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, 2001

                                       OR

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

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

                       Commission file number:  000-24394

                             PENN OCTANE CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

           DELAWARE                                      52-1790357
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)


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

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

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

     The number of shares of Common Stock, par value $.01 per share, outstanding
on  December  14,  2001  was  14,857,694.


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



         ITEM                                                                        PAGE NO.
         ----                                                                        --------
<S>            <C>                                                                   <C>
Part I    1.   Financial  Statements

               Independent Certified Public Accountants' Review Report                  3

               Consolidated Balance Sheets as of October 31, 2001 (unaudited)          4-5
               and  July  31,  2001

               Unaudited Consolidated Statements of Operations for the three months
               ended  October  31,  2001  and  2000                                     6

               Unaudited Consolidated Statements of Cash Flows for the three months
               ended  October  31,  2001  and  2000                                     7

               Notes to Unaudited Consolidated Financial Statements                    8-18

          2.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                              19-27

          3.   Quantitative and Qualitative Disclosures About Market Risk              27

Part II   1.   Legal  Proceedings                                                      28

          2.   Changes  in  Securities  and  Use  of  Proceeds                         28

          3.   Defaults  Upon  Senior  Securities                                      28

          4.   Submission of Matters to a Vote of Security Holders                     28

          5.   Other  Information                                                      29

          6.   Exhibits  and  Reports  on  Form  8-K                                   29

          7.   Signatures                                                              30
</TABLE>


                                        2
<PAGE>
             Independent Certified Public Accountants' Review Report



Board of Directors and Shareholders
Penn Octane Corporation

We  have  reviewed  the  accompanying  consolidated balance sheet of Penn Octane
Corporation  and  subsidiaries (Company) as of October 31, 2001, and the related
consolidated  statements of operations and cash flows for the three months ended
October 31, 2001 and 2000.  These financial statements are the responsibility of
the  Company's  management.

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

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

We  have  previously  audited,  in  accordance with auditing standards generally
accepted  in  the United States of America, the consolidated balance sheet as of
July  31,  2001,  and  the  related  consolidated  statements  of  operations,
stockholders'  equity,  and  cash  flows  for the year then ended (not presented
herein)  and  in  our report dated October 12, 2001, 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,  2001,  is  fairly stated, in all material respects, in
relation  to  the  consolidated  balance  sheet  from which it has been derived.


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

Brownsville, Texas
December 10, 2001


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

                              PENN OCTANE CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED BALANCE SHEETS

                                               ASSETS


                                                                          October 31,    July 31,
                                                                             2001          2001
                                                                          (Unaudited)
                                                                         -------------  -----------
<S>                                                                      <C>            <C>
Current Assets
  Cash (including restricted cash of $5,872,041 and $971,875)            $   6,516,107  $ 1,322,560
  Trade accounts receivable (less allowance for doubtful accounts of         2,666,253    4,802,897
    $695,897 and $779,663)
  Notes receivable                                                             444,346      439,053
  Inventories                                                               12,324,177   12,384,847
  Prepaid expenses and other current assets                                    295,841      298,828
                                                                         -------------  -----------
    Total current assets                                                    22,246,724   19,248,185

Property, plant and equipment - net                                         18,436,005   18,260,384
Lease rights (net of accumulated amortization of $627,394 and $615,945)        526,645      538,094
Mortgage receivable                                                          1,934,872    1,934,872
Other non-current assets                                                       269,497      312,808
                                                                         -------------  -----------
      Total assets                                                       $  43,413,743  $40,294,343
                                                                         =============  ===========
</TABLE>



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


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

                                  CONSOLIDATED BALANCE SHEETS - CONTINUED

                                    LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                             October 31,
                                                                                2001           July 31,
                                                                             (Unaudited)         2001
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
Current Liabilities
    Current maturities of long-term debt                                   $      925,571   $      918,885
    Short-term debt                                                             5,564,585        5,650,430
    LPG trade accounts payable                                                  8,419,873        9,537,825
    Obligation to deliver LPG                                                  15,932,043       10,942,817
    Other accounts payable and accrued liabilities                              5,122,191        4,867,870
                                                                           ---------------  ---------------
      Total current liabilities                                                35,964,263       31,917,827
Long-term debt, less current maturities                                         3,077,233        3,273,969
Commitments and contingencies                                                           -                -
Stockholders' Equity
    Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
    No shares issued and outstanding at October 31, 2001 and July 31, 2001              -                -

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

    Common stock - $.01 par value, 25,000,000 shares authorized;
    14,778,944 and 14,427,011 shares issued and outstanding at October
    31, 2001 and July 31, 2001                                                    147,790          144,270

    Additional paid-in capital                                                 26,598,886       25,833,822

    Notes receivable from officers of the Company and a related party for
    exercise of warrants, less reserve of $623,663 and $596,705 at October
    31, 2001 and July 31, 2001                                               (  3,761,350)    (  3,761,350)

    Accumulated deficit                                                     (  18,613,079)   (  17,114,195)
                                                                           ---------------  ---------------

    Total stockholders' equity                                                  4,372,247        5,102,547
                                                                           ---------------  ---------------

       Total liabilities and stockholders' equity                          $   43,413,743   $   40,294,343
                                                                           ===============  ===============
</TABLE>



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


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

                         CONSOLIDATED STATEMENTS OF OPERATIONS

                                      (UNAUDITED)


                                                             Three Months Ended
                                                       --------------------------------
                                                        October 31,      October 31,
                                                            2001             2000
                                                       --------------  ----------------
<S>                                                    <C>             <C>
Revenues                                               $  31,871,890   $    38,381,119
Cost of goods sold                                        31,245,790        36,792,694
                                                       --------------  ----------------
    Gross profit                                             626,100         1,588,425
Selling, general and administrative expenses
    Legal and professional fees                              623,952           204,514
    Salaries and payroll related expenses                    362,345           257,473
    Travel                                                    54,114            35,160
    Other                                                    198,028           178,253
                                                       --------------  ----------------
                                                           1,238,439           675,400
                                                       --------------  ----------------
      Operating income (loss)                           (    612,339)          913,025
Other income (expense)
    Interest expense                                    (    952,599)   (      806,157)
    Interest income                                           12,747             2,537
    Settlement of litigation                                       -    (      100,000)
                                                       --------------  ----------------
      Income (loss) before taxes                        (  1,552,191)            9,405
Refund of income taxes                                        53,306                 -
                                                       --------------  ----------------
           Net income (loss)                           $(  1,498,885)  $         9,405
                                                       ==============  ================

Net income (loss) per common share                     $(       0.10)  $          0.00
                                                       ==============  ================
Net income (loss) per common share assuming
dilution                                               $(       0.10)  $          0.00
                                                       ==============  ================
Weighted average common shares outstanding                14,611,694        13,583,756
                                                       ==============  ================
</TABLE>



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


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

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                (UNAUDITED)

                                                                                 Three Months Ended
                                                                                 ------------------
                                                                                     October 31,
                                                                                     -----------
                                                                                 2001            2000
                                                                             -------------  --------------
<S>                                                                          <C>            <C>
Cash flows from operating activities:
Net income (loss)                                                            $( 1,498,885)  $       9,405
Adjustments to reconcile net income (loss) to net cash  provided by (used
in) operating activities:
    Depreciation and amortization                                                 182,246         184,309
    Amortization of lease rights                                                   11,449          11,449
    Non-employee stock based costs                                                210,217          63,291
    Loan discount                                                                 503,362         452,027
    Other                                                                     (     5,292)              -
Changes in current assets and liabilities:
    Trade accounts receivable                                                   2,136,643    (  2,464,558)
    Deferred revenues                                                                   -       1,685,250
    Inventories                                                                    58,867    (  3,566,439)
    Prepaid and other current assets                                              (53,230)         41,464
    LPG trade accounts payable                                                ( 1,117,952)      5,328,021
    Obligation to deliver LPG                                                   4,991,029               -
    Other assets and liabilities, net                                              43,312          (6,250)
    Other accounts payable and accrued liabilities                                279,946         378,899
                                                                             -------------  --------------
      Net cash provided by operating activities                                 5,741,712       2,116,868
Cash flows from investing activities:
    Capital expenditures                                                      (   357,867)   (  1,016,723)
                                                                             -------------  --------------
      Net cash used in investing activities                                      (357,867)   (  1,016,723)
Cash flows from financing activities:
    Revolving credit facilities                                                         -    (    518,797)
    Issuance of common stock                                                            -          45,748
    Costs of registration                                                     (       248)   (     35,276)
    Reduction in debt                                                            (190,050)   (     65,653)
                                                                             -------------  --------------
      Net cash used in financing activities                                   (   190,298)   (    573,978)
                                                                             -------------  --------------
            Net increase in cash                                                5,193,547         526,167
Cash at beginning of period                                                     1,322,560          25,491
                                                                             -------------  --------------
Cash at end of period                                                        $  6,516,107   $     551,658
                                                                             =============  ==============
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
    Interest (including capitalized interest of $45,000 in 2000)             $    462,602   $     270,849
                                                                             =============  ==============
    Taxes                                                                    $          -   $           -
                                                                             =============  ==============
Supplemental disclosures of noncash transactions:
    Preferred stock, common stock and warrants issued                        $    768,832   $     561,290
                                                                             =============  ==============
    Notes receivable exchanged for common stock                              $          -   $(    555,661)
                                                                             =============  ==============
</TABLE>



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


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION

     Penn  Octane  Corporation  was incorporated in Delaware in August 1992. The
     Company  has  been  principally engaged in the purchase, transportation and
     sale  of  liquefied  petroleum  gas  (LPG). The Company owns and operates a
     terminal facility on leased property in Brownsville, Texas (the Brownsville
     Terminal  Facility)  and  owns  a  LPG  terminal  facility  in  Matamoros,
     Tamaulipas,  Mexico (the Matamoros Terminal Facility) and pipelines (the US
     -  Mexico Pipelines) which connect the Brownsville Terminal Facility to the
     Matamoros  Terminal  Facility.  The Company has a long-term lease agreement
     for  approximately  132  miles  of  pipeline  (the  Leased  Pipeline) which
     connects  Exxon Mobil Corporation's (Exxon) King Ranch Gas Plant in Kleberg
     County,  Texas  and  Duke Energy's La Gloria Gas Plant in Jim Wells County,
     Texas,  to  the  Company's  Brownsville Terminal Facility. In addition, the
     Company  has  access  to a twelve-inch pipeline (the ECCPL), which connects
     Exxon's  Viola  valve  station  in Nueces County, Texas to the inlet of the
     King  Ranch  Gas  Plant  as  well  as  existing and other potential propane
     pipeline  suppliers  which  have  the  ability  to  access  the  ECCPL.  In
     connection  with the Company's lease agreement for the Leased Pipeline, the
     Company  may access up to 21,000,000 gallons of storage located in Markham,
     Texas  (Markham  Storage),  as  well  as  other  potential propane pipeline
     exchange suppliers, via approximately 155 miles of pipeline located between
     Markham,  Texas and the Exxon King Ranch Gas Plant. The Company also has up
     to  8,400,000  gallons  of  available  storage at Mont Belvieu. 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  by  PMI is destined for consumption in the northeastern
     region  of  Mexico.

     The  Company  commenced  operations  during  the fiscal year ended July 31,
     1995,  upon  construction  of  the Brownsville Terminal Facility. Since the
     Company  began operations, the primary customer for LPG has been PMI. Sales
     of  LPG  to  PMI  accounted  for  approximately  69% of the Company's total
     revenues  for  the  three  months  ended  October  31,  2001.

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

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

     The  unaudited  consolidated  balance  sheet  as  of  October 31, 2001, the
     unaudited  consolidated statements of operations for the three months ended
     October  31,  2001  and  2000, and the unaudited consolidated statements of
     cash  flows for the three months ended October 31, 2001 and 2000, have been
     prepared  by  the  Company without audit. In the opinion of management, the
     unaudited  consolidated financial statements include all adjustments (which
     include  only normal recurring adjustments) necessary to present fairly the
     unaudited  consolidated financial position of the Company as of October 31,
     2001, the unaudited consolidated results of operations for the three months
     ended  October 31, 2001 and 2000, and the unaudited consolidated cash flows
     for  the  three  months  ended  October  31,  2001  and  2000.

     Certain  information  and  footnote  disclosures  normally  included  in
     consolidated  financial  statements  prepared in accordance with accounting
     principles  generally  accepted  in  the United States of America have been
     omitted.  These  unaudited consolidated financial statements should be read
     in conjunction with the consolidated financial statements and notes thereto
     included  in  the  Company's Annual Report on Form 10-K for the fiscal year
     ended  July  31,  2001.


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION  -  CONTINUED

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


NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE

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

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

<TABLE>
<CAPTION>
                                 For the three months ended October 31, 2001   For the three months ended October 31, 2000
                                 -------------------------------------------  ---------------------------------------------
                                  Income (loss)      Shares        Per-Share   Income (loss)       Shares       Per-Share
                                   (Numerator)    (Denominator)     Amount      (Numerator)    (Denominator)     Amount
                                 ---------------  -------------  -----------  ---------------  --------------  ------------
<S>                              <C>              <C>            <C>          <C>              <C>             <C>
Net income (loss)                $   (1,498,885)              -           -   $         9,405               -             -
BASIC EPS
Net income (loss) available to
    common stockholders              (1,498,885)     14,611,694  $(    0.10)            9,405      13,583,756  $       0.00
                                                                 ===========                                   ============

EFFECT OF DILUTIVE SECURITIES
 Warrants                                     -   N/A                     -                 -         889,733             -
Convertible Preferred Stock                   -   N/A                     -                 -               -             -
                                 ---------------  -------------               ---------------  --------------

DILUTED EPS
Net income (loss) available to
   common stockholders           $          N/A   N/A            $      N/A   $         9,405  $   14,473,489  $       0.00
                                 ===============  =============  ===========  ===============  ==============  ============
</TABLE>

NOTE  C  -  NOTES  FROM  RELATED  PARTIES

     As of October 31, 2001, the amounts due from notes issued to the Company by
     certain  officers,  directors  and  a  related party (Note Issuers) for the
     exercise  of  warrants  have  not been paid as required by the terms of the
     notes.  All  accrued  but  unpaid  interest  from officers, directors and a
     related  party has been reserved. During November 2001, the Company and the
     Note  Issuers  agreed  to  exchange  36,717  shares  of common stock of the
     Company  held  by the Note Issuers for payment of all unpaid interest owing
     to  the  Company  through  October  31,  2001  ($146,869). In addition, the
     Company  agreed  to  extend  the due date of the notes to October 31, 2003.


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  D  -  PROPERTY,  PLANT  AND  EQUIPMENT

     Property,  plant  and  equipment  consists  of  the  following:

<TABLE>
<CAPTION>
                                                         October 31,      July 31,
                                                            2001            2001
                                                       --------------  --------------
<S>                                                    <C>             <C>
LPG:
     Brownsville Terminal Facility:
          Building                                     $     173,500   $     173,500
          Terminal facilities                              3,631,207       3,631,207
          Tank Farm                                          370,855         370,855
          Midline pump station                             2,362,567       2,293,121
          Leasehold improvements                             298,157         291,409
          Capital construction in progress                    96,212          67,002
          Equipment                                          479,243         469,545
                                                       --------------  --------------
                                                           7,411,741       7,296,639
     US - Mexico Pipelines and Matamoros Terminal
     Facility:

          U.S. Pipelines and Rights of Way                 6,292,676       6,245,614
          Mexico Pipelines and Rights of Way                 993,300         993,300
          Matamoros Terminal Facility                      5,274,039       5,078,336
          Saltillo Terminal Facility                         799,309         799,309
          Land                                               644,526         644,526
                                                       --------------  --------------
               Total LPG                                  21,415,591      21,057,724
                                                       --------------  --------------
Other:
     Automobile                                               10,800          10,800
     Office equipment                                         56,266          56,266
                                                       --------------  --------------
                                                              67,066          67,066
                                                       --------------  --------------
                                                          21,482,657      21,124,790
     Less:  accumulated depreciation and amortization   (  3,046,652)   (  2,864,406)
                                                       --------------  --------------

                                                       $  18,436,005   $  18,260,384
                                                       ==============  ==============
</TABLE>


Property,  plant  and  equipment,  net  of  accumulated  depreciation,  includes
$6,906,314  and  $6,738,746  of costs, located in Mexico at October 31, 2001 and
July  31,  2001,  respectively.


                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  DEBT  OBLIGATIONS

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

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

     During  December  2000,  the Company entered into agreements (Restructuring
     Agreements)  with  the  holders  of  $5,409,000  in principal amount of the
     promissory  notes  (Notes)  providing  for  the restructuring of such Notes
     (Restructuring).

     Under  the  terms  of  the  Restructuring Agreements, the due dates for the
     restructured  Notes (Restructured Notes) were extended to December 15, 2001
     and  are payable on December 17, 2001 (see note J). Additionally, beginning
     December  16,  2000, the annual interest rate on the Restructured Notes was
     increased to 13.5% (subject to the adjustments referred to below). Interest
     payments  are  due  quarterly  beginning  March  15,  2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the  holders of the
     Restructured  Notes also received warrants to purchase up to 676,125 shares
     of  common stock of the Company at an exercise price of $2.50 per share and
     exercisable until December 15, 2003 (New Warrants). The Company also agreed
     to  modify  the  exercise  prices of the warrants to purchase up to 676,137
     shares  of  common stock of the Company previously issued to the holders of
     the  Restructured  Notes  in  connection  with  their  original  issuance
     (Warrants)  from $4.00 per share to $2.50 per share and extend the exercise
     dates  of  the  Warrants  from  December  15,  2002  to  December 15, 2003.

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

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

     In  connection  with  the  Restructuring Agreements, the Company recorded a
     discount  of  $1,597,140, to be amortized over the life of the Restructured
     Notes.  The  remaining  portion of the unamortized discount was $196,907 at
     October  31,  2001.  Total  amortization  of  discount  related  to  the
     Restructured Notes and included in the unaudited consolidated statements of
     operations  was  $402,567  for  the  three  months  ended October 31, 2001.


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  DEBT  OBLIGATIONS  -  CONTINUED

     During  August 2001 and September 2001, warrants to purchase 313,433 shares
     of common stock of the Company owned by certain holders of the Restructured
     Notes  were  exercised  and  was  paid by reducing the outstanding debt and
     accrued  interest  due  on  the  Restructured  Notes  by  $614,833.

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

     On  January  31,  2001,  the Company completed the placement of $991,000 in
     principal  amount of promissory notes (New Notes) due December 15, 2001 and
     are payable on December 17, 2001 (see note J). The holders of the New Notes
     received  warrants  to purchase up to 123,875 shares of common stock of the
     Company  (New  Note  Warrants).  The  terms  of  the New Notes and New Note
     Warrants  are substantially the same as those contained in the Restructured
     Notes  and  New  Warrants  issued  in  connection  with  the  Restructuring
     described  above.  As  described  above,  the Company's payment obligations
     under  the  New Notes will also be secured by the Collateral and the shares
     of  the  Company  which  are  being  pledged by the Company's President. In
     connection  with  the  New  Notes,  PMG  acted  as  placement agent for the
     Company.

     In connection with the issuance of the New Notes and New Note Warrants, the
     Company  recorded  a discount of $349,494, to be amortized over the life of
     the  New  Notes.  The  remaining  portion  of  the unamortized discount was
     $49,301 at October 31, 2001. Total amortization of discounts related to the
     New  Notes  and  included  in  the  unaudited  consolidated  statements  of
     operations  was  $100,795  for  the  three  months  ended October 31, 2001.

<TABLE>
<CAPTION>
LONG-TERM  DEBT
---------------

Long-term debt consists of the following:
                                                                                           October 31,    July 31,
                                                                                               2001         2001
                                                                                           ------------  ----------
<S>                                                                                        <C>           <C>
Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility, due  in monthly installments of $46,000 including
interest at 9% through  February 2004 (CPSC Note); collateralized by the US portion of
the US - Mexico Pipelines                                                                  $  1,151,692  $1,263,634

Promissory note issued in connection with the acquisition of the US - Mexico Pipelines
and the Matamoros Terminal Facility, due in  monthly installments of $29,000 including
interest at 9% through March 2004; collateralized by the US portion of the US - Mexico
Pipelines                                                                                       743,424     811,532

Promissory  note  issued  in  connection with the purchase of property, due in monthly
minimum  installments  of  $15,000  or $.001 for each gallon that flows through the US
Pipelines including interest at 10% with a balloon payment due in April 2003 (Mortgage
Note)                                                                                         1,934,872   1,934,872

Unsecured  noninterest-bearing note payable, discounted at 7%, for legal services; due
in February 2001                                                                                137,500     147,500

Other long-term debt                                                                             35,316      35,316
                                                                                           ------------  ----------
                                                                                              4,002,804   4,192,854

Current maturities                                                                              925,571     918,885
                                                                                           ------------  ----------

                                                                                           $  3,077,233  $3,273,969
                                                                                           ============  ==========
</TABLE>

The  Company's  President  is  providing  a  personal guarantee for the punctual
payment and performance under the CPSC Note until security pledged in connection
with  the  note  is  perfected.


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  DEBT  OBLIGATIONS  -  CONTINUED

     CPSC  International,  Inc.  (CPSC)  agreed  to  be responsible for payments
     required by the Mortgage Note in connection with a settlement in March 2001
     between  CPSC  and  the Company. CPSC's obligations under the Mortgage Note
     are  to be paid by the Company to the extent that there are amounts owed by
     the  Company  under  the  CPSC  Note, through direct offsets by the Company
     against  the CPSC Note. After the CPSC Note is fully paid, the Company will
     no  longer  have  any  payment  obligation  to  CPSC in connection with the
     Mortgage  Note  and  therefore,  CPSC will then be fully responsible to the
     Company  for any remaining obligations in connection with the Mortgage Note
     (Remaining  Obligations).  CPSC's  obligations to the Company in respect of
     the  Remaining  Obligations  are  collateralized  by  a  deed of trust lien
     granted  by  CPSC  in  favor  of  the  Company  against the land pledged as
     collateral  under  the  Mortgage  Note.  The  principal  of $1,908,000 plus
     accrued  and  unpaid  interest  is  included  in  long-term  debt  and  the
     corresponding  amount  required  to  be paid by CPSC has been recorded as a
     mortgage  receivable.

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

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


NOTE  F  -  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  and September 2001, warrants to purchase 37,500 and 275,933
     shares,  respectively,  of  common  stock  of  the Company owned by certain
     holders  of  the  Restructured  Notes were exercised for which the exercise
     price  was  paid  by  reductions  of  debt  obligations  (see  note  E).

     During  November  2001,  warrants  to  purchase a total of 78,750 shares of
     common  stock  of the Company were exercised, resulting in cash proceeds to
     the  Company  of  $137,813.

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

     During  September 2001, the Company issued 37,500 shares of common stock of
     the  Company  pursuant  to the Plan to a consultant in payment for services
     rendered  to  the  Company  valued  at  $150,000.

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

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

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


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

     BOARD  COMPENSATION  PLAN

     In  connection  with  the  Board Plan, during August 2001 the Board granted
     warrants  to  purchase  10,000  and  20,000  shares  of common stock of the
     Company  at  exercise  prices  of  $3.99  and  $4.05  per  share to outside
     directors.  Based  on the provisions of APB 25, no compensation expense was
     recorded  for  these  warrants.

     In  connection  with the Board Plan, during November 2001 the Board granted
     warrants  to  purchase  30,000  shares  of  common  stock of the Company at
     exercise  prices  of $3.66 per share to a newly appointed outside director.
     Based on the provisions of APB 25, no compensation expense was recorded for
     these  warrants.


NOTE  G  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION

     On March 2, 2000, litigation was filed in the Superior Court of California,
     County of San Bernardino by Omnitrans against Penn Octane Corporation, Penn
     Wilson  and  several other third parties alleging breach of contract, fraud
     and  other  causes  of  action  related  to the construction of a refueling
     station  by  a  third  party.  Penn  Octane  Corporation  has recently been
     dismissed  from  the  litigation  pursuant  to a summary judgment. Based on
     proceedings to date, the Company believes that the claims are without merit
     and  intends  to  vigorously  defend  against  the  lawsuit.

     On July 10, 2001, litigation was filed in the 164th Judicial District Court
     of  Harris County, Texas by Jorge V. Duran, a former chairman of the board,
     and  Ware, Snow, Fogel & Jackson L.L.P. against the Company alleging breach
     of  contract,  common  law fraud and statutory fraud in connection with the
     settlement  agreement  between  the parties dated July 26, 2000. Plaintiffs
     seek  actual  and  punitive  damages.  The  Company believes the claims are
     without  merit  and  intends  to  vigorously  defend  against  the lawsuit.

     On  August 7, 2001, a Mexican company, Intertek Testing Services de Mexico,
     S.A.  de  C.V.  (Plaintiff),  which  contracts  with  PMI  for  LPG testing
     services,  filed  suit  in  the Superior Court of California, County of San
     Mateo  against  the Company alleging breach of contract. The Company has no
     contract  with the Plaintiff and, therefore, believes that the complaint is
     without  merit  and  intends  to  vigorously  defend  against  the lawsuit.

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


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER

     As  of October 31, 2001, the Company has a $20,000,000 credit facility with
     RZB  Finance  L.L.C.  (RZB)  and  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 for demand
     loans  and  standby  letters of credit (RZB Credit Facility) to finance the
     Company's purchases of LPG. Under the RZB Credit Facility, the Company pays
     a  fee  with respect to each letter of credit thereunder in an amount equal
     to  the  greater  of (i) $500, (ii) 2.5% of the maximum face amount of such
     letter  of  credit, or (iii) such higher amount as may be agreed to between
     the  Company and RZB. Any 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  and  HVB each have sole and absolute discretion to limit or
     terminate  their  participation  in the RZB Credit Facility and to make any
     loan  or  issue  any letter of credit thereunder. RZB also has the right to
     demand  payment  of  any  and  all amounts outstanding under the RZB Credit
     Facility  at  any  time.  In  connection  with the RZB Credit Facility, the
     Company  granted  a  security interest and assignment in any and all of the
     Company's  accounts  (including  cash  of  $5,872,041 at October 31, 2001),
     inventory,  real  property,  buildings,  pipelines,  fixtures and interests
     therein  or relating thereto, including, without limitation, the lease with
     the  Brownsville  Navigation  District of Cameron County (District) for the
     land  on  which the Company's Brownsville Terminal Facility is located, the
     Pipeline  Lease, and in connection therewith agreed to enter into leasehold
     deeds  of  trust, security agreements, financing statements and assignments
     of  rent,  in forms satisfactory to RZB. Under the RZB Credit Facility, the
     Company  may  not  permit  to exist any subsequent lien, security interest,
     mortgage,  charge  or  other  encumbrance  of  any  nature  on  any  of its
     properties  or  assets, except in favor of RZB, without the consent of RZB.
     HVB  has  not participated in the RZB Credit Facility since September 2001.

     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, El Paso NGL
     Marketing  Company,  L.P.  (El Paso), Duke Energy NGL Services, Inc. (Duke)
     and/or  Koch  Hydrocarbon Company (Koch), letters of credit are issued on a
     monthly  basis  based  on  anticipated  purchases.

     OTHER

     At  October  31,  2001, the obligation to deliver LPG totaled approximately
     $15,932,000,  representing approximately 38,673,000 gallons of LPG, most of
     which  has  been designated for delivery from Markham. The customer has yet
     to  request  delivery of any of the quantities subject to the obligation to
     deliver  LPG.  However,  upon  request  for  delivery  by the customer, the
     Company's  requirement  to  deliver the LPG from Markham will be limited to
     among  other  things,  the  hydraulic  and  logistical  capabilities of the
     Markham  storage  system.  Furthermore,  the  Company's storage capacity at
     Markham  is  limited to space which is available to the Company pursuant to
     the  Markham  storage  contract.  At  October 31, 2001, storage balances at
     Markham  exceed  amounts which had previously been reserved by the Company.
     To  the  extent  that  quantities  related to the obligation to deliver LPG
     exceed  quantities of LPG on hand, the Company is exposed to price risk. To
     hedge  the  exposure  to  the price risk, during November 2001, the Company
     purchased  a financial Asian TET Mont Belvieu, Texas propane call option on
     8,400,000 gallons of propane for March 2002 with a strike price of $.39 per
     gallon  (Option).  Settlement of the Option is based on the monthly average
     price  of  TET  propane  for  March  2002,  as  published  by the Oil Price
     Information  Service.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     CONCENTRATIONS  OF  CREDIT  RISK

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


NOTE  H  -  REALIZATION  OF  ASSETS

     The  accompanying  consolidated  financial statements have been prepared in
     conformity  with  accounting  principles  generally  accepted in the United
     States of America, which contemplate continuation of the Company as a going
     concern.  The  Company  has had an accumulated deficit since inception, has
     used  cash  in  operations, continues to have a deficit in working capital,
     and  has  exposure  to  price  risk (see note G). Also at the time that the
     Company  is  required by a customer to deliver quantities of LPG related to
     its obligation to deliver LPG, subject to the limitations described in note
     G,  to  the  extent  that  quantities  of  LPG  to  be delivered exceed the
     quantities of LPG on hand, the Company may not have the financing available
     to  fund the purchase of such quantities. In addition, significantly all of
     the  Company's  assets are pledged or committed to be pledged as collateral
     on  existing debt in connection with the Restructured Notes, the New Notes,
     the  RZB  Credit  Facility  and  the  notes  related to the Settlement. The
     Restructured  Notes and the New Notes, which total approximately $5,811,000
     at  October  31, 2001, are due on December 15, 2001 and payable on December
     17,  2001  (see  note  J).  In  addition,  the  Company entered into supply
     agreements  for quantities of LPG totaling approximately 26,500,000 gallons
     per month (actual deliveries have been approximately 23,000,000 gallons per
     month)  although  a  new  sales agreement with PMI has not been consummated
     (see note I). As discussed in note A, the Company has historically depended
     heavily  on  sales  to  PMI.

     In view of the matters described in the preceding paragraph, recoverability
     of  a  major  portion  of  the  recorded  asset  amounts  as  shown  in the
     accompanying  unaudited  consolidated  balance sheets is dependent upon the
     Company's  ability  to  obtain additional financing, repay, renew or extend
     the  Restructured  Notes  and  the  New  Notes referred to in the preceding
     paragraph  and  to  raise  additional equity capital, resolve uncertainties
     related  to the Saltillo Terminal Facility and the success of the Company's
     future  operations.  The unaudited consolidated financial statements do not
     include any adjustments related to the recoverability and classification of
     recorded  asset  amounts  or amounts and classification of liabilities that
     might  be  necessary should the Company be unable to continue in existence.

     To  provide  the Company with the ability it believes necessary to continue
     in  existence,  management  is  taking  steps  to (i) increase sales to its
     current  customers  including  consummation  of the Proposed Agreement (see
     note  I),  (ii) increase its customer base assuming deregulation of the LPG
     industry  in  Mexico,  (iii) extend the terms of the Pipeline Lease and the
     Brownsville  Lease,  (iv)  expand  its product lines, (v) obtain additional
     letters  of  credit  financing,  (vi)  raise  additional debt and/or equity
     capital  and  (vii)  collect  unrecorded revenues from PMI that the Company
     believes it is due under the Old Agreement and Proposed Agreement (see note
     I).

     At  July  31,  2001,  the  Company had net operating loss carryforwards for
     federal  income  tax  purposes of approximately $11,722,000. 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.


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  I-  CONTRACTS

     LPG  SALES  TO  PMI

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

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

     The Old Agreements expired March 31, 2001. On April 26, 2001, PMI confirmed
     to  the  Company  in  writing  (Confirmation)  the following terms of a new
     agreement  (Proposed  Agreement)  effective  April  1,  2001,  subject  to
     revisions  to  be  provided  by  PMI's  legal  department. The Confirmation
     provides  for  minimum  monthly  volumes  of  19,000,000 gallons at indexed
     variable  posted  prices plus premiums that provide the Company with annual
     fixed  margins,  which  increase  annually  over a three year period. Since
     April  1,  2001, the Company and PMI have operated under the terms provided
     for  in  the Confirmation. From April 1, 2001 through October 31, 2001, the
     Company  sold  to PMI approximately 38,673,000 gallons (Sold LPG) for which
     PMI  has  not  taken delivery (obligation to deliver LPG - see note G). The
     Company  received the posted price plus other fees but has not received the
     fixed  margin  referred  to  in  the Confirmation on 35,058,000 gallons. At
     October  31,  2001,  the  obligation  to  deliver  LPG totals approximately
     $15,932,000  related to such sales. The Company and PMI are negotiating the
     revisions  of  the  Proposed  Agreement.

     Since  March  2001,  PMI has used the Matamoros Terminal Facility to load a
     portion  of  LPG purchased from the Company for distribution in Mexico. The
     Company  continues  to  use the Brownsville Terminal Facility in connection
     with  LPG  delivered  by  railcar  to  other customers or as an alternative
     terminal  in  the  event  the  Matamoros  Terminal Facility cannot be used.

     Based  on  the Company's interpretation of certain of the provisions of the
     Old  Agreements, additional amounts are due from PMI totaling approximately
     $5,900,000 as of October 31, 2001, resulting principally from shortfalls in
     the  minimum  volume  requirements  (approximately  15,100,000 gallons) and
     other  price  adjustments  as  provided  for  under  those  agreements.  In
     addition,  the  Company's  interpretation  of  the  Confirmation results in
     amounts  due  from  PMI totaling approximately $2,629,000 as of October 31,
     2001,  related  to  the fixed margin on undelivered LGP regardless of where
     the  LPG  is ultimately delivered. The Company will not record revenues, if
     any,  in  its  unaudited  consolidated  financial statements related to the
     above-mentioned  amounts  until they are paid by PMI or the validity of the
     Company's  interpretations  can  be  otherwise  determined.

     Revenues  from  PMI  totaled approximately $22,044,000 for the three months
     ended  October  31,  2001, representing approximately 69% of total revenues
     for  the  period.


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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

     RESTRUCTURED  NOTES  AND  NEW  NOTES

     Extension  Of  Notes
     --------------------

     During  December 2001, the Company and certain holders of the New Notes and
     the Restructured Notes (Accepting Noteholders) reached an agreement whereby
     the  due date of approximately $3,035,000 principal amount of the Accepting
     Noteholders  Restructured  Notes and/or New Notes were extended to June 15,
     2002.  In connection with the extension, the Company agreed to (i) continue
     paying  interest  at  a rate of 16.5% annually on the Accepting Noteholders
     Restructured  Notes  and/or  New  Notes,  payable  quarterly,  (ii) pay the
     Accepting  Noteholders  a  fee equal to 1% of the Restructured Notes and/or
     New  Notes extended, (iii) modify the Warrants and New Warrants held by the
     Accepting Noteholders by extending the expiration date to December 14, 2004
     and (iv) remove the Company's repurchase right with regard to the Warrants,
     New  Warrants  and  New  Note  Warrants.

     In  connection  with  the above, the Company agreed to make payments to the
     Accepting  Noteholders by December 15, 2001, equal to the interest owing on
     the  Restructured Notes and/or New Notes through December 15, 2001, and the
     fee  described  above.

     The  remaining  principal  amount of Restructured Notes and New Notes which
     were  not  extended  totaling  approximately  $2,776,000,  plus accrued and
     unpaid  interest  through  December  15,  2001, are payable on December 17,
     2001.


                                       18
<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 unaudited
consolidated  financial  statements  of  the  Company  and related notes thereto
appearing  elsewhere  herein.

FORWARD-LOOKING  STATEMENTS

     The  statements  contained in this Report that are not historical facts are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act  of  1933.  These forward-looking statements may be identified by the use of
forward-looking  terms such as "believes," "expects," "may," "will", "should" or
anticipates" or by discussions of strategy that involve risks and uncertainties.
From  time  to time, we have made or may make forward-looking statements, orally
or  in  writing.  These  forward-looking statements include statements regarding
anticipated future revenues, sales, LPG supply, operations, demand, competition,
capital  expenditures,  the  deregulation  of  the  LPG  market  in  Mexico, the
operations of the US - Mexico Pipelines, the Matamoros Terminal Facility and the
Saltillo  Terminal 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  involve predictions which are based upon a number of future conditions that
ultimately  may  prove  to  be  inaccurate.  Actual  results,  performance  or
achievements  could  differ materially from the results expressed in, or implied
by,  these  forward-looking statements.  Factors that may cause or contribute to
such  differences  include  those discussed under Part I of the Company's Annual
Report  on  Form  10-K for the fiscal year ended July 31, 2001, as well as those
discussed elsewhere in this  Report.  We caution you, however, that this list of
factors  may  not  be  complete.

OVERVIEW

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

     During  the three months ended October 31, 2001, the Company derived 69% of
its  revenues  from  sales  of  LPG  to  PMI,  its  primary  customer.

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


LPG  SALES

     The  following  table  shows  the  Company's  volume sold  and delivered in
gallons  and  average  sales  price  for  the  three  months  ended October 31,:

                                               2001   2000
                                              -----  -----

Volume Sold and Delivered

     LPG (millions of gallons) - PMI           45.0   40.0
     LPG (million of gallons) - Other          24.1   20.1
                                              -----  -----
                                               69.1   60.1

Average sales price

     LPG (per gallon) - PMI                   $0.49  $0.68
     LPG (per gallon) - Other                  0.41   0.56


                                       19
<PAGE>
RESULTS  OF  OPERATIONS

THREE MONTHS ENDED OCTOBER 31, 2001 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
2000

     Revenues.  Revenues  for the three months ended October 31, 2001 were $31.9
million compared with $38.4 million for the three months ended October 31, 2000,
a  decrease  of  $6.5  million  or  17.0%.  Of  this  decrease, $7.6 million was
attributable  to decreases in average sales prices of LPG sold to PMI during the
three  months  ended  October  31,  2001  and  $3.1  million was attributable to
decreased  average  sales  prices of LPG sold to customers other then PMI during
the  three months ended October 31, 2001 in connection with the Company's desire
to reduce quantities of inventory, partially offset by increases of $2.4 million
attributable  to  increased  volumes  of  LPG  sold  to  PMI  and  $1.7  million
attributable to increased volumes of LPG sold to customers other than PMI during
the  three  months  ended  October  31,  2001.

     Cost  of goods sold.  Cost of goods sold for the three months ended October
31,  2001,  was  $31.2  million compared with $36.8 million for the three months
ended  October 31, 2000, a decrease of $5.5 million or 15.1%.  Of this decrease,
$7.2 million was attributable to decreases in the cost of LPG sold to PMI during
the  three  months  ended October 31, 2001, $2.6 million was attributable to the
decreased  costs  of LPG sold to customers other than PMI in connection with the
Company's desire to reduce quantities of inventory during the three months ended
October  31, 2001, partially offset by increases of $2.1 million attributable to
increased  volume  of  LPG sold to PMI during the three months ended October 31,
2001,  $1.9  million  attributable  to increased volume of LPG sold to customers
other  than  PMI  during  the  three  months ended October 31, 2001 and $316,165
attributable  to  net  increases  in  other  operating costs associated with LPG
during  the  three  months  ended  October  31,  2001.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative expenses were $1.2 million for the three months ended October 31,
2001  compared  with  $675,400  for  the three months ended October 31, 2000, an
increase  of  $563,039  or  83.4%.   The  increase during the three months ended
October  31, 2001, was principally due to nonrecurring legal and consulting fees
incurred  in  connection  with  the  negotiation of contracts with PMI and costs
associated  with  the  Company's  plans  to  import  LPG  directly  into Mexico.

     Other  income  (expense).  Other  income  (expense)  was $(939,852) for the
three  months  ended  October  31,  2001  compared with $(903,620) for the three
months  ended  October  31,  2000, a decrease of $36,232.  The increase in other
expense  was  due  primarily  to  increased  interest  costs and amortization of
discounts  on  outstanding  debt  during the three months ended October 31, 2001
partially  offset  by  a  reduction  in  costs associated with the settlement of
litigation  during  the  three  months  ended  October  31,  2001.

     Income  tax.   Due  to  the availability of net operating losses during the
three  months  ended  October 31, 2001 and 2000, there was no income tax expense
recorded  in  either period.  The Company had a net operating loss carryforwards
of  approximately $12.0 million at July 31, 2001, which expire in the years 2010
to  2021,  and 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 to the extent of  any prior
alternative  minimum  taxes  paid.


                                       20
<PAGE>
LIQUIDITY  AND  CAPITAL  RESOURCES

     General.  The  Company  has had an accumulated deficit since its inception,
has  used cash in operations, continues to have a deficit in working capital and
has  exposure  to price risk (see note G to the unaudited consolidated financial
statements).  Also  at  the  time  that the Company is required by a customer to
deliver  quantities  of LPG related to its obligation to deliver LPG, subject to
the  limitations described in note G, to the extent that quantities of LPG to be
delivered  exceed  the  quantities  of LPG on hand, the Company may not have the
financing  available  to  fund the purchases of such quantities.    In addition,
significantly all of the Company's assets are pledged or committed to be pledged
as  collateral  on  existing debt in connection with the Restructured Notes, the
New  Notes,  the  RZB  Credit  Facility and the notes related to the Settlement.
The Restructured Notes and the New Notes, which total approximately $5.8 million
at October 31, 2001, are due on December 15, 2001 (payable on December 17, 2001)
or  June  15,  2002  (see  note  J  to  the  unaudited  consolidated  financial
statements).  The Company may need to increase its credit facility for increases
in  quantities of LPG purchased and/or to finance future price increases of LPG.
Further, the Company may find it necessary to liquidate inventories at a loss to
provide  working  capital,  to  reduce  outstanding  balances  under  its credit
facility  and/or  due  to  storage  limitations at Markham Storage.  The Company
depends  heavily  on sales to one major customer for which a new sales agreement
has  not  been  consummated.  The  Company's  sources  of  liquidity and capital
resources  historically  have  been  provided by sales of LPG, proceeds from the
issuance  of  short-term  and  long-term  debt,  revolving credit facilities and
credit  arrangements,  sale  or  issuance  of  preferred and common stock of the
Company  and  proceeds  from  the exercise of warrants to purchase shares of the
Company's  common  stock.

     The  following  summary table reflects comparative cash flows for the three
months ended October 31, 2001 and 2000.  All information is in thousands.

<TABLE>
<CAPTION>
                                             OCTOBER 31,      OCTOBER 31,
                                                2001             2000
                                           ---------------  ---------------
<S>                                        <C>              <C>
Net cash provided by operating activities  $        5,742   $        2,117
Net cash used in investing activities . .   (         358)    (      1,017)
Net cash used in financing activities . .   (         190)   (         574)
                                           ---------------  ---------------
Net increase in cash. . . . . . . . . . .  $        5,194   $          526
                                           ===============  ===============
</TABLE>

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

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

     The Old Agreements expired March 31, 2001. On April 26, 2001, PMI confirmed
to  the  Company  in  writing  (the "Confirmation") the following terms of a new
agreement  (the  "Proposed  Agreement")  effective  April  1,  2001,  subject to
revisions  to  be  provided by PMI's legal department. The Confirmation provides
for  minimum  monthly volumes of 19.0 million gallons at indexed variable posted
prices  plus  premiums that provide the Company with annual fixed margins, which
increase annually over a three year period. Since April 1, 2001, the Company and
PMI  have  operated under the terms provided for in the Confirmation. From April
1,  2001  through  October  31, 2001, the Company sold to PMI approximately 38.7
million  gallons  (the  "Sold  LPG")  for  which  PMI  has  not  taken  delivery
(obligation  to deliver LPG - see note G to the unaudited consolidated financial
statements).  The  Company received the posted price plus other fees on the Sold
LPG  but  has  not  received the fixed margin referred to in the Confirmation on
35.1  million gallons. At October 31, 2001, the obligation to deliver LPG totals
approximately  $15.9  million  related  to  such  sales. The Company and PMI are
negotiating  the  revisions  of  the  Proposed  Agreement.


                                       21
<PAGE>
     Since  March  2001,  PMI has used the Matamoros Terminal Facility to load a
portion  of  LPG  purchased  from  the  Company  for distribution in Mexico. The
Company  continues  to  use the Brownsville Terminal Facility in connection with
LPG delivered by railcar to other customers or as an alternative terminal in the
event  the  Matamoros  Terminal  Facility  cannot  be  used.

     Based  on  the Company's interpretation of certain of the provisions of the
Old  Agreements, additional amounts are due from PMI totaling approximately $5.9
million  as  of  October  31, 2001, resulting principally from shortfalls in the
minimum volume requirements (approximately 15.1 million gallons) and other price
adjustments  as  provided for under those agreements. In addition, the Company's
interpretation  of  the  Confirmation  results  in amounts due from PMI totaling
approximately  $2.6  million as of October 31, 2001, related to the fixed margin
on  undelivered  LPG  regardless  of  where the LPG is ultimately delivered. The
Company  will  not  record  revenues,  if  any,  in  its  consolidated financial
statements  related to the above-mentioned amounts until they are paid by PMI or
the  validity  of  the  Company's  interpretations  can be otherwise determined.

     Revenues  from PMI totaled approximately $22.0 million for the three months
ended  October 31, 2001, representing approximately 69% of total revenue for the
period.

     LPG  Supply  Agreements. The Company has entered into supply agreements for
quantities  of LPG totaling approximately 26.5 million gallons per month (actual
deliveries  have  been  approximately 23.0 million gallons per month) although a
new  sales  agreement  with  PMI  has  not  been  consummated.

     In  addition  to  the  LPG costs charged by the Suppliers, the Company also
incurs  additional  costs  to  deliver  the  LPG  to  the  Company's facilities.
Furthermore,  the Company may incur significant additional costs associated with
the  storage, disposal and/or changes in LPG prices resulting from the excess of
the  Plant  Commitment,  El  Paso 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 quantities
of  LPG  purchased  and/or  to  finance  future  price  increases  of  LPG.

     Pipeline  Lease. The Pipeline Lease currently expires on December 31, 2013,
pursuant  to  an amendment (the "Pipeline Lease Amendment") entered into between
the  Company  and Seadrift on May 21, 1997, which became effective on January 1,
1999  (the "Effective Date"). The Pipeline Lease Amendment provides, among other
things, for additional storage access and inter-connection with another pipeline
controlled  by Seadrift, thereby providing greater access to and from the Leased
Pipeline.  Pursuant  to the Pipeline Lease Amendment, the Company's fixed annual
rent  for  the  use  of  the Leased Pipeline beginning January 1, 2001 until its
expiration  is $1.0 million. The Company is required to pay a minimum charge for
storage of $300,000 per year (based on reserved storage of 8.4 million gallons).
In  connection  with the Pipeline Lease, the Company reserved up to 12.6 million
gallons  of storage through December 31, 2001 and may reserve up to 21.0 million
gallons  each  year  thereafter  provided  that the Company notifies Seadrift in
advance.  As  of  October  31, 2001, the Company's inventory balances at Markham
exceeded  the  amount  the  Company  had  reserved  for  storage  at  Markham.

     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.

     The  Company  has recently completed a mid-line pump station which included
the installation of additional piping, meters, valves, analyzers and pumps along
the  Leased  Pipeline  to  increase  the  capacity  of the Leased Pipeline.  The
Company  anticipates  the  mid-line  pump  station  will be utilized in the near
future.  The  Leased  Pipeline's capacity is estimated to be between 300 million
gallons  per  year  and  360  million  gallons  per  year.


                                       22
<PAGE>
     Deregulation of the LPG Industry in Mexico.  The Mexican petroleum industry
is  governed by the Ley Reglarmentaria del Art culo 27 Constitutional en el Ramo
del  Petr  leo  (the  Regulatory Law to Article 27 of the Constitution of Mexico
concerning  Petroleum Affairs (the "Regulatory Law")), and Ley Org nica del Petr
leos Mexicanos y Organismos Subsidiarios (the Organic Law of Petr leos Mexicanos
and  Subsidiary  Entities  (the  "Organic Law")).  Under Mexican law and related
regulations,  PEMEX  is  entrusted  with  the central planning and the strategic
management  of  Mexico's  petroleum  industry,  including importation, sales and
transportation  of  LPG.  In  carrying out this role, PEMEX controls pricing and
distribution  of  various  petrochemical  products,  including  LPG.

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

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

     In connection with the above, in August 2001, Tergas received a permit from
the  Mexican  government  to import LPG. Tergas also received authorization from
Mexican customs authorities regarding the use of the US-Mexico Pipelines for the
importation  of  LPG.

     Although  by  virtue  of the permit, Tergas is currently able to import LPG
into  Mexico, the Mexican government has asked Tergas to defer use of the permit
and  as a result the Company has not sold LPG to distributors other than PMI. As
a result of the foregoing it is uncertain as to when, if ever, Deregulation will
actually  occur  and  the  effect,  if  any,  it  will  have  on  the  Company.

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

     Credit  Arrangements  and  Other. As of October 31, 2001, the Company has a
$20.0  million  credit  facility  with RZB Finance L.L.C. ("RZB") and 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 for demand loans and standby letters of credit (RZB Credit Facility) to
finance  the  Company's  purchases  of  LPG.  Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an amount
equal  to  the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter  of  credit,  or (iii) such higher amount as may be agreed to between the
Company  and  RZB.  Any  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 and
HVB  each  have  sole  and  absolute  discretion  to  limit  or  terminate their
participation  in  the  RZB  Credit  Facility  and to make any loan or issue any
letter of credit thereunder. RZB also has the right to demand payment of any and
all amounts outstanding under the RZB Credit Facility at any time. In connection
with  the  RZB  Credit  Facility,  the  Company  granted a security interest and
assignment  in  any  and  all  of  the  Company's  accounts  (including  cash of
$5,872,041  at October 31 2001), inventory, real property, buildings, pipelines,
fixtures  and  interests  therein  or  relating  thereto,  including,  without
limitation, the lease with the Brownsville Navigation District of Cameron County
for  the  land  on which the Company's Brownsville Terminal Facility is located,
the  Pipeline  Lease, and in connection therewith agreed to enter into leasehold
deeds  of  trust,  security  agreements, financing statements and assignments of
rent,  in  forms satisfactory to RZB. Under the RZB Credit Facility, the Company
may not permit to exist any subsequent lien, security interest, mortgage, charge
or other encumbrance of any nature on any of its properties or assets, except in
favor  of  RZB,  without the consent of RZB. HVB has not participated in the RZB
Credit  Facility  since  September  2001.


                                       23
<PAGE>
     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, El Paso, Duke
and/or  Koch,  letters  of  credit  are  issued  on  a  monthly  basis  based on
anticipated  purchases.

     At  October  31,  2001, the obligation to deliver LPG totaled approximately
$15.9  million,  representing approximately 38.7 million gallons of LPG, most of
which  has  been  designated  for delivery from Markham. The customer has yet to
request  delivery  of any of the quantities subject to the obligation to deliver
LPG.  However,  upon  request  for  delivery  by  the  customer,  the  Company's
requirement  to  deliver  the  LPG  from  Markham will be limited to among other
things, the hydraulic and logistical capabilities of the Markham storage system.
Furthermore, the Company's storage capacity at Markham is limited to space which
is available to the Company pursuant to the Markham storage contract. At October
31,  2001,  storage balances at Markham exceed amounts which had previously been
reserved by the Company. To the extent that quantities related to the obligation
to deliver LPG exceed quantities of LPG on hand, the Company is exposed to price
risk. To hedge the exposure to the price risk, during November 2001, the Company
purchased  a  financial Asian TET Mont Belvieu, Texas propane call option on 8.4
million gallons of propane for March 2002 with a strike price of $.39 per gallon
(the  "Option").  Settlement of the Option is based on the monthly average price
of  TET  propane  for  March  2002,  as  published  by the Oil Price Information
Service.

     Private  Placements  and  Other  Transactions.  During  December  2000, the
Company  entered  into  agreements  (the  "Restructuring  Agreements")  with the
holders  of  $5.4  million  in  principal  amount  of  the promissory notes (the
"Notes")  providing  for  the  restructuring  of  such  remaining  Notes  (the
"Restructuring").

     Under  the  terms  of  the  Restructuring Agreements, the due dates for the
restructured notes (the "Restructured Notes") were extended to December 15, 2001
and  are  payable on December 17, 2001 (see note J to the unaudited consolidated
financial  statements).  Additionally,  beginning  December 16, 2000, the annual
interest  rate  on the Restructured Notes was increased to 13.5% (subject to the
adjustments  referred  to  below). Interest payments are due quarterly beginning
March  15,  2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the  holders of the
Restructured  Notes  also  received warrants to purchase up to 676,125 shares of
common  stock  of  the  Company  at  an  exercise  price  of $2.50 per share and
exercisable  until  December  15,  2003  (the  "New Warrants"). The Company also
agreed  to  modify the exercise prices of the Warrants to purchase up to 676,137
shares  of  common  stock of the Company previously issued to the holders of the
Restructured  Notes  in connection with their original issuance (the "Warrants")
from  $4.00  per  share  to $2.50 per share and extend the exercise dates of the
Warrants  from  December  15,  2002  to  December  15,  2003.

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


                                       24
<PAGE>
     Under  the  terms  of  the  Restructuring  Agreements,  the Company is also
required  to  provide  the  holders of the Restructured Notes with collateral to
secure the Company's payment obligations under the Restructured Notes consisting
of  a  senior  interest  in  substantially all of the Company's assets which are
located  in  the  United  States  (the  "US  Assets")  and  Mexico (the "Mexican
Assets"),  excluding  inventory,  accounts  receivable  and sales contracts with
respect  to  which  the  Company  is  required  to grant a subordinated security
interest  (collectively  referred  to  as  the  "Collateral").  The  Company's
President  has  also  pledged  2.0 million shares of common stock of the Company
owned  by  the  President  (1.0  million shares to be released when the required
security  interests  in the US Assets have been granted and perfected and all of
the shares are to be released when the required security interests in all of the
Collateral have been granted and perfected).  The granting and perfection of the
security  interests  in  the  Collateral,  as  prescribed under the Restructured
Notes,  have  not  been  finalized.  Accordingly,  the  interest  rate under the
Restructured  Notes  increased  to 16.5% on March 16, 2001, and will continue at
such rate until the required security interest in all of the Collateral has been
granted  and perfected.  The Collateral is also being pledged in connection with
the  issuance  of other indebtedness by the Company (see note G to the unaudited
consolidated  financial  statements).  PMG has agreed to serve as the collateral
agent.

     During  August 2001 and September 2001, warrants to purchase 313,433 shares
of  common  stock  of  the  Company owned by certain holders of the Restructured
Notes  were  exercised and was paid by reducing the outstanding debt and accrued
interest  due  on  the  Restructured  Notes.

     On  January  31,  2001,  the Company completed the placement of $991,000 in
principal amount of promissory notes (the "New Notes") due December 15, 2001 and
are  payable  on  December  17,  2001  (see note J to the unaudited consolidated
financial  statements).  The  holders  of  the  New  Notes  received warrants to
purchase  up  to  123,875  shares  of common stock of the Company (the "New Note
Warrants").  The  terms of the New Notes and New Note Warrants are substantially
the same as those contained in the Restructured Notes and New Warrants issued in
connection  with  the  Restructuring  described  above.  As described above, the
Company's  payment  obligations  under the New Notes will also be secured by the
Collateral  and  the  shares  of  the  Company  which  are  being pledged by the
Company's  President.  In  connection with the New Notes, PMG acted as placement
agent  for  the  Company.

     During  December 2001, the Company and certain holders of the New Notes and
the  Restructured  Notes  (the  "Accepting  Noteholders")  reached  an agreement
whereby  the  due  date  of  approximately  $3.0 million principal amount of the
Accepting  Noteholders Restructured Notes and/or New Notes were extended to June
15,  2002.  In connection with the extension, the Company agreed to (i) continue
paying  interest  at  a  rate  of  16.5%  annually  on the Accepting Noteholders
Restructured  Notes  and/or New Notes, payable quarterly, (ii) pay the Accepting
Noteholders  a  fee  equal  to  1%  of  the  Restructured Notes and/or New Notes
extended,  (iii)  modify  the  Warrants  and  New Warrants held by the Accepting
Noteholders  by  extending  the  expiration  date  to December 14, 2004 and (iv)
remove  the Company's repurchase right with regard to the Warrants, New Warrants
and  New  Note  Warrants.

     In  connection  with  the above, the Company agreed to make payments to the
Accepting  Noteholders  by December 15, 2001, equal to the interest owing on the
Restructured  Notes  and/or  New  Notes  through  December 15, 2001, and the fee
described  above.

     The  remaining  principal  amount of Restructured Notes and New Notes which
were  not  extended totaling approximately $2.8 million, plus accrued and unpaid
interest  through  December  15,  2001,  are  payable  on  December 17, 2001 are
expected to be paid from proceeds from the sale of assets subsequent to December
17,  2001.

     During  September 2001, the Company issued 37,500 shares of common stock of
the  Company  to  a  consultant  in payment for services rendered to the Company
valued  at  $150,000.

     During  November  2001,  warrants  to  purchase a total of 78,750 shares of
common  stock  of  the Company were exercised, resulting in cash proceeds to the
Company  of  $137,813.


                                       25
<PAGE>
     As of October 31, 2001, the amounts due from notes issued to the Company by
certain  officers,  directors  and  a related party (the "Note Issuers") for the
exercise  of  warrants have not been paid as required by the terms of the notes.
All accrued but unpaid interest from officers, directors and a related party has
been  reserved. During November 2001, the Company and the Note Issuers agreed to
exchange  36,717  shares of common stock of the Company held by the Note Issuers
for payment of all unpaid interest owing to the Company through October 31, 2001
($146,869).  In addition, the Company agreed to extend the due date of the notes
to  October  31,  2003.

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

     Litigation. On March 2, 2000, litigation was filed in the Superior Court of
California,  County  of  San  Bernardino  by  Omnitrans  against  Penn  Octane
Corporation,  Penn  Wilson  and  several  other third parties alleging breach of
contract,  fraud  and  other  causes  of action related to the construction of a
refueling  station  by  a third party. Penn Octane Corporation has recently been
dismissed  from  the  litigation  pursuant  to  a  summary  judgment.  Based  on
proceedings  to date, the Company believes that the claims are without merit and
intends  to  vigorously  defend  against  the  lawsuit.

     On July 10, 2001, litigation was filed in the 164th Judicial District Court
of  Harris  County, Texas by Jorge V. Duran, a former chairman of the board, and
Ware,  Snow,  Fogel  &  Jackson  L.L.P.  against  the Company alleging breach of
contract, common law fraud and statutory fraud in connection with the settlement
agreement  between  the parties dated July 26, 2000 (see above). Plaintiffs seek
actual  and  punitive damages. The Company believes the claims are without merit
and  intends  to  vigorously  defend  against  the  lawsuit.

     On  August 7, 2001, a Mexican company, Intertek Testing Services de Mexico,
S.A.  de  C.V.  (the  "Plaintiff"),  which  contracts  with  PMI for LPG testing
services,  filed  suit  in the Superior Court of California, County of San Mateo
against  the  Company  alleging  breach of contract. The Company has no contract
with  the Plaintiff and, therefore, believes that the complaint is without merit
and  intends  to  vigorously  defend  against  the  lawsuit.

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

     Realization  of  Assets.  The  Company has had an accumulated deficit since
inception,  has  used cash in operations, continues to have a deficit in working
capital and has exposure to price risk (see note G to the unaudited consolidated
financial  statements).  Also  at  the  time  that  the Company is required by a
customer  to deliver quantities of LPG related to its obligation to deliver LPG,
subject to the limitations described in note G, to the extent that quantities of
LPG  to  be  delivered exceed the quantities of LPG on hand, the Company may not
have  the  financing  available  to  fund  the  purchase  of such quantities. In
addition,  significantly all of the Company's assets are pledged or committed to
be  pledged  as  collateral on existing debt in connection with the Restructured
Notes,  the  New  Notes,  the  RZB  Credit Facility and the notes related to the
Settlement.  The Restructured Notes and the New Notes, which total approximately
$5.8  million  at  October  31,  2001,  are due on December 15, 2001 (payable on
December  17,  2001)  or June 15, 2002 (see note J to the unaudited consolidated
financial  statements). The Company may need to increase its credit facility for
the purchase of quantities of LPG in excess of current quantities sold and/or to
finance  future price increases of LPG, if any. Further, the Company may find it
necessary  to  liquidate  inventories  at  a loss to provide working capital, to
reduce  outstanding  balances  under  its  credit  facility  or  due  to storage
limitations  at  Markham  storage.  In addition, the Company entered into supply
agreements for quantities of LPG totaling approximately 26.5 million gallons per
month (actual deliveries have been approximately 23.0 million gallons per month)
although  a new sales agreement with PMI has not been consummated (see note I to
the  unaudited consolidated financial statements). As discussed in note A to the
unaudited  consolidated  financial  statements,  the  Company  has  historically
depended  heavily  on  sales  to  PMI.


                                       26
<PAGE>
     In view of the matters described in the preceding paragraph, recoverability
of  a  major  portion of the recorded asset amounts as shown in the accompanying
unaudited consolidated balance sheets is dependent upon the Company's ability to
obtain  additional  financing, repay, renew or extend the Restructured Notes and
the  New  Notes  referred  to in the preceding paragraph and to raise additional
equity  capital, resolve uncertainties related to the Saltillo Terminal Facility
and  the  success of the Company's future operations. The unaudited consolidated
financial  statements  do  not  include  any  adjustments  related  to  the
recoverability  and  classification  of  recorded  asset  amounts or amounts and
classification  of  liabilities  that  might  be necessary should the Company be
unable  to  continue  in  existence.

     To  provide  the Company with the ability it believes necessary to continue
in  existence,  management  is taking steps to (i) increase sales to its current
customers  including  consummation  of the Proposed Agreement (see note I to the
unaudited  consolidated  financial  statements), (ii) increase its customer base
assuming  Deregulation,  (iii)  extend  the  terms of the Pipeline Lease and the
Brownsville  Lease, (iv) expand its product lines, (v) obtain additional letters
of  credit financing, (vi) raise additional debt and/or equity capital and (vii)
collect  unrecorded  revenues from PMI that the Company believes it is due under
the  Old  Agreement  and  Proposed  Agreement  (see  note  I  to  the  unaudited
consolidated  financial  statements).

     At  July  31,  2001,  the  Company had net operating loss carryforwards for
federal  income  tax  purposes  of  approximately $12.0 million.  The ability to
utilize  such  net  operating loss carryforwards may be significantly limited by
the  application  of  the  "change  of ownership" rules under Section 382 of the
Internal  Revenue  Code.


STATEMENT  BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED  PUBLIC  ACCOUNTANTS.

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


ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

     To  the  extent  that  the Company maintains quantities of LPG inventory in
excess  of  commitments for quantities of undelivered LPG and/or has commitments
for  undelivered  LPG in excess of inventory balances, the Company is exposed to
market  risk  related  to  the  volatility  of  LPG  prices.  In  the event that
inventory  balances  exceed  commitments  for undelivered LPG, during periods of
falling LPG prices, the Company may sell excess inventory to customers to reduce
the  risk  of  these  price  fluctuations.  In  the  event  that commitments for
undelivered  LPG  exceed  inventory balances, the Company may purchase contracts
which  protect  the Company against future price increases of LPG (see note G to
the  unaudited  consolidated  financial  statements).



                                       27
<PAGE>
PART  II

ITEM 1.   LEGAL PROCEEDINGS

          See  note  G  to  the  accompanying  unaudited  consolidated financial
          statements  and note L to the Company's Annual Report on Form 10-K for
          the  fiscal  year  ended  July  31,  2001.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

          See  note  F  to  the  accompanying  unaudited  consolidated financial
          statements  and  notes  J and K to the Company's Annual Report on Form
          10-K  for  the  fiscal  year  ended  July  31,  2001,  for information
          concerning  certain  sales  of  Securities.

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

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None.

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

          The 2001 Annual Meeting of Stockholders of the Company (the "Meeting")
          was  held on December 14, 2001 at the Company's executive offices. The
          record  date  for  the  Meeting was November 19, 2001. Proxies for the
          meeting  were  solicited pursuant to Regulation 14A under the Exchange
          Act.  There  was  no  solicitation  in opposition to management's five
          proposals,  and  all  of  the  nominees  for election as director were
          elected.  The  results  of  the  voting  by  the stockholders for each
          proposal  are  presented  below.

          Proposal #1    Election  of  Directors

          Name of Director Elected  Votes For   Votes Withheld
          ------------------------  ----------  --------------

          Jerome B. Richter         11,065,592         165,130
          Jorge R. Bracamontes      11,065,592         165,130
          Ian T. Bothwell           11,065,592         165,130
          Jerry L. Lockett          11,065,592         165,130
          Charles Handly            11,065,592         165,130
          Stewart J. Paperin        11,065,592         165,130
          Harvey L. Benenson        11,065,592         165,130
          Emmett M. Murphy          11,065,592         165,130


          Proposal #2    Proposal  to  ratify  the  compensation  of the outside
                         directors of the Company by the issuance of warrants of
                         the  Company.

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

                           6,518,165           359,477                17,370

          Proposal #3    Proposal  to  ratify  the  issuance  of warrants of the
                         Company to certain executive officers of the Company as
                         bonus  compensation.

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

                           6,492,465           377,077                25,470


                                       28
<PAGE>
          Proposal #4    Proposal  to  ratify  the  adoption  of  a warrant plan
                         for  the  benefit  of  Company  officers,  directors,
                         employees,  and  consultants.

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

                           6,527,365           361,477                 6,170

          Proposal #5    Proposal to ratify the appointment of Burton McCumber &
                         Cortez,  L.L.P.  as  the  independent  auditors  of the
                         Company  for  the  fiscal  year  ending  July 31, 2002.

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

                           10,962,222          259,950                 8,550


ITEM 5.   OTHER INFORMATION

          None.

ITEM 6.   EXHIBITS  AND  REPORTS  ON  FORM  8-K.

     a.   Exhibits

     THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:

     10.01     Form  of Amendment to Promissory Note (the "Note") of Penn Octane
               Corporation  (the  "Company")  due December 15, 2001, and related
               agreements  and  instruments dated November 28, 2001, between the
               Company  and  the  holders  of  the  Notes.


     b.   Reports  on  Form  8-K

          None.


                                       29
<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 20, 2001           By:  /s/  Ian  T.  Bothwell
                                 -----------------------------------------------
                                 Ian  T.  Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                 Chief  Financial  Officer


                                       30
<PAGE>