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,  2000

                                       OR

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

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

                       Commission file number:  000-24394

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

                   DELAWARE                             52-1790357
         (State or Other Jurisdiction                (I.R.S. Employer
       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  29,  2000  was  12,996,131.


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

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

                Consolidated Balance Sheets as of January 31, 2000 (unaudited)
                and  July  31,  1999                                                     3-4

                Consolidated Statements of Operations for the three and six months
                ended  January  31,  2000  and  1999  (unaudited)                          5

                Consolidated  Statements  of  Cash  Flows  for  the  six  months
                ended  January  31,  2000  and  1999  (unaudited)                          6

                Notes  to  Consolidated  Financial  Statements  (unaudited)             7-24

         2.     Management's Discussion and Analysis of Financial Condition
                and  Results  of  Operations                                           25-36

         3.     Quantitative  and  Qualitative  Disclosures About Market Risk             36

Part II  1.     Legal  Proceedings                                                        37

         2.     Changes  in  Securities                                                   37

         3.     Defaults  Upon  Senior  Securities                                        37

         4.     Submission  of  Matters  to  a  Vote  of  Security  Holders               37

         5.     Other  Information                                                        37

         6.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K          37
</TABLE>


                                        2
<PAGE>
PART  I
ITEM  1.

<TABLE>
<CAPTION>
                          PENN OCTANE CORPORATION AND SUBSIDIARIES

                                 CONSOLIDATED BALANCE SHEETS

                                           ASSETS


                                                                    January 31,
                                                                       2000        July 31,
                                                                    (Unaudited)      1999
                                                                   -------------  ----------
<S>                                                                <C>            <C>
Current Assets
  Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $   1,255,574  $1,032,265
  Trade accounts receivable, less allowance for doubtful accounts
    of $521,067 and $521,067 . . . . . . . . . . . . . . . . . .       5,608,801   2,505,915
  Notes receivables (note F) . . . . . . . . . . . . . . . . . .         122,764      77,605
  Receivable from IBC-Brownsville (note M) . . . . . . . . . . .       4,254,347           -
  Inventories (note D) . . . . . . . . . . . . . . . . . . . . .       4,803,969     615,156
  Prepaid expenses and other current assets. . . . . . . . . . .          60,748      42,517
                                                                   -------------  ----------
    Total current assets . . . . . . . . . . . . . . . . . . . .      16,106,203   4,273,458
Property, plant and equipment - net (note C) . . . . . . . . . .       7,579,017   3,171,650
Lease rights (net of accumulated amortization
  of $547,252 and $524,355). . . . . . . . . . . . . . . . . . .         606,787     629,684
Notes receivable (note F). . . . . . . . . . . . . . . . . . . .         737,038     822,196
Other non-current assets . . . . . . . . . . . . . . . . . . . .          14,870      11,720
                                                                   -------------  ----------
   Total assets. . . . . . . . . . . . . . . . . . . . . . . . .   $  25,043,915  $8,908,708
                                                                   =============  ==========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        3
<PAGE>
<TABLE>
<CAPTION>
                                  PENN OCTANE CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED BALANCE SHEETS - CONTINUED


                                    LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                               January 31,
                                                                                   2000          July 31,
                                                                                (Unaudited)        1999
                                                                              --------------  ---------------
<S>                                                                           <C>             <C>
Current Liabilities
  Current maturities of long-term debt (note G). . . . . . . . . . . . . . .  $   3,944,493   $      365,859
  Revolving line of credit (note I). . . . . . . . . . . . . . . . . . . . .      3,707,035                -
  LPG trade accounts payable (note I). . . . . . . . . . . . . . . . . . . .      4,645,815        2,850,197
  Other accounts payable and accrued liabilities . . . . . . . . . . . . . .      3,122,140        1,382,603
                                                                              --------------  ---------------
    Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . .     15,419,483        4,598,659
Long-term debt, less current maturities (note G) . . . . . . . . . . . . . .        128,034          258,617
Commitments and contingencies (note I) . . . . . . . . . . . . . . . . . . .              -                -
Stockholders' Equity (note H)
  Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
    No shares issued and outstanding at January 31, 2000 and July 31, 1999 .              -                -
  Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
    5,000,000 shares authorized; 0 and 90,000 shares issued and
    outstanding at January 31, 2000 and July 31, 1999. . . . . . . . . . . .              -              900
  Common stock-$.01 par value, 25,000,000 shares authorized;
    12,901,131 and 11,845,497 shares issued and outstanding at
    January 31, 2000 and July 31, 1999 . . . . . . . . . . . . . . . . . . .        129,011          118,456
  Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . .     19,334,662       17,133,222
  Notes receivable from the president of the Company and a related party
    for exercise of warrants, less reserve of $563,806 and $451,141 at
    January 31, 2000 and July 31, 1999 . . . . . . . . . . . . . . . . . . .     (2,765,350)      (2,765,350)
  Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . .     (7,201,925)     (10,435,796)
                                                                              --------------  ---------------
    Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . .      9,496,398        4,051,432
                                                                              --------------  ---------------
      Total liabilities and stockholders' equity . . . . . . . . . . . . . .  $  25,043,915   $    8,908,708
                                                                              ==============  ===============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        4
<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,
                                                                       2000           1999           2000           1999
                                                                   -------------  -------------  -------------  -------------
<S>                                                                <C>            <C>            <C>            <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 19,006,831   $  8,353,027   $ 34,977,731   $ 14,831,593
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . .    17,823,068      7,413,785     32,788,080     13,323,218
                                                                   -------------  -------------  -------------  -------------
  Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . .     1,183,763        939,242      2,189,651      1,508,375
                                                                   -------------  -------------  -------------  -------------
Selling, general and administrative expenses
  Legal and professional fees . . . . . . . . . . . . . . . . . .       456,321        223,617        622,050        426,699
  Salaries and payroll related expenses . . . . . . . . . . . . .       335,315        228,870        545,107        416,698
  Travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . .        29,963         43,740         87,983         80,105
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       190,400        148,465        324,297        258,200
                                                                   -------------  -------------  -------------  -------------
                                                                      1,011,999        644,692      1,579,437      1,181,702
                                                                   -------------  -------------  -------------  -------------
  Operating income. . . . . . . . . . . . . . . . . . . . . . . .       171,764        294,550        610,214        326,673
Other income (expense)
  Interest expense. . . . . . . . . . . . . . . . . . . . . . . .      (237,970)      (200,681)      (303,997)      (293,074)
  Interest income . . . . . . . . . . . . . . . . . . . . . . . .         2,858            879          6,386          1,297
  Award from litigation, net (note M) . . . . . . . . . . . . . .     3,036,638        987,114      3,036,638        987,114
                                                                   -------------  -------------  -------------  -------------
    Income (loss) from continuing operations before taxes . . . .     2,973,290      1,081,862      3,349,241      1,022,010
Provision for income taxes. . . . . . . . . . . . . . . . . . . .        70,000              -         70,000              -
                                                                   -------------  -------------  -------------  -------------
  Income (loss) from continuing operations. . . . . . . . . . . .     2,903,290      1,081,862      3,279,241      1,022,010
Discontinued operations, net of taxes (note E)
  Income (loss) from operations of CNG segment. . . . . . . . . .             -       (121,403)             -       (202,822)
                                                                   -------------  -------------  -------------  -------------
    Net income (loss) . . . . . . . . . . . . . . . . . . . . . .  $  2,903,290   $    960,459   $  3,279,241   $    819,188
                                                                   =============  =============  =============  =============
Income (loss) from continuing operations
  per common share (note B) . . . . . . . . . . . . . . . . . . .  $       0.23   $       0.10   $       0.25   $       0.10
                                                                   =============  =============  =============  =============
Net income (loss) per common share (note B) . . . . . . . . . . .  $       0.23   $       0.09   $       0.25   $       0.08
                                                                   =============  =============  =============  =============
Income (loss) from continuing operations per
  common share assuming dilution (note B) . . . . . . . . . . . .  $       0.21   $       0.10   $       0.24   $       0.10
                                                                   =============  =============  =============  =============
Net income (loss) per common share assuming
  dilution (note B) . . . . . . . . . . . . . . . . . . . . . . .  $       0.21   $       0.09   $       0.24   $       0.08
                                                                   =============  =============  =============  =============
Weighted average common shares outstanding. . . . . . . . . . . .    12,894,078     10,479,319     12,685,225     10,215,996
                                                                   =============  =============  =============  =============
</TABLE>

The  accompanying  notes  are  an  integral  part  of  these  statements.


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

                         CONSOLIDATED STATEMENTS OF CASH FLOWS

                                      (UNAUDITED)


                                                                Six Months Ended
                                                         ------------------------------
                                                          January 31,     January 31,
                                                              2000            1999
                                                         --------------  --------------
<S>                                                      <C>             <C>
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . .  $   3,279,241   $     819,188
Adjustments to reconcile net income to net cash used in
  (provided by) operating activities:
  Depreciation and amortization . . . . . . . . . . . .        116,054         159,291
  Amortization of lease rights. . . . . . . . . . . . .         22,898          22,897
  Amortization of loan discount . . . . . . . . . . . .        119,729          94,255
  Award from litigation . . . . . . . . . . . . . . . .     (3,036,638)       (987,114)

Changes in current assets and liabilities:
  Trade accounts receivable . . . . . . . . . . . . . .     (3,102,884)       (388,874)
  Inventories . . . . . . . . . . . . . . . . . . . . .     (4,188,813)        (48,092)
  Prepaids and other current assets . . . . . . . . . .        (18,231)         54,375
  LPG trade accounts payable. . . . . . . . . . . . . .      1,795,618         593,698
  Other assets and liabilities, net . . . . . . . . . .         (3,150)        (48,486)
  Other accounts payable and accrued liabilities. . . .        521,788        (104,058)
                                                         --------------  --------------
    Net cash provided by (used in) operating activities     (4,494,388)        167,080

Cash flows from investing activities:
  Capital expenditures. . . . . . . . . . . . . . . . .     (1,523,421)       (170,485)
  Investment in leased interests. . . . . . . . . . . .     (3,000,000)              -
  Payments on note receivable . . . . . . . . . . . . .         40,000
                                                         --------------

    Net cash used in investing activities . . . . . . .     (4,483,421)       (170,485)

Cash flows from financing activities:
  Revolving credit facilities . . . . . . . . . . . . .      3,707,035        (404,322)
  Issuance of debt. . . . . . . . . . . . . . . . . . .      4,633,170          43,706
  Preferred stock dividends . . . . . . . . . . . . . .        (45,370)              -
  Issuance of common stock. . . . . . . . . . . . . . .      1,067,200         717,500
  Reduction in debt . . . . . . . . . . . . . . . . . .       (160,917)              -
                                                         --------------  --------------
    Net cash provided by financing activities . . . . .      9,201,118         356,884
                                                         --------------  --------------

      Net increase in cash. . . . . . . . . . . . . . .        223,309         353,479
Cash at beginning of period . . . . . . . . . . . . . .      1,032,265         157,513
                                                         --------------  --------------
Cash at end of period . . . . . . . . . . . . . . . . .  $   1,255,574   $     510,992
                                                         ==============  ==============
Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest. . . . . . . . . . . . . . . . . . . . . .  $     149,493   $     125,800
                                                         ==============  ==============
Supplemental disclosures of non-cash transactions:
  Common stock and warrants issued. . . . . . . . . . .  $           -   $     144,883
                                                         ==============  ==============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                        6
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  A  -  ORGANIZATION

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

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

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

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

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

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

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

NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE

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

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


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

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

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

<TABLE>
<CAPTION>
                                   For the three months ended January 31,2000  For the three months ended January 31,1999
                                   ------------------------------------------  ------------------------------------------
                                    Income (Loss)      Shares      Per-Share   Income (Loss)      Shares       Per-Share
                                     (Numerator)    (Denominator)    Amount     (Numerator)    (Denominator)    Amount
                                    --------------  -------------  ----------  --------------  -------------  -----------
<S>                                 <C>             <C>            <C>         <C>             <C>            <C>
Income (loss) from continuing
  Operations . . . . . . . . . . .  $    2,903,290              -           -  $   1,081,862               -           -
Income (loss) from   discontinued
  operations . . . . . . . . . . .               -              -           -       (121,403)              -           -
                                    --------------                             --------------
Net income (loss). . . . . . . . .       2,903,290              -           -        960,459               -           -
Less:  Dividends on preferred
  stock. . . . . . . . . . . . . .               -              -           -              -               -           -
BASIC EPS
Income (loss) from continuing
  operations available to
  common stockholders. . . . . . .       2,903,290     12,894,078  $     0.23      1,081,862      10,479,319  $     0.10
                                                                   ==========                                 ===========
Income (loss) from
  discontinued operations. . . . .               -     12,894,078  $     0.00       (121,403)     10,479,319  $    (0.01)
                                    --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders. . . . . . .       2,903,290     12,894,078  $     0.23        960,459      10,479,319  $     0.09
                                                                   ==========                                 ===========
EFFECT OF DILUTIVE SECURITIES
Warrants . . . . . . . . . . . . .               -        978,205           -              -          19,396           -
Convertible Preferred Stock. . . .               -              -           -              -               -           -
DILUTED EPS
Income (loss) from continuing
  operations available to
  common stockholders. . . . . . .       2,903,290     13,872,283  $     0.21      1,081,862      10,498,715  $     0.10
                                                                   ==========                                 ===========
Income (loss) from
  discontinued operations. . . . .               -     13,872,283  $     0.00       (121,403)     10,498,715  $    (0.01)
                                    --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders. . . . . . .  $    2,903,290     13,872,783  $     0.21  $     960,459      10,498,715  $     0.09
                                    ==============  =============  ==========  ==============  =============  ===========
</TABLE>


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

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

<TABLE>
<CAPTION>
                                 For the six months ended January 31, 2000   For the six months ended January 31,1999
                                 -----------------------------------------  ------------------------------------------
                                 Income (Loss)      Shares      Per-Share   Income (Loss)      Shares       Per-Share
                                  (Numerator)    (Denominator)    Amount     (Numerator)    (Denominator)    Amount
                                 --------------  -------------  ----------  --------------  -------------  -----------
<S>                              <C>             <C>            <C>         <C>             <C>            <C>
Income (loss) from continuing
  Operations. . . . . . . . . .  $   3,279,241               -           -  $   1,022,010               -           -
Income (loss) from
  discontinued operations . . .              -               -           -       (202,822)              -           -
                                 --------------                             --------------
Net income (loss) . . . . . . .      3,279,241               -           -        819,188               -           -
Less:  Dividends on preferred
  stock . . . . . . . . . . . .        (45,370)              -           -              -               -           -
BASIC EPS
Income (loss) from continuing
  operations available to
  common stockholders . . . . .      3,233,871      12,685,225  $     0,25      1,022,010      10,215,996  $     0.10
                                                                ==========                                 ===========
Income (loss) from
  discontinued operations . . .              -      12,685,225  $     0.00       (202,822)     10,215,996  $    (0.02)
                                 --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders . . . . .      3,233,871      12,685,225  $     0.25        819,188      10,215,996  $     0.08
                                                                ==========                                 ===========
EFFECT OF DILUTIVE SECURITIES
Warrants. . . . . . . . . . . .              -         813,534           -              -          98,686           -
Convertible Preferred Stock . .              -          83,152           -              -               -           -
DILUTED EPS
Income (loss) from continuing
  operations available to
  common stockholders . . . . .      3,233,871      13,581,911  $     0.24      1,022,010      10,314,682  $     0.10
                                                                ==========                                 ===========
Income (loss) from
  discontinued operations . . .              -      13,581,911  $     0.00       (202,822)     10,314,682  $    (0.02)
                                 --------------                 ==========  --------------                 ===========
Net income (loss) available to
  common stockholders . . . . .  $   3,233,871      13,581,911  $     0.24  $     819,188      10,314,682  $     0.08
                                 ==============  =============  ==========  ==============  =============  ===========
</TABLE>


                                        9
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  C  -  PROPERTY,  PLANT  AND  EQUIPMENT

     Property,  plant  and  equipment  consists  of  the  following:

<TABLE>
<CAPTION>
                                                        January 31,       July 31,
                                                            2000            1999
                                                       --------------  --------------
<S>                                                    <C>             <C>
LPG:
  Brownsville Terminal Facilities:
    Building. . . . . . . . . . . . . . . . . . . . .  $     173,500   $     173,500
    Terminal facilities . . . . . . . . . . . . . . .      3,719,008       3,426,440
    Leasehold improvements. . . . . . . . . . . . . .        291,409         291,409
    Capital construction in progress (see note J) . .        306,645               -
    Equipment . . . . . . . . . . . . . . . . . . . .        383,011         378,039

                                                       --------------  --------------
                                                           4,873,573       4,269,388
                                                       --------------  --------------

  US-Mexico Pipeline and Mexican Terminal Facilities
  (see note J):
    Purchase of 50% interest in the Lease Agreements.      3,000,000               -
    Other costs paid by the Company . . . . . . . . .      1,490,525         572,774

                                                       --------------  --------------
                                                           4,490,525         572,774
                                                       --------------  --------------
Other:
  Automobile. . . . . . . . . . . . . . . . . . . . .         10,800          10,800
  Office Equipment. . . . . . . . . . . . . . . . . .         37,223          35,738

                                                       --------------  --------------
                                                              48,023          46,538
                                                       --------------  --------------

                                                           9,412,121       4,888,700

  Less:  accumulated depreciation and amortization. .     (1,833,104)     (1,717,050)

                                                       --------------  --------------
                                                       $   7,579,017   $   3,171,650
                                                       ==============  ==============
</TABLE>

The  actual  costs  to  complete  the  US-Mexico  Pipeline  and Mexican Terminal
Facilities (the "Costs") are the sole responsibility of CPSC.  As of January 31,
2000  and  July  31,  1999,  the  Company  has  spent approximately $683,000 and
$512,000,  respectively,  related  to  the  Costs  (see  notes  I  and  J).


                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  D  -  INVENTORIES

     Inventories  consist  of  the  following:

<TABLE>
<CAPTION>
                                             January 31,   July 31,
                                                 2000        1999
                                             ------------  ---------
<S>                                          <C>           <C>
LPG:
  Pipeline. . . . . . . . . . . . . . . . .  $    657,596  $ 434,987
  LPG terminal. . . . . . . . . . . . . . .       288,046    180,169
  Storage-Union Carbide (see notes I and L)     3,858,327          -

                                             ------------  ---------
                                             $  4,803,969  $ 615,156
                                             ============  =========
</TABLE>

NOTE  E  -  DISCONTINUED  OPERATIONS

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

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

NOTE  F  -  SALE  OF  CNG  ASSETS

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

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

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


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  G  -  LONG-TERM  DEBT

ISSUANCE  OF  NOTES
-------------------

From  December  10,  1999 through January 18, 2000, and on February 2, 2000, the
Company  completed  a  series  of  related  transactions  in connection with the
private  placement  of  $4,944,000  and  $710,000, respectively, of subordinated
notes  (the "Notes") due the earlier of December 15, 2000 or upon the receipt of
proceeds  by  the  Company from any future debt or equity financing in excess of
$2,250,000.  Interest  at  9% is due on June 15, 2000, and December 15, 2000 (or
the  maturity date, if earlier).  In connection with the Notes, the Company also
granted  the holders of the Notes, warrants (the "Warrants") to purchase a total
of  279,559  shares of common stock of the Company at an exercise price of $4.00
per share, exercisable through December 15, 2002 and the Company agreed to issue
to  the holders of the Notes, additional warrants (the "Additional Warrants") to
purchase a total of 213,066 shares of common stock of the Company at an exercise
price of $4.00 per share, exercisable through December 15, 2002 if the Notes are
not  repurchased  prior  to  90  days  from the original date of issuance of the
Notes.  The  Company  is  also  required  to  register  the  shares  issuable in
connection  with  exercise  of  the  Warrants  and the Additional Warrants on or
before  April  15,  2000.

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

Under  the  terms  of  the Notes, the Company has agreed to pledge the Company's
interests  in  the  US-Mexico  Pipeline  and  the  Mexican  Terminal Facilities.

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

Upon  the  issuance  of the Notes, the Company recorded a discount of $1,454,762
related to the fair value of the Warrants and the Additional Warrants issued and
other  costs,  to  be  amortized  over  the  life  of  the  Notes.


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  G  -  LONG-TERM  DEBT  -  Continued

LONG-TERM  DEBT  CONSISTS  OF  THE  FOLLOWING:
----------------------------------------------

<TABLE>
<CAPTION>
                                                                                    January 31,   July 31,
                                                                                        2000        1999
                                                                                    ------------  ---------
<S>                                                                                 <C>           <C>
$4,944,000 in promissory notes, less unamortized discount of $1,345,128;
principal due December 15, 2000, or upon earlier receipt of proceeds from any
public offering of debt or equity of the Company resulting in net proceeds to
the Company in excess of $2,250,000; interest at 9.0% (effective interest rate of
approximately 45% after consideration of the discount and loan fees) on the
principal amount of the promissory notes is due June 15, 2000 and
December 15, 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  3,598,872          _
Contract for Bill of Sale which was extended in April 1999; due in
monthly payments of $3,000, including interest at 10%; due in February 2001;
collateralized by a building.. . . . . . . . . . . . . . . . . . . . . . . . . . .        32,347  $  50,347
Noninterest bearing note payable, discounted at 7%, for legal services, due in
monthly installments of $20,000 through January 2001 with a final payment
of $110,000 in February 2001.. . . . . . . . . . . . . . . . . . . . . . . . . . .       337,225    387,129

Note payable for legal services in connection with litigation; payable in
monthly installments of $11,092, including interest at 6.9% (see note I).. . . . .        74,083    127,000

Other long-term debt.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        30,000     60,000

                                                                                       4,072,527    624,476
Current maturities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3,944,493    365,859
                                                                                    ------------  ---------
                                                                                    $    128,034  $ 258,617
                                                                                    ============  =========
</TABLE>

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

NOTE  H  -  STOCKHOLDERS'  EQUITY

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

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

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


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  Continued

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

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

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

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

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

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

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

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

MANAGEMENT  INCENTIVE  PLAN
---------------------------

During  December  2000,  the Board authorized the implementation of a management
incentive  program  whereby  officers  and  directors  of  the  Company received
warrants  to  purchase  1,200,000  shares  of  common  stock  of the Company and
warrants to purchase 400,000 shares of common stock of the Company were received
by  other members of management and consultants (the "Incentive Warrants").  The
Incentive Warrants have an exercise price equal to $4.60 per share and will vest
ratably  on  a  monthly  basis  over three years or immediately upon a change in
control  in  the  Company.


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  H  -  STOCKHOLDERS'  EQUITY  -  Continued

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

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

The  total amount of shares and warrants subject to registration at February 29,
2000,  are  as  follows:

<TABLE>
<CAPTION>
                                Unexercised
                                  Shares     Warrants
                                -----------  ---------
<S>                             <C>          <C>
Demand Registration Rights . .    1,400,000          -
Piggy-Back Registration Rights    1,617,576  1,379,419
                                -----------  ---------
Total Registrable Securities .    3,017,576  1,379,419
                                ===========  =========
Registration Rights Subject To
  Penalty* . . . . . . . . . .      400,000    200,000
<FN>
*  Also  entitled  to  piggy-back  registration  rights
</TABLE>

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

Under  the Company's 1997 Stock Award Plan (the "Stock Award Plan"), the Company
has  reserved  for  issuance  150,000  shares  of Common Stock, of which 124,686
shares  were unissued as of January 31, 2000, to compensate consultants who have
rendered  significant  services  to  the  Company.  The  Stock  Award  Plan  is
administered  by  the  Compensation  Committee  of the Board of Directors of the
Company  which  has  complete  authority  to  select participants, determine the
awards  of Common Stock to be granted and the times such awards will be granted,
interpret  and  construe the Stock Award Plan for purposes of its administration
and  make  determinations  relating  to  the  Stock  Award  Plan, subject to its
provisions, which are in the best interests of the Company and its stockholders.
Only  consultants who have rendered significant advisory services to the Company
are  eligible  to be participants under the Stock Award Plan.  Other eligibility
criteria  may  be  established by the Compensation Committee as administrator of
the  Stock  Award  Plan.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES

LITIGATION

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

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

On January 28, 2000, a complaint was filed by WIN Capital Corporation ("WIN") in
the  Supreme  Court  of  the  State of New York, County of New York, against the
Company  for  breach  of  contract  seeking specific performance and declaratory
relief  in  connection  with an investment banking agreement. In connection with
the  lawsuit,  WIN  is  seeking  damages of no less than $1,500,000, issuance of
warrants  to  purchase  150,000  shares  of  common  stock  of the Company at an
exercise  price  of $1.75 per share exercisable for five years from November 10,
1998  and issuance of warrants to purchase 225,000 shares of common stock of the
Company  at  a exercise price of $3.25 per share exercisable for five years from
November 10, 1998.  In addition, WIN is demanding that the warrants to be issued
be  registered  by  the  Company.  The Company believes that the allegations are
without  merit  and intends to vigorously defend against the claims made by WIN.

On February 24, 2000, a complaint was filed in the 357th Judicial District Court
of  Cameron  County,  Texas,  by  a  landowner  (the "Landowner") against Cowboy
Pipeline Service Company, Inc. ("Cowboy"), CPSC International, Inc. ("CPSC") and
the  Company  (collectively  referred  as  the  "Defendants")  alleging that the
Defendants had illegally trespassed on the Landowner's property (the "Property")
in  connection  with  the construction of the US-Mexico Pipeline and the Mexican
Terminal  Facilities  (the  "Complaint").  On  March  20,  2000,  the Defendants
settled  the  Complaint  (see  note  J).

On  March  14,  2000  CPSC  filed  for protection under Chapter 11 of the United
States  Bankruptcy  Code.  The  Company  is  reviewing  its  legal  options.

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


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  Continued

CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER

As of January 31, 2000, the Company has a $10.0 million credit facility with RZB
Finance  L.L.C. (RZB) for demand loans and standby letters of credit (RZB Credit
Facility)  to  finance  the  Company's  purchase  of  LPG.  Under the RZB Credit
Facility,  the  Company  pays  a  fee  with  respect  to  each  letter of credit
thereunder  in  an  amount  equal  to  the greater of (i) $500, (ii) 2.5% of the
maximum face amount of such letter of credit, or (iii) such higher amount as may
be agreed to between the Company and RZB.  Any amounts outstanding under the RZB
Credit  Facility  shall accrue interest at a rate equal to the rate announced by
the  Chase  Manhattan  Bank  as  its  prime rate plus 2.5%.  Pursuant to the RZB
Credit  Facility,  RZB  has  sole  and  absolute discretion to terminate the RZB
Credit  Facility  and to make any loan or issue any letter of credit thereunder.
RZB  also  has  the  right  to demand payment of any and all amounts outstanding
under  the  RZB  Credit Facility at any time.  In connection with the RZB Credit
Facility,  the  Company  granted a mortgage, security interest and assignment in
any  and  all of the Company's real property, buildings, pipelines, fixtures and
interests  therein or relating thereto, including, without limitation, the lease
with the Brownsville Navigation District of Cameron County for the land on which
the  Company's Brownsville Terminal Facility is located, the Pipeline Lease, and
in  connection therewith agreed to enter into leasehold deeds of trust, security
agreements,  financing statements and assignments of rent, in forms satisfactory
to  RZB.  Under the RZB Credit Facility, the Company may not permit to exist any
lien,  security interest, mortgage, charge or other encumbrance of any nature on
any  of its properties or assets, except in favor of RZB, without the consent of
RZB.  The  Company's  President,  Chairman  and  Chief  Executive  Officer  has
personally  guaranteed  all of the Company's payment obligations with respect to
the  RZB  Credit  Facility.

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

As  of  January  31,  2000,  letters  of credit established under the RZB Credit
Facility  in  favor  of  Exxon,  PG&E  and  Koch  for  purchases  of LPG totaled
$5,722,580  of  which  $4,645,815 was being used to secure unpaid purchases.  In
addition,  as  of January 31, 2000, the Company had borrowed $3,707,035 from its
revolving line of credit under the RZB Credit Facility for purchases of LPG.  In
connection  with  these  purchases,  at January 31, 2000, the Company had unpaid
invoices  due  from PMI totaling $5,342,925, cash balances maintained in the RZB
Credit  Facility collateral account of $186,739 and inventory held in storage of
$3,858,327  (see  note  D).

OPERATING  LEASE  COMMITMENTS

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


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  I  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

CAPITALIZED  LEASE  COMMITMENT
------------------------------

The following is a schedule of the estimated future minimum lease payments under
the  Lease Agreements for the US-Mexico Pipeline and Mexican Terminal Facilities
together with the present value of the net minimum lease payments net of the 50%
interest  in Lease Agreements purchased during December 1999.   The Company will
record  the  capitalized  lease obligations upon the Substantial Completion Date
(see  note  J).

<TABLE>
<CAPTION>
<S>                                                                  <C>
Total minimum lease payments. . . . . . . . . . . . . . . . . . . .  $   28,260,000

Less:  Amount representing estimated executory costs for operations    (  3,600,000)
                                                                     ---------------

                                                                         24,660,000

Less:  Amounts related to the purchased interest - see note J . . .   (  11,304,000)
                                                                     ---------------

Net minimum lease payments. . . . . . . . . . . . . . . . . . . . .      13,356,000

Less:  Amount representing interest . . . . . . . . . . . . . . . .    (  7,356,000)
                                                                     ---------------

Present value of net minimum lease payments . . . . . . . . . . . .  $    6,000,000
                                                                     ===============
</TABLE>

In  connection  with  the  Addendum  and  the  Letter Agreement, the Company may
acquire  the  remaining  50% interest in the Lease Agreements.  At the time that
the  Company  has  purchased the remaining 50% interest in the Lease Agreements,
the  Company  will  no longer record any capitalized lease obligations (see note
J).

NOTE  J  -  LPG  EXPANSION  PROGRAM

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

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

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


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  Continued

In connection with the Expansion, the Company and CPSC entered into two separate
Lease  / Installation Purchase Agreements, as amended, (the "Lease Agreements"),
whereby  CPSC agreed to construct and maintain the US-Mexico Pipeline (including
an additional pipeline to accommodate refined products) and the Mexican Terminal
Facilities  and agreed to lease these assets to the Company.  Under the terms of
the Lease Agreements, the Company is required to make monthly rental payments of
approximately  $157,000,  beginning  the  date  that  the US-Mexico Pipeline and
Mexican  Terminal  Facilities reach substantial completion, as defined under the
Lease Agreements (the "Substantial Completion Date").  During January 2000, CPSC
notified  the  Company  that  the  Substantial Completion Date had occurred.  In
addition, the Company has agreed to provide a lien on certain assets, leases and
contracts  which are currently pledged to RZB, and provide CPSC with a letter of
credit  of  approximately  $1,000,000  (the "LOC").  The Company is currently in
negotiations  with  RZB and CPSC concerning RZB's subordination of RZB's lien on
certain  assets,  leases  and  contracts.  The  Company  also  has the option to
purchase  the  US-Mexico Pipeline and the Mexican Terminal Facilities at the end
of  the  10th  year  anniversary  and  15th  year anniversary for $5,000,000 and
$100,000,  respectively.  Under  the  terms  of  the  Lease  Agreements, CPSC is
required  to  pay  all  costs  associated  with  the  design,  construction  and
maintenance  of  the  US-Mexico  Pipeline  and  Mexican Terminal Facilities (the
"Costs").  As  of January 31, 2000, the Company has spent approximately $683,000
related to the Costs, which are included in other costs paid by the Company (see
note  C).

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

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

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

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

As  a  result  of the purchase of the 50% interest in the US-Mexico Pipeline and
Mexican  Terminal  Facilities,  including a 50% interest in the underlying Lease
Agreements,  the  Company  is  only  required  to  provide 50% of the collateral
originally  agreed  to  under  the  Lease  Agreements.


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  Continued

On  February  21,  2000, the Company and CPSC entered into a letter of agreement
(the  "Letter Agreement") whereby the Company modified the terms associated with
acquiring  the  remaining  50%  interest  in  the US-Mexico Pipeline and Mexican
Terminal  Facilities,  whereby  the Company will only be required to make a cash
payment  of  $4,500,000  ($2,000,000  to  be  paid on or prior to March 3, 2000,
$1,000,000 payable on or before August 21, 2000 and $1,500,000 payable in twelve
equal  monthly  installments  beginning March 31, 2000) and warrants to purchase
200,000  shares of common stock of the Company exercisable for three years at an
exercise  price  of  $4.00  per  share.  In  addition, the Company agreed to pay
Cowboy  $150,000  on  or  before June 1, 2000 as full satisfaction of a disputed
claim  arising  from a previous consulting agreement entered into between Cowboy
and  the Company.  The Company also agreed that all payments made by the Company
on  behalf  of  CPSC  in  connection  with  the Lease Agreements (see note C) be
assumed  by  the  Company.  The  Company  has yet to make any payments under the
Letter  Agreement and is not obligated until CPSC provides the Company the among
other  things,  proof of ownership and lease rights (see following paragraph) in
connection  with  the  US-Mexico  Pipeline and Mexican Terminal Facilities.  The
closing  of  the  purchase  is  subject to satisfactory transfer of title to all
assets  relating  to the US-Mexico Pipeline  and Mexican Terminal Facilities and
execution  of  formal  agreements.

In  connection  with  the  lawsuit  filed on February 24, 2000 (see note I), the
Company  discovered that CPSC had not fulfilled all of its obligations under the
Lease Agreements and therefore the Substantial Completion Date has not occurred.
As  a  result,  additional  amounts  may  be  required  to reach the Substantial
Completion  Date.  If  CPSC  is  not able to complete the US-Mexico Pipeline and
Mexican  Terminal Facilities, the Company may incur additional costs to complete
the  US-Mexico Pipeline and Mexican Terminal Facilities, the amount of which can
not  presently  be  determined.  As  described  earlier,  any  additional  costs
incurred  by  the  Company may be offset against future rental obligations under
the  Lease  Agreements  or  against  amounts required to be paid to purchase the
remaining  50%  interest  in  the  US-Mexico  Pipeline  and  Mexican  Terminal
Facilities.

For  financial  accounting  purposes,  the  Lease Agreements are capital leases.
Therefore,  the assets and related liabilities will be recorded in the Company's
balance sheet on the Substantial Completion Date (see note I) for the portion of
the  obligations under the Lease Agreements which have not been purchased by the
Company.

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

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

PennMex, Tergas or Termatsal are currently the owners of the land which is being
utilized  for the Mexican Pipeline and Mexican Terminal Facilities, have entered
into  leases associated with the Saltillo Terminal Facilities, have been granted
the permit for the Mexican Pipeline, have been granted and/or are expected to be
granted  permits  to  operate  the  Mexican Terminal Facilities and the Saltillo
Terminal  Facilities,  or have title to the assets paid for by CPSC to construct
the  Mexican Pipeline and Mexican Terminal Facilities.  In addition, the Company
has  advanced  funds  (totaling  approximately  $790,000 at January 31, 2000) to
PennMex,  Tergas or Termatsal in connection with the purchase of property, plant
and  equipment associated with the construction of the Mexican Pipeline, Mexican
Terminal  Facilities and the Saltillo Terminal Facilities, which are included in
other  costs  paid  by  the  Company  (see  note  C).


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  J  -  LPG  EXPANSION  PROGRAM  -  Continued

During  the  years  ended  July  31,  1998 and 1999 and for the six months ended
January  31,  2000,  the  Company  paid PennMex $181,000, $125,000 and $121,312,
respectively,  for  Mexico  related expenses incurred by that corporation on the
Company's  behalf.  Such  amounts  were  expensed.

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

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

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

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

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

NOTE  K  -  REALIZATION  OF  ASSETS

The  accompanying  financial  statements  have  been prepared in conformity with
generally  accepted accounting principles, which contemplate continuation of the
Company  as  a  going concern.  The Company has had an accumulated deficit since
inception,  has  used  cash  in  operations,  and  has  had a deficit in working
capital.  In  addition,  the  Company  is involved in litigation, the outcome of
which  cannot  be  determined  at  the  present  time.  Although the Company has
entered  into  the  Lease  Agreements,  there  exists  significant uncertainties
related  to  the  substantial  completion  of the US-Mexico Pipeline and Mexican
Terminal Facilities (see note J).  In addition, the acquisition of the interests
in  PennMex  and  the operating agreements among the Company, Tergas, PennMex or
Termatsal  have  yet to be consummated.  As discussed in note A, the Company has
historically  depended  heavily  on  sales  to  one  major  customer.

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


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  K  -  REALIZATION  OF  ASSETS  -  Continued

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

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

NOTE  L  -  CONTRACTS

LPG  BUSINESS

The  Company  has  entered into a sales agreement, as amended (the "Agreement"),
with  PMI, its major customer, to provide a minimum monthly volume of LPG to PMI
through  March 31, 2000.  Sales to PMI for the six months ended January 31, 2000
totaled  $34,883,855,  representing approximately 100% of total revenues for the
period.  The  Company  is  currently purchasing LPG from major suppliers to meet
the  minimum  monthly  volumes required in the Agreement.  The suppliers' prices
are  below  the  sales  price  provided  for  in  the  Agreement.

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

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

The Exxon Supply Contract currently requires that the Company purchase a minimum
supply  of LPG, which is significantly higher than committed sales volumes under
the PMI Sales Agreement.  In addition, the Company is required to pay additional
fees  associated with the Additional Propane Supply, which will increase its LPG
costs by a minimum of $.01 per gallon without considering the actual cost of the
propane  charged  to  the  Company  from  other  suppliers.

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

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


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  L  -  CONTRACTS  -  Continued

In  March  2000, the Company and Koch entered into a three year supply agreement
(the  "Koch  Supply Contract") whereby Koch has agreed to supply and the Company
has  agreed  to take, a monthly average of 8,200,000 gallons (the "Koch Supply")
of  propane  beginning  April  1, 2000, subject to the actual amounts of propane
purchased  by  Koch  from  the  refinery  owned by its affiliate, Koch Petroleum
Group, L.P. In connection with the Koch Supply Contract, the sales price charged
to  the  Company may be adjusted during each year of the contract (the "Contract
Year") if Koch receives a bona-fide third party offer prior to the Contract Year
for  the  Koch Supply and the Company agrees to accept such price adjustment for
the  Contract  Year  at  issue,  otherwise  the  Koch  Supply  Contract shall be
terminated.  Furthermore,  the  Company  has  agreed  to  pay additional charges
associated  with  the construction of a new pipeline interconnection which would
allow  deliveries  of  the  Koch  Supply  into  the  CCPL.

In  connection  with  the  delivery  of  the  Koch Supply, Exxon has yet to make
operational  the  CCPL.  Accordingly, the Company will not be able to accept the
Koch  Supply  until the completion of the CCPL.  During the period April 1, 2000
to the date the CCPL is completed, the Company will arrange  for the sale of the
Koch Supply to third parties (the "Unaccepted Koch  Supply Sales").  The Company
anticipates that the net cost to the Company in connection  with  the Unaccepted
Koch Supply Sales will be between $0.00 per gallon  and  $.025  per  gallon.

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

During  March  2000,  the  Company  and  Duke Energy NGL Services, Inc. ("Duke")
entered  into a three year supply agreement (the "Duke Supply Contract") whereby
Duke  has agreed to supply and the Company has agreed to take, a monthly average
of  1,900,000  gallons  (the  "Duke  Supply")  of propane or propane/butane mix,
beginning April 1, 2000.

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

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

The  Company may incur significant additional costs associated with the storage,
disposal  and/or  changes  in  LPG prices resulting from the excess of the Plant
Commitment,  PG&E  Supply, Koch Supply or Duke Supply over actual sales volumes.
Furthermore,  the  Company's  existing  letter  of  credit  facility  may not be
adequate and the Company may require additional sources of financing to meet the
letter  of  credit requirements under the Exxon Supply Contract, the PG&E Supply
Agreement,  the  Koch  Supply  Contract  or  the  Duke  Supply  Contract.

CONSULTING  COMMISSION  AGREEMENT

The  Company  has entered into an incentive arrangement with several consultants
(the  "Arrangement")  whereby  the  Company will pay a commission based on $.001
plus  5% of every $.01 of gross margin in excess of $.0425 earned by the Company
in  connection  with  the  LPG sales of the Company, so long as the volume is in
excess  of 7.5 million gallons per month.  The Arrangement became effective July
1,  1999  and  is  renewable  annually.  The  amounts owed by the Company to the
Consultants  for  the  period from August 1, 1999 through January 31, 2000, were
not  material.


                                       23
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

NOTE  M  -  AWARD  FROM  LITIGATION

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

In  connection  with the lawsuit, IBC-Brownsville filed an appeal with the Texas
Court  of  Appeals  on  January 21, 1997.  The Company responded on February 14,
1997.  On September 18, 1997, the appeal was heard by the Texas Court of Appeals
and on June 18, 1998, the Texas Court of Appeals issued its opinion in the case,
ruling  essentially in favor of the Company.  IBC-Brownsville sought a rehearing
of  the  case  on  August  3,  1998.  On December 30, 1998, the Court denied the
IBC-Brownsville  request  for  rehearing.  On February 16, 1999, IBC-Brownsville
(the  "Petitioner") filed a petition for review with the Supreme Court of Texas.
On May 10, 1999 the Company responded to the Supreme Court of Texas' request for
response  of  the  Petitioner's  petition  for  review.  On  May  27,  1999, the
Petitioner  filed  a  reply  with  the  Supreme  Court of Texas to the Company's
response of the Petitioner's petition for review.  On June 10, 1999, the Supreme
Court  of  Texas denied the Petitioner's petition for review.  During July 1999,
the  Petitioner  filed  an  appeal with the Supreme Court of Texas to rehear the
Petitioner's  petition  for  review.  On  August  26, 1999, the Supreme Court of
Texas  upheld its decision to deny the Petitioner's petition for review.  During
November  1999,  the Petitioner filed a petition for writ of certiorari with the
United  States  Supreme  Court.  On  January 24, 2000, the United States Supreme
Court  denied  the Petitioner's request for review and the Judgment became final
and  binding.  During  March  2000,  the  Company  received  a cash payment from
IBC-Brownsville  of  $4,254,347  of which approximately $1,200,000 is to be paid
for  legal  fees  and  for  other  expenses  associated  with  the  Judgment.

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


                                       24
<PAGE>
ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
             RESULTS  OF  OPERATIONS

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

FORWARD-LOOKING  STATEMENTS

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

OVERVIEW

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

     Historically,  the  Company  has  derived substantially all of its revenues
from  sales  of  LPG  to PMI, its primary customer.  During the six months ended
January  31,  2000,  the  Company derived approximately all of its revenues from
sales  of  LPG.

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

LPG  SALES

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

<TABLE>
<CAPTION>
                                 Three Months Ended           Six Months Ended
                             --------------------------  --------------------------
                             January 31,   January 31,   January 31,   January 31,
                                 2000          1999          2000          1999
                             ------------  ------------  ------------  ------------
<S>                          <C>           <C>           <C>           <C>
Volume Sold
  LPG (millions of gallons)          36.6          31.5          70.4          54.0

Average sales price

  LPG (per gallon). . . . .  $       0.52  $       0.26  $       0.50  $       0.27
</TABLE>


                                       25
<PAGE>
RESULTS  OF  OPERATIONS

     THREE  MONTHS  ENDED  JANUARY 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
JANUARY  31,  1999

     Revenues.  Revenues  for the three months ended January 31, 2000 were $19.0
million  compared with $8.4 million for the three months ended January 31, 1999,
an  increase  of  $10.6  million  or  127.5%.  Of this increase $2.6 million was
attributable  to increased volumes of LPG sold in the three months ended January
31,  2000 and $8.0 million was attributable to increased average sales prices of
LPG  sold  in  the  three  months  ended  January  31,  2000.

     Cost  of  sales.  Cost of sales for the three months ended January 31, 2000
was  $17.8 million compared with $7.4 million for the three months ended January
31,  1999,  an  increase  of  $10.4  million  or 140.4%.  Of this increase  $2.4
million  was  attributable to an increased volumes of LPG purchased in the three
months  ended  January  31,  2000,  $7.7  million  was attributable to increased
average sales prices of LPG purchased in the three months ended January 31, 2000
and  $370,612  was attributable to increased operating costs associated with LPG
during  the  three  months  ended  January  31,  2000.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative expenses were $1.0 million for the three months ended January 31,
2000  compared  with  $644,692  for  the three months ended January 31, 1999, an
increase  of  $367,307  or  57.0%.  This  increase was primarily attributable to
additional  professional fees incurred during the three months ended January 31,
2000.

     Other  income  and  expense,  net.  Other  income  (expense),  net was $2.8
million  for  the three months ended January 31, 2000 compared with $787,312 for
the  three  months  ended  January  31,  1999, an increase of $2.0 million.  The
increase  in  other  income,  net was due primarily to increased income from the
award from litigation of $2.1 million which was recorded during the three months
ended  January  31, 2000 compared with the award from litigation recorded during
the  three  months  ended  January  31,  1999.

     Income  tax.   During  the three months ended January 31, 2000, the Company
recorded  a  provision for income taxes of $70,000, representing the alternative
minimum  tax  due.  Due  to the availability of net operating loss carryforwards
($8.0 million at July 31, 1999), the Company did not incur any additional income
tax  expense  during  the  three  months  ended  January  31,  2000.  Due to the
availability  of  net  operating  loss  carryforwards  at  June 31, 1998 of $8.8
million,  there was no income tax expense recorded during the three months ended
January  31,  1999.   The  ability to use such net operating loss carryforwards,
which  expire  in  the  years  2009 to 2018, may be significantly limited by the
application of the "change in ownership" rules under Section 382 of the Internal
Revenue  Code.  The Company can receive a credit against any future tax payments
due  to  the  extent  of  prior  alternate  minimum  taxes  paid.

     SIX  MONTHS  ENDED  JANUARY  31,  2000  COMPARED  WITH THE SIX MONTHS ENDED
JANUARY  31,  1999

     Revenues.  Revenues  for  the  six months ended January 31, 2000 were $35.0
million  compared  with $14.8 million for the six months ended January 31, 1999,
an  increase  of  $20.2  million  or  135.8%.  Of this increase $8.2 million was
attributable  to  increased  volumes of LPG sold in the six months ended January
31, 2000 and $12.1 million was attributable to increased average sales prices of
LPG  sold  in  the  six  months  ended  January  31,  2000.

     Cost of sales.  Cost of sales for the six months ended January 31, 2000 was
$32.8  million  compared with $13.3 million for the six months ended January 31,
1999,  an  increase  of $19.5 million or 146.1%.  Of this increase  $7.4 million
was  attributable  to  an  increased  volumes of LPG purchased in the six months
ended  January  31,  2000,  $11.8  million was attributable to increased average
sales  prices  of  LPG  purchased  in  the six months ended January 31, 2000 and
$339,596  was  attributable  to  increased  operating  costs associated with LPG
during  the  six  months  ended  January  31,  2000.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were $1.6 million for the six months ended January 31,
2000  compared  with  $1.2 million for the six months ended January 31, 1999, an
increase  of  $397,735  or  33.7%.  This  increase was primarily attributable to
additional  professional  fees  incurred during the six months ended January 31,
2000.


                                       26
<PAGE>
     Other  income  and  expense,  net.  Other  income  (expense),  net was $2.7
million for the six months ended January 31, 2000 compared with $695,337 for the
six months ended January 31, 1999, an increase of $2.0 million.  The increase in
other  income,  net  was  due  primarily to increased income from the award from
litigation  of  $2.1  million  which  was  recorded  during the six months ended
January 31, 2000 compared with the award from litigation recorded during the six
months  ended  January  31,  2000.

     Income  tax.   During  the  six  months ended January 31, 2000, the Company
recorded  a  provision for income taxes of $70,000, representing the alternative
minimum  tax  due.  Due  to the availability of net operating loss carryforwards
($8.0 million at July 31, 1999), the Company did not incur any additional income
tax  expense  during  the  six  months  ended  January  31,  2000.  Due  to  the
availability  of  net  operating  loss  carryforwards  at  June 31, 1998 of $8.8
million,  there  was  no income tax expense recorded during the six months ended
January  31,  1999.   The  ability to use such net operating loss carryforwards,
which  expire  in  the  years  2009 to 2018, may be significantly limited by the
application of the "change in ownership" rules under Section 382 of the Internal
Revenue  Code.  The Company can receive a credit against any future tax payments
due  to  the  extent  of  prior  alternate  minimum  taxes  paid.

LIQUIDITY  AND  CAPITAL  RESOURCES

     General.  The Company has had an accumulated deficit since its inception in
1992,  has used cash in operations and has had a deficit in working capital.  In
addition,  the Company is involved in litigation, the outcome of which cannot be
determined at the present time.  Although the Company has entered into the Lease
Agreements,  there  exists  significant uncertainties related to the substantial
completion of the US-Mexico Pipeline and Mexican Terminal Facilities (see note J
to  the  unaudited  consolidated  financial  statements).  The  Company  depends
heavily  on sales to one major customer.  The Company's sources of liquidity and
capital  resources  historically  have  been  provided  by  sales  of  LPG  and
CNG-related  equipment,  proceeds  from the issuance of short-term and long-term
debt,  revolving  credit facilities and credit arrangements, sale or issuance of
preferred  and  common  stock  of  the Company and proceeds from the exercise of
warrants  to  purchase  shares  of  the  Company's  common  stock.

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

<TABLE>
<CAPTION>
                                                           Six months Ended
                                                     ----------------------------
                                                      January 31,    January 31,
                                                         2000           1999
                                                     -------------  -------------
<S>                                                  <C>            <C>
Net cash provided by (used in) operating activities  $     (4,494)  $        167
Net cash (used in) investing. . . . . . . . . . . .        (4,484)          (171)
  Activities
Net cash provided by financing activities . . . . .         9,201            357
                                                     -------------  -------------
Net increase in cash  . . . . . . . . . . . . . . .  $        223   $        353
                                                     =============  =============
</TABLE>

     PMI  Sales  Agreement.  The PMI Sales Agreement is effective for the period
from October 1, 1998 through September 30, 1999 and provides for the purchase by
PMI  of  minimum  monthly  volumes of LPG aggregating a minimum annual volume of
69.0  million gallons, similar to minimum volume requirements under the previous
sales  agreement  with  PMI  effective during the period from October 1, 1997 to
September  30, 1998.  During June 1999, the PMI Sales Agreement was amended (the
"PMI  Sales  Agreement Amendment") to extend the expiration date until March 31,
2000 and to provide the Company with additional margins for any volume exceeding
7.0  million  gallons per month during the summer period (April - September) and
9.0 million gallons per month during the winter period (October - March).  Under
the PMI Sales Agreement Amendment, PMI is obligated to purchase a minimum volume
of  45.0  million  gallons  during  October  1999  through  March  2000.

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


                                       27
<PAGE>
     Effective  October  1,  1999, the Company and Exxon entered into a ten year
LPG  supply  contract (the "Exxon Supply Contract"), whereby Exxon has agreed to
supply  and  the  Company  has  agreed to take, the supply of propane and butane
available at Exxon's King Ranch Gas Plant (the "Plant") which is estimated to be
between  10.1  million  gallons  per  month  and  13.9 million gallons per month
blended  in  accordance  with the specifications as outlined under the PMI Sales
Agreement  (the  "Plant Commitment"), with a minimum of 10.1 million gallons per
month  guaranteed  by  Exxon  to  be  provided  to  the  Company.

     In  addition,  under  the  terms  of  the  Exxon  Supply Contract, Exxon is
required to make operational its Corpus Christi Pipeline (the "CCPL") which will
allow  the Company to acquire an additional supply of propane from other propane
suppliers  located  near Corpus Christi, Texas (the "Additional Propane Supply),
and  bring  the  Additional  Propane Supply to the Plant (the "CCPL Supply") for
blending to the proper specifications outlined under the PMI Sales Agreement and
then  delivered  into  the  Pipeline.  In  connection  with the CCPL Supply, the
Company  has  agreed  to  supply  a minimum of 7.7 million gallons into the CCPL
during  the  first  quarter  from  the  date  that  the  CCPL  is  operational,
approximately  92.0 million gallons the following year and 122.0 million gallons
each  year  thereafter  and  continuing  for four years.  The CCPL has yet to be
completed.

     The  Exxon  Supply  Contract currently requires that the Company purchase a
minimum  supply  of  LPG,  which  is  significantly  higher than committed sales
volumes  under the PMI Sales Agreement.  In addition, the Company is required to
pay  additional  fees  associated with the Additional Propane Supply, which will
increase  its  LPG costs by a minimum of $.01 per gallon without considering the
actual  cost  of  the  propane  charged  to  the  Company  from other suppliers.

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

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

     In  March  2000,  the Company and Koch Hydrocarbon Company ("Koch") entered
into a three year supply agreement (the "Koch Supply Contract") whereby Koch has
agreed  to  supply  and the Company has agreed to take, a monthly average of 8.2
million  gallons (the "Koch Supply") of propane beginning April 1, 2000, subject
to  the  actual  amounts of propane purchased by Koch from the refinery owned by
its  affiliate,  Koch  Petroleum  Group, L.P. In connection with the Koch Supply
Contract,  the  sales  price  charged to the Company may be adjusted during each
year  of  the  contract (the "Contract Year") if Koch receives a bona-fide third
party  offer  prior  to  the  Contract  Year for the Koch Supply and the Company
agrees to accept such price adjustment for the Contract Year at issue, otherwise
the  Koch  Supply  Contract  shall  be terminated.  Furthermore, the Company has
agreed  to  pay  additional  charges  associated  with the construction of a new
pipeline  interconnection  which  would allow deliveries of the Koch Supply into
the  CCPL.

     In  connection  with the delivery of the Koch Supply, Exxon has yet to make
operational  the  CCPL.  Accordingly, the Company will not be able to accept the
Koch Supply until the completion of the CCPL.  During  the  period April 1, 2000
to the date the CCPL is completed, the Company will arrange  for the sale of the
Koch Supply to third parties (the "Unaccepted Koch  Supply Sales").  The Company
anticipates that the net cost to the Company in connection  with  the Unaccepted
Koch Supply Sales will be between $0.00 per gallon  and  $.025  per  gallon.

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


                                       28
<PAGE>
     During  March 2000, the Company and Duke Energy NGL Services, Inc. ("Duke")
entered  into a three year supply agreement (the "Duke Supply Contract") whereby
Duke  has agreed to supply and the Company has agreed to take, a monthly average
of  1.9  million  gallons  (the "Duke Supply") of propane or propane/butane mix,
beginning April 1, 2000.

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

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

     In  connection  with the Plant Commitment, the PG&E Supply, the Koch Supply
and the Duke Supply, the Company anticipates lower gross margins on its sales of
LPG  under  the  PMI  Sales  Agreement of approximately 10% - 40% as a result of
increased  LPG costs compared with the previous agreements to purchase LPG.  The
Company may incur significant additional costs associated with storage, disposal
and/or  changes in LPG prices resulting from the excess of the Plant Commitment,
PG&E  Supply, Koch Supply or Duke Supply (the "Excess Supply") over actual sales
volumes.

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

     The  ability  of  the  Company  to increase sales of LPG into Mexico in the
future  is  largely  dependent  on  the  Company's  ability  to negotiate future
contracts  with  PMI and/or with local Mexican distributors once Deregulation in
Mexico  is implemented.  In addition, there can be no assurance that the Company
will  be  able  to obtain terms as favorable as the PMI Sales Agreement.  In the
event that the Company is unable to meet its intended LPG sales objectives, then
the  Company  may incur significant losses as a result of not being able to meet
its  minimum  purchase  requirements  under  the Exxon Supply Contract, the PG&E
Supply  Agreement,  the Koch Supply Contract and the Duke Supply Contract or the
costs  of  LPG  may  be  in  excess  of  prices  received  on  sales  of  LPG.

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

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


                                       29
<PAGE>
As  a  result  of the Exxon Supply Contract, the PG&E Supply Agreement, the Koch
Supply  Contract and the Duke Supply Contract, the Company believes that its has
an adequate supply of LPG to satisfy the requirements of PMI under the PMI Sales
Agreement  and to meet its future sales obligations, if any, upon the expiration
of  the  PMI  Sales  Agreement.  Due  to  strategic  location  of  the Company's
pipelines  and terminal facilities, the Company believes that it will be able to
achieve  higher  margins  on  the  sale  of  LPG  in  the  future.

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

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

     Present  Pipeline  capacity  is approximately 265 million gallons per year.
During  the  six  months  ended  January 31, 2000, the Company sold 70.4 million
gallons  of  LPG  which  flowed  through  the  Pipeline.  The Company intends to
increase  the Pipeline's capacity through the installation of additional pumping
equipment.   (See  "LPG  Expansion  Program"  below).

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

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

     Management  believes  that  as  a result of the Expansion, the Company will
have  additional  strengths due to its ability to penetrate further into Mexico,
provide  greater  volumes  of  LPG  as a result of reduced cross border trucking
delays and greater access to Mexican distribution resources and the potential to
achieve  greater  margins  on  its  LPG  sales.

     In  addition  to the Expansion, the Company has begun construction of (i) a
midline  pump  station  on  the Pipeline (estimated  cost of $1.5 million), (ii)
expansion of the Brownsville Terminal Facility to  allow  for  the  loading  and
unloading  of  railcars,  (iii)  has  begun  construction  of  an additional LPG
terminal facility in Saltillo,  Mexico  (the  "Saltillo Terminal Facilities") at
an  estimated  cost of $500,000,  and (iv) completed the purchase of a tank farm
for a purchase price of $195,000 (plus costs related to the clean up of the tank
farm),  which  after  additional  improvements  will  be  capable of storing and
distributing refined products.  The Saltillo Terminal Facilities, when complete,
will allow for the distribution of LPG by railcars, which will directly link the
Company's  Brownsville  Terminal  Facility and the Saltillo Terminal Facilities.
The  Saltillo  Terminal  Facilities  will  contain  storage  to  accommodate
approximately  100,000  gallons of  LPG.  In connection with the purchase of the
tank farm,  the  Company  entered  into a lease agreement for rental of the land
which  the  tank  farm  occupies  and for the use of a refined products pipeline
connecting  the  tank  farm  with public dock facilities.  The completion of the
midline pump station  will increase  the capacity of the Pipeline to 360 million
gallons per year.


                                       30
<PAGE>
In  connection  with  the  Expansion,  the  Company and CPSC International, Inc.
("CPSC")  entered into two separate Lease / Installation Purchase Agreements, as
amended, (the "Lease Agreements"), whereby CPSC agreed to construct and maintain
the  US-Mexico Pipeline (including an additional pipeline to accommodate refined
products)  and  the Mexican Terminal Facilities and agreed to lease these assets
to  the  Company.  Under  the  terms  of  the  Lease  Agreements, the Company is
required  to  make  monthly rental payments of approximately $157,000, beginning
the  date  that  the  US-Mexico  Pipeline  and Mexican Terminal Facilities reach
substantial  completion, as defined under the Lease Agreements (the "Substantial
Completion  Date").  During  January  2000,  CPSC  notified the Company that the
Substantial  Completion  Date had occurred.  In addition, the Company has agreed
to  provide  a  lien on certain assets, leases and contracts which are currently
pledged  to  RZB, and provide CPSC with a letter of credit of approximately $1.0
million (the "LOC").  The Company is currently in negotiations with RZB and CPSC
concerning  RZB's  subordination  of  RZB's  lien  on certain assets, leases and
contracts.  The  Company  also has the option to purchase the US-Mexico Pipeline
and  the Mexican Terminal Facilities at the end of the 10th year anniversary and
15th  year  anniversary  for $5.0 million and $100,000, respectively.  Under the
terms of the Lease Agreements, CPSC is required to pay all costs associated with
the  design,  construction and maintenance of the US-Mexico Pipeline and Mexican
Terminal  Facilities  (the  "Costs").  As  of  January 31, 2000, the Company has
spent  approximately  $683,000 related to the Costs, which are included in other
costs  paid  by  the Company (see note C to the unaudited consolidated financial
statements).

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

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

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

     In connection with the Addendum, the Company is also entitled to offset any
amounts  which  have  been  paid by the Company on behalf of CPSC related to the
completion of CPSC's obligations under the Lease Agreements, except for the $3.0
million  paid  for  the  50%  interest,  described herein, against the Company's
future  rental  obligations under the Lease Agreements and/or against the option
price  of  $6.0  million to purchase the remaining 50% interest in the US-Mexico
Pipeline  and  Mexican  Terminal  Facilities,  including  a  50% interest in the
underlying  Lease  Agreements.  The  Company may also offset against its monthly
rent  obligations under the Lease Agreements any amounts to be received from its
interests  in  the  Lease Agreements so long as the Company is current on all of
the  lease  payments  required  under  the  Lease  Agreements.

     As  a  result of the purchase of the 50% interest in the US-Mexico Pipeline
and  Mexican  Terminal  Facilities,  including  a 50% interest in the underlying
Lease  Agreements, the Company is only required to provide 50% of the collateral
originally  agreed  to  under  the  Lease  Agreements.


                                       31
<PAGE>
     On  February  21,  2000,  the  Company  and  CPSC  entered into a letter of
agreement  (the  "Letter  Agreement")  whereby  the  Company  modified the terms
associated  with  acquiring the remaining 50% interest in the US-Mexico Pipeline
and  Mexican  Terminal  Facilities, whereby the Company will only be required to
make  a  cash  payment  of  $4.5 million ($2.0 million to be paid on or prior to
March  3,  2000,  $1.0  million  payable  on  or before August 21, 2000 and $1.5
million  payable  in twelve equal monthly installments beginning March 31, 2000)
and  warrants  to  purchase  200,000  shares  of  common  stock  of  the Company
exercisable  for  three  years  at  an  exercise  price  of $4.00 per share.  In
addition,  the  Company  agreed  to  pay  Cowboy  Pipeline Service Company, Inc.
("Cowboy") $150,000 on or before June 1, 2000 as full satisfaction of a disputed
claim  arising  from a previous consulting agreement entered into between Cowboy
and  the Company.  The Company also agreed that all payments made by the Company
on  behalf  of  CPSC  in connection with the Lease Agreements (see note C to the
unaudited  consolidated  financial  statements)  be assumed by the Company.  The
Company  has  yet  to  make  any  payments under the Letter Agreement and is not
obligated  until  CPSC  provides  the  Company  the among other things, proof of
ownership  and  lease  rights  (see  following paragraph) in connection with the
US-Mexico Pipeline and Mexican Terminal Facilities.  The closing of the purchase
is  subject  to  satisfactory  transfer  of  title to all assets relating to the
US-Mexico  Pipeline  and  Mexican  Terminal  Facilities  and execution of formal
agreements.

     In  connection  with  the lawsuit filed on February 24, 2000 (see note I to
the  unaudited  consolidated  financial statements), the Company discovered that
CPSC  had  not  fulfilled  all of its obligations under the Lease Agreements and
therefore  the  Substantial  Completion  Date  has  not  occurred.  As a result,
additional amounts may be required to reach the Substantial Completion Date.  If
CPSC  is  not  able  to  complete  the  US-Mexico  Pipeline and Mexican Terminal
Facilities,  the  Company  may  incur additional costs to complete the US-Mexico
Pipeline  and Mexican Terminal Facilities, the amount of which can not presently
be  determined.  As  described  earlier,  any  additional  costs incurred by the
Company  may  be  offset  against  future  rental  obligations  under  the Lease
Agreements or against  amounts required to be paid to purchase the remaining 50%
interest  in  the  US-Mexico  Pipeline  and  Mexican  Terminal  Facilities.

     For financial accounting purposes, the Lease Agreements are capital leases.
Therefore,  the assets and related liabilities will be recorded in the Company's
balance  sheet  on  the  Substantial  Completion  Date  for  the  portion of the
obligations  under  the  Lease  Agreements  which have not been purchased by the
Company.

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

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

     PennMex,  Tergas or Termatsal are currently the owners of the land which is
being  utilized  for  the Mexican Pipeline and Mexican Terminal Facilities, have
entered  into leases associated with the Saltillo Terminal Facilities, have been
granted  the  permit  for  the  Mexican  Pipeline,  have been granted and/or are
expected  to  be  granted permits to operate the Mexican Terminal Facilities and
the  Saltillo  Terminal Facilities, or have title to the assets paid for by CPSC
to construct the Mexican Pipeline and Mexican Terminal Facilities.  In addition,
the  Company  has advanced funds (totaling approximately $790,000 at January 31,
2000)  to  PennMex,  Tergas  or  Termatsal  in  connection  with the purchase of
property,  plant  and  equipment associated with the construction of the Mexican
Pipeline,  Mexican  Terminal  Facilities  and  the Saltillo Terminal Facilities,
which  are  included  in  other  costs  paid  by  the Company (see note C to the
unaudited  consolidated  financial  statements).

     During  the years ended July 31, 1998 and 1999 and for the six months ended
January  31,  2000,  the  Company  paid PennMex $181,000, $125,000 and $121,312,
respectively,  for  Mexico  related expenses incurred by that corporation on the
Company's  behalf.  Such  amounts  were  expensed.


                                       32
<PAGE>
     Foreign  Ownership  of  LPG  Operations.  PennMex, Tergas and Termatsal are
Mexican  companies  which  are owned 90%, 90% and 98%, respectively, by Jorge R.
Bracamontes  ("Bracamontes"),  an  officer  and  director of the Company and the
balance  by  other  citizens  of  Mexico.

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

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

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

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

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

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

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


                                       33
<PAGE>
Currently  the  Company  sells  LPG to PMI at its Brownsville Terminal Facility.
Upon the completion of the US - Mexico Pipeline and Mexican Terminal Facilities,
the Company will sell LPG to PMI at the U.S. border and transport the LPG to the
Mexican  Terminal Facilities through the US-Mexico Pipeline.  Upon Deregulation,
the  Company  intends to sell to independent Mexican LPG distributors as well as
PMI.

     Credit  Arrangements.  As  of  January  31,  2000,  the Company has a $10.0
million  credit  facility  with  RZB  Finance  L.L.C. (RZB) for demand loans and
standby  letters  of  credit  (RZB  Credit  Facility)  to  finance the Company's
purchase  of  LPG.  Under  the  RZB Credit Facility, the Company pays a fee with
respect to each letter of credit thereunder in an amount equal to the greater of
(i)  $500,  (ii)  2.5%  of  the maximum face amount of such letter of credit, or
(iii)  such  higher amount as may be agreed to between the Company and RZB.  Any
amounts  outstanding  under  the  RZB Credit Facility shall accrue interest at a
rate  equal  to the rate announced by the Chase Manhattan Bank as its prime rate
plus  2.5%.  Pursuant  to  the  RZB  Credit  Facility, RZB has sole and absolute
discretion  to  terminate  the RZB Credit Facility and to make any loan or issue
any  letter  of  credit thereunder.  RZB also has the right to demand payment of
any  and  all amounts outstanding under the RZB Credit Facility at any time.  In
connection  with  the  RZB  Credit  Facility,  the  Company  granted a mortgage,
security  interest and assignment in any and all of the Company's real property,
buildings,  pipelines,  fixtures  and  interests  therein  or  relating thereto,
including,  without  limitation,  the  lease  with  the  Brownsville  Navigation
District  of  Cameron  County  for  the  land on which the Company's Brownsville
Terminal  Facility  is  located, the Pipeline Lease, and in connection therewith
agreed  to  enter  into leasehold deeds of trust, security agreements, financing
statements and assignments of rent, in forms satisfactory to RZB.  Under the RZB
Credit  Facility,  the  Company  may  not  permit  to  exist  any lien, security
interest,  mortgage,  charge  or  other  encumbrance of any nature on any of its
properties  or  assets,  except in favor of RZB, without the consent of RZB. The
Company's  President,  Chairman  and  Chief  Executive  Officer  has  personally
guaranteed  all  of  the  Company's  payment obligations with respect to the RZB
Credit  Facility.

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

     As  of January 31, 2000, letters of credit established under the RZB Credit
Facility  in  favor  of  Exxon,  PG&E and Koch for purchases of LPG totaled $5.7
million  of  which  $4.6  million was being used to secure unpaid purchases.  In
addition, as of January 31, 2000, the Company had borrowed $3.7 million from its
revolving line of credit under the RZB Credit Facility for purchases of LPG.  In
connection  with  these  purchases,  at January 31, 2000, the Company had unpaid
invoices due from PMI totaling $5.3 million, cash balances maintained in the RZB
Credit  Facility collateral account of $186,739 and inventory held in storage of
$3.9  million.

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

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

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

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

     From  December  10, 1999 through January 18, 2000, and on February 2, 2000,
the  Company  completed  a series of related transactions in connection with the
private  placement  of  $5.0 million and $710,000, respectively, of subordinated
notes  (the "Notes") due the earlier of December 15, 2000 or upon the receipt of
proceeds  by  the  Company from any future debt or equity financing in excess of
$2.3 million.  Interest at 9% is due on June 15, 2000, and December 15, 2000 (or
the  maturity date, if earlier).  In connection with the Notes, the Company also


                                       34
<PAGE>
granted  the holders of the Notes, warrants (the "Warrants") to purchase a total
of  279,559  shares of common stock of the Company at an exercise price of $4.00
per share, exercisable through December 15, 2002 and the Company agreed to issue
to  the holders of the Notes, additional warrants (the "Additional Warrants") to
purchase a total of 213,066 shares of common stock of the Company at an exercise
price of $4.00 per share, exercisable through December 15, 2002 if the Notes are
not  repurchased  prior  to  90  days  from the original date of issuance of the
Notes.  The  Company  is  also  required  to  register  the  shares  issuable in
connection  with  exercise  of  the  Warrants  and the Additional Warrants on or
before  April  15,  2000.

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

     Under  the  terms  of  the  Notes,  the  Company  has  agreed to pledge the
Company's  interests  in  the  US-Mexico  Pipeline  and  the  Mexican  Terminal
Facilities.

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

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

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

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

     Judgment  in favor of the Company.  During March 2000, the Company received
the  cash portion of the Judgement from IBC-Brownsville of $4.3 million of which
approximately  $1.2  million  is  to  be  paid for legal fees and other expenses
associated  with  the  Judgment.


                                       35
<PAGE>
     Settlement  of  Litigation.  On  March  16,  1999,  the  Company settled in
mediation  a  lawsuit with its former chairman of the board, Jorge V. Duran.  In
connection  therewith  and  without  admitting  or denying liability the Company
agreed  to  pay Mr. Duran $250,000 in cash and the issuance of 100,000 shares of
common  stock  of  the  Company of which $100,000 is to be paid by the Company's
insurance  carrier.  The Company has agreed to register the stock in the future.
The  parties  have  agreed  to  extend  the  date which the payments required in
connection  with the settlement, including the issuance of the common stock, are
to  be  made.

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

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

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

FINANCIAL  ACCOUNTING  STANDARDS

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

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


ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

     None.


                                       36
<PAGE>
PART  II

ITEM  1.     LEGAL  PROCEEDINGS

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

ITEM  2.     CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

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

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

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

ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES

             None.

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

             None.

ITEM  5.     OTHER  INFORMATION

             None.

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

a.     Exhibits  and  Financial  Statement  Schedules

     The  following  Exhibits  are  incorporated  herein  by  reference:

EXHIBIT  NO.
------------

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

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

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

10.16      Addendum dated December 15, 1999 between CPSC International, Inc. and
           the  Company.

27.1       Financial  Data  Schedule.

b.     Reports  on  Form  8-K.

             None.


                                       37
<PAGE>
                                   SIGNATURES

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


                             PENN OCTANE CORPORATION



March 21, 2000               By: /s/ Ian T. Bothwell
                                 -------------------
                                 Ian T. Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                   Chief Financial Officer


                                       38
<PAGE>