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 January 31, 2002

                                       OR

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

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

                       Commission file number:  000-24394

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

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


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

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

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

The  number  of shares of Common Stock, par value $.01 per share, outstanding on
February  28,  2002  was  14,857,694.


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


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

                  Independent Certified Public Accountants' Review Report                    3

                  Consolidated Balance Sheets as of January 31, 2002 (unaudited)           4-5
                  and July 31, 2001

                  Unaudited Consolidated Statements of Operations for the three months
                  and six months ended January 31, 2002 and 2001                             6

                  Unaudited Consolidated Statement of Stockholders' Equity for the six
                  months ended January 31, 2002                                              7

                  Unaudited Consolidated Statements of Cash Flows for the six months
                  ended January 31, 2002 and 2001                                            8

                  Notes to Unaudited Consolidated Financial Statements                    9-19

              2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                              20-30

              3.  Quantitative and Qualitative Disclosures About Market Risk                30

Part II       1.  Legal Proceedings                                                         31

              2.  Changes in Securities and Use of Proceeds                                 31

              3.  Defaults Upon Senior Securities                                           31

              4.  Submission of Matters to a Vote of Security Holders                       31

              5.  Other Information                                                         32

              6.  Exhibits and Reports on Form 8-K                                          32

              7.  Signatures                                                                33
</TABLE>


                                        2
<PAGE>
            Independent Certified Public Accountants' Review Report


Board of Directors and Shareholders
Penn Octane Corporation

We  have  reviewed  the  accompanying consolidated balance sheets of Penn Octane
Corporation  and  subsidiaries  (Company)  as  of  January 31, 2002, the related
consolidated  statements of operations for the three months and six months ended
January 31, 2002, the consolidated statement of stockholders' equity for the six
months  ended January 31, 2002 and the consolidated statements of cash flows for
the  six months ended January 31, 2002 and 2001.  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
March  11,  2002


                                        3
<PAGE>
PART I
ITEM 1.

<TABLE>
<CAPTION>
                                 PENN OCTANE CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED BALANCE SHEETS

                                                  ASSETS


                                                                               January  31,
                                                                                   2002        July 31,
                                                                               (Unaudited)       2001
                                                                              --------------  -----------
<S>                                                                           <C>             <C>
Current Assets

  Cash (including restricted cash of $3,656,691 and $971,875)                 $    3,691,858  $ 1,322,560

  Trade accounts receivable (less allowance for doubtful accounts of  $0
  and $779,663)                                                                    2,732,990    4,802,897

  Notes receivable (including related parties' notes of  $414,355 and
  214,355)                                                                           649,639      439,053

  Inventories                                                                      6,385,597   12,384,847

  Prepaid expenses and other current assets                                          244,200      298,828
                                                                              --------------  -----------
    Total current assets                                                          13,704,284   19,248,185

Property, plant and equipment - net                                               18,398,620   18,260,384

Lease rights (net of accumulated amortization of $638,843 and $615,945)              515,196      538,094

Mortgage receivable                                                                1,943,212    1,934,872

Other non-current assets                                                             216,293      312,808
                                                                              --------------  -----------
      Total assets                                                            $   34,777,605  $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


                                                                             January 31,
                                                                                2002          July 31,
                                                                             (Unaudited)        2001
                                                                            -------------  ---------------
<S>                                                                         <C>            <C>
Current Liabilities

  Current maturities of long-term debt                                      $    916,884   $      918,885

  Short-term debt                                                              2,981,246        5,650,430

  LPG trade accounts payable                                                   5,921,683        9,537,825

  Obligation to deliver LPG                                                   11,128,698       10,942,817

  Other accounts payable and accrued liabilities                               5,714,577        4,867,870
                                                                            -------------  ---------------

    Total current liabilities                                                 26,663,088       31,917,827

Long-term debt, less current maturities                                        2,892,767        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 January 31, 2002 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 January
  31, 2002 and July 31, 2001                                                           -                -

  Common stock - $.01 par value, 25,000,000 shares authorized;
  14,857,694 and 14,427,011 shares issued and outstanding at January 31,
  2002 and July 31, 2001                                                         148,578          144,270

  Additional paid-in capital                                                  26,941,749       25,833,822

  Notes receivable from officers of the Company and a related party for
    exercise of warrants, less reserve of $650,570 and $596,705 at
    January 31,2002 and July 31, 2001                                         (3,761,350)      (3,761,350)

  Accumulated deficit                                                        (17,914,533)     (17,114,195)

  Accumulated other comprehensive loss                                          (192,694)               -
                                                                            -------------  ---------------

  Total stockholders' equity                                                   5,221,750        5,102,547
                                                                            -------------  ---------------

      Total liabilities and stockholders' equity                            $ 34,777,605   $   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               Six Months Ended
                                               -------------  --------------  -------------  --------------
                                                January 31,    January 31,     January 31,    January 31,
                                                   2002            2001           2002            2001
                                               -------------  --------------  -------------  --------------
<S>                                            <C>            <C>             <C>            <C>
Revenues                                       $ 32,897,657   $  47,637,301   $ 64,769,547   $  86,018,420
Cost of goods sold                               30,635,630      47,592,280     61,881,420      84,384,974
                                               -------------  --------------  -------------  --------------

    Gross profit                                  2,262,027          45,021      2,888,127       1,633,446

Selling, general and administrative expenses
    Legal and professional fees                     320,834         445,419        944,786         649,933
    Salaries and payroll related expenses           306,586         318,508        668,931         575,981
    Travel                                           45,131          65,293         99,245         100,453
    Other                                           216,019         172,778        414,047         351,031
                                               -------------  --------------  -------------  --------------
                                                    888,570       1,001,998      2,127,009       1,677,398
                                               -------------  --------------  -------------  --------------
      Operating income (loss)                     1,373,457        (956,977)       761,118         (43,952)
Other income (expense)
    Interest expense                               (691,391)       (854,633)    (1,643,990)     (1,660,790)
    Interest income                                  16,481          19,754         29,228          22,291
    Settlement of litigation                              -         (14,173)             -        (114,173)
                                               -------------  --------------  -------------  --------------
      Income (loss) before taxes                    698,547      (1,806,029)      (853,644)     (1,796,624)
Refund of income taxes                                    -               -         53,306               -
                                               -------------  --------------  -------------  --------------
        Net income (loss)                      $    698,547   $  (1,806,029)  $   (800,338)  $  (1,796,624)
                                               =============  ==============  =============  ==============

Net income (loss) per common share             $       0.05   $       (0.13)  $      (0.05)  $       (0.13)
                                               =============  ==============  =============  ==============
Net income (loss) per common share assuming
dilution                                       $       0.05   $       (0.13)  $      (0.05)  $       (0.13)
                                               =============  ==============  =============  ==============
Weighted average common shares outstanding       14,832,871      14,188,936     14,722,282      13,886,346
                                               =============  ==============  =============  ==============
</TABLE>

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


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

                                          CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                            FOR THE SIX MONTHS ENDED JANUARY 31, 2002

                                                           (UNAUDITED)


                                                                                                                    ACCUMULATED
                                                    SENIOR              ADDITIONAL      STOCK-                         OTHER
                                      PREFERRED   PREFERRED    COMMON     PAID-IN      HOLDERS'     ACCUMULATED    COMPREHENSIVE
                                        STOCK       STOCK      STOCK      CAPITAL       NOTES         DEFICIT          LOSS
                                      ----------  ----------  --------  -----------  ------------  -------------  --------------
<S>                                   <C>         <C>         <C>       <C>          <C>           <C>            <C>
Balance at July 31, 2001              $        -  $        -  $144,270  $25,833,822  $(3,761,350)  $(17,114,195)  $            -

  Comprehensive income (loss)

    Net loss                                                                                           (800,338)

    Unrealized loss on derivatives,
      net of tax                                                                                                        (192,694)


    Total comprehensive loss

Exercise of warrants                                               788      137,025

Exchange of debt for exercise of
  warrants                                                       3,135      611,698

Discount on extension of debt                                               207,283

Other                                                               10        2,296

Stock issued as payment for
  consulting services                                              375      149,625
                                      ----------  ----------  --------  -----------  ------------  -------------  --------------
Balance at January 31, 2002           $        -  $        -  $148,578  $26,941,749  $(3,761,350)  $(17,914,533)  $     (192,694)
                                      ==========  ==========  ========  ===========  ============  =============  ===============


                                         TOTAL
                                      -----------
<S>                                   <C>
Balance at July 31, 2001              $5,102,547

  Comprehensive income (loss)

    Net loss                            (800,338)

    Unrealized loss on derivatives,
      net of tax                        (192,694)
                                      -----------

    Total comprehensive loss            (993,032)

Exercise of warrants                   137,813

Exchange of debt for exercise of
  warrants                               614,833

Discount on extension of debt            207,283

Other                                      2,306

Stock issued as payment for
  consulting services                    150,000
                                      -----------
Balance at January 31, 2002           $5,221,750
                                      ===========
</TABLE>

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


                                        7
<PAGE>
<TABLE>
<CAPTION>
                                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                  (UNAUDITED)


                                                                                         Six Months Ended
                                                                                            January 31,
                                                                                    ---------------------------
                                                                                        2002           2001
                                                                                    -------------  ------------
<S>                                                                                 <C>            <C>
Cash flows from operating activities:
Net loss                                                                            $   (800,338)  $(1,796,624)
Adjustments to reconcile net loss to net cash  provided by  operating activities:
    Depreciation and amortization                                                        371,600       371,190
    Amortization of lease rights                                                          22,898        22,898
    Non-employee stock based costs                                                       262,434       109,991
    Loan discount                                                                        803,099       896,037
    Write-down of inventory to lower of cost or market                                         -     2,337,124
    Other                                                                                 (7,786)       29,157
Changes in current assets and liabilities:
    Trade accounts receivable                                                          2,069,906    (3,370,151)
    Deferred revenues                                                                          -       561,750
    Inventories                                                                        5,997,447    (3,437,712)
    Prepaid and other current assets                                                    (450,500)      133,166
    LPG trade accounts payable                                                        (3,616,142)    7,596,027
    Obligation to deliver LPG                                                            187,684             -
    Other assets and liabilities, net                                                     96,517        (6,250)
    Other accounts payable and accrued liabilities                                       872,332      (214,557)
                                                                                    -------------  ------------
     Net cash provided by operating activities                                         5,809,151     3,232,046
Cash flows from investing activities:
    Capital expenditures                                                                (509,836)   (1,356,271)
                                                                                    -------------  ------------
    Net cash used in investing activities                                               (509,836)   (1,356,271)
Cash flows from financing activities:
    Revolving credit facilities                                                                -    (2,543,537)
    Issuance of common stock                                                             137,813     1,419,581
    Costs of registration                                                                  ( 494)      (49,438)
    Issuance of debt                                                                           -       991,000
    Reduction in debt                                                                 (3,067,336)     (291,000)
                                                                                    -------------  ------------
     Net cash used in financing activities                                            (2,930,017)     (473,394)
                                                                                    -------------  ------------
               Net increase in cash                                                    2,369,298     1,402,381
Cash at beginning of period                                                            1,322,560        25,491
                                                                                    -------------  ------------
Cash at end of period                                                               $  3,691,858   $ 1,427,872
                                                                                    =============  ============
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
    Interest (including capitalized interest of $90,000 in 2001)                    $    913,785   $   829,468
                                                                                    =============  ============
Supplemental disclosures of noncash transactions:
    Preferred stock, common stock and warrants issued                               $     974,915   $ 2,910,820
                                                                                    =============  ============
    Notes receivable exchanged for common stock                                     $          -   $  (555,661)
                                                                                    =============  ============
    Unrealized loss on a derivative                                                 $   (192,694)  $         -
                                                                                    =============  ============
</TABLE>

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


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE  A  -  ORGANIZATION

     Penn  Octane  Corporation  was incorporated in Delaware in August 1992. The
     Company  has  been  principally engaged in the purchase, transportation and
     sale  of  liquefied  petroleum  gas  (LPG). The Company owns and operates a
     terminal  facility  on  leased  property in Brownsville, Texas (Brownsville
     Terminal  Facility)  and  owns  a  LPG  terminal  facility  in  Matamoros,
     Tamaulipas, Mexico (Matamoros Terminal Facility) and pipelines (US - Mexico
     Pipelines) which connect the Brownsville Terminal Facility to the Matamoros
     Terminal  Facility.  The  Company  has  a  long-term  lease  agreement  for
     approximately  132 miles of pipeline (Leased Pipeline) which connects 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  (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 in Mont Belvieu, Texas. 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 generally destined for consumption in the northeastern region of
     Mexico.

     The  Company  commenced  operations  during  the fiscal year ended July 31,
     1995,  upon  construction  of  the Brownsville Terminal Facility. Since the
     Company  began operations, the primary customer for LPG has been PMI. Sales
     of  LPG  to  PMI  accounted  for  approximately  73% of the Company's total
     revenues  for  the  six  months  ended  January  31,  2002.

     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  have  been  eliminated.

     The  unaudited  consolidated  balance  sheet  as  of  January 31, 2002, the
     unaudited  consolidated  statements  of operations for the three months and
     six  months  ended  January  31,  2002 and 2001, the unaudited consolidated
     statement of stockholders' equity for the six months ended January 31, 2002
     and  the  consolidated  statements  of  cash flows for the six months ended
     January 31, 2002 and 2001, 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 January 31, 2002, the unaudited
     consolidated  results  of  operations  for  the three months and six months
     ended  January  31,  2002 and 2001, the unaudited consolidated statement of
     stockholders'  equity  for  the  six  months ended January 31, 2002 and the
     consolidated  statements of cash flows for the six months ended January 31,
     2002  and  2001.

     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.


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE A - ORGANIZATION - CONTINUED

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


NOTE B - INCOME (LOSS) PER COMMON SHARE

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

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

<TABLE>
<CAPTION>
                                        For the three months ended January 31, 2002  For the three months ended January 31, 2001
                                        ------------------------------------------  ----------------------------------------------
                                        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)                       $      698,547              -            -  $(   1,806,029)              -              -
BASIC EPS
Net income (loss) available to common          698,547     14,832,871  $      0.05      (1,806,029)     14,188,936  $       (0.13)
   stockholders                                                        ===========                                  ==============

EFFECT OF DILUTIVE SECURITIES
Warrants                                             -        544,458            -               -             N/A              -
 Convertible Preferred Stock                         -              -            -               -             N/A              -
                                        --------------  -------------               ---------------  -------------

DILUTED EPS
Net income (loss) available to common   $      698,547     15,377,329  $      0.05  $          N/A             N/A  $         N/A
  stockholders                          ==============  =============  ===========  ===============  =============  ==============
</TABLE>
<TABLE>
<CAPTION>
                                         For the six months ended January 31, 2002     For the six months ended January 31, 2001
                                        --------------------------------------------  --------------------------------------------
                                        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)                       $   ( 800,338)              -             -   $  (1,796,624)              -             -
BASIC EPS
Net income (loss) available to common        (800,338)     14,722,282  $      (0.05)     (1,796,624)     13,886,346  $      (0.13)
  Stockholders                                                         =============                                 =============

EFFECT OF DILUTIVE SECURITIES
Warrants                                            -             N/A             -               -             N/A             -
Convertible Preferred Stock                         -             N/A             -               -             N/A             -
                                        --------------  -------------                 --------------  -------------
DILUTED EPS
Net income (loss) available to common   $         N/A             N/A  $        N/A   $         N/A             N/A  $        N/A
  stockholders                          ==============  =============  =============  ==============  =============  =============
</TABLE>


                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE C - NOTES FROM RELATED PARTIES

     As of January 31, 2002, 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 upon
     receipt  of  the common stock, the Company agreed to extend the due date of
     the  notes  to  October  31,  2003.

     During  January 2002, the Company received a note in the amount of $200,000
     for a loan to the Company's president. The note bears interest at the prime
     rate  and  the  note plus accrued interest are due on January 31, 2003. The
     note  is collateralized by shares collateralizing another obligation of the
     president  to  the  Company.


NOTE D - PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consists of the following:

                                                      January 31,    July 31,
                                                         2002          2001
                                                    -------------  ------------
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                               2,437,696     2,293,121
    Leasehold improvements                               298,157       291,409
    Capital construction in progress                      96,212        67,002
    Equipment                                            490,149       469,545
                                                    -------------  ------------
                                                       7,497,776     7,296,639

  US - Mexico Pipelines and Matamoros Terminal
  Facility:

    U.S. Pipelines and Rights of Way                   6,317,703     6,245,614
    Mexico Pipelines and Rights of Way                   993,300       993,300
    Matamoros Terminal Facility                        5,074,087     5,078,336
    Saltillo Terminal Facility                         1,027,266       799,309
    Land                                                 644,526       644,526
                                                    -------------  ------------
        Total LPG                                     21,554,658    21,057,724
                                                    -------------  ------------
Other:
  Automobile                                              10,800        10,800
  Office equipment                                        69,168        56,266
                                                    -------------  ------------
                                                          79,968        67,066
                                                    -------------  ------------
                                                      21,634,626    21,124,790
  Less:  accumulated depreciation and amortization    (3,236,006)   (2,864,406)
                                                    -------------  ------------

                                                    $ 18,398,620   $18,260,384
                                                    =============  ============


The  above  includes $6,914,026, and $6,738,746 net of accumulated depreciation,
of  costs of property, plant and equipment located in Mexico at January 31, 2002
and  July  31,  2001,  respectively.


                                       11
<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  were payable on December 17, 2001 (see below). Additionally, beginning
     December  16,  2000, the annual interest rate on the Restructured Notes was
     increased  to  13.5%  (subject  to  adjustment). Interest payments were due
     quarterly  beginning  March  15,  2001.


     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) which were due December
     15, 2001 and were payable on December 17, 2001 (see below). The terms of
     the New Notes are substantially the same as those contained in the
     Restructured Notes issued in connection with the Restructuring described
     above.

     Payment on Restructured Notes
    ------------------------------

     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.  The  exercise  price  was satisfied by the Company
     reducing  the outstanding debt and accrued interest due on the Restructured
     Notes  by  $614,833.

     Extension of Restructured Notes and New 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 for $3,135,000 of principal due on the Accepting Noteholders'
     Restructured  Notes  and/or  New  Notes  was  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  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.

     In  connection  with  the issuance of the Restructured Notes and New Notes,
     the  Company  recorded  a  discount of $1,946,634, to be amortized over the
     life  of  the  Restructured  Notes  and New Notes. At January 31, 2002, the
     entire  discount  has  been  amortized.  Amortization of discounts totaling
     $749,570 related to the Restructured Notes and New Notes is included in the
     unaudited  consolidated  statement  of  operations for the six months ended
     January  31,  2002.

     In  connection  with  the extension of the Accepting Noteholders' warrants,
     the  Company  recorded  a  discount  of $207,283, of which $53,529 has been
     amortized  as  of  January  31,  2002.


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE E - DEBT OBLIGATIONS - CONTINUED


     Extension of Restructured Notes and New Notes - Continued
     ---------------------------------------------------------

     The  remaining  principal  amount of Restructured Notes and New Notes which
     were  not  extended totaled approximately $2,676,000, plus accrued interest
     and  was  paid  during  December  2001  and  January  2002.

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

<TABLE>
<CAPTION>
Long-term debt consists of the following:
                                                                                           January 31,    July 31,
                                                                                               2002         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                                                                  $  1,045,602  $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                                                                                       673,772     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)                                                                                         1,943,212   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                                                                              9,565      35,316
                                                                                           ------------  ----------
                                                                                              3,809,651   4,192,854
Current maturities                                                                              916,884     918,885
                                                                                           ------------  ----------
                                                                                           $  2,892,767  $3,273,969
                                                                                           ============  ==========
</TABLE>


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


                                       13
<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.  Thereafter,  CPSC will be fully responsible to the Company
     for  any  remaining  obligations  in  connection  with  the  Mortgage  Note
     (Remaining  Obligations). CPSC's obligations to the Company relating to 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 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. The exercise price was
     satisfied  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.


                                       14
<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 and PennWilson have been
     dismissed  from  the  litigation  pursuant  to  summary  judgments.

     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.


                                       15
<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 January 31, 2002, 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 JPMorgan
     Chase  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  $3,656,691 at January 31, 2002),
     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  January  31,  2002,  the obligation to deliver LPG totaled $11,128,698,
     representing  32,317,733  gallons of LPG, most of which has been designated
     for  delivery  from Markham. 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  January 31, 2002, 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.


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED

     DERIVATIVE  INSTRUMENT

     To  the  extent  that  quantities  related to the obligation to deliver LPG
     exceed  quantities  of  LPG  on  hand,  the Company may purchase derivative
     financial  instruments  to hedge against the risks associated with negative
     price  fluctuations  in  LPG  until  such time as the Company expects to be
     required  to  purchase  the  necessary  LPG.

     The  Company  has  adopted  Statement of Financial Accounting Standards No.
     133,  "Accounting  for Derivative Instruments and Hedging Activities" (FASB
     133),  which  requires  that  all  derivative  financial  instruments  be
     recognized  in  the  financial  statements  and  measured  at  fair  value
     regardless  of  the purpose or intent for holding them. Changes in the fair
     value  of  derivative  financial  instruments  are  either  recognized
     periodically  in  income  or  stockholders'  equity  (as  a  component  of
     comprehensive income), depending on whether the derivative is being used to
     hedge  changes  in  fair  value  or  cash  flows.

     The  carrying value of the Company's financial instrument approximates fair
     value,  which is generally determined by quoted prices at the balance sheet
     date  for  similar  instruments  with  similar  terms.

     At  January  31,  2002, the Company has 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. The cost to acquire the
     Option  was  $192,694.  The  Company considers the call option to be a cash
     flow  hedge  and  therefore,  the  Company  has recorded a $192,694 loss in
     comprehensive  income  for  the  six  months  ended  January  31, 2002. Any
     ultimate gain or loss will be recognized upon the exercise or expiration of
     the  option.

     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 $3,135,000 at January 31,
     2002,  are  due  on  June  15,  2002. In addition, the Company entered into
     supply  agreements  for  quantities  of LPG totaling 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.


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE H - REALIZATION OF ASSETS - CONTINUED

     In view of the matters described in the preceding paragraph, recoverability
     of  a  major  portion  of  the  recorded  asset  amounts  as  shown  in the
     accompanying  consolidated  balance  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,  (vii)  collect  unrecorded  revenues  from  PMI  that the Company
     believes it is due under the Old Agreement and Proposed Agreement (see note
     I) and (viii) relocate the Satillo Terminal Facility to another location in
     or  near  Saltillo,  Coahuila,  Mexico.

     At  July  31,  2001,  the  Company had net operating loss carryforwards for
     federal  income  tax  purposes of approximately $11,700,000. The ability to
     utilize  such net operating loss carryforwards may be significantly limited
     by  the application of the "change of ownership" rules under Section 382 of
     the  Internal  Revenue  Code.

NOTE  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. From April
     1,  2001  through December 31, 2001, the Company and PMI operated under the
     terms  provided for in the Confirmation. Beginning January 1, 2002, PMI has
     purchased  minimum  monthly  volumes  of  17,000,000  gallons  per month at
     slightly  higher  premiums  than  those specified in the Confirmation. From
     April  1,  2001  through November 30, 2001, the Company sold PMI 39,555,216
     gallons  (Sold  LPG)  for which PMI has taken delivery on 7,237,483 gallons
     through  January  31,  2002  and  has  not  taken delivery on the remaining
     32,317,733  gallons  (Undelivered  Sold  LPG)  as  of  January  31,  2002
     (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  28,702,207  gallons  of the Undelivered Sold LPG. At
     January  31, 2002, the obligation to deliver LPG totals $11,128,698 related
     to  such  sales.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE I- CONTRACTS - CONTINUED

     LPG SALES TO PMI - CONTINUED

     During  February  2002,  the  Company  delivered  12,015,443 gallons of the
     Undelivered  Sold  LPG  at  Mont  Belvieu  of  which 3,615,443 gallons were
     delivered  from quantities of inventory held by the Company at Mont Belvieu
     and  8,400,000  gallons  were  delivered  through  an  exchange  with Exxon
     (Exchange). Under the terms of the Exchange, the Company is required to pay
     for the net cost of the gallons purchased totaling approximately $2,688,000
     through an additional surcharge on the propane and butane gallons purchased
     from  Exxon  pursuant  to  the  Exxon  Supply Contract of $.092 per gallon,
     beginning February 15, 2002 until such time as the total purchase price has
     been  paid.

     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 $5,900,000 as
     of  January  31, 2002, 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 $2,156,672 as of January 31, 2002, related to the fixed margin
     on  undelivered  LGP  regardless  of where the LPG is ultimately delivered.
     Furthermore,  beginning January 1, 2002, PMI began purchasing lower volumes
     than  those  provided for in the Confirmation, resulting in additional lost
     revenues  to  the  Company.  The  Company will not record revenues, if any,
     until they are paid by PMI or the validity of the Company's interpretations
     can  otherwise  be  determined.

     To  date,  the  Company's  attempts  to consummate an agreement and reach a
     settlement  regarding  the  above  matters  with PMI has been unsuccessful.

     Revenues  from PMI totaled $47,224,001 for the six months ended January 31,
     2002,  representing  approximately  73%  of  total revenues for the period.


                                       19
<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 January 31, 2002, the Company derived 73% 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 and six months ended January 31,
2002  and  2001.

<TABLE>
<CAPTION>
                                           Three months ended January 31,     Six months ended January 31,
                                         ----------------------------------  --------------------------------
                                               2002              2001             2002             2001
                                         ----------------  ----------------  ---------------  ---------------
<S>                                      <C>               <C>               <C>              <C>
Volume Sold and Delivered
      LPG (millions of gallons) - PMI                62.9              50.0            107.8             90.0
      LPG (millions of gallons) - Other              17.3              13.8             41.4             32.8
                                         ----------------  ----------------  ---------------  ---------------
                                                     80.2              63.8            149.2            122.8
                                         ================  ================  ===============  ===============

Average sales price
      LPG (per gallon) - PMI             $           0.40  $           0.77  $          0.44  $          0.73
      LPG (per gallon) - Other                       0.45              0.66             0.42             0.62
</TABLE>


                                       20
<PAGE>
RESULTS  OF  OPERATIONS

THREE MONTHS ENDED JANUARY 31, 2002 COMPARED WITH THREE MONTHS ENDED JANUARY 31,
2001

     Revenues.  Revenues for the three months ended January 31, 2002, were $32.9
million compared with $47.6 million for the three months ended January 31, 2001,
a  decrease  of  $14.7  million  or  30.9%.  Of this decrease, $18.5 million was
attributable  to decreases in average sales prices of LPG sold to PMI during the
three  months  ended  January  31,  2002  and  $2.9  million was attributable to
decreased  average  sales  prices of LPG sold to customers other than PMI during
the  three months ended January 31, 2002 in connection with the Company's desire
to reduce quantities of inventory, partially offset by increases of $5.1 million
attributable  to  increased  volumes  of  LPG  sold  to  PMI  and  $1.6  million
attributable to increased volumes of LPG sold to customers other than PMI during
the  three  months  ended  January  31,  2002.

     Cost  of goods sold.  Cost of goods sold for the three months ended January
31,  2002,  was  $30.6  million compared with $47.6 million for the three months
ended January 31, 2001, a decrease of $17.0 million or 35.6%.  Of this decrease,
$21.0  million  was  attributable  to  decreases  in the cost of LPG sold to PMI
during the three months ended January 31, 2002, $2.2 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  January  31,  2002,  partially  offset  by  increases  of  $4.1  million
attributable  to  increased  volume  of  LPG sold to PMI during the three months
ended  January  31,  2002,  $1.8 million attributable to increased volume of LPG
sold  to customers other than PMI during the three months ended January 31, 2002
and  $229,120  attributable to net increases in other operating costs associated
with  LPG  during  the  three  months  ended  January  31,  2002.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $888,570  for the three months ended January 31,
2002,  compared with $1.0 million for the three months ended January 31, 2001, a
decrease  of  $113,428  or  11.3%.  The  decrease  during the three months ended
January  31,  2002,  was  principally  due  to  reduced  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 $(674,910) for the
three  months  ended  January  31,  2002, compared with $(849,052) for the three
months  ended  January  31, 2001, a decrease of $174,142.  The decrease in other
expense  was  due  primarily  to  decreased  interest  costs and amortization of
discounts  on  outstanding  debt during the three months ended January 31, 2002.

     Income  tax.   Due  to the availability of net operating loss carryforwards
during the three months ended January 31, 2002 and 2001, there was no income tax
expense  recorded  in  either  period.  The  Company  had  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.


                                       21
<PAGE>
SIX  MONTHS  ENDED  JANUARY  31, 2002 COMPARED WITH SIX MONTHS ENDED JANUARY 31,
2001

     Revenues.  Revenues  for  the six months ended January 31, 2002, were $64.8
million compared with $86.0 million for the six months ended January 31, 2001, a
decrease  of  $21.2  million  or  24.7%.  Of  this  decrease,  $26.3 million was
attributable  to decreases in average sales prices of LPG sold to PMI during the
six  months  ended  January  31,  2002,  and  $6.0  million  was attributable to
decreased  average  sales  prices of LPG sold to customers other than PMI during
the  six  months ended January 31, 2002, in connection with the Company's desire
to reduce quantities of inventory, partially offset by increases of $7.8 million
attributable  to  increased  volumes  of  LPG  sold  to  PMI  and  $3.3  million
attributable to increased volumes of LPG sold to customers other than PMI during
the  six  months  ended  January  31,  2002.

     Cost  of  goods  sold.  Cost of goods sold for the six months ended January
31, 2002, was $61.9 million compared with $84.4 million for the six months ended
January 31, 2001, a decrease of $22.5 million or 26.7%.  Of this decrease, $28.4
million  was attributable to decreases in the cost of LPG sold to PMI during the
six  months  ended  January  31,  2002,  $4.8  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 six months ended
January  31, 2002, partially offset by increases of $6.5 million attributable to
increased  volume  of  LPG  sold  to PMI during the six months ended January 31,
2002,  $3.7  million  attributable  to increased volume of LPG sold to customers
other  than  PMI  during  the  six  months  ended  January 31, 2002 and $545,285
attributable  to  net  increases  in  other  operating costs associated with LPG
during  the  six  months  ended  January  31,  2002.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were $2.1 million for the six months ended January 31,
2002,  compared  with $1.7 million for the six months ended January 31, 2001, an
increase  of  $449,611  or  26.8%.   The  increase  during  the six months ended
January 31, 2002, was principally due to nonrecurring legal and consulting fees.

     Other  income (expense).  Other income (expense) was $(1.6) million for the
six  months  ended  January  31,  2002, compared with $(1.8) million for the six
months  ended  January  31, 2001, a decrease of $137,910.  The decrease in other
expense  was  due  primarily  to  decreased  interest  costs and amortization of
discounts  on  outstanding  debt  during  the six months ended January 31, 2002.

     Income  tax.   Due  to  the availability of net operating losses during the
six  months  ended  January  31,  2002 and 2001, there was no income tax expense
recorded  in either period.  The Company had 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.


                                       22
<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 $3.1 million
at January 31, 2002, are due on June 15, 2002.  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 six
months  ended  January  31,  2002  and  2001.  All  information is in thousands.


                                            JANUARY 31,    JANUARY 31,
                                               2002           2001
                                           -------------  -------------
Net cash provided by operating activities  $      5,810   $      3,232
Net cash used in investing activities . .          (510)        (1,356)
Net cash used in financing activities . .        (2,931)          (474)
                                           -------------  -------------
Net increase in cash. . . . . . . . . . .  $      2,369   $      1,402
                                           =============  =============


     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. From April 1, 2001 through December
31,  2001,  the  Company  and  PMI  operated under the terms provided for in the
Confirmation.  Beginning  January  1,  2002,  PMI  has purchased minimum monthly
volumes  of  17,000,000 gallons per month at slightly higher premiums than those
specified in the Confirmation. From April 1, 2001 through November 30, 2001, the
Company  sold  PMI approximately 39.6 million gallons (the "Sold LPG") for which
PMI  has  taken delivery on 7.2 million gallons through January 31, 2002 and has
not  taken delivery on the remaining 32.3 million gallons (the "Undelivered Sold
LPG")  as  of  January  31,  2002 (obligation to deliver LPG - see note G to the
unaudited  consolidated  financial  statements). The Company received the posted
price  plus  other fees but has not received the fixed margin referred to in the
Confirmation on 28.7 million gallons of the Undelivered Sold LPG. At January 31,
2002,  the  obligation to deliver LPG totals approximately $11.1 million related
to  such  sales.


                                       23
<PAGE>
     During  February  2002,  the  Company  delivered approximately 12.0 million
gallons of the Undelivered Sold LPG at Mont Belvieu of which 3.6 million gallons
were  delivered from quantities of inventory held by the Company at Mont Belvieu
and  8.4  million  gallons  were  delivered  through an exchange with Exxon (the
"Exchange"). Under the terms of the Exchange, the Company is required to pay for
the  net  cost  of  the  gallons  purchased  totaling approximately $2.6 million
through an additional surcharge on the propane and butane gallons purchased from
Exxon  pursuant  to  the  Exxon  Supply  Contract of $.092 per gallon, beginning
February  15,  2002  until  such time as the total purchase price has been paid.

     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  January  31, 2002, 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  $2.2  million as of January 31, 2002, related to the fixed margin
on  undelivered  LPG  regardless  of  where  the  LPG  is  ultimately delivered.
Furthermore,  beginning January 1, 2002, PMI began purchasing lower volumes than
those provided for in the Confirmation, resulting in additional lost revenues to
the  Company.  The Company will not record revenues, if any, until they are paid
by  PMI  or  the  validity  of  the  Company's  interpretations can otherwise be
determined.

     To  date,  the  Company's  attempt  to  consummate an agreement and reach a
settlement  regarding  the  above  matters  with  PMI  has  been  unsuccessful.

     Revenues  from  PMI  totaled approximately $47.2 million for the six months
ended  January 31, 2002, representing approximately 73% 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, 2002, and may reserve up to 21.0 million
gallons  each  year  thereafter  provided  that the Company notifies Seadrift in
advance.  As  of  January  31, 2002, the Company's inventory balances at Markham
exceeded  the  amount  the  Company  had  reserved  for  storage  at  Markham.


                                       24
<PAGE>
     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 recently began utilizing 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 Leased
Pipeline's  capacity is estimated to be between 300 million gallons per year and
360  million  gallons  per  year.

     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  Tergas  is  currently able to import LPG into Mexico by virtue of
the  permit,  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.
In  March  2002,  the  Mexican government again announced its intention to issue
permits  for  free  importation  of  LPG  into Mexico by distributors and others
beginning  in  the near future. As a result of the foregoing, it is uncertain as
to  when,  if  ever, Deregulation will actually occur and the effect, if any, it
will  have  on  the Company. However, it is the Company's intention, that should
Deregulation  occur,  to  sell LPG directly to distributors in Mexico as well as
PMI.

     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.
Revenue  is  not  recognized  on  these  transactions  until  physical delivery.


                                       25
<PAGE>
     Credit  Arrangements  and  Other. As of January 31, 2002, 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 JPMorgan Chase 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 approximately $3.7
million  at  January  31, 2002), inventory, real property, buildings, pipelines,
fixtures  and  interests  therein  or  relating  thereto,  including,  without
limitation, the lease with the Brownsville Navigation District of Cameron County
(the  "District")  for  the  land  on  which  the Company's Brownsville Terminal
Facility  is  located, the Pipeline Lease, and in connection therewith agreed to
enter  into  leasehold deeds of trust, security agreements, financing statements
and  assignments  of  rent,  in  forms satisfactory to RZB. Under the RZB Credit
Facility,  the  Company  may  not  permit to exist any subsequent lien, security
interest,  mortgage,  charge  or  other  encumbrance of any nature on any of its
properties  or  assets,  except in favor of RZB, without the consent of RZB. 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, Duke
and/or  Koch,  letters  of  credit  are  issued  on  a  monthly  basis  based on
anticipated  purchases.

     At  January  31,  2002, the obligation to deliver LPG totaled approximately
$11.1  million,  representing approximately 32.3 million gallons of LPG, most of
which  has  been designated for delivery from Markham. 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  January  31,  2002, 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  the  extent  that  quantities  related to the obligation to deliver LPG
exceed  quantities of LPG on hand, the Company may purchase derivative financial
instruments  to  hedge  against  the  risks  associated  with  negative  price
fluctuations  in  LPG  until  such time as the Company expects to be required to
purchase  the  necessary  LPG.

     The  Company  has  adopted  Statement of Financial Accounting Standards No.
133,  "Accounting  for  Derivative  Instruments  and  Hedging Activities" ("FASB
133"), which requires that all derivative financial instruments be recognized in
the financial statements and measured at fair value regardless of the purpose or
intent  for  holding  them.  Changes  in  the fair value of derivative financial
instruments are either recognized periodically in income or stockholders' equity
(as a component of comprehensive income), depending on whether the derivative is
being  used  to  hedge  changes  in  fair  value  or  cash  flows.

     The carrying value of the Company's financial instruments approximates fair
value,  which is generally determined by quoted prices at the balance sheet date
for  similar  instruments  with  similar  terms.

     At  January  31,  2002, the Company has 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.  The  cost  to acquire the Option was
$192,694.  The  Company  considers  the  call option to be a cash flow hedge and
therefore,  the Company has recorded a $192,694 loss in comprehensive income for
the  six  months  ended  January  31,  2002.  Any  ultimate gain or loss will be
recognized  upon  the  exercise  or  expiration  of  the  option.


                                       26
<PAGE>
     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  were  payable  on  December  17,  2001 (see below). Additionally, beginning
December  16,  2000,  the  annual  interest  rate  on the Restructured Notes was
increased to 13.5% (subject to adjustment). Interest payments were due quarterly
beginning  March  15,  2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the Company is also
required  to  provide  the  holders of the Restructured Notes with collateral to
secure the Company's payment obligations under the Restructured Notes consisting
of  a  senior  interest  in  substantially all of the Company's assets which are
located  in  the  United  States  (the  "US  Assets")  and  Mexico (the "Mexican
Assets"),  excluding  inventory,  accounts  receivable  and sales contracts with
respect  to  which  the  Company  is  required  to grant a subordinated security
interest (collectively referred to as the "Collateral"). The Company's President
has  also pledged 2.0 million shares of common stock of the Company 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 H to the unaudited consolidated
financial  statements).  PMG  has  agreed  to  serve  as  the  collateral agent.

     On  January  31,  2001,  the Company completed the placement of $991,000 in
principal  amount  of promissory notes (the "New Notes") which were due December
15, 2001 and were payable on December 17, 2001 (see below). The terms of the New
Notes  are  substantially  the same as those contained in the Restructured Notes
issued in connection with the Restructuring described above. As described above,
the  Company's  payment obligations under the New Notes will also be received by
the  Collateral  and  the  shares  of the Company which are being pledged by the
Company's  President.

     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. The exercise price was satisfied by the Company reducing
the  outstanding  debt  and  accrued  interest  due on the Restructured Notes by
$614,833.

     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  for  approximately $3.0 million of principal due on the
Accepting  Noteholders' Restructured Notes and/or New Notes was 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  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.

     In  connection  with  the issuance of the Restructured Notes and New Notes,
the  Company  recorded  a discount of approximately $1.9 million to be amortized
over  the life of the Restructured Notes and New Notes. At January 31, 2002, the
entire  discount has been amortized. Amortization of discounts totaling $749,570
related  to  the  Restructured  Notes and New Notes is included in the unaudited
consolidated  statement of operations for the six months ended January 31, 2002.

     In  connection  with  the extension of the Accepting Noteholders' warrants,
the Company recorded a discount of $207,283, of which $53,529 has been amortized
as  of  January  31,  2002.


                                       27
<PAGE>
     The  remaining  principal  amount of Restructured Notes and New Notes which
were  not extended totaled approximately $2.7 million, plus accrued interest and
was  paid  during  December  2001  and  January  2002.

     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.

     As of January 31, 2002, 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 upon receipt of the common stock, the Company agreed to
extend  the  due  date  of  the  notes  to  October  31,  2003.

     During  January  2002 the Company received a note in the amount of $200,000
for a loan to the Company's president. The note bears interest at the prime rate
and  the  note  plus  accrued  interest are due on January 31, 2003. The note is
collateralized  by shares collateralizing another obligation of the president to
the  Company.

     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 and PennWilson have
recently  been  dismissed  from  the  litigation  pursuant to summary judgments.

     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.  (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.


                                       28
<PAGE>
     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 unaudited consolidated
financial  statements,  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 $3.1 million at January 31,
2002,  are  due  on  June  15, 2002. 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.

     In view of the matters described in the preceding paragraph, recoverability
of  a  major  portion of the recorded asset amounts as shown in the accompanying
consolidated  balance  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, (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)  and  (viii) relocate the Saltillo Terminal
Facility  to  another  location  in  or  near  Saltillo,  Coahuila,  Mexico.

     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.


                                       29
<PAGE>
     The  following  is a summary of the Company's estimated minimum contractual
obligations  and commercial obligations as of January 31, 2002. Where applicable
LPG  prices  are  based  on the January 2002 monthly average as published by Oil
Price  Information  Services.

<TABLE>
<CAPTION>
                                                                PAYMENTS DUE BY PERIOD
                                                                 (AMOUNTS IN MILLIONS)
                                      ----------------------------------------------------------------
                                                     Less than     1 - 3        4 - 5         After
       Contractual Obligations            Total        1 Year      Years        Years        5 Years
       -----------------------        -------------  ----------  ---------  --------------  ----------
<S>                                   <C>            <C>         <C>        <C>             <C>
Long -Term Debt                       $         3.8  $      0.9  $     2.9  $            -  $        -

Operating Leases                               15.8         1.4        2.8             2.8         8.8

LPG Purchase Obligations                      406.9        85.1      100.2            95.0       126.6
                                      -------------  ----------  ---------  --------------  ----------

  Total Contractual Cash Obligations  $       426.5  $     87.4  $   105.9  $         97.8  $    135.4
                                      =============  ==========  =========  ==============  ==========


Obligation to Deliver LPG             $        11.1  $     11.1  $     0.0  $          0.0  $      0.0
                                      -------------  ----------  ---------  --------------  ----------
  Total Commercial Commitments        $        11.1  $     11.1  $     0.0  $          0.0  $      0.0
                                      =============  ==========  =========  ==============  ==========
</TABLE>


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).


                                       30
<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


                                       31
<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 INCORPORATED HEREIN BY REFERENCE:

     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.


                                       32
<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



March 15, 2001                         By:  /s/Ian  T.  Bothwell
                                            --------------------------
                                            Ian  T.  Bothwell
                                            Vice President, Treasurer,
                                              Assistant Secretary,
                                              Chief Financial Officer


                                       33
<PAGE>