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, 2001

                                       OR

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

          For  the  transition  period  from __________ to __________

                       Commission file number:  000-24394

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

           DELAWARE                                         52-1790357
(State or Other Jurisdiction                         (I.R.S. of Incorporation
      or Organization)                              Employer 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  March  5,  2001  was  14,412,011.


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


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

              Report on Review by Independent Certified Public Accountants             3

              Consolidated Balance Sheets as of January 31, 2001 (unaudited)         4-5
              and July 31, 2000

              Consolidated Statements of Operations for the three months
              and six months ended January 31, 2001 and 2000 (unaudited)               6

              Consolidated Statements of Cash Flows for the six months
              ended January 31, 2001 and 2000 (unaudited)                              7

              Notes to Consolidated Financial Statements (unaudited)                8-26

          2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                            27-39

          3.  Quantitative and Qualitative Disclosures About Market Risk              39

Part II   1.  Legal Proceedings                                                       40

          2.  Changes in Securities and Use of Proceeds                               40

          3.  Defaults Upon Senior Securities                                         40

          4.  Submission of Matters to a Vote of Security Holders                     40

          5.  Other Information                                                       40

          6.  Exhibits and Reports on Form 8-K                                     40-41

          7.  Signatures                                                              42
</TABLE>


                                        2
<PAGE>
               Review by Independent Certified Public Accountants


Board  of  Directors  and  Shareholders
Penn  Octane  Corporation

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

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

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

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


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

Brownsville, Texas
March 9, 2001


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

                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS


                                                                          January 31,
                                                                              2001       July 31,
                                                                          (Unaudited)      2000
                                                                          ------------  -----------
<S>                                                                       <C>           <C>
Current Assets

     Cash                                                                 $  1,427,872  $    25,491
     Trade accounts receivable, less allowance for doubtful accounts of
      $562,950 and $562,950 (note H)                                         7,186,835    3,816,685
     Notes receivable (note C and G)                                           428,697      770,016
     Inventories (note E)                                                    8,423,797    7,323,209
     Prepaid expenses and other current assets                                 643,948      338,187
     Property held for sale (note H)                                         1,908,000    1,908,000
                                                                          ------------  -----------
       Total current assets                                                 20,019,149   14,181,588
Property, plant and equipment - net (note D)                                17,741,897   16,756,816
Lease rights (net of accumulated amortization of $593,048 and $570,150)        560,991      583,889
Other non-current assets (note H)                                               21,121       14,870
                                                                          ------------  -----------
            Total assets                                                  $ 38,343,158  $31,537,163
                                                                          ============  ===========
</TABLE>


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


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

                    CONSOLIDATED BALANCE SHEETS - CONTINUED

                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                                      January 31,
                                                                                         2001           July 31,
                                                                                      (Unaudited)         2000
                                                                                    ---------------  --------------
<S>                                                                                 <C>              <C>
Current Liabilities

     Current maturities of long-term debt (note F)                                  $    3,780,516   $   3,859,266
     Short-term debt (note F)                                                            4,709,025       4,980,872
     Revolving line of credit (note H)                                                     994,857       3,538,394
     LPG trade accounts payable (note H)                                                12,822,985       5,226,958
     Deferred revenues (note M)                                                            561,750               -
     Other accounts payable and accrued liabilities                                      2,945,108       2,833,434
                                                                                    ---------------  --------------
       Total current liabilities                                                        25,814,241      20,438,924

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

Commitments and contingencies (notes G, H and M)                                                 -               -

Stockholders' Equity (note G)

     Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
     no shares issued and outstanding at January 31, 2001 and July 31, 2000                      -               -

     Series B - Senior preferred stock-$.01 par value, $10 liquidation value,
     5,000,000 shares authorized; no shares issued and outstanding at January 31,
     2001 and July 31, 2000                                                                      -               -

     Common stock - $.01 par value, 25,000,000 shares authorized;
     14,408,011 and 13,435,198 shares issued and outstanding at January 31,
     2001 and July 31, 2000                                                                144,079         134,352

     Additional paid-in capital                                                         25,498,213      21,782,638

     Notes receivable from officers of the Company and a related party for
      exercise of warrants, less reserve of $549,891 and $496,077 at January
      31, 2001 and July 31, 2000                                                      (  3,761,350)   (  3,263,350)

     Accumulated deficit                                                             (  10,817,009)   (  9,020,385)
                                                                                    ---------------  --------------

     Total stockholders' equity                                                         11,063,933       9,633,255
                                                                                    ---------------  --------------

               Total liabilities and stockholders' equity                           $   38,343,158   $  31,537,163
                                                                                    ===============  ==============
</TABLE>


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

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

                                         CONSOLIDATED STATEMENTS OF OPERATIONS

                                                      (UNAUDITED)


                                                                      Three Months Ended          Six Months Ended
                                                               ----------------------------  --------------------------
                                                                January 31,    January 31,    January 31,   January 31,
                                                                   2001           2000           2001          2000
                                                               -------------  -------------  ------------  ------------
<S>                                                            <C>            <C>            <C>           <C>
Revenues                                                       $ 47,637,301   $ 19,006,831   $86,018,420   $34,977,731
Cost of goods sold (note E)                                      47,592,280     17,823,068    84,384,974    32,788,080
                                                               -------------  -------------  ------------  ------------
     Gross profit                                                    45,021      1,183,763     1,633,446     2,189,651

Selling, general and administrative expenses
     Legal and professional fees                                    445,419        456,321       649,933       622,050
     Salaries and payroll related expenses                          318,508        335,315       575,981       545,107
     Travel                                                          65,293         29,963       100,453        87,983
     Other (note K)                                                 172,778        190,400       351,031       324,297
                                                               -------------  -------------  ------------  ------------
                                                                  1,001,998      1,011,999     1,677,398     1,579,437
                                                               -------------  -------------  ------------  ------------
         Operating income (loss)                                   (956,977)       171,764       (43,952)      610,214

Other income (expense)
     Interest expense (note F)                                     (854,633)      (237,970)   (1,660,790)   (  303,997)
     Interest income                                                 19,754          2,858        22,291         6,386
     Settlement of litigation (note H)                              (14,173)             -      (114,173)            -
     Award from litigation, net                                           -      3,036,638             -     3,036,638
                                                               -------------  -------------  ------------  ------------
          Income (loss) before taxes                             (1,806,029)     2,973,290    (1,796,624)    3,349,241
Provision for income taxes                                                -         70,000             -        70,000
                                                               -------------  -------------  ------------  ------------
               Net income (loss)                               $ (1,806,029)  $  2,903,290   $(1,796,624)  $ 3,279,241
                                                               =============  =============  ============  ============

Net income (loss) per common share (note B)                    $      (0.13)  $       0.23   $     (0.13)  $      0.25
                                                               =============  =============  ============  ============
Net income (loss) per common share assuming dilution (note B)  $      (0.13)  $       0.21   $     (0.13)  $      0.24
                                                               =============  =============  ============  ============
Weighted average common shares outstanding                       14,188,936     12,894,078    13,886,346    12,685,225
                                                               =============  =============  ============  ============
</TABLE>

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


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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)


                                                                            Six  Months  Ended
                                                                       ----------------------------
                                                                        January 31,    January 31,
                                                                           2001           2000
                                                                       -------------  -------------
<S>                                                                    <C>            <C>
Increase (Decrease) In Cash
Cash flows from operating activities:
Net income  (loss)                                                     $ (1,796,624)  $  3,279,241
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
     Depreciation and amortization                                          371,190        116,054
     Amortization of lease rights                                            22,898         22,898
     Writedown of inventory to LOCM                                       2,337,124              -
     Amortization of loan discount                                          896,037        119,729
     Award from litigation                                                        -     (3,036,638)
     Other                                                                  139,148              -
Changes in current assets and liabilities:
     Trade accounts receivable                                           (3,370,151)    (3,102,884)
     Deferred revenues                                                      561,750              -
     Inventories                                                         (3,437,712)    (4,188,813)
     Prepaid and other current assets                                       133,166        (18,231)
     LPG trade accounts payable                                           7,596,027      1,795,618
     Other assets and liabilities, net                                     (  6,250)        (3,150)
     Other accounts payable and accrued liabilities                        (214,557)       521,788
                                                                       -------------  -------------
        Net cash provided by (used in) operating activities               3,232,046     (4,494,388)
Cash flows from investing activities:
     Capital expenditures                                                (1,356,271)    (1,523,421)
     Investment in leased interests                                               -     (3,000,000)
     Payments on note receivable                                                  -         40,000
                                                                       -------------  -------------
        Net cash used in investing activities                            (1,356,271)    (4,483,421)
Cash flows from financing activities:
     Revolving credit facilities                                         (2,543,537)     3,707,035
     Costs of registration                                                  (49,438)             -
     Issuance of debt                                                       991,000      4,633,170
     Issuance of common stock                                             1,419,581      1,067,200
     Reduction in debt                                                     (291,000)      (160,917)
     Preferred stock dividends                                                    -        (45,370)
                                                                       -------------  -------------
        Net cash (used in) provided by financing activities                (473,394)     9,201,118
                                                                       -------------  -------------
           Net increase in cash                                           1,402,381        223,309
Cash at beginning of period                                                  25,491      1,032,265
                                                                       -------------  -------------
Cash at end of period                                                  $  1,427,872   $  1,255,574
                                                                       =============  =============
Supplemental disclosures of cash flow information:
     Cash paid during the period for:
     Interest (including capitalized interest of $90,000 in 2001)      $    829,468   $    149,493
                                                                       =============  =============
Supplemental disclosures of noncash transactions:
     Common stock and warrants issued  (note G)                        $  2,910,820   $  1,143,932
                                                                       =============  =============
     Note receivable exchanged for common stock (note C)               $   (555,661)  $          -
                                                                       =============  =============
</TABLE>

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


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION

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

     The  Company  commenced  operations  during  the fiscal year ended July 31,
     1995, upon construction of the Brownsville Terminal Facility. Prior to such
     time,  the  Company  was  in the "development stage" until the business was
     established.  Since  the Company began operations, the primary customer for
     LPG  has been PMI. Sales of LPG to PMI accounted for approximately 76.4% of
     the  Company's  total  revenues  for the six months ended January 31, 2001.

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

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

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

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


                                        8
<PAGE>
                         PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION  -  CONTINUED

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


NOTE  B  -  INCOME  (LOSS)  PER  COMMON  SHARE

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

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

<TABLE>
<CAPTION>
                                       For the three months ended January 31, 2001  For the three months ended January 31, 2000
                                      --------------------------------------------  -------------------------------------------
                                        Income (loss)      Shares       Per-Share   Income (loss)      Shares      Per-Share
                                         (Numerator)    (Denominator)    Amount      (Numerator)    (Denominator)    Amount
                                        --------------  -------------  -----------  --------------  -------------  ----------
<S>                                     <C>             <C>            <C>          <C>             <C>            <C>

Net income (loss)                       $  (1,806,029)              -           -   $    2,903,290              -           -
Less:  Dividends on preferred  stock                -               -           -                -              -           -
                                        --------------                              --------------
BASIC EPS
Net income (loss) available to common
     stockholders                          (1,806,029)     14,188,936  $(    0.13)       2,903,290     12,894,078  $     0.23
                                                                       ===========                                 ==========
EFFECT OF DILUTIVE SECURITIES
Warrants                                            -             N/A           -                -      1,127,042           -
Convertible Preferred Stock                         -             N/A           -                -              -           -
                                        --------------  -------------               --------------  -------------
DILUTED EPS
Net income (loss) available to common
     stockholders                       $         N/A             N/A  $      N/A   $    2,903,290     14,021,120  $     0.21
                                        ==============  =============  ===========  ==============  =============  ==========
</TABLE>


                                        9
<PAGE>
                         PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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


<TABLE>
<CAPTION>
                                        For the six months ended January 31, 2001   For the six months ended January 31, 2000
                                        ------------------------------------------  -----------------------------------------
                                        Income (loss)      Shares       Per Share   Income (loss)      Shares      Per-Share
                                         (Numerator)    (Denominator)    Amount      (Numerator)    (Denominator)    Amount
                                        --------------  -------------  -----------  --------------  -------------  ----------
<S>                                     <C>             <C>            <C>          <C>             <C>            <C>
Net income (loss)                       $  (1,796,624)              -           -   $   3,279,241               -           -
Less:  Dividends on preferred stock                 -               -           -         (45,370)              -           -
                                        --------------                              --------------
BASIC EPS
Net income (loss) available to common
     Stockholders                          (1,796,624)     13,886,346  $    (0.13)      3,233,871      12.685.225  $     0.25
                                                                       ===========                                 ==========
EFFECT OF DILUTIVE SECURITIES
Warrants                                            -             N/A           -               -         887,952           -
Convertible Preferred Stock                         -             N/A           -               -          83,152           -
                                        --------------  -------------               --------------  -------------
DILUTED EPS
Net income (loss) available to common
    Stockholders                        $         N/A             N/A  $      N/A   $   3,233,871      13,656,329  $     0.24
                                        ==============  =============  ===========  ==============  =============  ==========
</TABLE>


                                       10
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  C  -  SALE  OF  CNG  ASSETS

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

NOTE  D  -  PROPERTY,  PLANT  AND  EQUIPMENT

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

                                                       January 31,    July 31,
                                                          2001          2000
                                                     -------------  ------------

LPG:                                                 $    173,500   $   173,500
     Brownsville Terminal Facility:                     3,426,440     3,426,440
         Building                                         370,845       370,845
         Terminal facilities                              487,467       291,409
         Tank Farm                                      1,767,917     1,295,825
         Leasehold improvements                           476,213       393,462
                                                     -------------  ------------
        Capital construction in progress                6,702,382     5,951,481
                                                     -------------  ------------
        Equipment


     US - Mexico Pipelines and Matamoros Terminal       3,000,000     3,000,000
     Facility:                                          6,400,000     6,400,000
       Purchase of 50% interest in the Lease Agreements 3,258,784     2,674,716
                                                     -------------  ------------
        Capitalized leases                             12,658,784    12,074,716
                                                     -------------  ------------
        Other costs paid by the Company
                                                          799,309       785,699
                                                     -------------  ------------

    Saltillo Terminal Facility
                                                           10,800        10,800
Other:                                                     47,307        39,615
                                                     -------------  ------------
    Automobile                                             58,107        50,415
                                                     -------------  ------------
    Office equipment
                                                       20,218,582    18,862,311


Less:  accumulated depreciation and amortization,
    including amounts related to the capital lease of
    409,946 and $157,489 during the six months ended  (2,476,685)    (2,105,495)
                                                     -------------  ------------
    January 31, 2001 and the year ended July 31, 2000,
    respectively.                                    $ 17,741,897   $16,756,816
                                                     =============  ============


                                       11
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  INVENTORIES

     Inventories  consist  of  the  following:

<TABLE>
<CAPTION>
                                                  January 31, 2001            July 31, 2000
                                              -------------------------  -------------------------
                                                 Gallons        Cost        Gallons       Cost
                                              ------------  -----------  ------------  -----------
<S>                                           <C>           <C>          <C>           <C>
        LPG:
            Leased Pipeline and US-
               Mexico Pipelines               $  1,688,778  $ 1,023,874     1,361,850  $   736,485
            Storage:
              Brownsville Terminal Facility,
               Matamoros Terminal Facility
               and railcars leased by the
               Company                             638,732      387,251     1,037,290      560,964
              Markham and other                 11,566,698    7,012,672    11,176,125    6,025,760
                                              ------------  -----------  ------------  -----------

                                              $ 13,894,208    8,423,797    13,575,265  $ 7,323,209
                                              ============  ===========  ============  ===========
</TABLE>

     As  a  result  of declining LPG prices in February 2001, the net realizable
     value  of  the  inventory  at  January  31, 2001, was less than the cost of
     inventory determined on a FIFO basis. Accordingly, the cost of inventory at
     January 31, 2001, was adjusted to net realizable value at January 31, 2001,
     resulting  in  a  charge  to  cost  of  goods  sold  of  $2,337,124.

NOTE  F  -  DEBT  OBLIGATIONS

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

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

     From  December  10, 1999 through January 18, 2000, and on February 2, 2000,
     the  Company  completed a series of related transactions in connection with
     the  private  placement  of  $4,944,000  and  $710,000,  respectively,  of
     subordinated notes (Notes) which were 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 (see below). Interest at 9% was
     due  and  paid  on June 15, 2000, and December 15, 2000. In connection with
     the  Notes,  the  Company  granted  the  holders  of  the  Notes,  warrants
     (Warrants)  to  purchase  a  total of 706,763 shares of common stock of the
     Company  at  an  exercise  price  of  $4.00  per share, exercisable through
     December  15,  2002.

     During  December  2000,  the  Company  entered  into  agreements  (the
     "Restructuring  Agreements")  with  the  holders of $5,409,000 in principal
     amount  of  the  Notes  providing  for the restructuring of such Notes (the
     "Restructuring").  The  remaining  $245,000  balance  of the Notes was paid
     ($195,000  as  of  January  31,  2001  and  $50,000  in  February  2001).


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F-  DEBT  OBLIGATIONS  -  CONTINUED

     Under  the  terms  of  the  Restructuring Agreements, the due dates for the
     restructured Notes (the "Restructured Notes") were extended to December 15,
     2001, subject to earlier repayment upon the occurrence of certain specified
     events  provided  for  in  the  Restructured Notes. Additionally, beginning
     December  16,  2000, the annual interest rate on the Restructured Notes was
     increased to 13.5% (subject to the adjustments referred to below). Interest
     payments  are  due quarterly  beginning  March  15,  2001.

     Under  the  terms  of  the  Restructuring  Agreements,  the  holders of the
     Restructured  Notes also received warrants to purchase up to 676,125 shares
     of  common stock of the Company at an exercise price of $3.00 per share and
     exercisable  until December 15, 2003 (the "New Warrants"). The Company also
     agreed  to  modify  the  exercise  prices of the Warrants to purchase up to
     676,137  shares  of  common  stock  of the Company previously issued to the
     holders  of  the  Restructured  Notes  in  connection  with  their original
     issuance  from  $4.00  per share to $3.00 per share and extend the exercise
     dates  of  the  Warrants  from  December  15, 2002 to December 15, 2003. In
     addition,  the  Company  is  required  to  reduce the exercise price of the
     Warrants  and  the  New  Warrants issued to the holders of the Restructured
     Notes  from  $3.00  per  share  to  $2.50  per  share in the event that the
     Restructured  Notes  are  not  fully  repaid  by  June  15,  2001.

     In  connection  with  the  Restructuring  Agreements,  the Company has also
     agreed  to  register  the  shares  of common stock which may be acquired in
     connection  with  the  exercise  of  the  New  Warrants  (the  "Exercisable
     Shares").  In  the  event  that  the  Company  does  not  have an effective
     registration  statement  under  the  Securities  Act  of  1933, as amended,
     covering  the  Exercisable Shares by March 31, 2001 (or April 30, 2001, if,
     at  the time, the Company is ineligible to utilize Form S-3 for purposes of
     such registration), or if any effective registration statement ceases to be
     effective  during  any  period in which such effectiveness is required, the
     Company  will  be  required  to pay additional interest on the Restructured
     Notes  at  the  rate of 4% per annum for the period in which the deficiency
     continues  to  exist  (see  note  N).

     Under  the  terms  of  the  Restructuring  Agreements,  the Company is also
     required  to  provide the holders of the Restructured Notes with collateral
     to  secure  the  Company's payment obligations under the Restructured Notes
     consisting  of  a  senior  interest  in  substantially all of the Company's
     assets  which are located in the United States (the "US Assets") and Mexico
     (the  "Mexican Assets"), excluding inventory, accounts receivable and sales
     contracts  with  respect  to  which  the  Company  is  required  to grant a
     subordinated  security  interest  (collectively  referred  to  as  the
     "Collateral"). The Company's President is also required to pledge 2,000,000
     shares  of  common  stock  of  the Company held by the President (1,000,000
     shares to be released when the required security interests in the US Assets
     have  been  granted  and perfected and all of the shares are to be released
     when  the  required  security  interests in all of the Collateral have been
     granted  and  perfected). Under the terms of the Restructured Notes, if the
     required  security interests in all of the Collateral have not been granted
     and  perfected  by  March  15,  2001,  the  Company will be required to pay
     additional  interest  at  a  rate of 3% per annum from March 16, 2001 until
     such  time as the required security interests in all of the Collateral have
     been  granted  and  perfected  (see  note N). PMG Capital Corp. ("PMG") has
     agreed  to  serve  as  the  collateral  agent.

     PMG  acted  as  financial  advisor  for  the restructuring of $4,384,000 in
     principal amount of the Restructured Notes. PMG received fees consisting of
     $131,520  in cash and warrants to purchase 50,000 shares of common stock of
     the  Company  with  terms  similar  to  the  terms of the New Warrants. The
     Company  also  agreed to modify and extend the exercise date of warrants to
     purchase 114,375 shares of common stock of the Company originally issued to
     PMG  in  connection  with  the original issuance of the Notes with the same
     terms  as  those which were modified in the Warrants in connection with the
     Restructuring  Agreements.


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

     In  connection  with  the  Restructuring Agreements, the Company recorded a
     discount  of  $1,597,140  related  to  the  fair  value of the New Warrants
     issued,  fair value related to the modifications of the Warrants, fees paid
     to  PMG (including cash, new warrants granted and modifications to warrants
     previously  granted  to PMG in connection with the original issuance of the
     Notes)  and other costs associated with the Restructuring Agreements, to be
     amortized over the life of the Restructured Notes. The remaining portion of
     the  unamortized  discount  was  $1,391,481  at  January  31,  2001.  Total
     amortization  of  discounts related to the Notes and the Restructured Notes
     and  included  in  the  unaudited consolidated statements of operations was
     $452,027 and $896,037 for the three months and six months ended January 31,
     2001,  respectively.

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

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

     Net  proceeds  from  the  New Notes were used for working capital purposes.

     In  connection  with  the  New  Notes, PMG acted as placement agent for the
     Company and received cash fees totaling $69,370 and reimbursement of out of
     pocket  expenses.

     In connection with the issuance of the New Notes and New Note Warrants, the
     Company  recorded  a  discount of $349,494 related to the fair value of the
     New  Note Warrants issued, fees paid to PMG and other costs associated with
     the  private  placement,  to  be  amortized over the life of the New Notes.

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

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

<TABLE>
<CAPTION>
Long-term debt consists of the following:
                                                                                          January 31,    July 31,
                                                                                              2001         2000
                                                                                          ------------  ----------
<S>                                                                                       <C>           <C>
Capitalized lease obligations in connection with the US - Mexico Pipelines and the
Matamoros Terminal Facility (see notes D, H and I).                                       $  5,070,500  $5,070,500
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.
Paid during November 2000.                                                                           -      14,347
Noninterest-bearing note payable, discounted at 7%, for legal services; due in monthly
installments of $20,000 through January 2001; final payment of $110,000 due in February
2001.                                                                                          175,000     202,750

Other long-term debt.                                                                                -      36,653
                                                                                          ------------  ----------
                                                                                             5,245,500   5,324,250
Current maturities.                                                                          3,780,516   3,859,266
                                                                                          ------------  ----------
                                                                                          $  1,464,984  $1,464,984
                                                                                          ============  ==========
</TABLE>


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  F  -  DEBT  OBLIGATIONS  -  CONTINUED

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


NOTE  G  -  STOCKHOLDERS'  EQUITY

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

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

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

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

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

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

     During  November 2000, the Company agreed to reduce the exercise price from
     $2.50  to $2.00 per share for warrants to purchase 500,000 shares of common
     stock  of  the  Company  as an inducement for the holder of the warrants to
     exercise  the  warrants. The consideration for the exercise of the warrants
     included  $5,000  in  cash  and  a  $995,000 promissory note. The principal
     amount  of the note plus accrued interest at an annual rate of 10.5% is due
     on  April  30, 2001. The holder of the note is liable with full recourse to
     the  Company and has provided 500,000 shares of common stock of the Company
     as  collateral.  During  January  2001,  the  Company  received $795,000 as
     partial  payment  of  the  promissory  note.

     During  December  2000, the Company issued 14,500 shares of common stock of
     the  Company  to certain employees of the Company as a bonus. In connection
     with the issuance of the shares, the Company recorded an expense of $43,500
     based  on  the  market  value  of  the  stock  issued.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY - CONTINUED

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

     Under  the Company's 1997 Stock Award Plan (Plan), the Company has reserved
     for  issuance  150,000 shares of Common Stock, of which 111,470 shares were
     unissued  as  of  January  31,  2001,  to  compensate  consultants who have
     rendered  significant  services to the Company. The Plan is administered by
     the  Compensation  Committee of the Board of Directors of the Company which
     has  complete  authority  to  select  participants, determine the awards of
     Common  Stock  to  be  granted  and  the times such awards will be granted,
     interpret and construe the Plan for purposes of its administration and make
     determinations  relating  to the Plan, subject to its provisions, which are
     in the best interests of the Company and its stockholders. Only consultants
     who have rendered significant advisory services to the Company are eligible
     to  be  participants  under  the  Plan.  Other  eligibility criteria may be
     established  by  the  Compensation  Committee as administrator of the Plan.

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

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

     In  December  2000, the Company entered into an agreement with a consultant
     whereby  the  Company agreed to issue 2,000 shares of Common Stock pursuant
     to  the  Plan  for  each month of service for a minimum of three months. At
     January  31,  2001,  the  Company  issued  2,000  shares of common stock in
     connection  with  this  agreement.  In  February  2001,  the  agreement was
     terminated  and  the  Company  issued  the remaining 4,000 shares of common
     stock  due  to  the  consultant.

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

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

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

     The  Board  of Directors (Board) granted warrants to purchase 10,000 shares
     of  common  stock  at an exercise price of $6.94 per share to those outside
     directors previously elected and serving on the Board at August 1, 2000. In
     addition, the Board granted to newly elected directors warrants to purchase
     60,000  shares of common stock, at an exercise of $6.69 per share, with the
     vesting period to commence on August 7, 2000. The exercise prices per share
     of  the  warrants  issued  were  equal to or greater than the quoted market
     prices  per  share at the measurement dates. Based on the provisions of APB
     25,  no  compensation  expense  was  recorded  for  these  warrants.

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


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE  G  -  STOCKHOLDERS'  EQUITY  -  CONTINUED

     STOCK  WARRANTS  -  CONTINUED
     -----------------------------

     Other
     -----

     In  connection  with  a  consulting  agreement  between  the  Company and a
     director of the Company, during August 2000, the director received warrants
     to  purchase  100,000  shares of common stock at an exercise price of $6.38
     per  share  exercisable  through  August  6,  2005.  The warrants will vest
     ratably  on  a quarterly basis over four years. The warrants were accounted
     for  under  the  provisions  of SFAS 123 and the resulting expense is being
     amortized  over  the  vesting  period.

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

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


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES

     LITIGATION

     On  October  12,  1999,  a Demand for Arbitration (Arbitration) of $780,767
     (subsequently  amended to $972,515) was filed by A.E. Schmidt Environmental
     (Schmidt)  against Amwest Surety Insurance Company (Amwest), PennWilson and
     Penn  Octane  Corporation on a performance bond pursuant to a CNG contract.
     The  Company  filed  a  response  with  the  court opposing the petition by
     Schmidt to compel Penn Octane Corporation to participate in the Arbitration
     pursuant  to  an  alter  ego  theory.  During  April 2000, the court denied
     Schmidt's  petition to compel Penn Octane Corporation to participate in the
     Arbitration. PennWilson had countersued Schmidt in connection with overruns
     under  the  CNG  contract.  In November 2000, the litigation was settled in
     mediation  without  admission  as to fault whereby PennWilson agreed to pay
     Schmidt  $100,000 and Amwest agreed to pay Schmidt $350,000. PennWilson and
     Penn  Octane  Corporation both gave and received mutual general releases of
     all known and unknown claims pursuant to California Civil Code Section 1654
     with  exception  only  for  unknown  latent  deficiencies  as  defined  in
     California  Civil  Procedure  Code Section 337.15 and third party indemnity
     claims  for  injury,  death  or  property  damage.

     On  February  24, 2000, litigation was filed in the 357th Judicial District
     Court  of  Cameron  County, Texas, against Cowboy Pipeline Service Company,
     Inc.  (Cowboy),  CPSC  International,  Inc.  (CPSC)  and  the  Company
     (collectively  referred  to as the Defendants) alleging that the Defendants
     had  illegally  trespassed  in  connection  with the construction of the US
     Pipelines  (see  note  I) and seeking a temporary restraining order against
     the  Defendants from future use of the US Pipelines. On March 20, 2000, the
     Company acquired the portion of the property which surrounds the area where
     the  US  Pipelines  were constructed for cash of $1,908,000, which was paid
     during  April  2000, and debt in the amount of $1,908,000. As a result, the
     litigation was dismissed. The debt bears interest at 10% per annum, payable
     monthly  in  minimum  installments  of  $15,000  with a balloon payment due
     during April 2003. The liability of $1,908,000 is included in capital lease
     obligations  (see  note  F).


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     LITIGATION  -  CONTINUED

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

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

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

     During  May  2000,  the  Company  filed  a motion with the Court seeking to
     appoint  a  Chapter  11 Trustee and the Company also filed a complaint with
     the  Court  seeking a declaratory judgment stating that the US Pipelines be
     held  in  trust  for  the  benefit  of  the  Company and that the US-Mexico
     Pipelines are no longer the assets of the bankruptcy estate. The motion and
     the  complaint  are  still  pending.

     On  June  2,  2000,  additional  litigation was filed in the 138th Judicial
     District  Court  of  Cameron  County, Texas, against Cowboy and the Company
     alleging that Cowboy and the Company had illegally trespassed in connection
     with  the  construction of the US Pipelines and seeking declaratory relief,
     including  damages,  exemplary  damages  and  injunctive  relief preventing
     Cowboy  and  the  Company from utilizing the US Pipelines. On June 9, 2000,
     CPSC  intervened and removed the case to the Court. During August 2000, the
     litigation  was  settled  through  a court ordered mediation by the Company
     agreeing  to  acquire land for which substantially all of the costs will be
     offset  against the balance of the promissory note due to CPSC (see below).
     The  settlement  is  subject  to  completion  of  the settlement documents.

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


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     LITIGATION  -  CONTINUED

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

     In  addition,  there  is no certainty that the Company will (i) acquire the
     remaining  50% interest in the US - Mexico Pipelines and Matamoros Terminal
     Facility,  (ii) continue to utilize the US - Mexico Pipelines and Matamoros
     Terminal  Facility  or  (iii)  realize its recorded investment in the Lease
     Agreements  or in the US - Mexico Pipelines and Matamoros Terminal Facility
     (see  note  D).

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

     CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER

     As  of January 31, 2001, the Company has a $20,000,000 credit facility with
     RZB  Finance  L.L.C.  (RZB)  for demand loans and standby letters of credit
     (RZB  Credit  Facility)  to  finance  the  Company's  purchase  of  LPG. In
     connection  with  the RZB Credit Facility, RZB entered into a participation
     agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft, New York
     Branch  (HVB),  whereby RZB and HVB will each participate up to $10,000,000
     toward  the  total  credit  facility.  Under  the  RZB Credit Facility, the
     Company  pays  a fee with respect to each letter of credit thereunder in an
     amount  equal  to  the  greater  of (i) $500, (ii) 2.5% of the maximum face
     amount  of  such  letter  of  credit, or (iii) such higher amount as may be
     agreed  to  between  the Company and RZB. Any amounts outstanding under the
     RZB  Credit  Facility  shall  accrue  interest  at a rate equal to the rate
     announced by the Chase Manhattan Bank as its prime rate plus 2.5%. Pursuant
     to  the  RZB  Credit  Facility,  RZB  has  sole  and absolute discretion to
     terminate  the RZB Credit Facility and to make any loan or issue any letter
     of  credit  thereunder. RZB also has the right to demand payment of any and
     all  amounts  outstanding  under  the  RZB  Credit Facility at any time. In
     connection  with  the  RZB Credit Facility, the Company granted a mortgage,
     security  interest  and  assignment  in  any  and all of the Company's real
     property,  buildings, pipelines, fixtures and interests therein or relating
     thereto,  including,  without  limitation,  the  lease with the Brownsville
     Navigation  District  of Cameron County for the land on which the Company's
     Brownsville  Terminal  Facility  is  located,  the  Pipeline  Lease, and in
     connection  therewith  agreed  to  enter  into  leasehold  deeds  of trust,
     security agreements, financing statements and assignments of rent, in forms
     satisfactory  to  RZB.  Under  the RZB Credit Facility, the Company may not
     permit  to  exist  any  lien,  security interest, mortgage, charge or other
     encumbrance  of  any  nature  on any of its properties or assets, except in
     favor  of  RZB,  without  the  consent  of  RZB  (see  notes  F  and  I).

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

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


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  H  -  COMMITMENTS  AND  CONTINGENCIES  -  CONTINUED

     CREDIT  FACILITY,  LETTERS  OF  CREDIT  AND  OTHER  -  CONTINUED

     As  of January 31, 2001, letters of credit established under the RZB Credit
     Facility  in  favor  of  Exxon,  PG&E,  Duke  and Koch for purchases of LPG
     totaled  $13,673,904  of  which $12,822,985 was being used to secure unpaid
     purchases.  In  addition,  as of January 31, 2001, the Company had borrowed
     $994,857  from  its  revolving line of credit under the RZB Credit Facility
     for  purchases  of  LPG. In connection with these purchases, at January 31,
     2001,  the  Company  had  unpaid invoices due from PMI totaling $6,005,340,
     cash  balances  maintained in the RZB Credit Facility collateral account of
     $92,779  and  inventory  held  in  storage  of  $7,012,672  (see  note  E).


NOTE  I  -  CAPITAL  LEASE

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

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

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


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  I  -  CAPITAL  LEASE  -  CONTINUED

     During  September  1999,  December  1999 and February 2000, the Company and
     CPSC  amended the Lease Agreements whereby the Company agreed to acquire up
     to  a  100% interest in the Lease Agreements which, as of January 31, 2001,
     the  Company  had  acquired  a  50%  interest pursuant to the December 1999
     amendment.  During  February 2000, the Company determined that CPSC did not
     comply  with certain obligations under the Lease Agreements. In March 2000,
     CPSC  filed for protection under Chapter 11 of the United States Bankruptcy
     Code.  Since  that  date, the Company has also determined that CPSC did not
     comply  with other obligations provided for under the Lease Agreements. The
     Settlement  would provide for 100% ownership of the US-Mexico Pipelines and
     Matamoros  Terminal Facility by the Company or its affiliates and eliminate
     the  requirement  for  the  Liens.  Until  the Settlement is completed, the
     Company  will continue to record the remaining 50% portion of the US-Mexico
     Pipelines  and Matamoros Terminal Facility as a capital lease (see notes D,
     F,  H  and  K).

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

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


NOTE  J  -  UPGRADES

     The  Company  is  currently  completing  a mid-line pump station which will
     include  the  installation  of additional piping, meters, valves, analyzers
     and  pumps  along  the Leased Pipeline to increase its capacity and make it
     bi-directional. The mid-line pump station will increase the capacity of the
     Leased  Pipeline  to  approximately 360,000,000 gallons per year. The total
     estimated cost to complete the project is approximately $2,000,000 of which
     approximately  $1,700,000  has  been  incurred  through  January  31, 2001.

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


NOTE  K  -  MEXICAN  OPERATIONS

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


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  K  -  MEXICAN  OPERATIONS  -  CONTINUED

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

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

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

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

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

     PennMex,  Tergas  or Termatsal (i) have entered into leases associated with
     the  Saltillo  Terminal Facility, (ii) have been granted the permit for the
     Mexican  Pipeline, (iii) have been granted permits to operate the Matamoros
     Terminal  Facility  and  the Saltillo Terminal Facility, (iv) own, lease or
     are  in  the  process  of  obtaining  the land or rights of way used in the
     construction  of  the  Mexican  Pipeline,  Matamoros  Terminal Facility and
     Saltillo  Terminal  Facility  and (v) own the assets comprising the Mexican
     Pipeline,  Matamoros  Terminal Facility and Saltillo Terminal Facility, all
     of  which  were  funded by the Company or CPSC (see note D). The portion of
     funds  which  were  advanced by the Company (totaling $3,800,000 at January
     31,  2001)  to  PennMex  or  Termatsal  are included in property, plant and
     equipment.  Furthermore,  the  Company  is  committed  to  fund  PennMex or
     Termatsal  for any additional costs required in connection with the Mexican
     Pipeline,  Matamoros  Terminal Facility and the Saltillo Terminal Facility.

     During  the  six  months  ended January 31, 2001 and 2000, the Company paid
     PennMex,  Tergas  or  Termatsal  $346,197  and  $121,312, respectively, for
     Mexico  related  expenses  incurred  by those corporations on the Company's
     behalf.  Such  amounts  have  been  expensed.

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


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  L  -  REALIZATION  OF  ASSETS

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in conformity with accounting principles generally accepted in the
     United  States of America, which contemplate continuation of the Company as
     a  going  concern.  The  Company  has  had  an  accumulated  deficit  since
     inception,  has  used  cash in operations, and has had a deficit in working
     capital.  In addition significantly all of the Company's assets are pledged
     or  committed  to  be  pledged as collateral on existing debt in connection
     with the Restructured Notes, the New Notes, the RZB Credit Facility and the
     Settlement.  The  Company is currently negotiating final documents with the
     creditors  for  the  required security agreements. In addition, the Company
     entered  into  supply  agreements  for  quantities  of LPG substantially in
     excess  of  minimum  quantities under the New Agreement (see note E and M).
     Although  the  Company  has  entered  into  the  Settlement  (see  note H),
     significant  uncertainties  exist  related to the US - Mexico Pipelines and
     Matamoros  Terminal  Facility.  As  discussed  in  note  A, the Company has
     historically  depended  heavily  on  sales  to  one  major  customer.

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

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

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


NOTE  M  -  CONTRACTS

     LPG  BUSINESS  -  SALES  AGREEMENT

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

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


                                       23
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  CONTINUED

     LPG  BUSINESS  -  SALES  AGREEMENT  -  CONTINUED

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

     The  New  Agreement  also  provides  for trucking of LPG from the Company's
     Brownsville  Terminal  Facility  to  the  Matamoros  Terminal  Facility (or
     designated  locations  within  the  area) and from the Brownsville Terminal
     Facility  or  the  Matamoros  Terminal  Facility  to  the Saltillo Terminal
     Facility  (or  designated  locations within the area) in the event that (i)
     the  Company  is  unable  to transport LPG through the US-Mexico Pipelines,
     (ii)  the  Saltillo  Terminal  Facility  or  railcars to deliver LPG to the
     Saltillo  Terminal  Facility  are not utilized or (iii) until the Matamoros
     Terminal  Facility or the Saltillo Terminal Facility are fully operational.
     Under  the  terms  of  the  New  Agreement, in the event that the US-Mexico
     Pipelines  or  railcars  are  not  used, the sales prices received shall be
     reduced  by  the  corresponding  trucking  charges.  During April 2000, the
     Company  began shipping LPG through the US-Mexico Pipelines. During January
     2001,  approximately  81%  of the LPG sold to PMI was delivered through the
     US-Mexico  Pipelines  to the Matamoros Terminal Facility. As of January 31,
     2001,  the  Saltillo  Terminal  Facility  had  not  commenced  operations.

     Sales  to  PMI  totaled  approximately $65,700,000 for the six months ended
     January  31,  2001,  representing approximately 76.4% of total revenues for
     the  period.  The Company believes that it is due an  additional $7,600,000
     (plus  other  incremental  costs  incurred),  of  which $3,200,000 has been
     billed  to  PMI  through  January  31,  2001,  resulting  principally  from
     shortfalls  in  the  minimum  volume requirements (approximately 11,100,000
     gallons)  and  other  price adjustments as provided for under the new sales
     agreements  based  on  the  Company's  interpretation  of  certain  of  the
     provisions  of  those  agreements.  PMI has not paid the amount billed. The
     Company will not record in its unaudited consolidated financial statements,
     revenues,  if  any,  related  to the above-mentioned $7,600,000 (plus other
     incremental  costs  incurred) until the amounts are agreed to by PMI or the
     validity  of  the  Company's  claim  can  be  otherwise determined. Had the
     amounts  been  recorded  by  the Company and paid by PMI, the Company would
     have  reflected  additional  gross  profit  of  approximately  $926,000.

     As part of the volume requirements under the New Agreement, the Company has
     committed  to  sell to PMI 1,050,000 gallons of propane at a sales price of
     approximately  $0.60  per gallon, to be delivered during February 2001. The
     sales  price  of $561,750 has been received from PMI as of January 31, 2001
     and  is  included  in  the unaudited consolidated balance sheet as deferred
     revenue.


                                       24
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


NOTE  M  -  CONTRACTS  -  CONTINUED

     LPG  SUPPLY  AGREEMENTS

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

     In  addition,  under  the  terms  of  the Exxon Supply Contract, Exxon made
     operational  its Corpus Christi Pipeline (ECCPL) during September 2000. The
     ability  to  utilize  the ECCPL allows the Company to acquire an additional
     supply of propane from other propane suppliers located near Corpus Christi,
     Texas  (Additional Propane Supply), and bring the Additional Propane Supply
     to  the  Plant  (ECCPL  Supply)  for  blending to the proper specifications
     outlined  under  the  New  Agreement  and  then  delivered  into the Leased
     Pipeline.  In  connection  with the ECCPL Supply, the Company has agreed to
     supply  a  minimum  of  7,700,000  gallons  into the ECCPL during the first
     quarter  from  the  date  that  the  ECCPL  is  operational,  approximately
     92,000,000  gallons  the  following  year and 122,000,000 gallons each year
     thereafter  and  continuing  for four years. The Company is required to pay
     additional  costs  associated  with  the  use  of  the  ECCPL.

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

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

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

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

     Under  the  terms  of  the  Koch  Supply  Contract, the Koch Supply will be
     delivered  into  the  ECCPL  and  blended  to  the proper specifications as
     outlined  under  the  New  Agreement.


                                       25
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  M  -  CONTRACTS  -  CONTINUED

     LPG  SUPPLY  AGREEMENTS  -  CONTINUED

     During  March  2000,  the Company and Duke entered into a three year supply
     agreement  (Duke Supply Contract) whereby Duke has agreed to supply and the
     Company  has  agreed  to take, a monthly average of 1,900,000 gallons (Duke
     Supply)  of  propane  or  propane/butane  mix, beginning April 1, 2000. The
     purchase  price  is  indexed  to  variable  posted  prices.

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

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

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

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


NOTE  N  -  SUBSEQUENT  EVENTS

     In  connection with the Company's obligations under the Restructured Notes,
     on  March  14,  2001,  the  Company's registration statement containing the
     Exercisable  Shares  was  declared  effective.

     As of March 15, 2001, the granting and perfection of the security interests
     in  the Collateral as prescribed under the Restructured Notes have not been
     finalized.  Accordingly,  the  interest  rate  under the Restructured Notes
     increases  to  16.5%  during the period beginning March 16, 2001 until such
     time  as  the  required security interest in all of the Collateral has been
     granted  and  perfected.


                                       26
<PAGE>
ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
             RESULTS  OF  OPERATIONS

          The  following  discussion  of the Company's results of operations and
liquidity  and  capital  resources  should  be  read  in  conjunction  with  the
consolidated  financial  statements  of  the  Company  and related notes thereto
appearing  elsewhere  herein.  References to specific years preceded by "fiscal"
(e.g.  fiscal  2000)  refer  to  the  Company's  fiscal  year  ended  July  31.

FORWARD-LOOKING  STATEMENTS

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

OVERVIEW

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

          During  the  six  months  ended  January 31, 2001, the Company derived
76.4%  of  its  revenues  from  sales  of  LPG  to  PMI,  its  primary customer.

          The  Company  provides  products and services through a combination of
fixed-margin  and fixed-price contracts. Under the Company's agreements with PMI
and  the  suppliers, the buying and selling prices of LPG are based on similarly
indexed  variable  posted  prices  that provide the Company with a fixed margin.
Costs  included in cost of goods sold, other than the purchase price of LPG, may
affect  actual  profits  from sales, including costs relating to transportation,
storage,  leases  and  maintenance.  Mismatches in volumes of LPG purchased from
suppliers and volumes sold to PMI or others could result in gains during periods
of  rising  LPG  prices  or  losses  during periods of declining LPG prices as a
result  of  holding  inventories  or  disposing  of  excess  inventories.

LPG  SALES

          The  following  table  shows  the Company's volume sold in gallons and
average  sales prices of LPG for the three and six months ended January 31, 2001
and  2000.

<TABLE>
<CAPTION>
                                     Three Months Ended January 31,  Six  Months  Ended January 31,
                                     ------------------------------  ------------------------------
                                           2001           2000            2001            2000
                                     --------------  --------------  --------------  --------------

<S>                                  <C>             <C>             <C>             <C>
Volume Sold                                    50.0            36.6            90.0            70.4
                                               13.8               -            32.8               -
                                     --------------  --------------  --------------  --------------
  LPG (millions of gallons) - PMI              63.8            36.6           122.8            70.4
  LPG (millions of gallons) - Other


Average sales price                  $         0.77  $         0.52  $         0.73  $         0.50
                                               0.66               -            0.62               -
  LPG (per gallon) - PMI
  LPG (per gallon) - Other
</TABLE>


                                       27
<PAGE>
RESULTS  OF  OPERATIONS

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

          Revenues.  Revenues  for the three months ended January 31, 2001, were
$47.6  million  compared  with  $19.0 million for the three months ended January
31,2000, an increase of $28.6 million or 150.6%. Of this increase, $10.3 million
was  attributable  to  increased  volumes of LPG sold to PMI in the three months
ended January 31, 2001, $9.2 million was attributable to increased average sales
prices  of  LPG  sold to PMI in the three months ended January 31, 2001 and $9.1
million  was  attributable  to  sales  of  LPG  to  customers  other then PMI in
connection  with  the  Company's  desire  to  reduce  quantities  of  inventory.

          Cost  of  goods  sold.  Cost  of goods sold for the three months ended
January  31,  2001,  was $47.6 million compared with $17.8 million for the three
months  ended  Janaury 31, 2000, an increase of $29.8 million or 167.0%. Of this
increase,  $9.9 million was attributable to increased volumes of LPG sold to PMI
in  the  three  months ended January 31, 2001, $10.1 million was attributable to
the  increase  in the cost of LPG sold to PMI for the three months ended January
31,  2001,  $7.0 million was attributable to cost of LPG sold to customers other
than  PMI  in  connection  with  the  Company's  desire  to reduce quantities of
inventory  during  the  three  months  ended  January 31, 2001, $2.3 million was
attributable  to  inventory  adjustments for quantities held at January 31, 2001
valued  based  on  the  lower  of  market compared to FIFO cost and $543,753 was
attributable  to  increased operating costs associated with LPG during the three
months  ended  January  31,  2001.

          Selling,  general  and  administrative  expenses. Selling, general and
administrative expenses were $1.0 million for the three months ended January 31,
2001  compared  with  $1.0  million for the three months ended Janaury 31, 2000.

          Other  income (expense). Other income (expense) was $(849,052) for the
three  months  ended  January  31, 2001 compared with $2.8 million for the three
months ended Janaury 31, 2000, a decrease of $3.6 million. The decrease in other
income  (expense) was due primarily to increased interest costs and amortization
of  discounts  of $567,333 associated with the issuance of debt during the three
months  ended  January  31,  2001  and a decrease of $3.0 million related to the
award  from litigation, which was recorded during the three months ended January
31,  2000.

          Income  tax.  Due  to  the loss for the three months ended January 31,
2001,  the  Company  did not incur any income tax expense during the quarter and
only  $70,000 of alternative minimum taxes during the three months ended January
31,  2000. The ability to use net operating loss carryforwards ($5.6 million and
$8.0  million at July 31, 2000 and July 31, 1999, respectively), which expire in
the  years  2010 to 2018, may be significantly limited by the application of the
"change  in ownership" rules under Section 382 of the Internal Revenue Code. The
Company  can receive a credit against future tax payments to the extent of prior
alternative  minimum  taxes  paid.

SIX  MONTHS  ENDED  JANUARY  31, 2001 COMPARED WITH SIX MONTHS ENDED JANUARY 31,
2000

          Revenues.  Revenues  for  the  six months ended January 31, 2001, were
$86.0  million  compared with $35.0 million for the six months ended January 31,
2000,  an  increase  of $51.0 million or 145.9%. Of this increase, $14.3 million
was attributable to increased volumes of LPG sold to PMI in the six months ended
January  31,  2001,  $16.5  million  was attributable to increased average sales
prices  of  LPG  sold  to PMI in the six months ended January 31, 2001 and $20.2
million  was  attributable  to  sales  of  LPG  to  customers  other then PMI in
connection  with  the  Company's  desire  to  reduce  quantities  of  inventory.


                                       28
<PAGE>
          Cost  of  goods  sold.  Cost  of goods sold for the three months ended
January  31,  2001,  was  $84.4  million compared with $32.8 million for the six
months  ended  Janaury 31, 2000, an increase of $51.6 million or 157.4%. Of this
increase, $13.3 million was attributable to increased volumes of LPG sold to PMI
in  the six months ended January 31, 2001, $16.3 million was attributable to the
increase  in  the  cost  of LPG sold to PMI for the six months ended January 31,
2001, $18.8 million was attributable to cost of LPG sold to customers other than
PMI  in  connection  with the Company's desire to reduce quantities of inventory
during  the  six months ended January 31, 2001, $2.3 million was attributable to
inventory adjustment for quantities held at January 31, 2001 valued based on the
lower of market compared to FIFO cost and $947,433 was attributable to increased
operating  costs  associated  with LPG during the three months ended January 31,
2001.

          Selling,  general  and  administrative  expenses. Selling, general and
administrative  expenses  were $1.7 million for the six months ended January 31,
2001  compared  with  $1.6 million for the six months ended Janaury 31, 2000, an
increase  of  $97,961  or  6.2%.  This  increase  was  primarily attributable to
additional  payroll  related and other expenses incurred during the three months
ended  January  31,  2001.

          Other  income (expense). Other income (expense) was $(1.8) million for
the  six  months  ended  January 31, 2001 compared with $2.7 million for the six
months ended Janaury 31, 2000, a decrease of $4.5 million. The decrease in other
income  (expense) was due primarily to increased interest costs and amortization
of discounts of $1.1 million associated with the issuance of debt during the six
months  ended  January  31,  2001  and a decrease of $3.0 million related to the
award  from litigation, which was recorded during the three months ended January
31,  2000.

          Income tax. Due to the loss for the six months ended January 31, 2001,
the  Company  did  not  incur any income tax expense during the six months ended
January  31,  2001  and only $70,000 of alternative minimum taxes during the six
months  ended  January  31,  2000.  The  ability  to  use  net  operating  loss
carryforwards  ($5.6  million  and  $8.0  at  July  31,  2000 and July 31, 1999,
respectively),  which  expire  in  the  years 2010 to 2018, may be significantly
limited  by the application of the "change in ownership" rules under Section 382
of  the  Internal  Revenue Code. The Company can receive a credit against future
tax  payments  to  the  extent  of  prior  alternative  minimum  taxes  paid.


LIQUIDITY  AND  CAPITAL  RESOURCES

          General.  The  Company  has  had  an  accumulated  deficit  since  its
inception in 1992, has used cash in operations, and has had a deficit in working
capital.  In  addition, significantly all of the Company's assets are pledged or
committed  to  be  pledged as collateral on existing debt in connection with the
Restructured  Notes,  the New Notes, the RZB credit facility and the Settlement.
The  Company is currently negotiating final documents with the creditors for the
required  security  agreements.  The  Company  may  need  to increase its credit
facility  for  the purchase of quantities of LPG in excess of current quantities
sold  and/or  to  finance  future  price  increases of LPG, if any. Further, the
Company  may  find  it  necessary  to liquidate inventories at a loss to provide
working  capital.  Although  the  Company  has  entered  into  the  Settlement,
significant  uncertainties  exist  related  to  the  US  -  Mexico Pipelines and
Matamoros  Terminal Facility (see note H to the unaudited consolidated financial
statements).  The  Company  depends  heavily on sales to one major customer. The
Company's  sources  of  liquidity  and  capital resources historically have been
provided by sales of LPG, proceeds from the issuance of short-term and long-term
debt,  revolving  credit facilities and credit arrangements, sale or issuance of
preferred  and  common  stock  of  the Company and proceeds from the exercise of
warrants  to  purchase  shares  of  the  Company's  common  stock.


                                       29
<PAGE>
          The  following  summary  table reflects comparative cash flows for the
six  months  ended  January  31, 2001 and 2000. All information is in thousands.

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                             ----------------
                                                        January 31,      January 31,
                                                           2001              2000
                                                     -----------------  --------------
<S>                                                  <C>                <C>
Net cash provided by (used in) operating activities  $          3,232   $ (     4,494)
Net cash used in investing activities . . . . . . .   (         1,356)    (     4,484)
Net cash (used in) provided by financing activities   (           474)          9,201
                                                     -----------------  --------------
Net increase in cash. . . . . . . . . . . . . . . .  $          1,402   $         223
                                                     =================  ==============
</TABLE>

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

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

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

          The New Agreement also provides for trucking of LPG from the Company's
Brownsville  Terminal Facility to the Matamoros Terminal Facility (or designated
locations  within  the  area)  and from the Brownsville Terminal Facility or the
Matamoros  Terminal  Facility  to  the Saltillo Terminal Facility (or designated
locations  within  the  area)  in  the  event  that (i) the Company is unable to
transport  LPG  through  the  US  - Mexico Pipelines, (ii) the Saltillo Terminal
Facility  or  railcars  to deliver LPG to the Saltillo Terminal Facility are not
utilized or (iii) until the Matamoros Terminal Facility or the Saltillo Terminal
Facility  are  fully  operational.  Under the terms of the New Agreement, in the
event  that  the  US-Mexico  Pipelines or railcars are not used, the sales price
received  shall  be  reduced by the corresponding trucking charges. During April
2000,  the  Company began shipping LPG through the US - Mexico Pipelines. During
January 2001, approximately 81% of the LPG sold to PMI was delivered through the
US-Mexico  Pipelines to the Matamoros Terminal Facility. As of January 31, 2001,
the  Saltillo  Terminal  Facility  had  not  commenced  operations.

          Sales  to  PMI  totaled approximately $65.7 million for the six months
ended  January  31, 2001, representing approximately 76.4% of total revenues for
the  period.  The  Company  believes  that  it is due an additional $7.6 million
(plus  other  incremental costs incurred), of which $3.2 million has been billed
to  PMI  through  January 31, 2001, resulting principally from shortfalls in the
minimum volume requirements (approximately 11.1 million gallons) and other price
adjustments  as  provided  for  under  the  new  sales  agreements  based on the
Company's  interpretation  of certain of the provisions of those agreements. PMI
has  not  paid  the  amount billed. The Company will not record in its unaudited
consolidated  financial  statements,  revenues,  if  any,  related  to  the
above-mentioned  $7.6 million (plus other incremental costs  incurred) until the
amounts  are  agreed  to  by  PMI  or the validity of the Company's claim can be
otherwise  determined.  Had the amounts been recorded by the Company and paid by
PMI,  the  Company would have reflected additional gross profit of approximately
$926,000.

          As  part  of  the  volume  requirements  under  the New Agreement, the
Company  has  committed  to  sell  PMI 1.1 million gallons of propane at a sales
price  of  approximately $0.60 per gallon, to be delivered during February 2001.
The  sales  price  of $561,750 has been received from PMI as of January 31, 2001
and is included in the unaudited consolidated balance sheet as deferred revenue.

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


                                       30
<PAGE>
          LPG Supply Agreements. During October 1998, the Company entered into a
monthly  supply  agreement  with  Exxon  Mobil Corporation ("Exxon") pursuant to
which  Exxon  agreed  to supply minimum volumes of LPG to the Company. Effective
November  1,  1998,  the  Company  entered into a supply agreement with Exxon to
purchase  minimum  monthly  volumes  of  LPG  through  September  1999.

          Effective  October  1,  1999, the Company and Exxon entered into a ten
year  LPG  supply  contract,  as  amended (the "Exxon Supply Contract"), whereby
Exxon  has  agreed to supply and the Company has agreed to take, 100% of Exxon's
owned or controlled volume of propane and butane available at Exxon's King Ranch
Gas  Plant  (the  "Plant")  up  to  13.9  million  gallons  per month blended in
accordance  with  the  specifications  as  outlined under the New Agreement (the
"Plant  Commitment").  The  purchase price is indexed to variable posted prices.

          In  addition, under the terms of the Exxon Supply Contract, Exxon made
operational its Corpus Christi Pipeline (the "ECCPL") during September 2000. The
ability  to utilize the ECCPL allows the Company to acquire an additional supply
of  propane from other propane suppliers located near Corpus Christi, Texas (the
"Additional  Propane  Supply"),  and  bring the Additional Propane Supply to the
Plant  (the  "ECCPL  Supply") for blending to the proper specifications outlined
under  the  New  Agreement  and  then  delivered  into  the  Leased Pipeline. In
connection  with the ECCPL Supply, the Company has agreed to supply a minimum of
7.7  million  gallons into the ECCPL during the first quarter from the date that
the  ECCPL is operational, approximately 92.0 million gallons the following year
and  122.0  million  gallons each year thereafter and continuing for four years.
The  Company  is required to pay additional costs associated with the use of the
ECCPL.

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

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

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

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

          Under  the  terms of the Koch Supply Contract, the Koch Supply will be
delivered  into  the  ECCPL and blended to the proper specifications as outlined
under  the  New  Agreement.

          During  March  2000,  the  Company  and Duke Energy NGL Services, Inc.
("Duke") entered into a three year supply agreement (the "Duke Supply Contract")
whereby  Duke has agreed to supply and the Company has agreed to take, a monthly
average  of 1.9 million gallons (the "Duke Supply") of propane or propane/butane
mix,  beginning  April 1, 2000. The purchase price is indexed to variable posted
prices.

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


                                       31
<PAGE>
          The  delivery  of  the  PG&E  Supply or the Koch Supply will satisfy a
portion or all of the ECCPL Supply requirements under the Exxon Supply Contract.

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

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

          The Company may incur significant additional costs associated with the
storage,  disposal and/or changes in LPG prices resulting from the excess of the
Plant  Commitment,  PG&E  Supply,  Koch  Supply or Duke Supply over actual sales
volumes.  Under  the  terms  of  the  Supply Contracts, the Company must provide
letters  of  credit in amounts equal to the cost of the product to be purchased.
In  addition,  the  cost  of  the  product purchased is tied directly to overall
market conditions. As a result, the Company's existing letter of credit facility
may  not  be  adequate  to  meet  the  letter  of  credit requirements under the
agreements  with  the  Suppliers or other suppliers due to increases in costs of
LPG  or  LPG  volumes purchased by PMI. Upon the implementation of Deregulation,
the  Company anticipates entering into contracts with Mexican distributors which
require  payments in pesos. In addition, the Mexican distributors may be limited
in  their  ability  to  obtain  adequate  financing.

          The ability of the Company to increase sales of LPG into Mexico in the
future  is  largely  dependent  on  the  Company's  ability  to negotiate future
contracts  with  PMI and/or with local Mexican distributors once Deregulation in
Mexico  is  implemented. In addition, there can be no assurance that the Company
will  be  able  to obtain terms equal to or more favorable than those in the New
Agreement.  In  the  event  that  the Company is unable to meet its intended LPG
sales  objectives,  then  the  Company  may  incur  significant  losses.

          Furthermore,  the  Company currently utilizes the Brownsville Terminal
Facility  and may be required to deliver a portion or all of the minimum monthly
volumes  from  the  Brownsville  Terminal  Facility in the future. Historically,
sales  of  LPG  from  the  Brownsville  Terminal Facility have not exceeded 12.7
million  gallons  per  month.  In  addition,  breakdowns  along  the  planned
distribution  route for the LPG once purchased from the Suppliers, may limit the
ability  of  the  Company  to  accept or deliver the Plant Commitment, the ECCPL
Supply,  the  PG&E  Supply,  the  Koch  Supply,  and  the  Duke  Supply.

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

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

          Present  Pipeline  capacity  is  approximately 250 million gallons per
year.  During  the  six  months  ended  January  31,  2001,  the  Company  sold
approximately  90  million  gallons  of  LPG,  substantially all of which flowed
through  the  Leased  Pipeline.  The  Company can increase the Leased Pipeline's
capacity  through  the  installation  of  additional  pumping  equipment  (see
"Upgrades"  below).


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


                                       32
<PAGE>
          The Company is currently completing a mid-line pump station which will
include  the  installation  of  additional piping, meters, valves, analyzers and
pumps  along  the  Leased  Pipeline  to  increase  its  capacity  and  make  it
bi-directional.  The  mid-line  pump  station  will increase the capacity of the
Leased  Pipeline  to  approximately  360  million  gallons  per  year. The total
estimated  cost  to  complete the project is approximately $2.0 million of which
approximately  $1.7  million  has  been  incurred  through  January  31,  2001.

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

          Lease Agreements. In connection with the construction of the US-Mexico
Pipelines  and  the  Matamoros  Terminal  Facility,  the  Company  and  CPSC
International,  Inc.  ("CPSC")  entered  into  two separate Lease / Installation
Purchase  Agreements,  as  amended,  ("the  Lease Agreements"), whereby CPSC was
required  to  construct  and  operate  the  US  - Mexico Pipelines (including an
additional  pipeline to accommodate Refined Products) and the Matamoros Terminal
Facility  and  lease  these  assets to the Company. Under the terms of the Lease
Agreements,  the  Company  was  required to pay monthly rentals of approximately
$157,000,  beginning  the  date  that  the  US  - Mexico Pipelines and Matamoros
Terminal  Facility  are  physically capable of transporting and receiving LPG in
accordance  with  technical specifications required (the "Substantial Completion
Date").  In  addition,  the  Company agreed to provide a lien on certain assets,
leases  and  contracts  which  are currently pledged to RZB (Liens), which Liens
would  require  the  consent of RZB, and provide CPSC with a letter of credit of
approximately $1.0 million. The Company also had the option to purchase the US -
Mexico  Pipelines  and  Matamoros  Terminal Facility at the end of the 10th year
anniversary  and  15th  year  anniversary  for  $5.0  million  and  $100,000,
respectively.  Under the terms of the Lease Agreements, CPSC was required to pay
all  costs  associated  with the construction and maintenance of the US - Mexico
Pipeline  and  Matamoros  Terminal  Facility.

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

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

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

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


                                       33
<PAGE>
          PennMex,  Tergas  or Termatsal (i) have entered into leases associated
with  the  Saltillo Terminal Facility, (ii) have been granted the permit for the
Mexican  Pipeline,  (iii)  have  been  granted  permits to operate the Matamoros
Terminal  Facility and the Saltillo Terminal Facility, (iv) own, lease or are in
the  process  of obtaining the land or rights of way used in the construction of
the Mexican Pipeline, Matamoros Terminal Facility and Saltillo Terminal Facility
and  (v)  own  the  assets  comprising  the Mexican Pipeline, Matamoros Terminal
Facility and Saltillo Terminal Facility, all of which were funded by the Company
or  CPSC (see notes D and K to the unaudited consolidated financial statements).
The  portion  of funds which were advanced by the Company (totaling $3.8 million
at January 31, 2001) to PennMex or Termatsal are included in property, plant and
equipment.  Furthermore,  the  Company  intends to fund PennMex or Termatsal for
any additional costs required in connection with the Mexican Pipeline, Matamoros
Terminal  Facility  and  the  Saltillo  Terminal  Facility.

          During  the  six  months  ended  January  31,  2001,  the Company paid
PennMex,  Tergas  or  Termatsal $346,197 for Mexico related expenses incurred by
those  corporations  on  the  Company's behalf. Such amounts have been expensed.

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

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

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

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

          Currently  the  Company  sells  LPG to PMI at its Brownsville Terminal
Facility  or at the United States-Mexico border for LPG product destined for the
Matamoros  Terminal  Facility  or  the  Saltillo  Terminal  Facility.  Upon
Deregulation,  the  Company  intends  to  sell  to  independent  Mexican  LPG
distributors  as  well  as to PMI at its Brownsville Terminal Facility or at the
United  States-Mexico  border.

          Credit  Arrangements.  As of January 31, 2001, the Company has a $20.0
million  credit  facility  with  RZB  Finance  L.L.C. (RZB) for demand loans and
standby  letters  of  credit  (RZB  Credit  Facility)  to  finance the Company's
purchase  of LPG. In connection with the RZB Credit Facility, RZB entered into a
participation agreement with Bayerische Hypo-und Vereinsbank Aktiengeselischaft,
New  York  Branch ("HVB"), whereby RZB and HVB will each participate up to $10.0
million  toward  the  total  credit facility. Under the RZB Credit Facility, the
Company pays a fee with respect to each letter of credit thereunder in an amount
equal  to  the greater of (i) $500, (ii) 2.5% of the maximum face amount of such
letter  of  credit,  or (iii) such higher amount as may be agreed to between the
Company  and  RZB.  Any  amounts outstanding under the RZB Credit Facility shall
accrue  interest  at  a  rate equal to the rate announced by the Chase Manhattan
Bank  as  its prime rate plus 2.5%. Pursuant to the RZB Credit Facility, RZB has
sole  and  absolute  discretion to terminate the RZB Credit Facility and to make
any  loan  or  issue  any letter of credit thereunder. RZB also has the right to
demand  payment of any and all amounts outstanding under the RZB Credit Facility
at  any  time. In connection with the RZB Credit Facility, the Company granted a


                                       34
<PAGE>
mortgage,  security interest and assignment in any and all of the Company's real
property,  buildings,  pipelines,  fixtures  and  interests  therein or relating
thereto,  including,  without  limitation,  the  lease  with  the  Brownsville
Navigation  District  of  Cameron  County  for  the  land on which the Company's
Brownsville  Terminal Facility is located, the Pipeline Lease, and in connection
therewith  agreed  to  enter into leasehold deeds of trust, security agreements,
financing  statements  and  assignments  of  rent, in forms satisfactory to RZB.
Under  the  RZB  Credit  Facility, the Company may not permit to exist any lien,
security interest, mortgage, charge or other encumbrance of any nature on any of
its  properties  or  assets,  except in favor of RZB, without the consent of RZB
(see  notes  F,  H  and  I  to the unaudited consolidated financial statements).

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

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

          As  of  January  31, 2001, letters of credit established under the RZB
Credit  Facility  in  favor  of  Exxon, PG&E, Duke and Koch for purchases of LPG
totaled  $13.7  million  of  which $12.8 million was being used to secure unpaid
purchases.  In  addition,  as of January 31, 2001, the Company had borrowed $1.0
million  from  its  revolving  line  of credit under the RZB Credit Facility for
purchases  of  LPG. In connection with these purchases, at January 31, 2001, the
Company  had  unpaid  invoices due from PMI totaling $6.0 million, cash balances
maintained  in  the  RZB  Credit  Facility  collateral  account  of  $92,779 and
inventory  held  in  storage  of  $7.0  million  (see  note  E  to the unaudited
consolidated  financial  statements).

          Private  Placements  and  Other  Transactions.  From December 10, 1999
through  January  18,  2000,  and  on  February 2, 2000, the Company completed a
series  of related transactions in connection with the private placement of $4.9
million  and $710,000, respectively, of subordinated notes (the "Notes") due the
earlier  of  December  15,  2000, or upon the receipt of proceeds by the Company
from  any future debt or equity financing in excess of $2.3 million. Interest at
9%  was due and paid on June 15, 2000, and December 15, 2000. In connection with
the  Notes,  the  Company  granted  the  holders  of  the  Notes,  warrants (the
"Warrants") to purchase a total of 706,763 shares of common stock of the Company
at  an exercise price of $4.00 per share, exercisable through December 15, 2002.

          During  December  2000  the  Company  entered  into  agreements  (the
"Restructuring Agreements") with the holders of $5.4 million in principal amount
of  the  Notes  providing  for  the  restructuring  of such remaining Notes (the
"Restructuring").  The  remaining  $245,000  balance  of  the  Notes  was  paid
($195,000  as  of  January  31,  2001  and  $50,000  in  February  2001).

          Under the terms of the Restructuring Agreements, the due dates for the
restructured  Notes  (the  "Restructured  Notes")  were extended to December 15,
2001,  subject  to  earlier  repayment  upon the occurrence of certain specified
events  provided for in the Restructured Notes. Additionally, beginning December
16,  2000,  the  annual interest rate on the Restructured Notes was increased to
13.5%  (subject to the adjustments referred to below). Interest payments are due
quarterly  beginning  March  15,  2001.


                                       35
<PAGE>
          Under  the  terms  of the Restructuring Agreements, the holders of the
Restructured  Notes  also  received warrants to purchase up to 676,125 shares of
common  stock  of  the  Company  at  an  exercise  price  of $3.00 per share and
exercisable  until  December  15,  2003  (the  "New Warrants"). The Company also
agreed  to  modify the exercise prices of the Warrants to purchase up to 676,137
shares  of  common  stock of the Company previously issued to the holders of the
Restructured  Notes  in  connection  with their original issuance from $4.00 per
share  to  $3.00  per  share  and extend the exercise dates of the Warrants from
December  15, 2002 to December 15, 2003. In addition, the Company is required to
reduce  the  exercise  price  of the Warrants and the New Warrants issued to the
holders of the Restructured Notes from $3.00 per share to $2.50 per share in the
event  that  the  Restructured  Notes  are  not  fully  repaid by June 15, 2001.

          Under  the  terms of the Restructuring Agreements, the Company is also
required  to  provide  the  holders of the Restructured Notes with collateral to
secure the Company's payment obligations under the Restructured Notes consisting
of  a  senior  interest  in  substantially all of the Company's assets which are
located  in  the  United  States  (the  "US  Assets")  and  Mexico (the "Mexican
Assets"),  excluding  inventory,  accounts  receivable  and sales contracts with
respect  to  which  the  Company  is  required  to grant a subordinated security
interest (collectively referred to as the "Collateral"). The Company's President
is  also  required  to  pledge 2.0 million shares of common stock of the Company
held  by  the  President  (1.0  million  shares to be released when the required
security  interests  in the US Assets have been granted and perfected and all of
the shares are to be released when the required security interests in all of the
Collateral have been granted and perfected). Under the terms of the Restructured
Notes, if the required security interests in all of the Collateral have not been
granted  and  perfected  by  March 15, 2001, the Company will be required to pay
additional  interest  at  a  rate of 3% per annum from March 16, 2001 until such
time  as  the  required  security  interests  in all of the Collateral have been
granted  and  perfected.  PMG  Capital  Corp. ("PMG") has agreed to serve as the
collateral  agent.  As  of  March  15,  2001, the granting and perfection of the
security  interests in the Collateral as prescribed under the Restructured Notes
have  not  been finalized. Accordingly, the interest rate under the Restructured
Notes  increases  to 16.5% during the period beginning March 16, 2001 until such
time as the required security interest in all of the Collateral has been granted
and  perfected.

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

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

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

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

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

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


                                       36
<PAGE>
          During  November 2000, the Company agreed to reduce the exercise price
from  $2.50 to $2.00 per share for warrants to purchase 500,000 shares of common
stock of the Company as an inducement for the holder of the warrants to exercise
the warrants. The consideration for the exercise of the warrants included $5,000
in  cash  and  a $995,000 promissory note. The principal amount of the note plus
accrued interest at an annual rate of 10.5% is due on April 30, 2001. The holder
of the note is liable with full recourse to the Company and has provided 500,000
shares  of  common  stock of the Company as collateral. During January 2001, the
Company  received  $795,000  as  partial  payment  on  the  promissory  note.

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

          During December 2000, the Company issued 14,500 shares of common stock
of  the  Company  to  certain employees of the Company as a bonus. In connection
with  the  issuance  of  the  shares, the Company recorded an expense of $43,500
based  on  the  market  value  of  the  stock  issued.

          In  December  2000,  the  Company  entered  into  an  agreement with a
consultant  whereby  the  Company  agreed  to issue 2,000 shares of Common Stock
pursuant to the Plan for each month of service for a minimum of three months. At
January  31, 2001, the Company issued 2,000 shares of common stock in connection
with  this  agreement.  In  February  2001, the agreement was terminated and the
Company issued the remaining 4,000 shares of common stock due to the consultant.

          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.

          Settlement  of  Litigation. On February 24, 2000, litigation was filed
in  the  357th  Judicial District Court of Cameron County, Texas, against Cowboy
Pipeline Service Company, Inc. ("Cowboy"), CPSC International, Inc. ("CPSC") and
the  Company  (collectively  referred  to as the "Defendants") alleging that the
Defendants  had  illegally trespassed in connection with the construction of the
US  Pipelines  and  seeking a temporary restraining order against the Defendants
from future use of the US Pipelines. On March 20, 2000, the Company acquired the
portion  of  the  property  which surrounds the area where the US Pipelines were
constructed for cash of $1.9 million, which was paid during April 2000, and debt
in  the  amount  of $1.9 million. As a result, the litigation was dismissed. The
debt bears interest at 10% per annum, payable monthly in minimum installments of
$15,000  with  a  balloon  payment  due during April 2003. The liability of $1.9
million  is  included  in capital lease obligations (see note F to the unaudited
consolidated  financial  statements).

          On June 2, 2000, additional litigation was filed in the 138th Judicial
District Court of Cameron County, Texas, against Cowboy and the Company alleging
that  Cowboy  and  the  Company  had illegally trespassed in connection with the
construction  of  the  US  Pipelines  and  seeking declaratory relief, including
damages,  exemplary  damages  and  injunctive  relief  preventing Cowboy and the
Company  from  utilizing  the US Pipelines. On June 9, 2000, CPSC intervened and
removed  the  case  to the Court. During August 2000, the litigation was settled
through  a  court  ordered mediation by the Company agreeing to acquire land for
which  substantially  all of the costs will be offset against the balance of the
promissory note due to CPSC (see below). The Settlement is subject to completion
of  the  settlement  documents.

          On  June  19,  2000, the Company, CPSC, Cowboy and the Owner reached a
settlement  (the  "Settlement")  whereby  the Company has agreed to purchase the
remaining  50%  interest  in the assets associated with the Lease Agreements for
cash,  two  promissory  notes,  transfer  of  the  property owned by the Company
purchased  on  March 20, 2000, referred to above, and warrants to acquire common
stock  of  the  Company  together  with  a release of all claims and proceedings
between  them.  The  promissory notes are for $900,000 and $1.5 million and both
bear  interest  at 9%. Principal and interest are payable monthly with the notes
due  in  three years. In addition, CPSC will assume the Company's debt issued in
connection  with  the  acquisition  of  the  property.  On  July  19,  2000, the
Settlement  expired  without  the parties completing final documents as provided
for in the Settlement. During November 2000, the parties negotiated a settlement
of  all  disputes  and  in  December  2000,  submitted  a preliminary settlement
agreement  to  the  Court  which  was  approved  by  the Court. The accompanying
unaudited  consolidated  financial  statements have been adjusted to reflect the
Settlement.  If  the  Settlement  is not finalized, the Company will continue to
pursue  its  legal  remedies.


                                       37
<PAGE>
          As  a  result  of the aforementioned, the Company may incur additional
costs to complete the US - Mexico Pipelines and Matamoros Terminal Facility, the
amount  of  which  cannot  presently  be  determined.

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

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

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

          Realization  of  Assets.  The  Company  has had an accumulated deficit
since  inception,  has used cash in operations, and has had a deficit in working
capital.  In  addition  significantly all of the Company's assets are pledged or
committed  to  be  pledged as collateral on existing debt in connection with the
Restructured  Notes,  the New Notes, the RZB Credit Facility and the Settlement.
The  Company is currently negotiating final documents with the creditors for the
required  security  agreements.  The  Company  may  need  to increase its credit
facility  for  the purchase of quantities of LPG in excess of current quantities
sold  and/or  to  finance  future  price  increases of LPG, if any. Further, the
Company  may  find  it  necessary  to liquidate inventories at a loss to provide
working  capital.  In  addition,  the Company entered into supply agreements for
quantities  of  LPG  substantially in excess of minimum quantities under the New
Agreement  (see  note  M  to  the  unaudited consolidated financial statements).
Although  the  Company  has  entered  into  the  Settlement  (see  note H to the
unaudited  consolidated  financial  statements), significant uncertainties exist
related  to  the  US  -  Mexico  Pipelines  and  Matamoros Terminal Facility. As
discussed  in  note  A  to  the unaudited consolidated financial statements, the
Company  has  historically  depended  heavily  on  sales  to one major customer.

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

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

          At July 31, 2000, the Company had net operating loss carryforwards for
federal  income  tax  purposes  of  approximately  $5.6  million. The ability to
utilize  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.


                                       38
<PAGE>
STATEMENT  BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED  PUBLIC  ACCOUNTANTS.

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

ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK.

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

          As  part  of  the  volume  requirements  under  the New Agreement, the
Company committed to sell PMI 1.1 million gallons of propane at a sales price of
approximately  $0.60  per  gallon,  to  be  delivered during February 2001. As a
result  of  the  sale,  the  Company  did  not record any material gain or loss.


                                       39
<PAGE>
PART  II

ITEM 1.   LEGAL  PROCEEDINGS

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

ITEM 2.   CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

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

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

ITEM 3.   DEFAULTS  UPON  SENIOR  SECURITIES

          None.

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

          None

ITEM 5.   OTHER  INFORMATION

          None.

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

     a.   Exhibits  and  Financial  Statement  Schedules

     THE  FOLLOWING  EXHIBITS  ARE  INCORPORATED  HEREIN  BY  REFERENCE:

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

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

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

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

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


                                       40
<PAGE>
       10.154  Promissory  Share  Transfer  Agreement to purchase shares of Penn
               Octane  de  Mexico, S.A. de C.V. dated November 13, 2000, between
               Jorge  Bracamontes  and  the  Company (Translation from Spanish).
               (Incorporated by reference to the Company's Annual Report on Form
               10-K  for  the  year  ended  July 31, 2000, filed on November 14,
               2000,  SEC  File  No.  000-24394).

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

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

       10.157  Promissory  Note  and  Pledge  and  Security  Agreement  dated
               November 30, 2000, between Western Wood Equipment Corporation and
               the  Registrant.  (Incorporated  by  reference  to  the Company's
               Annual  Report  on  Form  10-K  for the year ended July 31, 2000,
               filed  on  November  14,  2000,  SEC  File  No.  000-24394).

        b.   Reports  on  Form  8-K

          Reference is made to the Company's Form 8-K filed on February 9, 2001,
          regarding  the  restructuring  of  promissory  notes  originally  due
          December  15,  2000 and the issuance of additional promissory notes on
          January  31,  2001  (see  note  F  to  the  accompanying  unaudited
          consolidated  financial  statements).


                                       41
<PAGE>
                                   SIGNATURES

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


                           PENN  OCTANE  CORPORATION



March 21, 2001             By:   /s/  Ian  T.  Bothwell
                                 -----------------------------------------------
                                 Ian  T.  Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                 Chief  Financial  Officer


                                       42
<PAGE>