable
with full recourse to the Company and has provided 60,809 shares of common stock
of the  Company  as  collateral.  The  promissory  note has been  recorded  as a
reduction of  stockholders'  equity during the quarter  ending October 31, 2000.
Interest on the promissory note will be recorded when the cash is received.

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

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

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


                                       32
<PAGE>
     During  November 2000, the Company agreed to reduce the exercise price from
$2.50 to $2.00 per share for warrants to purchase 500,000 shares of common stock
of  the  Company as an inducement for the holder of the warrants to exercise the
warrants.  The consideration for the exercise of the warrants included $5,000 in
cash  and  a  $995,000  promissory  note.  The principal amount of the note plus
accrued  interest  at  an  annual  rate  of 10.5% is due on April 30, 2001.  The
holder  of the note is liable with full recourse to the Company and has provided
500,000  shares  of  common  stock  of  the  Company  as  collateral.

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

     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 Company  was  obligated  to
register the Registrable  Securities even though the Registrable Securities have
been tradable under Rule 144. The registration  rights agreements  generally did
not contain provisions for damages if the Registration was not completed, except
for certain  Shares  required to be registered on December 1, 1999,  whereby the
Company was required to pay a penalty of $80,000 in cash and/or  common stock of
the Company  based on the then current  trading price of the common stock of the
Company.  In connection with the requirements,  the Company issued 11,977 shares
of its  common  stock.  On July  14,  2000,  the  Company  filed a  registration
statement which included the Shares. The registration statement was subsequently
declared effective on October 6, 2000.

     Settlement  of Litigation.    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, which was 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 during April 2003.  The liability of $1.9
million  is  included in capital lease obligations  (see note F to the unaudited
consolidated  financial  statements).

     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.  Subsequent to July 31, 2000, the litigation was
settled  through  a  court  ordered mediation by the Company agreeing to acquire
land for which substantially all of the costs will be offset against the balance
of  the  promissory  note due to CPSC (see below).  The Settlement is subject to
completion  of  the  settlement  documents.


                                       33
<PAGE>
     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 the Lease Agreements for
cash,  two  promissory  notes,  transfer  of  the  property owned by the Company
purchased  on  March 20, 2000, referred to above, and warrants to acquire common
stock  of  the  Company  together  with  a  release of all claims and proceeding
between  them.  The  promissory  notes  are for $900,000 and $1,462,500 and both
bear  interest at 9%.  Principal and interest are payable monthly with the notes
due  in three years.  In addition, CPSC will assume the Company's debt issued in
connection  with  the  acquisition  of  the  property.  On  July  19,  2000, the
Settlement  expired  without  the parties completing final documents as provided
for in the Settlement Agreement.  During November 2000, the parties negotiated a
settlement  of  all  disputes  and  have submitted a settlement agreement to the
Court  for  approval which as yet to be received.  The accompanying consolidated
financial  statements  have  been  adjusted  to  reflect the Settlement.  If the
Settlement  is  not  finalized,  the  Company  will continue to pursue its legal
remedies.

     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.

     In addition,  there is no  certainty  that the Company will (i) acquire the
remaining  50%  interest in the US - Mexico  Pipelines  and  Matamoros  Terminal
Facility,  (ii)  continue to 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 D to the unaudited consolidated financial statements).

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

     Other  Litigation.  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.

     Realization  of Assets.  The Company has had an  accumulated  deficit since
inception,  has  used  cash in  operations,  and has had a  deficit  in  working
capital.  The  Company  presently  lacks  sufficient  cash to pay the  principal
amounts  of the Notes  due on  December  15,  2000.  The  Company  is  currently
negotiating with the holders of the Notes to renew or extend the due date and is
also pursuing other financing  alternatives.  The failure of the Company to pay,
renew or extend  the Notes may cause an event of  default  under the Notes  (see
note F to the unaudited  consolidated  financial  statements).  In addition, the
Company entered into supply  agreements for quantities of LPG  substantially  in
excess  of  minimum  quantities  under  the  New  Agreement  (see  note M to the
unaudited consolidated financial statements)).  Although the Company has entered
into  the  Settlement  (see  note  H to  the  unaudited  consolidated  financial
statements)),  significant  uncertainties  exist  related  to  the  US -  Mexico
Pipelines  and  Matamoros  Terminal  Facility.  As  discussed  in  note A to the
unaudited  consolidated  financial  statements,  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
unaudited  consolidated balance sheet is dependent upon the Company's ability to
obtain  additional  financing,  renew or  extend  the Notes  referred  to in the
preceding  paragraph  and to  raise  additional  equity  capital,  complete  the
transactions related to the US-Mexico Pipelines, Matamoros Terminal Facility and
the  Saltillo  Terminal  Facility  and  the  success  of  the  Company's  future
operations.  The unaudited  consolidated financial statements do not include any
adjustments  related to the  recoverability and classification of recorded asset
amounts or amounts and  classification  of  liabilities  that might be necessary
should the Company be unable to continue in existence.

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

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


                                       34
<PAGE>
STATEMENT  BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED  PUBLIC  ACCOUNTANTS.

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

ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

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

     As part of the volume requirements under the New Agreement, the Company has
committed  to  sell  PMI  3.2  million  gallons  of  propane at a sales price of
approximately  $0.60  per  gallon,  to  be  delivered  during  December 2000 and
February  2001.

     If the cost of the 3.2 million gallons of propane increases by 25% from the
cost  of  propane  at  October 31, 2000 during the period from December 31, 2000
through  February  2001,  the  Company  would  realize  a  loss of approximately
$480,000  upon  the  sale  of  the  propane  based  on  this  commitment.


                                       35
<PAGE>
PART  II

ITEM  1.  LEGAL  PROCEEDINGS

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

ITEM  2.  CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

          See Note G to the unaudited consolidated financial statements and Note
          K to the  Company's  Annual  Report on Form 10-K for the  fiscal  year
          ended  July  31,  2000 for  information  concerning  certain  sales of
          Securities.

ITEM  3.  DEFAULTS  UPON  SENIOR  SECURITIES

          None.

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

          None

ITEM  5.  OTHER  INFORMATION

          None.

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

     a. Exhibits and Financial Statement Schedules

     THE  FOLLOWING  EXHIBITS  ARE  INCORPORATED  HEREIN  BY  REFERENCE:

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

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

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

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

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

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

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


                                       36
<PAGE>
   10.156 Promissory  Share  Transfer  Agreement  to  purchase  shares  of  Penn
          Octane de Mexico,  S.A. de C.V. dated November 13, 2000,  between Juan
          Jose  Navarro  Plascencia  and  Penn  Octane   International,   L.L.C.
          (Translation   from  Spanish).   (Incorporated  by  reference  to  the
          Company's Annual Report on Form 10-K for the year ended July 31, 2000,
          filed on November 14, 2000, SEC File No. 000-24394).

   The following Exhibits are filed as part of this report:

   10.157 Promissory  Note  and Pledge and Security Agreement dated November 30,
          2000, between Western Wood Equipment Corporation and the Registrant.

   27.1   Financial Data Schedule.

   b.   Reports on Form 8-K

        None.


                                       37
<PAGE>
                                   SIGNATURES

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


                                 PENN  OCTANE  CORPORATION



December 12, 2000                  By:  /s/  Ian  T.  Bothwell
                                        ---------------------------------------
                                        Ian  T.  Bothwell
                                        Vice President, Treasurer, Assistant
                                          Secretary, Chief Financial Officer


                                       38
<PAGE>