Penn Octane (POCC) 10-Q 2007 Q4 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                    to                    

Commission file number: 000-24394

Penn Octane Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	52-1790357
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. 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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero      Accelerated Filero       Non-Accelerated Filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yeso Noþ

The number of shares of Common Stock, par value $.01 per share, outstanding on August 10, 2007 was 15,396,187.

PENN OCTANE CORPORATION

TABLE OF CONTENTS

		PAGE NO.
PART I	FINANCIAL INFORMATION
ITEM
1.	Financial Statements
	Report of Independent Registered Public Accounting Firm	3
	Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007 (unaudited)	4-5
	Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and 2007	6
	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2007	7
	Notes to Consolidated Financial Statements (Unaudited)	8-32
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-52
3.	Quantitative and Qualitative Disclosures About Market Risk	52
4T.	Controls and Procedures	52
PART II	OTHER INFORMATION
1.	Legal Proceedings	53
1A.	Risk Factors	53 - 54
2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
3.	Defaults Upon Senior Securities	55
4.	Submission of Matters to a Vote of Security Holders	55
5.	Other Information	55
6.	Exhibits	56-62
Signatures		63
Exhibit 2.3
Exhibit 2.4
Exhibit 10.46
Exhibit 10.47
Exhibit 10.48
Exhibit 10.49
Exhibit 10.50
Exhibit 10.51
Exhibit 10.52
Exhibit 10.53
Exhibit 10.54
Exhibit 10.55
Exhibit 10.56
Exhibit 10.57
Exhibit 10.58
Exhibit 10.59
Exhibit 10.60
Exhibit 10.61
Exhibit 10.62
Exhibit 15
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

Part I – FINANCIAL INFORMATION

Item 1.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Penn Octane Corporation

We have reviewed the consolidated balance sheet of Penn Octane Corporation and subsidiaries (Company) as of June 30, 2007, the consolidated statements of operations for the three months and six months ended June 30, 2006 and 2007, and the consolidated statement of cash flows for six months ended June 30, 2006 and 2007. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with United States generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Penn Octane Corporation and Subsidiaries as of December 31, 2006, 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 February 15, 2007, we expressed an unqualified opinion on those consolidated financial statements.

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

Brownsville, Texas
August 13, 2007

3

Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31,		June 30,
	2006		2007
			(unaudited)
Current Assets
Cash	$	8,765,747	$	5,788,598
Restricted cash		1,862,199		1,152,149
Trade accounts receivable (less allowance for doubtful accounts of $254,729 at December 31, 2006 and June 30, 2007)		3,504,866		3,513,504
Inventories		1,603,355		2,679,213
Deferred tax asset		647,000		1,063,548
Prepaid expenses and other current assets		310,577		946,107
Total current assets		16,693,744		15,143,119
Property, plant and equipment – net		10,910,572		10,790,336
Other non-current assets		16,183		121,028
Total assets	$	27,620,499	$	26,054,483

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

4

Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS — CONTINUED

LIABILITIES AND STOCKHOLDERS’ EQUITY

	December 31,			June 30,
	2006			2007
				(unaudited)
Current Liabilities
Current maturities of long-term debt	$	1,137,500		$	1,137,500
Revolving line of credit		804,300			1,135,093
Fuel Products trade accounts payable		3,102,029			1,957,353
Other accounts payable		792,311			1,425,328
U.S. and foreign taxes payable		119,086			72,417
Accrued liabilities		1,339,982			1,863,858
Total current liabilities		7,295,208			7,591,549
Minority interest in Rio Vista Energy Partners L.P.		14,946,071			12,911,621
Commitments and contingencies		—			—
Stockholders’ Equity
Series A – Preferred stock-$.01 par value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2006 and June 30, 2007		—			—
Series B – Senior preferred stock-$.01 par value, $10 liquidation value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2006 and June 30, 2007		—			—
Common stock — $.01 par value, 25,000,000 shares authorized; 15,386,187 shares issued and outstanding at December 31, 2006 and June 30, 2007		153,862			153,862
Additional paid-in capital		29,105,611			29,190,732
Note receivable from a former officer of the Company for exercise of warrants, net of reserves of $1,500,000 and $0 at December 31, 2006 and June 30, 2007		(1,687,693	)		(1,200,000	)
Accumulated deficit		(22,192,560	)		(22,593,281	)
Total stockholders’ equity		5,379,220			5,551,313
Total liabilities and stockholders’ equity	$	27,620,499		$	26,054,483

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

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Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2007			2006			2007
Revenues	$	35,368,778		$	32,980,623		$	65,459,940		$	72,362,619
Cost of goods sold		35,496,185			32,479,986			65,601,385			70,918,044
Gross profit		(127,407	)		500,637			(141,445	)		1,444,575
Selling, general and administrative expenses
Legal and professional fees		465,941			482,953			774,374			959,143
Salaries and payroll related expenses		363,048			738,035			917,254			1,144,692
Other		500,476			487,002			998,499			1,008,619
		1,329,465			1,707,990			2,690,127			3,112,454
Operating (loss) from continuing Operations		(1,456,872	)		(1,207,353	)		(2,831,572	)		(1,667,879	)
Other income (expense)
Interest and Fuel Products financing expense		(219,530	)		(146,970	)		(395,725	)		(298,800	)
Interest income		13,524			5,639			22,985			18,352
Minority interest in loss of Rio Vista Energy Partners L.P.		1,108,913			685,681			2,420,831			1,146,058
(Loss) from continuing operations before taxes		(553,965	)		(663,003	)		(783,481	)		(802,269	)
Provision (benefit) for income taxes		14,663			(374,110	)		28,588			(401,548	)
Net (loss) from continuing operations		(568,628	)		(288,893	)		(812,069	)		(400,721	)
Discontinued operations:
Net income (loss) from operations of the LPG Assets Sold, net of minority interest of $683,495 and $1,749,085 for three months and six months ended June 30, 2006		214,811			—			175,174			—
Net (loss)	$	(353,817	)	$	(288,893	)	$	(636,895	)	$	(400,721	)
Basic and Diluted EPS:
Net loss from continuing operations per common share	$	(0.04	)	$	(0.02	)	$	(0.05	)	$	(0.03	)
Net income (loss) from discontinued operations per common share		0.02			0.00			0.01			0.00
Net (loss) per common share	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.03	)
Weighted average common shares outstanding		15,522,745			15,386,187			15,522,745			15,386,187

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

6

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	June 30,			June 30,
	2006			2007
Cash flows from operating activities:
Net (loss)	$	(636,895	)	$	(400,721	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		500,955			290,455
Amortization of lease rights		22,898			—
Amortization of loan discount related to detachable warrants		22,104			—
Discount on Richter Note		—			377,693
Provision for doubtful accounts		63,958			—
Share-based payment expense		214,192			160,186
Minority interest in Rio Vista Energy Partners L.P.		(671,746	)		(1,144,440	)
(Gain) loss on sale of assets		74,520			—
Changes in current assets and liabilities:
Trade accounts receivable		2,546,525			(8,638	)
Inventories		(715,792	)		(1,075,858	)
Prepaid expenses and other current assets		116,027			(535,530	)
Deferred tax asset		—			(416,548	)
LPG and Fuel Products trade accounts payable		(6,841,551	)		(1,144,676	)
Other accounts payable and accrued liabilities		(88,343	)		1,156,893
U.S. and Foreign taxes payable		14,340			(46,669	)
Net cash used in operating activities		(5,378,808	)		(2,787,853	)
Cash flows from investing activities:
Capital expenditures		(55,715	)		(170,219	)
Proceeds from sale of assets		130,776			—
(Increase) decrease in other non-current assets		1,514			(104,845	)
Net cash (used in) provided by investing activities		76,575			(275,064	)
Cash flows from financing activities:
Decrease (increase) in restricted cash		1,564,110			710,050
Revolving credit facilities		4,187,804			330,793
Loan origination fees related to RZB Loan Agreement		—			(100,000	)
Distributions paid to limited partners		—			(955,327	)
Distributions paid to the minority owners of the General Partner		—			(9,748	)
Stockholder’s note		—			110,000
Reduction in debt		(630,296	)		—
Net cash provided by financing activities		5,121,618			85,768
Net (decrease) increase in cash		(180,615	)		(2,977,149	)
Cash at beginning of period		299,597			8,765,747
Cash at end of period	$	118,982		$	5,788,598
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	911,083		$	297,887
Taxes	$	—		$	—
Supplemental disclosures of noncash transactions:
Equity — common stock and warrants issued and other	$	236,296		$	160,186

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

7

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE A — ORGANIZATION

Penn Octane Corporation (Penn Octane), a Delaware corporation and its consolidated subsidiaries, including Rio Vista Energy Partners L.P. and its subsidiaries (Rio Vista), are collectively hereinafter referred to as the Company. As more fully described in note F, prior to the sale of all of Penn Octane’s liquefied petroleum gas (LPG) related assets and a portion of Rio Vista’s LPG related assets to TransMontaigne Product Services Inc. (TransMontaigne) on August 22, 2006 (Restated LPG Asset Sale), the Company was principally engaged in the purchase, transportation and sale of LPG and the sale of gasoline and diesel fuel (Fuel Products). Subsequent to the Restated LPG Asset Sale, Penn Octane continues to sell Fuel Products and Rio Vista continues to own and operate an LPG terminal facility in Matamoros, Tamaulipas, Mexico (Matamoros Terminal Facility) and approximately 23 miles of pipelines (US — Mexico Pipelines) which connect the Matamoros Terminal Facility to the LPG terminal facility in Brownsville, Texas sold to TransMontaigne. Pursuant to an LPG transportation agreement with TransMontaigne, Rio Vista uses its remaining LPG assets to transport LPG exclusively for TransMontaigne on a fee-for-services basis. On July 27, 2007, Rio Vista acquired Regional Enterprizes, Inc. which was merged into Regional Enterprises, Inc., a wholly owned subsidiary of Rio Vista (see below and note E).

On July 27, 2007, Rio Vista entered into an Agreement and Plan of Merger (Merger Agreement) with Regional Enterprises, Inc., a Virginia corporation (New Regional), Regional Enterprizes, Inc., a Virginia corporation (Old Regional), the shareholders of Old Regional and W. Gary Farrar, Jr. The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista (the Regional Acquisition). The transactions contemplated by the Merger Agreement were completed on July 27, 2007. The principal business of Old Regional and New Regional (collectively, Regional) is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products, owned by its customers. Regional’s principal facilities are located on the James River in Hopewell, Virginia, where it receives bulk chemicals and petroleum products from ships and barges into approximately 10,000,000 gallons of available storage. Regional also receives product from a rail spur which is capable of receiving 14 rail cars at any one time for transloading of chemical and petroleum liquids for delivery throughout the mid-Atlantic region. Regional utilizes its fleet of 32 tractors and 50 trailers to distribute the various products it receives as well as to perform direct hauling operations on behalf of its customers. Regional has operated for 34 years and has approximately 50 employees.

The Company sells Fuel Products (Fuel Sales Business) through transactional, bulk and/or rack transactions. Typical transactional and bulk sales are made based on a predetermined net spread between the purchase and sales price over posted monthly variable prices and/or daily spot prices. Rack sales transactions are based on variable sale prices charged by the Company which are tied to posted daily spot prices and purchase costs which are based on a monthly average or 3 day average based on posted prices. The Company pays pipeline and terminal fees based on regulated rates.

The Company has the ability to access certain pipeline and terminal systems located in California, Arizona, Nevada and Texas, where it is able to deliver its Fuel Products.

For bulk and transactional sales, the Company enters into individual sales contracts for each sale. Fuel Products sales are subject to credit limitations imposed on each individual buyer by the Company. The Company has several supply contracts for each of the Fuel Products it sells. The supply contracts are for annual periods with flexible volumes but they may be terminated sooner by the supplier if the Company consistently fails to purchase minimum volumes of Fuel Products. The Company’s ability to access its various terminal locations is based on maintaining minimum through-put volumes at each terminal.

8

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A – ORGANIZATION — Continued

On September 30, 2004, Penn Octane completed a series of transactions that (i) transferred substantially all of its owned pipeline and terminal assets in Brownsville and Matamoros to its wholly owned subsidiary Rio Vista Operating Partnership L.P. and its subsidiaries (RVOP) (ii) transferred Penn Octane’s 99.9% interest in RVOP to its wholly owned subsidiary Rio Vista and (iii) distributed all of its limited partnership interest (Common Units) in Rio Vista to its common stockholders (Spin-Off), resulting in Rio Vista becoming a separate public company. The Common Units represented 98% of Rio Vista’s outstanding partnership interests. The remaining 2% interest represented the general partner interest. The general partner interest is solely owned and controlled by Rio Vista GP LLC (General Partner). Prior to June 30, 2006, the General Partner was wholly owned by Penn Octane. On July 1, 2006, options to acquire 50% of the General Partner were exercised, resulting in Penn Octane having a 50% interest in the General Partner. During July 2007, Penn Octane acquired the 25% interest in the General Partner from Shore Trading (see note L) resulting in Penn Octane having a 75% interest in the General Partner. Penn Octane has voting control over the 25% interest in the General Partner not owned by Penn Octane pursuant to a voting agreement with the other owner of the General Partner. Therefore, Rio Vista is consolidated with the Company and the interest of the General Partner not owned by Penn Octane and the interests of the limited partners of Rio Vista are classified as minority interests in the Company’s consolidated financial statements. The General Partner is responsible for the management of Rio Vista.

Prior to the Restated LPG Asset Sale, the Company’s primary customer for LPG was P.M.I. Trading Limited (PMI). PMI is a subsidiary of Petróleos Mexicanos, the state-owned Mexican oil company, which is commonly known by its trade name “PEMEX.” PMI is currently the exclusive importer of LPG into Mexico. PMI sold the LPG delivered from the Matamoros Terminal Facility to PEMEX which distributed the LPG into the northeastern region of Mexico. Subsequent to the Restated LPG Asset Sale, TransMontaigne continues to use the Matamoros Terminal Facility for sales of LPG to PMI which are principally destined for consumption in the northeastern region of Mexico, which includes the states of Coahuila, Nuevo Leon and Tamaulipas. Sales of LPG to PMI have historically fluctuated in part based on the seasons. The demand for LPG is strongest during the winter season.

Basis of Presentation

The accompanying consolidated financial statements include Penn Octane and its United States subsidiaries including PennWilson CNG, Inc. (PennWilson) and Penn CNG Holdings, Inc. and Rio Vista and its U.S. and Mexican subsidiaries, including Penn Octane International, L.L.C., Penn Octane de Mexico, S. de R.L. de C.V. (PennMex), Termatsal, S. de R.L. de C.V. (Termatsal) and Tergas, S. de R.L. de C.V. (Tergas), a consolidated affiliate, and Penn Octane’s other inactive Mexican subsidiaries, (collectively the Company). All significant intercompany accounts and transactions are eliminated. Regional will be included in the consolidated financial statements subsequent to the date of the Regional Acquisition.

The unaudited consolidated balance sheet as of June 30, 2007, the unaudited consolidated statements of operations for the three months and six months ended June 30, 2006 and 2007 and the unaudited consolidated statements of cash flows for the six months ended June 30, 2006 and 2007, 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 June 30, 2007, the unaudited consolidated results of operations for the three months and six months ended June 30, 2006 and 2007 and the unaudited consolidated statements of cash flows for the six months ended June 30, 2006 and 2007.

9

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A – ORGANIZATION — Continued

Basis of Presentation — Continued

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. 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/A Amendment No. 1 for the year ended December 31, 2006 and Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2006.

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

NOTE B – INCOME (LOSS) PER COMMON SHARE

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

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

	For the three months ended June 30, 2006
	Income (Loss)			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net income (loss) from continuing operations	$	( 568,628	)
Basic EPS
Net income (loss) available to common stockholders		(568,628	)		15,522,745	$	(0.04	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net income (loss) available to common stockholders		N/A			N/A		N/A

	For the three months ended June 30, 2007
	Income (Loss)			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net income (loss) from continuing operations	$	( 288,893	)
Basic EPS
Net income (loss) available to common stockholders		( 288,893	)		15,386,187	$	(0.02	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net income (loss) available to common stockholders		N/A			N/A		N/A

10

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B – INCOME (LOSS) PER COMMON SHARE — Continued

	For the six months ended June 30, 2006
	Income (Loss)			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net income (loss) from continuing operations	$	( 812,069	)
Basic EPS
Net income (loss) available to common stockholders		( 812,069	)		15,522,745	$	(0.05	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net income (loss) available to common stockholders		N/A			N/A		N/A

	For the six months ended June 30, 2007
	Income (Loss)			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net income (loss) from continuing operations	$	( 400,721	)
Basic EPS
Net income (loss) available to common stockholders		( 400,721	)		15,386,187	$	(0.03	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net income (loss) available to common stockholders		N/A			N/A		N/A

11

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE C – SHARE-BASED PAYMENT

The Company applies the provisions of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (123R) and Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (APB 14) to account for such transactions. SFAS 123R requires that such transactions be accounted for at fair value. If the fair value of the goods and services or debt related transactions are not readily measurable, the fair value of the warrants is used to account for such transactions.

The Company utilizes share-based awards as a form of compensation for employees, officers, directors and consultants. During the quarter ended March 31, 2006, the Company adopted the provisions of SFAS 123R for share-based payments to employees using the modified prospective application transition method. Under this method, previously reported amounts should not be restated to reflect the provisions of SFAS 123R. SFAS 123R requires measurement of all employee share-based payment awards using a fair-value method and recording of such expense in the consolidated financial statements over the requisite service period. The fair value concepts have not changed significantly in SFAS 123R; however, in adopting this standard, companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using both the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion of the grant. The Company will reconsider use of this model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Previously, the Company had applied the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations and elected to utilize the disclosure option of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Penn Octane recorded share-based payment expense for employees and non-employees of $81,733 ($0.01 per common share) and $29,581 ($0.00 per common share) for the three months ended June 30, 2006 and 2007, respectively, $205,794 ($0.01 per common share) and $84,363 ($0.01 per common share) for the six months ended June 30, 2006 and 2007, respectively, under the fair-value provisions of SFAS 123R. Rio Vista recorded unit-based payment expense for employees and non-employees of $0 ($0.00 per common unit) and $35,890 ($0.02 per common unit) for the three months ended June 30, 2006 and 2007, respectively, and $8,394 ($0.00 per common unit) and $75,823 ($0.04 per common unit) for the six months ended June 30, 2006 and 2007, respectively under the fair-value provisions of SFAS 123R.

NOTE D – NOTE RECEIVABLE FROM A FORMER OFFICER OF THE COMPANY

On July 9, 2007, the board of directors of Penn Octane agreed to amend the note receivable from Mr. Jerome B. Richter, a former officer of the Company, (Richter Note) whereby the Richter Note was extended from July 29, 2007 until January 1, 2009, and agreed to reduce the balance of the Richter Note to an outstanding total amount of $1,500,000 as consideration for Mr. Richter’s services to Penn Octane and his agreement not to provide services for any competitors until January 1, 2009. Furthermore, on August 10, 2007, the board of directors of Penn Octane agreed to discount the amount of the Richter Note to $1,200,000 as inducement for Mr. Richter to prepay his loan by August 15, 2007. On July 25, 2007 and August 10, 2007, Mr. Richter paid the Company $600,000 and $600,000, respectively, as full satisfaction of all amounts owing under the Richter Note. As a result of the foregoing, the Company recorded a charge to compensation expense during the quarter ended June 30, 2007 in the amount of $377,693.

12

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE E — ACQUISITION OF REGIONAL ENTERPRIZES INC.

On July 27, 2007, Rio Vista entered into the Merger Agreement with New Regional, Old Regional, the shareholders of Old Regional and W. Gary Farrar, Jr. The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista. The transactions contemplated by the Merger Agreement were completed on July 27, 2007. The principal business of Regional is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products owned by its customers. The total consideration pursuant to the Merger Agreement was $9,000,000, of which Rio Vista paid $8,000,000 in cash, less certain working capital and other adjustments and subject to certain amounts held in escrow, with the remaining $1,000,000 to be paid in four equal semiannual installments beginning six months from the date of the Regional Acquisition. Under the terms of the Merger Agreement, Rio Vista is entitled to net working capital of Old Regional of $500,000 (subject to adjustments) in excess of assumed liabilities. Under the terms of the Merger Agreement, a total of $1,500,000 was placed into escrow to secure certain indemnification obligations of the former shareholders of Old Regional. Rio Vista funded the Regional Acquisition through a loan of $5,000,000 (RZB Loan) from RZB Finance LLC (RZB) and the remaining amounts due at closing were paid from available working capital.

In connection with the Regional Acquisition, Rio Vista entered into a loan agreement (the Loan Agreement) with RZB dated July 26, 2007. The principal amount of the RZB Loan is $5,000,000, due on demand, with a one-year maturity. The RZB Loan carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%, in each case plus a margin of 4.75%. In connection with the RZB Loan, New Regional granted to RZB a security interest in all of New Regional’s assets, including a deed of trust on real property owned by New Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of New Regional. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB Loan is also guaranteed by New Regional and RVOP.

13

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F – SALE OF LPG ASSETS / DISCONTINUED OPERATIONS

On August 22, 2006, Penn Octane completed the sale and assignment to TransMontaigne of all of Penn Octane’s LPG assets, including assignment of the lease of the Leased Pipeline and the Exxon Supply Contract (Penn Octane Sold Assets) pursuant to an amended and restated purchase and sale agreement (Penn Octane Restated PSA). The terms of the Penn Octane Restated PSA were substantially similar to the original purchase and sale agreement entered into between Penn Octane and TransMontaigne on August 15, 2005. Penn Octane retained assets related to its Fuel Sales Business, and its interest in the General Partner. The purchase price was $10,100,000 for assets sold by Penn Octane less closing adjustments of $132,177. In connection with the sale, Penn Octane used approximately $1,016,000 of its proceeds to pay off all remaining amounts owed under the Restructured Notes and $280,000 Notes including accrued interest.

Also on August 22, 2006, Rio Vista completed the sale and assignment to TransMontaigne of certain LPG assets, including the Brownsville Terminal Facility, the refined products tank farm and associated leases, and LPG inventory, wherever located, (collectively, the Brownsville Terminal Assets) and assignment of the 2006 PMI agreement (Brownsville Terminal Assets and the 2006 PMI agreement collectively, the Rio Vista Sold Assets) pursuant to an amended and restated purchase and sale agreement (Rio Vista Restated PSA). The Rio Vista Restated PSA replaced the previous purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005. Rio Vista retained its owned pipelines located in the United States, including land, leases and rights of way and 100% of the outstanding stock of its Mexican subsidiaries. Rio Vista’s Mexican subsidiaries and consolidated affiliate own pipelines in Mexico and the Matamoros Terminal Facility, including land and rights of way (collectively, the Retained Assets). The purchase price for the Rio Vista Sold Assets was $8,300,000 less closing adjustments of $351,173 and escrow cleaning costs of $500,000 (see next paragraph).

The Rio Vista Restated PSA required Rio Vista to escrow $500,000 for disposal and cleaning costs of the refined products tank farm (Escrow Cleaning Costs) and the TransMontaigne Note (see note G) was amended whereby Rio Vista was required to pay $300,000 of principal at closing and will be required to pay the remaining outstanding principal balance on August 22, 2007. In addition, any portion of the Escrow Cleaning Costs returned to Rio Vista is required to be paid on the outstanding principal balance of the TransMontaigne Note. The Company currently estimates that the amount, if any, of the Escrow Cleaning Costs that may be returned by TransMontaigne will be immaterial.

Under the Rio Vista Restated PSA and the related transportation agreement between Rio Vista and TransMontaigne dated August 22, 2006, (LPG Transportation Agreement), TransMontaigne agreed to exclusively use the services and Retained Assets of Rio Vista on a fee basis for purposes of transportation of LPG to be delivered into northeastern Mexico and/or LPG sold pursuant to the existing PMI agreement. Rio Vista has agreed not to transport LPG through Rio Vista’s Retained Assets in Mexico except on behalf of TransMontaigne, subject to certain conditions. TransMontaigne has agreed to use the Retained Assets pursuant to the LPG Transportation Agreement which began on August 22, 2006 and runs for the term of the existing PMI agreement between TransMontaigne and PMI, as extended from time to time thereafter. The Company receives a fee for all LPG transported on behalf of TransMontaigne through the Retained Assets. In addition, under the Rio Vista Restated PSA and the related pipeline services agreement between Rio Vista and TransMontaigne dated August 22, 2006 (U.S. Pipeline Services Agreement), TransMontaigne agreed to provide routine and non-routine operation and maintenance services, as defined, for the U.S. portion only of Rio Vista’s pipelines between Brownsville, Texas and Matamoros, Mexico. TransMontaigne agreed to provide the routine services at its sole cost and expense. For the non-routine services, Rio Vista agreed to reimburse TransMontaigne for all costs actually incurred in performing the services and all materials and supplies provided in connection with such services, plus 15%. Rio Vista has also granted TransMontaigne certain rights of first offer with respect to a sale of the Retained Assets by Rio Vista to any third party.

In connection with Mr. Richter’s previous consulting agreement, Penn Octane and Rio Vista paid Mr. Richter $193,216 and $138,349, respectively, for fees due on the sale of the Penn Octane Sold Assets and Rio Vista Sold Assets.

14

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F – SALE OF LPG ASSETS/DISCONTINUED OPERATIONS – Continued

The sale of the Penn Octane Sold Assets and the Rio Vista Sold Assets (collectively the Sold Assets) constituted a disposal of a business in accordance with FAS 144. Accordingly, the financial statements reflect the results associated with the Sold Assets prior to the sale as discontinued operations in the accompanying financial statements. Costs related to the Retained Assets consisting of depreciation expense and the expenses related to the US-Mexico Pipelines and Matamoros Terminal Facility totaling approximately $446,000 and $986,000 for the three months and six months ended June 30, 2006 have been included in cost of goods sold since these costs have continued to be incurred in connection with the LPG Transportation Agreement. Revenues reported in discontinued operations in the accompanying consolidated statements of operations for the three months and six months ended June 30, 2006 were $31,574,648 and $70,811,750, respectively.

The following were also transferred to TransMontaigne in connection with the Restated LPG Asset Sale:

Leases Assigned

The leased pipeline, the Brownsville terminal land lease and the Brownsville tank farm land lease were transferred to TransMontaigne in connection with the Restated LPG Asset Sale.

In connection with the above leases, rent expense included in discontinued operations was $269,218 and $729,352 for the three months and six months ended June 30, 2006, respectively.

2006 PMI Agreement

Effective June 4, 2005, the Company entered into an agreement with PMI for the period June 4, 2005 through March 31, 2006 for the sale of LPG to PMI (2005 PMI Agreement). On March 31, 2006, the 2005 PMI Agreement expired. During the month of April 2006, the Company sold LPG to PMI under a monthly contract which provided for volumes of approximately 6,000,000 gallons at prices similar to the 2005 PMI Agreement. During April 2006, PMI purchased approximately 6,000,000 gallons.

On April 28, 2006, the Company received electronic confirmation (PMI Confirmation) from PMI of the terms of a new purchase and sale agreement for LPG for the period May 1, 2006 through March 31, 2007.

The PMI Confirmation was subject to execution of a definitive written agreement between Rio Vista and PMI. The agreement (2006 PMI Agreement) was executed during July 2006 with the terms specified in the PMI Confirmation. The 2006 PMI Agreement provided that PMI did not have a financial obligation with respect to any short falls if volumes actually purchased are less than minimum volumes contained in the 2006 PMI Agreement.

15

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F – SALE OF LPG ASSETS/DISCONTINUED OPERATIONS – Continued

The following table sets forth the actual volumes purchased by PMI for the months January 2006 through July 2007.

	Actual Volumes
Month	Sold/Transported
	(gallons)
January 2006		14,757,646
February 2006		11,940,257
March 2006		11,606,435
April 2006		6,035,733
May 2006		5,733,193
June 2006		7,130,666
July 2006		4,937,441
August 2006		5,408,563
September 2006		6,402,253
October 2006		8,908,931
November 2006		9,906,874
December 2006		10,448,614
January 2007		10,362,590
February 2007		8,590,460
March 2007		8,772,010
April 2007		6,492,361
May 2007		5,818,669
June 2007		5,480,023
July 2007		5,552,780

For the period January 1, 2006 through August 21, 2006, the Company sold LPG to PMI. Beginning on August 22, 2006, the Company transported LPG pursuant to the LPG Transportation Agreement. The volume transported by the Company for the period August 22, 2006 to August 31, 2006 totaled 1,384,581 gallons.

16

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE F – SALE OF LPG ASSETS/DISCONTINUED OPERATIONS – Continued

Exxon Supply Contract

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

Effective March 1, 2006, the Exxon Supply Contract was amended to extend through September 30, 2010.

LPG Supply Agreement with Rio Vista

Beginning with the date of the Spin-Off and continuing through the date of the Restated LPG Asset Sale, Penn Octane entered into a long-term supply agreement (LPG Supply Agreement) with Rio Vista pursuant to which Rio Vista agreed to purchase all of its LPG requirements for sales which utilized the assets transferred to Rio Vista by Penn Octane to the extent Penn Octane was able to supply such LPG requirements. The LPG Supply Agreement further provided that Rio Vista had no obligation to purchase LPG from Penn Octane to the extent the distribution of such LPG to Rio Vista’s customers would not require the use of any of the assets Penn Octane transferred to Rio Vista or Penn Octane ceased to have the right to access to Leased Pipeline.

As a result of the Restated LPG Asset Sale, the LPG Supply Agreement was terminated.

17

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following as of:

	December 31,			June 30,
	2006			2007
LPG:
US — Mexico Pipelines and Matamoros Terminal Facility: (a)(c)
U.S. Pipelines and Rights of Way	$	6,851,667		$	6,851,667
Mexico Pipelines and Rights of Way		1,045,300			1,045,300
Matamoros Terminal Facility		5,564,330			5,564,330
Land		705,358			705,358
Total LPG		14,166,655			14,166,655
Other:
Office equipment (b)		117,802			130,392
Software (b)		198,841			356,469
		316,643			486,861
		14,483,298			14,653,516
Less: accumulated depreciation and amortization		(3,572,726	)		(3,863,180	)
	$	10,910,572		$	10,790,336

(a)	Rio Vista assets
(b)	Penn Octane and Subsidiaries other than Rio Vista
(c)	Rio Vista owns, leases, or is in the process of obtaining the land or rights of way used related to the US-Mexico Pipelines

Depreciation and amortization expense of property, plant and equipment from continuing operations totaled $149,235 and $123,703, $301,326 and $290,455 for the three months and six months ended June 30, 2006 and 2007, respectively.

Property, plant and equipment, net of accumulated depreciation, includes $4,704,425 and $4,512,583 of costs, located in Mexico at December 31, 2006 and June 30, 2007, respectively.

18

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE H – INVENTORIES

	December 31, 2006				June 30, 2007
	Gallons		LCM		Gallons		LCM
Fuel Products		938,458	$	1,603,355		1,193,750	$	2,679,213

NOTE I – DEBT OBLIGATIONS

Debt obligations are as follows:

	December 31,		June 30,
	2006		2007
Noninterest-bearing debt obligation, discounted at 7%, for legal services; due in February 2001	$	137,500	$	137,500
TransMontaigne Note		1,000,000		1,000,000
Total debt		1,137,500		1,137,500
Less: Current maturities		1,137,500		1,137,500
Long-term debt	$	—	$	—

TransMontaigne Note

In connection with the purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005 (see note F), TransMontaigne loaned Rio Vista $1,300,000 (TransMontaigne Note). The TransMontaigne Note was to be repaid, including interest, as a reduction of the total purchase price at the time of closing or 120 days following demand by TransMontaigne. The TransMontaigne Note was secured by the tank farm and certain LPG storage tanks located at the Brownsville Terminal Facility (Collateral). The TransMontaigne Note began to accrue interest on November 15, 2005 at the prime rate plus 2%. On August 22, 2006, in connection with the Rio Vista Restated PSA, the TransMontaigne Note was amended whereby Rio Vista paid $300,000 of principal and the TransMontaigne Note was extended to August 22, 2007. The TransMontaigne Note was also amended to substitute as collateral the US portion of the eight-inch pipeline owned by Rio Vista. The TransMontaigne Note bears interest at the rate of prime (8.25% as of June 30, 2007) plus 2% annually and interest is payable monthly.

NOTE J – COMMON STOCK

During August 2007, warrants to purchase a total of 10,000 shares of common stock of Penn Octane were exercised resulting in cash proceeds to the Company of $11,438.

19

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE K – STOCK WARRANTS

2001 Warrant Plan

On February 13, 2007, the board of directors of Penn Octane approved the grant of warrants to purchase a total of 127,500 shares of its common stock under Penn Octane’s 2001 Warrant Plan. Of the total number of warrants granted, 30,000 were issued to an executive officer of Penn Octane and 97,500 were issued to outside directors of Penn Octane. The exercise price for the warrants is $0.51 per share, which was the closing price for Penn Octane common stock as reported by the Pink Sheets quotation system on February 13, 2007. Warrants granted to the executive officer vest in equal monthly installments over a period of 36 months from the date of grant, become fully exercisable upon a change in control event, and expire five years from the date of grant. Warrants granted to outside directors are fully vested on the date of grant and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $114,000.

On June 15, 2007, in connection with a consulting agreement (Board Consulting Agreement) with Richard R. Canney, the chairman of the board of directors of Penn Octane and chairman of the board of managers of the General Partner (Chairman) (see note M), Penn Octane granted the Chairman a warrant to purchase 270,224 shares of Penn Octane common stock. The exercise price for the warrant is $0.70 per share, which was the closing price for Penn Octane common stock as reported by the OTC Bulletin Board on June 15, 2007. The warrant vests as to 25% of the shares on February 1, 2008, with the remainder vesting in equal monthly installments over a period of 36 months from such date, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. The Board Consulting Agreement may be terminated by either party upon written notice. If Penn Octane terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), the Chairman is entitled to acceleration of vesting of the first 25% of his warrant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $138,000.

On June 29, 2007, the board of directors of Penn Octane approved the grant of a warrant to purchase 150,000 shares of its common stock under Penn Octane’s 2001 Warrant Plan to an executive officer of Penn Octane. The exercise price for the warrant is $0.70 per share, which was the closing price for Penn Octane common stock as reported by the OTC Bulletin Board on June 29, 2007. The warrant vests in equal monthly installments over a period of 36 months beginning January 1, 2007, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $77,000.

NOTE L – COMMON UNITS AND OPTIONS OF RIO VISTA

Common Units

On June 29, 2007, the Board of Managers of the General Partner Rio Vista approved the grant of a restricted unit bonus of 25,000 common units under Rio Vista’s 2005 Equity Incentive Plan to an executive officer of the General Partner. The restricted unit bonus vests as to 8,334 units on July 1, 2007, an additional 8,333 units on January 1, 2008, and an additional 8,333 units on July 1, 2008, and becomes fully vested upon a change in control event. In connection with the grant of restricted units, the Board of Managers also approved the payment to the executive officer of one or more cash bonuses in amounts sufficient, on an after-tax basis, to cover all taxes payable by the executive officer with respect the award of restricted units to him. Total compensation to be recorded under the aforementioned grant of units as they vest totals $280,250.

20

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE L – COMMON UNITS AND OPTIONS OF RIO VISTA — Continued

General Partner Options

On July 1, 2006, Penn Octane’s 100% interest in the General Partner was decreased to 50% as a result of the exercise by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore, former President of the Company, and by Mr. Richter, of options to each acquire 25% of the General Partner (General Partner Options). The exercise price for each option was approximately $82,000 pursuant to the July 10, 2003 option agreements. Mr. Shore resigned from the Company in June 2005. Mr. Richter’s option was amended to permit payment of the exercise price by surrender of Penn Octane common stock having a fair market value equal to the exercise price. Mr. Richter paid the exercise price for his option by surrender of 136,558 shares of Penn Octane common stock. In connection with the exercise of the General Partner Options, Penn Octane retained voting control of the General Partner pursuant to a voting agreement with each of Shore Capital and Mr. Richter. In December 2006, Shore Capital transferred its interest in the General Partner to Shore Trading LLC, an affiliated entity (Shore Trading). Shore Trading was also a party to the voting agreement with Penn Octane.

On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that provided Penn Octane with the option (Purchase Option) to purchase the 25% interest in the General Partner held by Shore Trading. Penn Octane paid Shore Trading $100,000 in order to acquire the Purchase Option. The exercise price for the Purchase Option was $1,300,000, for a total purchase price of $1,400,000. On July 19, 2007, Penn Octane exercised the Purchase Option. As a result of the exercise of the Purchase Option, beginning July 19, 2007, Penn Octane’s interest in the General Partner increased from 50% to 75%. All amounts paid in connection with the Purchase Option were determined pursuant to arm’s length negotiations between Penn Octane and Shore Trading in February 2007.

Common Unit Options

On February 15, 2007, the board of managers of the General Partner approved the grant of options to purchase a total of 21,250 common units under Rio Vista’s 2005 Equity Incentive Plan (2005 Plan). Of the total number of options granted, 5,000 were issued to an executive officer of the General Partner and 16,250 were issued to outside managers of the General Partner. The exercise price for the options is $8.38 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on February 15, 2007. Options granted to the executive officer vest in equal monthly installments over a period of 36 months from the date of grant, become fully vested and exercisable upon a change in control event, and expire five years from the date of grant. Options granted to outside managers are fully vested on the date of grant and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $51,000.

On March 21, 2007, the board of managers of the General Partner approved the grant of an option to purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of the General Partner. The exercise price for the options is $7.36 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 21, 2007. The options vest in equal monthly installments over a period of 36 months from the date of grant, become fully vested and exercisable upon a change in control event, and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $44,000.

21

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE L – OPTIONS AND WARRANTS OF RIO VISTA — Continued

Common Unit Options — Continued

On June 15, 2007, in connection with the Board Consulting Agreement with the Chairman (see note M), Rio Vista granted the Chairman an option to purchase 26,963 common units of Rio Vista. The exercise price for the option is $11.14 per unit, which was the average of the high and low sale prices as reported by the NASDAQ Stock Market on June 15, 2007. The option vests as to 25% of the units on February 1, 2008, with the remainder vesting in equal monthly installments over a period of 36 months from such date, becomes fully vested and exercisable upon a change in control event, and expires five years from the date of grant. The Board Consulting Agreement may be terminated by either party upon written notice. If Rio Vista terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), the Chairman is entitled to acceleration of vesting of the first 25% of his unit option. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $90,000.

On June 29, 2007, the board of managers of the General Partner Rio Vista approved the grant of an option to purchase 75,000 common units of Rio Vista under Rio Vista’s 2005 Equity Incentive Plan to an executive officer of the General Partner. The exercise price for the options is $11.21 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on June 29, 2007. The unit option vests in equal monthly installments over a period of 36 months beginning January 1, 2007, becomes fully vested and exercisable upon a change in control event, and expires five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $254,000.

NOTE M — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Penn Octane, Rio Vista and/or Rio Vista’s subsidiaries were named as defendants in two lawsuits filed in connection with an accident in the town of Lucio Blanco, Mexico on August 11, 2005, involving a tanker truck carrying LPG which was struck by a train resulting in an explosion. None of Penn Octane, Rio Vista or any of Rio Vista’s subsidiaries owned or operated the tanker truck or employed or controlled the driver of the tanker truck. Further, none of Penn Octane, Rio Vista or any of Rio Vista’s subsidiaries owned or had custody of the LPG on the tanker truck at the time and location of the accident.

The tanker truck reportedly took delivery of LPG at the Matamoros Terminal Facility operated under agreement with Rio Vista’s Mexican subsidiaries. According to the lawsuits, after leaving the Matamoros Terminal Facility, the tanker truck was involved in a collision with a train in Lucio Blanco, Mexico, resulting in a tragic explosion that killed and injured several persons and caused significant property damage. Published reports indicate that the truck used a road not approved for large trucks and failed to stop at an unprotected rail crossing, resulting in the collision and explosion. The insurance carrier for the owner of the tanker truck has settled certain claims in Mexico with victims of the accident.

22

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES

Legal Proceedings — Continued

Even though the accident took place in Mexico, these lawsuits were filed in Texas. The first case is captionedLesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane International LLC, et aland was filed in the 404^th Judicial District Court for Cameron County, Texas on September 26, 2005. The plaintiffs seek unspecified monetary damages. On August 16, 2006 with the consent of the parties, the Court issued an amended order for temporary injunction for the purpose of preserving relevant evidence. The amended injunction required a subsidiary of Rio Vista to make available for inspection by plaintiffs Rio Vista’s terminal facilities in Brownsville, Texas and Matamoros, Mexico and associated equipment and records. The order also required Rio Vista to give 30 days advance notice to plaintiffs before conducting any alteration, repair, service, work or changes to the facilities or equipment. In addition, the order required Rio Vista to make available its employees for deposition by the plaintiffs and to secure and preserve certain physical evidence believed to be located in Mexico. The Brownsville, Texas terminal facility was sold to TransMontaigne Product Services Inc. on August 22, 2006. In January 2007, this case was removed to the U.S. District Court for the Southern District of Texas, Brownsville Division. In July 2007, the case was remanded to the state court in Cameron County, Texas. In August 2007, plaintiffs filed an amended petition alleging that defendants delivered the LPG to an unqualified driver and that defendants failed to properly odorize the LPG before delivery. Limited discovery has been conducted to date in this proceeding.

The second case is captionedFaustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et al.and was filed in the 107^th Judicial District Court for Cameron County, Texas, on November 14, 2005. The plaintiffs sought unspecified monetary damages. In March 2007, the Company entered into a settlement agreement with the plaintiffs on terms deemed favorable to the Company. Pursuant to the settlement agreement this case was dismissed in April 2007. The Company’s legal fees and settlement costs were covered by insurance.

Management believes the remaining lawsuit against Penn Octane, Rio Vista and/or Rio Vista’s subsidiaries relating to the accident in Lucio Blanco is without merit and, based on the advice of counsel, does not anticipate liability for damages. The Company’s insurance carrier is expected to bear the legal fees and expenses in connection with defending this case. If, however, a court found liability on the part of Penn Octane, Rio Vista or their subsidiaries, a judgment or settlement in excess of insurance coverage could have a material adverse effect on Penn Octane’s and Rio Vista’s business, financial condition and results of operations.

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

23

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Credit Facility and Letters of Credit

Penn Octane finances its purchases of Fuel Products through its credit facility with RZB. As of June 30, 2007, Penn Octane had a $15,000,000 credit facility with RZB for demand loans and standby letters of credit (RZB Credit Facility) to finance Penn Octane’s purchases of Fuel Products (see below). The RZB Credit facility is an uncommitted facility under which the letters of credit have an expiration date of no more than 90 days and the facility is reviewed annually. In connection with the RZB Credit Facility, the Company granted RZB a security interest and assignment in any and all of the Company’s accounts, inventory, real property, buildings, pipelines, fixtures and interests therein or relating thereto. Under the existing RZB Credit Facility, the Company may not permit to exist any subsequent lien, security interest, mortgage, charge or other encumbrance of any nature on any of its properties or assets, except in favor of RZB, without the consent of RZB. After the Spin-Off and transfer of assets to Rio Vista, RZB continued to retain a security interest in the assets transferred to Rio Vista.

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% of the maximum face amount of such letter of credit for Fuel Products, or (iii) such higher amount as may be agreed to between the Company and RZB. Any loan amounts outstanding under the RZB Credit Facility accrue interest at a rate equal to the rate announced by the JPMorgan Chase Bank as its prime rate (8.25% at June 30, 2007) plus 2.5%. Pursuant to the RZB Credit Facility, RZB has sole and absolute discretion to limit or terminate its participation in the RZB Credit Facility and to refrain from making any loans or issuing any letters 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 addition to the fees described above, the Company is required to pay RZB annual fees of $25,000.

On July 26, 2007, as a condition of the Loan Agreement (see note E), Penn Octane entered into a First Amendment to Line Letter (First Amendment) with RZB. The First Amendment amends the Amended and Restated Line Letter dated as of September 14, 2004 between Penn Octane and RZB. The First Amendment reduces the amount of the RZB Credit Facility from $15,000,000 to $10,000,000. Subject to RZB’s discretion, the amount of the RZB Credit Facility will be increased dollar for dollar by Rio Vista’s principal repayments under the Loan Agreement.

The ability of the Company to grow the Fuel Sales Business is dependent on the future limits of the RZB Credit Facility or other sources of financing and/or the reduction in Fuel Products purchase prices.

Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required to maintain net worth of a minimum of $10,000,000.

In connection with the Company’s purchases of Fuel Products, letters of credit are issued based on anticipated purchases. Outstanding letters of credit for purchases of Fuel Products at June 30, 2007 totaled approximately $3,943,000 of which approximately $1,951,000 represents June 2007 purchases and approximately $1,992,000 represents July 2007 purchases.

24

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Credit Facility and Letters of Credit — Continued

In connection with the Company’s purchase of Fuel Products, under the RZB Credit Facility, assets related to product sales (Assets) are required to be in excess of borrowings and commitments (including restricted cash of approximately $632,000 at June 30, 2007). At June 30, 2007, the Company’s borrowings and commitments were less than the amount of the Assets.

Under the terms of the RZB Credit Facility, all cash from Penn Octane Fuel Products sales are deposited directly into a restricted cash account under the direction of RZB to pay down all obligations of Penn Octane arising under RZB Credit Facility. Accordingly, Penn Octane only receives net proceeds from the restricted cash account when the amounts of acceptable collateral provided by Penn Octane and /or Rio Vista exceed all liabilities under the outstanding letters of credit and/or loans issued on behalf of Penn Octane, at the sole discretion of RZB. The balance of restricted cash reflected in the accompanying balance sheet at June 30, 2007 has been reduced by the amount of cash held by RZB which exceeds obligations covered by the RZB Credit Facility.

In connection with the Company’s Fuel Sales Business, the Company has provided bonds totaling $662,000 to the states of California, Nevada, Arizona and Texas (Bonds) to secure payments of excise and other taxes collected from customers in connection with sales of Fuel Products. The Bonds are partially secured by letters of credit totaling $452,600. At June 30, 2007, such taxes in the amount of approximately $664,000 were due. The letters of credit issued have all been secured by cash in the amount of approximately $494,000 which is included in restricted cash in the Company’s balance sheet at June 30, 2007.

Consulting Agreements

JBR Capital

Penn Octane entered into a consulting agreement (Consulting Agreement) with JBR Capital Resources, Inc. (JBR Capital) regarding consulting services to be rendered by JBR Capital to Penn Octane and to Rio Vista. JBR Capital is controlled by Mr. Richter. The provisions of the Consulting Agreement dated March 5, 2007 are effective as of November 15, 2006 (Effective Date).

Pursuant to the Consulting Agreement, JBR Capital has agreed to assist Penn Octane and Rio Vista with the potential acquisition and disposition of assets and with other transactions involving Penn Octane or Rio Vista. In exchange for these services, Penn Octane has agreed to pay JBR Capital a fee based on approved services rendered by JBR Capital plus a fee based on the net proceeds to Penn Octane resulting from a sale of assets to a third party introduced to Penn Octane by JBR Capital. Pursuant to a related letter agreement, JBR Capital agreed that Penn Octane apply 50% of the amount of any fees payable to JBR Capital under the Consulting Agreement against amounts owed by Mr. Richter to Penn Octane pursuant to the Richter Note (see note D). For the three months and six months ended June 30, 2007, the Company expensed approximately $110,000 and $192,000 in connection with the Consulting Agreement, paid $69,000 and $110,000 to JBR Capital and $48,000 and $89,000 were applied against the Richter Note. The term of the Consulting Agreement is six months following the Effective Date. The Consulting Agreement renews for additional six-month terms unless terminated by either party at least 30 days before the end of each term.

25

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Richard R. Canney

On June 15, 2007, Penn Octane and Rio Vista entered into the Board Consulting Agreement regarding consulting services to be rendered by Mr. Canney to Penn Octane and to Rio Vista. Pursuant to the Board Consulting Agreement, Mr. Canney has agreed to assist Penn Octane and Rio Vista with the potential acquisition and disposition of assets, obtaining financing, other transactions, and recommending candidates for management and board service. In exchange for these services, Penn Octane and Rio Vista have agreed to pay Mr. Canney a combined total monthly fee of $12,500, inclusive of all fees payable in connection with Mr. Canney’s services as a director and chairman of the board of Penn Octane and Rio Vista, retroactive to November 1, 2006. The monthly fee will be paid equally by Penn Octane and Rio Vista. Mr. Canney will also receive medical insurance benefits and is eligible for a discretionary bonus. Mr. Canney is expected to provide at least 80 hours of service per month. Pursuant to the Board Consulting Agreement, Penn Octane granted Mr. Canney a warrant to purchase 270,224 shares of Penn Octane common stock. Rio Vista granted Mr. Canney an option to purchase 26,963 common units of Rio Vista. The Board Consulting Agreement may be terminated by any party upon written notice. If Penn Octane terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), Mr. Canney is entitled to continued payment of the monthly fee for three months following notice of termination and to acceleration of vesting of the first 25% of his warrant. If Rio Vista terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), Mr. Canney is entitled to continued payment of the monthly fee for three months following notice of termination and to acceleration of vesting of the first 25% of his unit option.

CEOcast

Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc. (CEOcast) whereby CEOcast agreed to render investor relations services to Rio Vista. Under the terms of the CEOcast agreement, CEOcast will receive cash fees of $7,500 per month and Rio Vista shall also issue to CEOcast (a) 1,399 of Rio Vista’s fully-paid, non-assessable common units (Common Units) and (b) $75,000 worth of Common units on March 31, 2008 based on a calculation of units contained in the consulting agreement. The delivery of any Common Units provided for herein shall be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio Vista. This Agreement shall be effective for a one-year period and can be terminated by either party by providing written notice to the other party on or before May 30, 2008, otherwise the Agreement will automatically renew for additional one year periods (Additional Period) under the same terms and conditions except that either party may terminate the Agreement at any time during any Additional Period by providing 60 days written notice to the other party.

26

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Distributions of Available Cash

All Rio Vista unitholders have the right to receive distributions from Rio Vista of “available cash” as defined in the Rio Vista partnership agreement in an amount equal to at least the minimum distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum quarterly distribution on the units from prior quarters subject to any reserves determined by the General Partner. The General Partner has a right to receive a distribution corresponding to its 2% general partner interest and the incentive distribution rights described below. The distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio Vista is prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has guaranteed.

In addition to its 2% general partner interest, the General Partner is currently the holder of incentive distribution rights which entitle the holder to an increasing portion of cash distributions as described in the partnership agreement. As a result, cash distributions from Rio Vista are shared by the holders of Rio Vista common units and the General Partner interest based on a formula whereby the General Partner receives disproportionately more distributions per percentage interest than the holders of the common units as annual cash distributions exceed certain milestones.

On both February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of $487,000 for the quarters ended December 31, 2004 and March 31, 2005. Because of insufficient available cash, Rio Vista did not declare any other distributions for the quarters ended June 30, 2005 through June 30, 2006.

On October 26, 2006, January 18, 2007, May 4, 2007 and July 31, 2007, Rio Vista made cash distributions of $0.25 per unit totaling $487,412, $487,412, $487,412 and $493,790 (including amount paid to the General Partner) for the quarters ended September 30, 2006, December 31, 2006, March 31, 2007 and June 30, 2007, respectively. Total arrearages in minimum quarterly distributions payable to the limited partners and General Partner after the July 2007 distribution are $2,437,061.

During July 2007, the board of directors of the General Partner approved a cash distribution to its common unit holders to pay the existing arrearage in the payment of quarterly distributions. The distribution is expected to be in an amount equal $2,437,061 (including amount paid to the General Partner). The distribution is scheduled to be paid on or before December 31, 2007 to all holders of record of Rio Vista common units as of the close of business on August 7, 2007 subject to the sufficiency of available cash.

As a result of the exercise of the General Partner Options, subsequent to July 1, 2006, through July 19, 2007 Penn Octane was only entitled to receive up to 50% of any distributions paid by Rio Vista and distributed by the General Partner, including any distributions associated with arrearages prior to the exercise of the General Partner Options. Subsequent to July 19, 2007, as a result of the exercise of the Purchase Option, Penn Octane was entitled to receive 75% of any distributions paid by Rio Vista to the General Partner and distributed by the General Partner, including any distributions approved after July 19, 2007.

27

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Partnership Tax Treatment

Rio Vista is not a taxable entity for U.S. tax purposes (see below) and incurs no U.S. federal income tax liability. Rio Vista’s US Corporate subsidiary is taxed on its income and Rio Vista’s Mexican subsidiaries are taxed on their income directly by the Mexican government. The income/loss of Rio Vista’s Mexican subsidiaries and any distributions or interest payments made by Rio Vista’s corporate subsidiary to its parent is included in the U.S. partnership income tax return of Rio Vista. The holders of the common units and General Partner interest will be entitled to their proportionate share of any tax credits resulting from any income taxes paid to the Mexican government. Each unitholder of Rio Vista is required to take into account that unitholder’s share of items of income, gain, loss and deduction of Rio Vista in computing that unitholder’s federal income tax liability, even if no cash distributions are made to the unitholder by Rio Vista. Distributions by Rio Vista to a unitholder are generally not taxable unless the amount of cash distributed is in excess of the unitholder’s adjusted tax basis in Rio Vista.

Section 7704 of the Internal Revenue Code (Code) provides that publicly traded partnerships, as a general rule, are taxed as corporations despite the fact that they are not classified as corporations under Section 7701 of the Code. Section 7704 of the Code provides an exception to this general rule for a publicly traded partnership if 90% or more of its gross income for every taxable year consists of “qualifying income” (Qualifying Income Exception). For purposes of this exception, “qualifying income” includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines) or marketing of any mineral or natural resource. Other types of “qualifying income” include interest (other than from a financial business or interest based on profits of the borrower), dividends, real property rents, gains from the sale of real property, including real property held by one considered to be a “dealer” in such property, and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes “qualifying income”.

Rio Vista estimates that more than 90% of its gross income is “qualifying income”. No ruling has been or will be sought from the IRS and the IRS has made no determination as to Rio Vista’s classification as a partnership for federal income tax purposes or whether Rio Vista’s operations generate a minimum of 90% of “qualifying income” under Section 7704 of the Code.

If Rio Vista were classified as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, Rio Vista’s items of income, gain, loss and deduction would be reflected only on Rio Vista’s tax return rather than being passed through to Rio Vista’s unitholders, and Rio Vista’s net income would be taxed at corporate rates.

If Rio Vista were treated as a corporation for federal income tax purposes, Rio Vista would pay tax on income at corporate rates, which is currently a maximum of 35%. Distributions to unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, or deductions would flow through to the unitholders. Because a tax would be imposed upon Rio Vista as a corporation, the cash available for distribution to unitholders would be substantially reduced and Rio Vista’s ability to make minimum quarterly distributions would be impaired. Consequently, treatment of Rio Vista as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to unitholders and therefore would likely result in a substantial reduction in the value of Rio Vista’s common units.

Current law may change so as to cause Rio Vista to be taxable as a corporation for federal income tax purposes or otherwise subject Rio Vista to entity-level taxation. The partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subject Rio Vista to taxation as a corporation or otherwise subjects Rio Vista to entity-level taxation for federal, state or local income tax purposes, then the minimum quarterly distribution amount and the target distribution amount will be adjusted downward to reflect the impact of that law on Rio Vista.

28

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE M — COMMITMENTS AND CONTINGENCIES — Continued

Concentrations of Credit Risk

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

NOTE N – INTERCOMPANY AGREEMENT AND INTERCOMPANY GUARANTEES

Omnibus Agreement.In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista that governs, among other things, indemnification obligations among the parties to the agreement, related party transactions and the provision of general administration and support services by Penn Octane.

The Omnibus Agreement prohibits Rio Vista from entering into any material agreement with Penn Octane without the prior approval of the conflicts committee of the board of managers of the General Partner. For purposes of the Omnibus Agreement, a material agreement is any agreement between Rio Vista and Penn Octane that requires aggregate annual payments in excess of $100,000.

The Omnibus Agreement may be amended by written agreement of the parties; provided, however that it may not be amended without the approval of the conflicts committee of the General Partner if the amendment would adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an initial term of five years that automatically renews for successive five-year terms and, other than the indemnification provisions, will terminate if Rio Vista is no longer an affiliate of Penn Octane.

Guarantees

Debt Guarantee. Rio Vista is liable as guarantor on the RZB Credit Facility and RZB Loan Agreement and will continue to pledge certain of its assets as collateral in connection with the RZB Credit Facility and RZB Loan Agreement. Rio Vista may also be prohibited from making any distributions to unit holders if it would cause an event of default, or if an event of default is existing, under the RZB Credit Facility and/or RZB Loan Agreement. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise.

Tax Guarantee.Rio Vista has agreed to indemnify Penn Octane for a period of three years from the fiscal year end that includes the date of the Spin-Off for any federal income tax liabilities resulting from the Spin-Off in excess of $2,500,000. Penn Octane has filed its federal income tax return for the year of the Spin-Off and it did not incur a federal income tax liability in excess of $2,500,000. However, the Internal Revenue Service (IRS) may review Penn Octane’s federal income tax returns and challenge positions that Penn Octane has taken with respect to the Spin-Off. Further, if Penn Octane is determined to have a federal income tax liability in excess of the amounts which were included in the federal income tax return related to the Spin-Off and if Penn Octane is unable to pay such liabilities or Rio Vista is unable to pay, then the Internal Revenue Service may assert that the Penn Octane stockholders who received common units in the Spin-Off are liable for unpaid federal income taxes of Penn Octane, including interest and any penalties, up to the value of the Rio Vista Common Units received by each stockholder.

29

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE O — SEGMENT INFORMATION

Beginning on August 22, 2006, the Company has the following reportable segments: Transportation and Terminaling and Fuel Sales. The Transportation and Terminaling segment includes the LPG transportation business and will include the storage and transportation business of Regional. The Fuel Sales segment is a reseller of gasoline and diesel fuel.

The accounting policies used to develop segment information correspond to those described in the summary of significant accounting policies. Segment profit (loss) is based on gross profit (loss) from operations before selling, general and administrative expenses, other income (expense) and income tax. The reportable segments are distinct business units operating in similar industries. They are separately managed, with separate marketing and distribution systems. The following information about the segments is for the three months and six months ended June 30, 2007. The Transportation and Terminaling segment commenced August 22, 2006.

Three months ended June 30, 2007:

	Transportation
	and
	Terminaling		Fuel Sales			Totals
Revenues from external customers	$	435,881	$	32,544,742		$	32,980,623
Interest expense		25,910		116,797			142,707
Interest income		249		—			249
Depreciation and amortization		122,916		199			123,115
Segment gross profit (loss)		33,755		466,882			500,637
Segment assets		16,355,234		6,857,703			23,212,937
Segment liabilities		2,710,977		3,988,204			6,699,181
Expenditure for segment assets		—		—			—
Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments			$	32,980,623
Elimination of intersegment revenues				—
Total consolidated revenues			$	32,980,623
Profit (loss)
Total gross profit (loss) for reportable Segments			$	500,637
Selling, general and administrative expense				(1,707,990	)
Interest and Fuel Products financing expense				(146,970	)
Interest income				5,639
Minority interest in loss of Rio Vista Energy Partners L.P.				685,681
Elimination of intersegment profits				—
Unallocated amounts
Corporate headquarters expense				—
Other expenses				—
Consolidated income from continuing operations before income tax			$	(663,003	)
Assets
Total assets for reportable segments			$	23,212,937
Other assets				2,841,546
Corporate headquarters				—
Other unallocated amounts				—
Total consolidated assets			$	26,054,483

30

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE O — SEGMENT INFORMATION — Continued

Six months ended June 30, 2007:

	Transportation
	and
	Terminaling			Fuel Sales			Totals
Revenues from external customers	$	1,115,145		$	71,247,474		$	72,362,619
Interest expense		51,654			239,799			291,453
Interest income		496			—			496
Depreciation and amortization		287,748			398			288,146
Segment gross profit (loss)		319,329			1,125,246			1,444,575
Segment assets		16,355,234			6,857,703			23,212,937
Segment liabilities		2,710,977			3,988,204			6,699,181
Expenditure for segment assets		—			1,875			1,875
Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments				$	72,362,619
Elimination of intersegment revenues					—
Total consolidated revenues				$	72,362,619
Profit (loss)
Total gross profit (loss) for reportable Segments				$	1,444,575
Selling, general and administrative expense					(3,112,454	)
Interest and Fuel Products financing expense					(298,800	)
Interest income					18,352
Minority interest in loss of Rio Vista Energy Partners L.P.					1,146,058
Elimination of intersegment profits					—
Unallocated amounts
Corporate headquarters expense			��		—
Other expenses					—
Consolidated income from continuing operations before income tax				$	(802,269	)
Assets
Total assets for reportable segments				$	23,212,937
Other assets					2,841,546
Corporate headquarters					—
Other unallocated amounts					—
Total consolidated assets				$	26,054,483

31

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE P – INCOME TAXES

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax positions recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of the tax position taken or expected to be taken in a tax return. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the accompanying financial statements.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The tax years that remain open to examination are 2001 – 2006 for foreign jurisdictions and 2003 – 2006 for domestic federal and state jurisdictions.

32

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Penn Octane Corporation (“Penn Octane”) and its consolidated subsidiaries which includes Rio Vista Energy Partners L.P. (“Rio Vista”) and its subsidiaries are collectively hereinafter referred to as the “Company”.

The following discussion of the Company’s results of operations and liquidity and capital resources should be read in conjunction with the unaudited consolidated financial statements of the Company and related notes thereto appearing elsewhere herein. References to specific years preceded by “fiscal” (e.g. fiscal 2007) refer to the Company’s fiscal year ended December 31.

Forward-Looking Statements

The statements contained in this Quarterly Report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will”, “should”, “estimates”, “projects” or “anticipates” or by discussions of strategy that inherently involve risks and uncertainties. From time to time, the Company has made or may make forward-looking statements, orally or in writing. These forward-looking statements include statements regarding anticipated future revenues, sales, working capital, LPG supply, LPG pricing, operations, demand, competition, capital expenditures, future acquisitions, additional financing, the deregulation of the LPG market in Mexico, the operations of the US – Mexico Pipelines, the Matamoros Terminal Facility, other upgrades to facilities, foreign ownership of LPG operations, short-term obligations and credit arrangements, Transportation and Terminaling Business, Fuel Sales Business, TransMontaigne Note, RZB Loan Agreement, cash distributions, “Qualifying Income”, Spin-Off, partnership tax treatment, risk factors and other statements regarding matters that are not historical facts, and involve predictions which are based upon a number of future conditions that ultimately may prove to be inaccurate. Actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that may cause or contribute to such differences include those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Report onForm 10-Q. We caution, however, that the following list of factors may not include all material risks facing the Company.

Overview

As more fully described in Note F to the unaudited consolidated financial statements, prior to the sale of all of Penn Octane’s liquefied petroleum gas (LPG) related assets and a portion of Rio Vista’s LPG related assets to TransMontaigne Product Services, Inc. (TransMontaigne) on August 22, 2006 (Restated LPG Asset Sale), the Company was principally engaged in the purchase, transportation and sale of LPG and the sale of gasoline and diesel fuel (Fuel Products). Subsequent to the Restated LPG Asset Sale, Penn Octane continues to sell Fuel Products and Rio Vista continues to own and operate an LPG terminal facility in Matamoros, Tamaulipas, Mexico (Matamoros Terminal Facility) and approximately 23 miles of pipelines (US — Mexico Pipelines) which connect the Matamoros Terminal Facility to the LPG terminal facility in Brownsville, Texas sold to TransMontaigne. Pursuant to an LPG transportation agreement with TransMontaigne, Rio Vista uses its remaining LPG assets to transport LPG exclusively for TransMontaigne on a fee-for-services basis. On July 27, 2007, Rio Vista acquired Regional Enterprizes, Inc. which was merged into Regional Enterprizes, Inc, a wholly owned subsidiary of Rio Vista (see note E to the unaudited consolidated financial statements).

33

On July 27, 2007, Rio Vista entered into an Agreement and Plan of Merger (Merger Agreement) with Regional Enterprises, Inc., a Virginia corporation (New Regional), Regional Enterprizes, Inc., a Virginia corporation (Old Regional), the shareholders of Old Regional and W. Gary Farrar, Jr. The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista (the Regional Acquisition). The transactions contemplated by the Merger Agreement were completed on July 27, 2007. The principal business of Old Regional and New Regional (collectively, Regional) is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products, owned by its customer. Regional’s principal facilities are located on the James River in Hopewell, Virginia, where it receives bulk chemicals and petroleum products from ships and barges into approximately 10 million gallons of available storage. Regional also receives product from a rail spur which is capable of receiving 14 rail cars at any one time for transloading of chemical and petroleum liquids for delivery throughout the mid-Atlantic region. Regional utilizes its fleet of 32 tractors and 50 trailers to distribute the various products it receives as well as to perform direct hauling operations on behalf of its customers. Regional has operated for 34 years and has approximately 50 employees.

The Company sells Fuel Products (Fuel Sales Business) through transactional, bulk and/or rack transactions. Typical transactional and bulk sales are made based on a predetermined net spread between the purchase and sales price over posted monthly variable prices and/or daily spot prices. Rack sales transactions are based on variable sale prices charged by the Company which are tied to posted daily spot prices and purchase costs which are based on a monthly average or 3 day average based on posted prices. The Company pays pipeline and terminal fees based on regulated rates.

The Company has the ability to access certain pipeline and terminal systems located in California, Arizona, Nevada and Texas, where it is able to deliver its Fuel Products.

For bulk and transactional sales, the Company enters into individual sales contracts for each sale. Fuel Products sales are subject to credit limitations imposed on each individual buyer by the Company. The Company has several supply contracts for each of the Fuel Products it sells. The supply contracts are for annual periods with flexible volumes but they may be terminated sooner by the supplier if the Company consistently fails to purchase minimum volumes of Fuel Products. The Company’s ability to access its various terminal locations is based on maintaining minimum through-put volumes at each terminal. The Company purchases volumes of Fuel Products under its supply contracts, but the Company does not have corresponding sales contracts with its customers. To the extent the Company maintains inventory of Fuel Products, the Company is exposed to market risk related to the volatility of Fuel Product prices. The Company’s cost for Fuel Products is based on a monthly average or 3 day average, to be pre-determined by the Company, based on posted prices. Timing of sales and changes in market prices can result in gains or losses.

On September 30, 2004, Penn Octane completed a series of transactions that (i) transferred substantially all of its owned pipeline and terminal assets in Brownsville and Matamoros to its wholly owned subsidiary Rio Vista Operating Partnership L.P. and its subsidiaries (RVOP) (ii) transferred Penn Octane’s 99.9% interest in RVOP to its wholly owned subsidiary Rio Vista and (iii) distributed all of its limited partnership interest (Common Units) in Rio Vista to its common stockholders (Spin-Off), resulting in Rio Vista becoming a separate public company. The Common Units represented 98% of Rio Vista’s outstanding partnership interests. The remaining 2% interest represented the general partner interest. The general partner interest is solely owned and controlled by Rio Vista GP LLC (General Partner). Prior to June 30, 2006, the General Partner was wholly owned by Penn Octane. On July 1, 2006, options to acquire 50% of the General Partner were exercised, resulting in Penn Octane having a 50% interest in the General Partner. During July 2007 Penn Octane acquired the 25% interest in the General Partner from Shore Trading (see note L to the unaudited consolidated financial statements) resulting, in Penn Octane having a 75% interest in the General Partner. Penn Octane has voting control over the 25% interest in the General Partner not owned by Penn Octane pursuant to a voting agreement with the other owner of the General Partner. Therefore, Rio Vista is consolidated with the Company and the interests of the General Partner not owned by Penn Octane and the interests of the limited partners of Rio Vista are classified as minority interests in the Company’s consolidated financial statements. The General Partner is responsible for the management of Rio Vista.

34

Prior to the Restated LPG Asset Sale, the Company’s, primary customer for LPG was P.M.I. Trading Limited (PMI). PMI is a subsidiary of Petróleos Mexicanos, the state-owned Mexican oil company, which is commonly known by its trade name “PEMEX.” PMI is currently the exclusive importer of LPG into Mexico. PMI sold the LPG delivered from the Matamoros Terminal Facility to PEMEX which distributed the LPG into the northeastern region of Mexico. Subsequent to the Restated LPG Asset Sale, TransMontaigne continues to use the Matamoros Terminal Facility for sales of LPG to PMI which are principally destined for consumption in the northeastern region of Mexico, which includes the states of Coahuila, Nuevo Leon and Tamaulipas. Sales of LPG to PMI have historically fluctuated in part based on the seasons. The demand for LPG is strongest during the winter season.

Acquisition of Regional Enterprizes, Inc.

On July 27, 2007, Rio Vista entered into the Merger Agreement with New Regional, Old Regional, the shareholders of Old Regional and W. Gary Farrar, Jr. The Merger Agreement provided for Rio Vista to acquire the business of Old Regional by means of a merger of Old Regional into New Regional, a newly-formed, wholly-owned subsidiary of Rio Vista. The transactions contemplated by the Merger Agreement were completed on July 27, 2007. The principal business of Regional is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products owned by its customers. The total consideration pursuant to the Merger Agreement was $9.0 million, of which Rio Vista paid $8.0 million in cash, less certain working capital and other adjustments and subject to certain amounts held in escrow, with the remaining $1.0 million to be paid in four equal semiannual installments beginning six months from the date of the Regional Acquisition. Under the terms of the Merger Agreement, Rio Vista is entitled to net working capital of Old Regional of $500,000 (subject to adjustments) in excess of assumed liabilities. Under the terms of the Merger Agreement, a total of $1.5 million was placed into escrow to secure certain indemnification obligations of the former shareholders of Old Regional. Rio Vista funded the Regional Acquisition through a loan of $5.0 million (RZB Loan) from RZB Finance LLC (RZB) and the remaining amounts due at closing were paid from available working capital.

In connection with the Regional Acquisition, Rio Vista entered into a loan agreement (the Loan Agreement) with RZB dated July 26, 2007. The principal amount of the RZB Loan is $5.0 million, due on demand, with a one-year maturity. The RZB Loan carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%, in each case plus a margin of 4.75%. In connection with the RZB Loan, New Regional granted to RZB a security interest in all of New Regional’s assets, including a deed of trust on real property owned by New Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of New Regional. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB Loan is also guaranteed by New Regional and RVOP.

LPG Transportation Agreement

Under the Rio Vista Restated PSA and the related transportation agreement between Rio Vista and TransMontaigne dated August 22, 2006 (LPG Transportation Agreement), TransMontaigne agreed to exclusively use the services and Retained Assets of Rio Vista on a fee basis for purposes of transportation of LPG to be delivered into northeastern Mexico and/or LPG sold pursuant to the existing PMI agreement. Rio Vista has agreed not to transport LPG through Rio Vista’s Retained Assets in Mexico except on behalf of TransMontaigne, subject to certain conditions. TransMontaigne has agreed to use the Retained Assets pursuant to the LPG Transportation Agreement which began on August 22, 2006 and runs for the term of the existing PMI agreement between TransMontaigne and PMI, as extended from time to time thereafter. The Company receives a fee for all LPG transported on behalf of TransMontaigne through the Retained Assets. In addition, under the Rio Vista Restated PSA and the related pipeline services agreement between Rio Vista and TransMontaigne dated August 22, 2006 (U.S. Pipeline Services Agreement), TransMontaigne agreed to provide routine and non-routine operation and maintenance services, as defined, for the U.S. portion only of Rio Vista’s pipelines between Brownsville, Texas and Matamoros, Mexico. TransMontaigne agreed to provide the routine services at its sole cost and expense. For the non-routine services, Rio Vista agreed to reimburse TransMontaigne for all costs actually incurred in performing the services and all materials and supplies provided in connection with such services, plus 15%. Rio Vista has also granted TransMontaigne certain rights of first offer with respect to a sale of the Retained Assets by Rio Vista to any third party. Any changes in future contracts between PMI and TransMontaigne for the sale of LPG may have an impact on the fees which the Company will receive pursuant to the LPG Transportation Agreement. The Company is also exploring potential opportunities which would increase the value of the Retained Assets.

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The following table sets forth the actual volumes purchased by PMI for the months January 2006 through July 2007.

	Actual Volumes
Month	Sold/Transported
	(gallons)
January 2006		14,757,646
February 2006		11,940,257
March 2006		11,606,435
April 2006		6,035,733
May 2006		5,733,193
June 2006		7,130,666
July 2006		4,937,441
August 2006		5,408,563
September 2006		6,402,253
October 2006		8,908,931
November 2006		9,906,874
December 2006		10,448,614
January 2007		10,362,590
February 2007		8,590,460
March 2007		8,772,010
April 2007		6,492,361
May 2007		5,818,669
June 2007		5,480,023
July 2007		5,552,780

For the period January 1, 2006 through August 21, 2006, the Company sold LPG to PMI. Beginning on August 22, 2006, the Company transported LPG pursuant to the LPG Transportation Agreement. The gallons transported by the Company for the period August 22, 2006 to August 31, 2006 totaled 1,384,581 gallons.

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The Company is entitled to fees for actual volumes delivered pursuant to the LPG Transportation Agreement.

Potential Factors Affecting Future Demand For The Retained Assets:

Trends.

PMI has historically used the Matamoros Terminal Facility to load LPG by truck for product destined for the northeastern part of Mexico. Since April 2004, through the date of the Restated LPG Asset Sale, PMI contracted with the Company for LPG volumes which were significantly lower than amounts purchased by PMI in similar periods during previous years. The contract between TransMontaigne and PMI which expired on March 31, 2007, provided for minimum volumes lower than historical amounts. From April 1, 2007 through July 31, 2007 TransMontaigne has continued to sell LPG to PMI which has been transported using the Retained Assets in the volumes reflected above. The Company believes that the reduction of volume commitments by PMI is based on additional LPG production by PEMEX being generated from the Burgos Basin field in Reynosa, Mexico, an area within the proximity of the Company’s Matamoros Terminal Facility and increased competition from U.S. suppliers (see below). Although the Company is not aware of the total amount of LPG actually being produced by PEMEX from the Burgos Basin, it is aware that PEMEX has constructed and is operating two new cryogenic facilities at the Burgos Basin which it believes may have a capacity of producing up to 12 million gallons of LPG per month. The Company also believes that PEMEX intends to install two additional cryogenic facilities, with similar capacity, to be operational in the near future. The Company is also not aware of the capacity at which the current cryogenic facilities are being operated. Furthermore, the Company is not aware of the actual gas reserves of the Burgos Basin or the gas quality, each of which could significantly impact LPG production amounts.

During June 2004, Valero L.P. (Valero) began operation of a newly constructed LPG terminal facility in Nuevo Laredo, Mexico and a newly constructed pipeline connecting the terminal facility in Nuevo Laredo, Mexico to existing pipelines in Juarez, Texas which connect directly to Valero Energy Corporation’s Corpus Christi, Texas and Three Rivers, Texas refineries. Valero originally contracted with PMI under a five year agreement to deliver approximately 6.3 million gallons (of which 3.2 million gallons were previously delivered by truck from Three Rivers, Texas) of LPG per month. During July 2005, Valero announced that it had entered into a new agreement with PMI which provides for double the amount of LPG previously contracted for with PMI.

During 2004, a pipeline operated by El Paso Energy between Corpus Christi, Texas and Hidalgo County, Texas was closed. Historically these facilities had supplied approximately 5.0 million gallons of LPG per month to the Company’s strategic zone. The Company is not aware of any future plans for these facilities.

During 2003, PMI constructed and began operations of a refined products cross border pipeline connecting a pipeline running from PEMEX’s Cadereyta Refinery in Monterrey, Mexico to terminal facilities operated by TransMontaigne, Inc. in Brownsville, Texas. The pipeline crosses the US-Mexico border near the proximity of the Company’s pipelines. In connection with the construction of the pipeline, PMI utilizes an easement from the Company for an approximate 21.67 acre portion of the pipeline easement. Under the terms of the easement, PMI has agreed that it will not transport LPG through October 15, 2017.

Dependence on TransMontaigne.

The ability of the Company to transport LPG using the Retained Assets is dependent on TransMontaigne, including TransMontaigne’s future contracts with PMI, and TransMontaigne’s ability to bring supplies of LPG into the Retained Assets. Currently, the Company believes that TransMontaigne’s options to obtain and deliver significant additional volumes of LPG in excess of the maximum gallons committed under the Exxon Supply Agreement depends on TransMontaigne’s ability to bring shipments of LPG into the port of Brownsville via barges or ships to be delivered to its Brownsville terminal, railcar deliveries of LPG to its Brownsville Terminal and/or access to new pipelines which are capable of transporting LPG from other LPG suppliers into the Seadrift pipeline.

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Fuel Sales Business

The Company sells Fuel Products through transactional, bulk and/or rack transactions. Typical transactional and bulk sales are made based on a predetermined net spread between the purchase and sales price over posted monthly variable prices and/or daily spot prices. Rack sales transactions are based on variable sale prices charged by the Company which are tied to posted daily spot prices and purchase costs which are based on a monthly average or 3 day average based on posted prices. The Company pays pipeline and terminal fees based on regulated rates.

The Fuel Products market on the west coast of the United States is characterized by limited pipeline and terminal space to move sufficient Fuel Products to locations where demand for Fuel Products exists. The Company has the ability to access to certain pipeline and terminal systems located in California, Arizona, Nevada and Texas, where it is able to deliver its Fuel Products. The markets where the Company has targeted its products are generally in areas where the Fuel Products are difficult to deliver due to the infrastructure limitations and accordingly, the Company’s access may provide an advantage over other potential competitors who may not have access to these pipelines or terminals. In addition, the Company’s supply contracts provide it with greater flexibility to manage changes in the prices of the Fuel Products. The Company believes it has an advantage over other competitors based on its favorable supply contracts and existing access to certain pipelines and terminals.

For bulk and transactional sales, the Company enters into individual sales contracts for each sale. Fuel Products sales are subject to credit limitations imposed on each individual buyer by the Company. The Company has several supply contracts for each of the Fuel Products it sells. The supply contracts are for annual periods with flexible volumes but they may be terminated sooner by the supplier if the Company consistently fails to purchase minimum volumes of Fuel Products. The Company’s ability to access its various terminal locations is based on maintaining through-put volumes at each terminal. The Company purchases volumes of Fuel Products under its supply contracts, but the Company does not have corresponding sales contracts with its customers. To the extent the Company maintains inventory of Fuel Products, the Company is exposed to market risk related to the volatility of Fuel Product prices. The Company’s cost for Fuel Products is based on a monthly average or 3 day average, to be pre-determined by the Company, based on posted prices. Timing of sales and changes in market prices can result in gains or losses. Future success of the Fuel Sales Business is dependent on the demand for Fuel Products in the Company’s markets and the Company’s ability to manage fluctuations in the price of such products.

The ability of the Company to participate in the Fuel Sales Business is largely dependent on the Company’s ability to finance its supplies. Currently, the Company utilizes the RZB Credit Facility to finance the purchases of Fuel Products. Future increases in the costs of Fuel Products may reduce the amount of financing available for the Fuel Sales Business.

Federal and State agencies require the Company to obtain the necessary regulatory and other approvals for its Fuel Sales Business.

The following table shows the Company’s volume sold and delivered in gallons and average sales price for the Fuel Products for the three months ended June 30, 2006 and 2007, respectively:

	Three Months		Three Months		Six Months		Six Months
	ended		ended		ended		ended
	June 30, 2006		June 30, 2007		June 30, 2006		June 30, 2007
Volume Sold
Fuel Products (millions of gallons)		15.0		14.5		30.2		34.0
Average sales price
Fuel Products (per gallon)	$	2.36	$	2.20	$	2.17	$	1.89

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Results of Operations

The following summarizes the gross profit among the Company’s continuing operations consisting of Transportation and Terminaling and the Fuel Sales Businesses for the three months and six months ended June 30, 2006 and 2007, respectively. All amounts are in thousands.

For the three months ended June 30, 2006

	Continuing Operations
	Transportation			Fuel
	and Terminaling			Sales		Total
Revenues	$	—	(a)	$	35,369	$	35,369
Cost Of Sales		446	(b)		35,050		35,496
Gross Profit (Loss)	$	(446	)	$	319	$	(127	)

For the three months ended June 30, 2007

	Continuing Operations
	Transportation		Fuel
	and Terminaling		Sales		Total
Revenues	$	436	$	32,544	$	32,980
Cost Of Sales		402		32,078		32,480
Gross Profit (Loss)	$	34	$	466	$	500

For the six months ended June 30, 2006

	Continuing Operations
	Transportation			Fuel
	and Terminaling			Sales		Total
Revenues	$	—	(a)	$	65,460	$	65,460
Cost Of Sales		986	(b)		64,615		65,601
Gross Profit (Loss)	$	(986	)	$	845	$	(141	)

For the six months ended June 30, 2007

	Continuing Operations
	Transportation		Fuel
	and Terminaling		Sales		Total
Revenues	$	1,115	$	71,247	$	72,362
Cost Of Sales		796		70,122		70,918
Gross Profit (Loss)	$	319	$	1,125	$	1,444

(a)	LPG Transportation agreement revenue began August 22, 2006.
(b)	Consists of depreciation on Retained Assets and expenses related to the US-Mexico Pipelines and the Matamoros Terminal Facility.

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Continuing Operations:

The following discussion of the Company’s results of operations from continuing operations for all periods presented excludes the results of operations related to the Sold Assets, including revenues, direct costs, associated interest expenses, minority interest and income taxes, which have been reclassified as discontinued operations (see below). As a result, the results of operations from continuing operations reflects only the results associated with the Transportation and Terminaling Business, including all costs associated with operation of the US-Mexico Pipelines and Matamoros Terminal Facility, the Company’s Fuel Sales business and all indirect income and expenses of the Company. Revenues from the Company’s Transportation and Terminaling Business commenced on August 22, 2006 although expenses associated with operation of the US-Mexico Pipelines and Matamoros Terminal Facility were incurred during the entire period for each period presented. Regional will be included in the consolidated financial statements subsequent to the date of the Regional Acquisition.

Three Months Ended June 30, 2007 Compared With Three Months Ended June 30, 2006

Revenues.Revenues for the three months ended June 30, 2007, were $33.0 million compared with $35.4 million for the three months ended June 30, 2006, a decrease of $2.4 million or 6.8%. Of this decrease, $1.6 million was attributable to decreases in average sales prices of Fuel Products sold during the three months ended June 30, 2007 and $1.2 million was attributable decreased volumes of Fuel Products sold during the three months ended June 30, 2007, partially offset by approximately $436,000 attributable to increases in revenues associated with the LPG Transportation Agreement which commenced during August 2006.

Cost of goods sold.Cost of goods sold for the three months ended June 30, 2007 was $32.5 million compared with $35.5 million for the three months ended June 30, 2006, a decrease of $3.0 million or 8.5%. Of this decrease, of $1.8 million was attributable to decreases in average costs of Fuel Products sold during the three months ended June 30, 2007 and $1.2 million was attributable decreased volumes of Fuel Products sold during the three months ended June 30, 2007.

Selling, general and administrative expenses.Selling, general and administrative expenses were $1.7 million for the three months ended June 30, 2007 compared with $1.3 million for the three months ended June 30, 2006. The increase was primarily attributable to increase compensation cost associated with the discount of the Richter Note (see note D to the unaudited consolidated financial statements).

Other income (expense).Other income was $.5 million for the three months ended June 30, 2007, compared with other income of $.9 million for the three months ended June 30, 2006. The decrease in other income was due primarily to a decrease in the minority interest in the losses of Rio Vista of $.4 million during the three months ended June 30, 2007 resulting from reduced losses from continuing operations at Rio Vista during the three months ended June 30, 2006.

Six months Ended June 30, 2007 Compared With Six months Ended June 30, 2006

Revenues.Revenues for the six months ended June 30, 2007, were $72.4 million compared with $65.5 million for the six months ended June 30, 2006, an increase of $6.9 million or 10.5%. Of this increase, $7.8 million was attributable to increased volumes of Fuel Products sold during the six months ended June 30, 2007 and $1.1 million was attributable to increases in revenues associated with the LPG Transportation Agreement which commenced during August 2006, partially offset by $2.0 million to decreases in average sales prices of Fuel Products sold during the six months ended June 30, 2007.

Cost of goods sold.Cost of goods sold for the six months ended June 30, 2007 was $70.9 million compared with $65.6 million for the six months ended June 30, 2006, an increase of $5.3 million or 8.1%. Of this increase, $7.6 million was attributable to increased volumes of Fuel Products sold during the six months ended June 30, 2007 partially offset by $2.1 million attributable to decreases in average costs of Fuel Products sold during the six months ended June 30, 2007.

Selling, general and administrative expenses.Selling, general and administrative expenses were $3.1 million for the six months ended June 30, 2007 compared with $2.7 million for the six months ended June 30, 2006. The increase was primarily attributable to increase compensation cost associated with the discount of the Richter Note (see note D to the unaudited consolidated financial statements).

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Other income (expense).Other income was $0.9 million for the six months ended June 30, 2007, compared with other income of $2.0 million for the six months ended June 30, 2006. The decrease in other income was due primarily to a decrease in the minority interest in the losses of Rio Vista of $1.3 million during the six months ended June 30, 2007 resulting from reduced losses from continuing operations at Rio Vista.

Discontinued Operations:

The following table shows the Company’s volume of LPG sold in gallons and average sales price for LPG for the three months and six months ended June 30, 2006 and 2007.

	Three Months		Three Months		Six Months		Six Months
	ended June 30,		ended June 30,		ended June 30,		ended June 30,
	2006		2007		2006		2007
Volume Sold
LPG (millions of gallons) – PMI		18.9		—		57.2		—
LPG (millions of gallons) – Other		10.0		—		10.0		—
		28.9		—		67.2		—
Average sales price
LPG (per gallon) – PMI	$	1.13	$	—	$	1.06	$	—
LPG (per gallon) – Other		1.03		—		1.03		—

(a) Sales of LPG ceased on August 21, 2006, immediately prior to the date of the Restated LPG Asset Sale

The Company’s results of operations from discontinued operations of its LPG sales business applies only for the three months and six months ended June 30, 2006 since these operations were sold on August 21, 2006. As a result, there is no comparison of such operations presented for the three months and six months ended June 30, 2006 and June 30, 2007.

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Liquidity and Capital Resources

General.The following schedule details the pro forma working capital of the Company and its subsidiaries, including Rio Vista, and Rio Vista and its subsidiaries, respectively after adjustment for the distribution paid by Rio Vista during July 2007, the exercise of the Purchase Option, cash received from the Richter Note, cash used to complete the Regional Acquisition and the offset of outstanding intercompany balances.

	The Company’s Consolidated Pro Forma							Rio Vista Energy Partners L.P.
	Working Capital							Consolidated Pro Forma Working Capital
	June 30, 2007							June 30, 2007
	As Reported					Adjusted		As Reported					Adjusted
	6/30/2007		Pro Forma			6/30/2007		6/30/2007		Pro Forma			6/30/2007
Current Assets
Cash	$	5,788,598	$	(493,790	)(a)	$	2,424,808	$	4,698,901	$	(493,790	)(a)	$	761,908
											(673,203	) (b)
				(2,770,000	)(c)						(2,770,000	) (c)
				(1,300,000	) (d)
				1,200,000	(e)
Restricted Cash		1,152,149					1,152,149		25,792					25,792
Trade Accounts Receivable		3,513,504					3,513,504		361,234					361,234
Inventories		2,679,213					2,679,213		—					—
Deferred Tax Asset		1,063,548					1,063,548		—					—
Prepaid Expenses		946,107					946,107		840,613					840,613
Total Current Assets		15,143,119		(3,363,790	)		11,779,329		5,926,540		(3,936,993	)		1,989,547
Current Liabilities
Current Maturities Of Long-Term Debt	$	1,137,500				$	1,137,500	$	1,000,000				$	1,000,000
Revolving Line Of Credit		1,135,093					1,135,093		—					—
Fuel Products Payables		1,957,353					1,957,353		—					—
Due to Affiliates		—		—			—		673,203		( 673,203	) (b)		—
US and Foreign Taxes Payable		72,417					72,417		43,252					43,252
Accounts Payables		1,425,328					1,425,328		653,621					653,621
Accrued Liabilities		1,863,858					1,863,858		1,014,104					1,014,104
Total Current Liabilities		7,591,549		—			7,591,549		3,384,180		( 673,203	)		2,710,977
Working Capital	$	7,551,570	$	(3,363,790	)	$	4,187,780	$	2,542,360	$	(3,263,790	)	$	(721,430	)

(a)	distribution paid by Rio Vista during July 2007
(b)	offset of outstanding intercompany balances
(c)	cash used to acquire Regional
(d)	exercise of the Purchase Option
(e)	cash received on Richter Note

The pro forma net working capital available to the Company at June 30, 2007 after adjustment for the June 30, 2007 quarterly distribution paid on July 31, 2007, the exercise of the Purchase Option, cash received from the Richter Note and cash used to complete the Regional Acquisition is approximately $4.2 million of which approximately $4.9 million is available to Penn Octane and $(0.7) million is available to Rio Vista. The pro forma net unrestricted cash on hand available to the Company at June 30, 2007 after adjustment for the June 30, 2007 quarterly distribution paid on July 31, 2007, the exercise of the Purchase Option, cash received from the Richter Note, cash used to complete the Regional Acquisition and offset of intercompany balances was $2.4 million of which $1.6 million was available to Penn Octane and $0.8 million was available to Rio Vista. In addition, Penn Octane has approximately $3.2 million of working capital at June 30, 2007 which was being used in connection with the operation of the Fuel Sales Business. Rio Vista will be required to pay the TransMontaigne Note of $1.0 million plus accrued and unpaid interest in August 2007.

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Rio Vista has minimum quarterly distribution arrearages payable to the limited partners and the General Partner for the quarters ended June 30, 2005 through June 30, 2006 totaling $2.4 million.

As a result of the Restated LPG Asset Sale, Penn Octane’s sources of cash flows are expected to be derived from the Fuel Sales Business and from distributions from its interest in the General Partner, if any. The Fuel Sales Business may not provide Penn Octane with sufficient cash flow to meet its cash operating expenses. Rio Vista’s sources of cash flows are expected to be derived from the LPG Transportation Agreement and from the operations of Regional subsequent to the date of the Regional Acquisition. Under the LPG Transportation Agreement, Rio Vista may only transport LPG on behalf of TransMontaigne using the Retained Assets. Accordingly, there is no assurance that TransMontaigne will utilize the Retained Assets and if so, at capacity levels which provide Rio Vista with gross profit. In addition, although TransMontaigne’s agreement with PMI expired on March 31, 2007, and TransMontaigne has continued to utilize the Retained Assets at historical levels, there can be no assurance that TransMontaigne will continue selling LPG to PMI. From April 1, 2007 through July 31, 2007, TransMontaigne has continued to sell LPG to PMI which has been transported using the Retained Assets in the volumes reflected above. Although the operations of Regional are expected to be profitable, the cash flows of Regional are subject to payments required under the RZB Loan Agreement and income taxes on Regional’s stand-alone consolidated earnings. The RZB Loan is required to be paid within one year. The additional $1.0 million loan due in connection with the Regional Acquisition requires four semi-annual payments beginning December 27, 2007. There is no assurance that Regional’s operations will continue to be profitable and/or sufficient to cover the additional tax and debt obligations. There is no assurance that the LPG Transportation Agreement and Regional operations will provide sufficient cash flow for Rio Vista to meet its future cash operating expenses. Both Penn Octane and/or Rio Vista may obtain additional sources of revenues through the completion of future transactions, including acquisitions and/or dispositions of assets. The ability of Penn Octane and/or Rio Vista to complete future acquisitions may require the use of a portion or substantially all of Penn Octane’s and/or Rio Vista’s liquid assets, the issuance of additional debt and/or the issuance of additional stock and/or units. Currently, substantially all of the Company’s assets are pledged or committed to be pledged as collateral on existing debt in connection with the RZB Credit Facility, the TransMontaigne Note and the RZB Loan Agreement. Accordingly Penn Octane and/or Rio Vista may be unable to obtain additional financing collateralized by those assets.

Pursuant to the Omnibus Agreement, Penn Octane is entitled to reimbursement of costs incurred on behalf of Rio Vista, including an allocable share of overhead. Neither Penn Octane nor Rio Vista can be certain that future cash flows from their respective businesses, including the Fuel Sales Business, the Transportation and Terminaling Business and future investments, if any, will be adequate to cover all of their future working capital requirements including minimum distributions by Rio Vista.

Rio Vista projects that monthly cash flows from its LPG Transportation Agreement during the months of April through September will be less than during the months of October through March as a result of seasonality.

Further, if Penn Octane is determined to have a federal income tax liability in excess of the amounts which were included in the federal income tax return related to the Spin-Off and if Penn Octane is unable to pay such liabilities or Rio Vista is unable to pay, then the Internal Revenue Service may assert that the Penn Octane stockholders who received Rio Vista’s common units in the Spin-Off are liable for unpaid federal income taxes of Penn Octane, including interest and any penalties, up to the value of the Rio Vista common units received by each stockholder.

On July 19, 2006 pursuant to a written determination received from The NASDAQ Stock Market’s Listing Qualification Department, Penn Octane’s common stock was delisted from the NASDAQ Stock Market. As a result of the delisting, Penn Octane’s common stock began trading on the Pink Sheets, a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time. On March 22, 2007 the Company received clearance for entry of quotations on the OTC Bulletin Board for Penn Octane’s common stock and began trading on or about March 26, 2007 on the OTC Bulletin Board. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter securities. There is no assurance that Penn Octane will remain quoted on the OTC Bulletin Board. Penn Octane will continue to file all required reports with the Securities and Exchange Commission. The delisting by NASDAQ could result in decreased market interest in Penn Octane common stock, investors and stockholders may experience more difficulty in buying and selling Penn Octane common stock and Penn Octane’s common stock price may decline. In addition, Penn Octane may experience greater difficulty in obtaining necessary debt and equity capital for potential acquisitions or the operation of its business.

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Credit Arrangements. Penn Octane finances its purchases of Fuel Products through its credit facility with RZB Finance, LLC (RZB). As of June 30, 2007, Penn Octane had a $15.0 million credit facility with RZB for demand loans and standby letters of credit (RZB Credit Facility) to finance Penn Octane’s purchases of Fuel Products (see below). The RZB Credit facility is an uncommitted facility under which the letters of credit have an expiration date of no more than 90 days and the facility is reviewed annually. In connection with the RZB Credit Facility, the Company granted RZB a security interest and assignment in any and all of the Company’s accounts, inventory, real property, buildings, pipelines, fixtures and interests therein or relating thereto. Under the existing RZB Credit Facility, the Company may not permit to exist any subsequent lien, security interest, mortgage, charge or other encumbrance of any nature on any of its properties or assets, except in favor of RZB, without the consent of RZB. After the Spin-Off and transfer of assets to Rio Vista, RZB continued to retain a security interest in the assets transferred to Rio Vista.

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% of the maximum face amount of such letter of credit for Fuel Products, or (iii) such higher amount as may be agreed to between the Company and RZB. Any loan amounts outstanding under the RZB Credit Facility accrue interest at a rate equal to the rate announced by the JPMorgan Chase Bank as its prime rate (8.25% at June 30, 2007) plus 2.5%. Pursuant to the RZB Credit Facility, RZB has sole and absolute discretion to limit or terminate its participation in the RZB Credit Facility and to refrain from making any loans or issuing any letters 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 addition to the fees described above, the Company is required to pay RZB annual fees of $25,000.

In connection with the Regional Acquisition, Rio Vista entered into a loan agreement (the Loan Agreement) with RZB dated July 26, 2007. The principal amount of the RZB Loan is $5.0 million, due on demand, with a one-year maturity. The RZB Loan carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” or (b) the weighted average overnight funds rate of the Federal Reserve System plus 0.50%, in each case plus a margin of 4.75%. In connection with the RZB Loan, New Regional granted to RZB a security interest in all of New Regional’s assets, including a deed of trust on real property owned by New Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of New Regional. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB Loan is also guaranteed by New Regional and RVOP.

On July 26, 2007, as a condition of the Loan Agreement, Penn Octane entered into a First Amendment to Line Letter (First Amendment) with RZB. The First Amendment amends the Amended and Restated Line Letter dated as of September 14, 2004 between Penn Octane and RZB. The First Amendment reduces the amount of the RZB Credit Facility from $15.0 million to $10.0 million. Subject to RZB’s discretion, the amount of the RZB Credit Facility will be increased dollar for dollar by Rio Vista’s principal repayments under the Loan Agreement.

The ability of the Company to grow the Fuel Sales Business is dependent on the future limits of the RZB Credit Facility or other sources of financing and/or the reduction in Fuel Products purchase prices.

Under the terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required to maintain net worth of a minimum of $10.0 million.

In connection with the Company’s purchases of Fuel Products, letters of credit are issued based on anticipated purchases. Outstanding letters of credit for purchases of Fuel Products at June 30, 2007 totaled approximately $3.9 million of which approximately $1.9 million represents June 2007 purchases and approximately $2.0 million represents July 2007 purchases.

In connection with the Company’s purchase of Fuel Products, under the RZB Credit Facility, assets related to product sales (Assets) are required to be in excess of borrowings and commitments (including restricted cash of approximately $0.6 million at June 30, 2007). At June 30, 2007, the Company’s borrowings and commitments were less than the amount of the Assets.

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Under the terms of the RZB Credit Facility, all cash from Penn Octane Fuel Products sales are deposited directly into a restricted cash account under the direction of RZB to pay down all obligations of Penn Octane arising under RZB Credit Facility. Accordingly, Penn Octane only receives net proceeds from the restricted cash account when the amounts of acceptable collateral provided by Penn Octane and /or Rio Vista exceed all liabilities under the outstanding letters of credit and/or loans issued on behalf of Penn Octane, at the sole discretion of RZB. The balance of restricted cash reflected in the accompanying balance sheet at June 30, 2007 has been reduced by the amount of cash held by RZB which exceeds obligations covered by the RZB Credit Facility.

In connection with the Company’s Fuel Sales Business, the Company has provided bonds totaling $662,000 to the states of California, Nevada, Arizona and Texas (Bonds) to secure payments of excise and other taxes collected from customers in connection with sales of Fuel Products. The Bonds are partially secured by letters of credit totaling $452,600. At June 30, 2007, such taxes in the amount of approximately $0.7 million were due. The letters of credit issued have all been secured by cash in the amount of approximately $494,000 which is included in restricted cash in the Company’s balance sheet at June 30, 2007.

The following is a summary of the Company’s estimated minimum contractual obligations and commercial obligations as of June 30, 2007.

	Payments due by Period
	(Amounts in Millions)
			Less than		1 – 3		4 – 5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Long-Term Debt Obligations and Note Payable	$	1.0	$	1.0	$	—	$	—	$	—
Operating Leases		—		—		—		—		—
LPG Purchase Obligations		—		—		—		—		—
Other Long-Term Obligations		—		—		—		—		—
Total Contractual Cash Obligations	$	1.0	$	1.0	$	—	$	—	$	—

	Amount of Commitment Expiration
	Per Period
	(Amounts in Millions)
	Total Amounts		Less than		1 – 3		4 – 5		Over
Commercial Commitments	Committed		1 Year		Years		Years		5 Years
Lines of Credit	$	1.1	$	1.1	$	—	$	—	$	—
Standby Letters of Credit		4.0		4.0		—		—		—
Guarantees		N/A		N/A		N/A		N/A		N/A
Standby Repurchase Obligations		N/A		N/A		N/A		N/A		N/A
Other Commercial Commitments		N/A		N/A		N/A		N/A		N/A
Total Commercial Commitments	$	5.1	$	5.1	$	—	$	—	$	—

Distributions of Available Cash.All Rio Vista unitholders have the right to receive distributions from Rio Vista of “available cash” as defined in the Rio Vista partnership agreement in an amount equal at least to the minimum distribution of $0.25 per quarter per unit, plus any arrearages in the payment of the minimum quarterly distribution on the units from prior quarters subject to any reserves determined by the General Partner. The General Partner has a right to receive a distribution corresponding to its 2% general partner interest and the incentive distribution rights described below. The distributions are to be paid within 45 days after the end of each calendar quarter. However, Rio Vista is prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default exists, under any obligation of Penn Octane which Rio Vista has guaranteed.

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In addition to its 2% general partner interest, the General Partner is currently the holder of incentive distribution rights which entitle the holder to an increasing portion of cash distributions as described in the partnership agreement. As a result, cash distributions from Rio Vista are shared by the holders of Rio Vista common units and the General Partner interest based on a formula whereby the General Partner receives disproportionately more distributions per percentage interest than the holders of the common units as annual cash distributions exceed certain milestones.

On both February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of $487,000 for the quarters ended December 31, 2004 and March 31, 2005. Because of insufficient available cash, Rio Vista did not declare any other distributions for the quarters ended June 30, 2005 through June 30, 2006.

On October 26, 2006, January 18, 2007, May 4, 2007 and July 31, 2007, Rio Vista made cash distributions of $0.25 per unit totaling $487,412, $487,412, $487,412 and $493,790 (including amount paid to the General Partner) for the quarters ended September 30, 2006, December 31, 2006, March 31, 2007 and June 30, 2007, respectively. Total arrearages in minimum quarterly distributions payable to the limited partners and General Partner after the July 2007 distribution are $2.4 million.

During July 2007, the board of directors of the General Partner approved a cash distribution to its common unit holders to pay the existing arrearage in the payment of quarterly distributions. The distribution is expected to be in an amount equal $2.4 million (including amount paid to the General Partner). The distribution is scheduled to be paid on or before December 31, 2007 to all holders of record of Rio Vista common units as of the close of business on August 7, 2007 subject to the sufficiency of available cash.

As a result of the exercise of the General Partner Options, subsequent to July 1, 2006, through July 19, 2007 Penn Octane was only entitled to receive up to 50% of any distributions paid by Rio Vista and distributed by the General Partner, including any distributions associated with arrearages prior to the exercise of the General Partner Options. Subsequent to July 19, 2007, as a result of the exercise of the Purchase Option, Penn Octane was entitled to receive 75% of any distributions paid by Rio Vista to the General Partner and distributed by the General Partner, including any distributions approved after July 19, 2007.

Information Systems

The Company intends to upgrade its computer and information systems at a total estimated cost of approximately $350,000 expected to be completed during 2007. During 2006 the Company contracted for offsite hosting services of its computer information systems and software update license and support. The contracts are renewable annually and provide for payments of approximately $105,000 on an annual basis.

Partnership Tax Treatment

See note M to the unaudited consolidated financial statements for discussion of partnership tax treatment.

Legal Proceedings

See note M to the unaudited consolidated financial statements for legal proceedings discussion.

Consulting Agreements

See note M to the unaudited consolidated financial statements for discussion of consulting agreements.

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Mexican Operations

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). PennMex has a transportation permit and Termatsal owns, leases, or is in the process of obtaining the land or rights of way used in the construction of the Mexican portion of the US-Mexico Pipelines, and owns the Mexican portion of the assets comprising the US-Mexico Pipelines. The Company’s consolidated Mexican affiliate, Tergas, owns the Matamoros Terminal Facility and has been granted the permit to operate the Matamoros Terminal Facility. The Company relies on Tergas’ permit to continue its delivery of LPG at the Matamoros Terminal Facility. Tergas is owned 95% by Mr. Vicente Soriano, and the remaining balance is owned by an unrelated party. The Company has an option to purchase Tergas for a nominal price of approximately $5,000.

Through its operations in Mexico and the operations of the Mexican Subsidiaries and Tergas, the Company is subject to the tax laws of Mexico which, among other things, require that the Company comply with transfer pricing rules, the payment of income, asset and ad valorem taxes, and possibly taxes on distributions in excess of earnings. In addition, distributions to foreign corporations, including dividends and interest payments may be subject to Mexican withholding taxes.

Deregulation of the LPG Industry in Mexico

The Mexican petroleum industry is governed by theLey Reglarmentaria del Artículo 27 Constitutional en el Ramo del Petróleo(the Regulatory Law to Article 27 of the Constitution of Mexico concerning Petroleum Affairs (Regulatory Law)), Reglamento de Gas Licuado de Petroleo (Regulation of LPG) andLey Orgánica del Petróleos Mexicanos y Organismos Subsidiarios(the Organic Law of Petróleos Mexicanos and Subsidiary Entities (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, Regulation of LPG was enacted to permit foreign entities to participate without limitation in the defined LPG activities related to transportation and storage. However, foreign entities are prohibited from participating in the distribution of LPG in Mexico. Upon Deregulation, Mexican entities will be able to import LPG into Mexico. Under Mexican law, an entity with a permit to transport LPG is not permitted to obtain permits for the other defined LPG activities (storage and distribution). As a result of the foregoing, it is uncertain as to when, if ever, Deregulation will actually occur and the effect, if any, it may have on the Company as a result of, among other things, its LPG Transportation Agreement with TransMontaigne.

Private Placements and Other Transactions.

During August 2007, warrants to purchase a total of 10,000 shares of common stock of Penn Octane were exercised resulting in cash proceeds to the Company of $11,438.

Penn Octane 2001 Warrant Plan

On February 13, 2007, the board of directors of Penn Octane approved the grant of warrants to purchase a total of 127,500 shares of its common stock under Penn Octane’s 2001 Warrant Plan. Of the total number of warrants granted, 30,000 were issued to an executive officer of Penn Octane and 97,500 were issued to outside directors of Penn Octane. The exercise price for the warrants is $0.51 per share, which was the closing price for Penn Octane common stock as reported by the Pink Sheets quotation system on February 13, 2007. Warrants granted to the executive officer vest in equal monthly installments over a period of 36 months from the date of grant, become fully exercisable upon a change in control event, and expire five years from the date of grant. Warrants granted to outside directors are fully vested on the date of grant and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $114,000.

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On June 15, 2007, in connection with a consulting agreement (Board Consulting Agreement) with Richard R. Canney, the chairman of the board of directors of Penn Octane and chairman of the board of managers of the General Partner (Chairman) (see note M to the unaudited consolidated financial statements), Penn Octane granted the Chairman a warrant to purchase 270,224 shares of Penn Octane common stock. The exercise price for the warrant is $0.70 per share, which was the closing price for Penn Octane common stock as reported by the OTC Bulletin Board on June 15, 2007. The warrant vests as to 25% of the shares on February 1, 2008, with the remainder vesting in equal monthly installments over a period of 36 months from such date, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. The Board Consulting Agreement may be terminated by either party upon written notice. If Penn Octane terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), the Chairman is entitled to acceleration of vesting of the first 25% of his warrant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $138,000.

On June 29, 2007, the board of directors of Penn Octane approved the grant of a warrant to purchase 150,000 shares of its common stock under Penn Octane’s 2001 Warrant Plan to an executive officer of Penn Octane. The exercise price for the warrant is $0.70 per share, which was the closing price for Penn Octane common stock as reported by the OTC Bulletin Board on June 29, 2007. The warrant vests in equal monthly installments over a period of 36 months beginning January 1, 2007, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. Total compensation to be recorded under the aforementioned grant of warrants as they vest totals approximately $77,000.

Note Receivable from a Former Officer of the Company

On July 9, 2007, the board of directors of Penn Octane agreed to amend the note receivable from Mr. Jerome B. Richter, a former officer of the Company, (Richter Note) whereby the Richter Note was extended from July 29, 2007 until January 1, 2009 and agreed to reduce the balance of the Richter Note to an outstanding total amount of $1.5 million as consideration for Mr. Richter’s services to Penn Octane and his agreement not to provide services for any competitors until January 1, 2009. Furthermore, on August 10, 2007, the board of directors of Penn Octane agreed to discount the amount of the Richter Note to $1.2 million as inducement for Mr. Richter to prepay his loan by August 15, 2007. On July 25, 2007 and August 10, 2007, Mr. Richter paid the Company $600,000 and $600,000, respectively, as full satisfaction of all amounts owing under the Richter Note. As a result of the foregoing, the Company recorded a charge to compensation expense during the quarter ended June 30, 2007 in the amount of $377,693.

TransMontaigne Note

In connection with the purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005 (see note F to the unaudited consolidated financial statements), TransMontaigne loaned Rio Vista $1.3 million (TransMontaigne Note). The TransMontaigne Note was to be repaid, including interest, as a reduction of the total purchase price at the time of closing or 120 days following demand by TransMontaigne. The TransMontaigne Note was secured by the tank farm and certain LPG storage tanks located at the Brownsville Terminal Facility (Collateral). The TransMontaigne Note began to accrue interest on November 15, 2005 at the prime rate plus 2%. On August 22, 2006, in connection with the Rio Vista Restated PSA, the TransMontaigne Note was amended whereby Rio Vista paid $300,000 of principal and the TransMontaigne Note was extended to August 22, 2007. The TransMontaigne Note was also amended to substitute as collateral the US portion of the eight-inch pipeline owned by Rio Vista. The TransMontaigne Note bears interest at the rate of prime (8.25% as of June 30, 2007) plus 2% annually and interest is payable monthly.

Common Units and Options of Rio Vista

Common Units.On June 29, 2007, the Board of Managers of the General Partner Rio Vista approved the grant of a restricted unit bonus of 25,000 common units under Rio Vista’s 2005 Equity Incentive Plan to an executive officer of the General Partner. The restricted unit bonus vests as to 8,334 units on July 1, 2007, an additional 8,333 units on January 1, 2008, and an additional 8,333 units on July 1, 2008, and becomes fully vested upon a change in control event. In connection with the grant of restricted units, the Board of Managers also approved the payment to the executive officer of one or more cash bonuses in amounts sufficient, on an after-tax basis, to cover all taxes payable by the executive officer with respect the award of restricted units to him. Total compensation to be recorded under the aforementioned grant of units as they vest totals $280,250.

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Effective July 2, 2007, Rio Vista entered into a consulting agreement with CEOcast, Inc. (CEOcast) whereby CEOcast agreed to render investor relations services to Rio Vista. Under the terms of the CEOcast agreement, CEOcast will receive cash fees of $7,500 per month and Rio Vista shall also issue to CEOcast (a) 1,399 of Rio Vista’s fully-paid, non-assessable common units (Common Units) and (b) $75,000 worth of Common units on March 31, 2008 based on a calculation of units contained in the consulting agreement. The delivery of any Common Units provided for herein shall be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio Vista. This Agreement shall be effective for a one-year period and can be terminated by either party by providing written notice to the other party on or before May 30, 2008, otherwise the Agreement will automatically renew for additional one year periods (Additional Period) under the same terms and conditions except that either party may terminate the Agreement at any time during any Additional Period by providing 60 days written notice to the other party.

General Partner Options.On July 1, 2006, Penn Octane’s 100% interest in the General Partner was decreased to 50% as a result of the exercise by Shore Capital LLC (Shore Capital), an affiliate of Mr. Richard Shore, Jr., former President of Penn Octane and former Chief Executive Officer of Rio Vista and by Mr. Jerome B. Richter, of options to each acquire 25% of the General Partner (General Partner Options). The exercise price for each option was approximately $82,000 pursuant to the July 10, 2003 option agreements. Mr. Shore resigned from Penn Octane in June 2005. Mr. Richter’s option was amended to permit payment of the exercise price by surrender of Penn Octane common stock having a fair market value equal to the exercise price. Mr. Richter paid the exercise price for his option by surrender of 136,558 shares of Penn Octane common stock. In connection with the exercise of the General Partner Options, Penn Octane retained voting control of the General Partner pursuant to a voting agreement with each of Shore Capital and Mr. Richter. In December 2006, Shore Capital transferred its interest in the General Partner to Shore Trading LLC, an affiliated entity (Shore Trading). Shore Trading was also a party to the voting agreement with Penn Octane.

On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that provided Penn Octane with the option (Purchase Option) to purchase the 25% interest in the General Partner held by Shore Trading. Penn Octane paid Shore Trading $100,000 in order to acquire the Purchase Option. The exercise price for the Purchase Option was $1.3 million, for a total purchase price of $1.4 million. On July 19, 2007, Penn Octane exercised the Purchase Option. As a result of the exercise of the Purchase Option, beginning July 19, 2007, Penn Octane’s interest in the General Partner increased from 50% to 75%. All amounts paid in connection with the Purchase Option were determined pursuant to arm’s length negotiations between Penn Octane and Shore Trading in February 2007.

Common Unit Options.On February 15, 2007, the board of managers of the General Partner approved the grant of options to purchase a total of 21,250 common units under Rio Vista’s 2005 Equity Incentive Plan (2005 Plan). Of the total number of options granted, 5,000 were issued to an executive officer of the General Partner and 16,250 were issued to outside managers of the General Partner. The exercise price for the options is $8.38 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on February 15, 2007. Options granted to the executive officer vest in equal monthly installments over a period of 36 months from the date of grant, become fully exercisable upon a change in control event, and expire five years from the date of grant. Options granted to outside managers are fully vested on the date of grant and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $51,000.

On March 21, 2007, the board of managers of the General Partner approved the grant of an option to purchase 20,000 common units of Rio Vista under the 2005 Plan to an executive officer of the General Partner. The exercise price for the options is $7.36 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 21, 2007. The options vest in equal monthly installments over a period of 36 months from the date of grant, become fully exercisable upon a change in control event, and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $44,000.

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On June 15, 2007, in connection with the Board Consulting Agreement with the Chairman (see note M to the unaudited consolidated financial statements), Rio Vista granted the Chairman an option to purchase 26,963 common units of Rio Vista. The exercise price for the option is $11.14 per unit, which was the average of the high and low sale prices as reported by the NASDAQ Stock Market on June 15, 2007. The option vests as to 25% of the units on February 1, 2008, with the remainder vesting in equal monthly installments over a period of 36 months from such date, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. The Board Consulting Agreement may be terminated by either party upon written notice. If Rio Vista terminates the Board Consulting Agreement without cause (as defined in the Board Consulting Agreement), the Chairman is entitled to continued payment of the monthly fee for three months following notice of termination and to acceleration of vesting of the first 25% of his unit option. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $90,000.

On June 29, 2007, the board of managers of the General Partner Rio Vista approved the grant of an option to purchase 75,000 common units of Rio Vista under Rio Vista’s 2005 Equity Incentive Plan to an executive officer of the General Partner. The exercise price for the options is $11.21 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on June 29, 2007. The unit option vests in equal monthly installments over a period of 36 months beginning January 1, 2007, becomes fully exercisable upon a change in control event, and expires five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $254,000.

Intercompany Agreement and Intercompany Guarantees

Omnibus Agreement.In connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement with Rio Vista that governs, among other things, indemnification obligations among the parties to the agreement, related party transactions and the provision of general administration and support services by Penn Octane.

The Omnibus Agreement prohibits Rio Vista from entering into any material agreement with Penn Octane without the prior approval of the conflicts committee of the board of managers of the General Partner. For purposes of the Omnibus Agreement, a material agreement is any agreement between Rio Vista and Penn Octane that requires aggregate annual payments in excess of $100,000.

The Omnibus Agreement may be amended by written agreement of the parties; provided, however that it may not be amended without the approval of the conflicts committee of the General Partner if the amendment would adversely affect the unitholders of Rio Vista. The Omnibus Agreement has an initial term of five years that automatically renews for successive five-year terms and, other than the indemnification provisions, will terminate if Rio Vista is no longer an affiliate of Penn Octane.

Guarantees

Debt Guarantee.Rio Vista is liable as guarantor on the RZB Credit Facility and RZB Loan Agreement and will continue to pledge certain of its assets as collateral in connection with the RZB Credit Facility and RZB Loan Agreement. Rio Vista may also be prohibited from making any distributions to unit holders if it would cause an event of default, or if an event of default is existing, under the RZB Credit Facility and/or RZB Loan Agreement. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise.

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Tax Guarantee.Rio Vista has agreed to indemnify Penn Octane for a period of three years from the fiscal year end that includes the date of the Spin-Off for any federal income tax liabilities resulting from the Spin-Off in excess of $2.5 million. Penn Octane has filed its federal income tax return for the year of the Spin-Off and it did not incur a federal income tax liability in excess of $2.5 million. However, the Internal Revenue Service (IRS) may review Penn Octane’s federal income tax returns and challenge positions that Penn Octane has taken with respect to the Spin-Off. Further, if Penn Octane is determined to have a federal income tax liability in excess of the amounts which were included in the federal income tax return related to the Spin-Off and if Penn Octane is unable to pay such liabilities or Rio Vista is unable to pay, then the Internal Revenue Service may assert that the Penn Octane stockholders who received common units in the Spin-Off are liable for unpaid federal income taxes of Penn Octane, including interest and any penalties, up to the value of the Rio Vista Common Units received by each stockholder.

Impact of Inflation

Inflation in the United States and Mexico has been relatively low in recent years and did not have a material impact on the consolidated financial statements of the Company. However, inflation remains a factor in the United States and the Mexican economies and could increase the Company’s cost to acquire or replace property, plant and equipment as well as our labor and supply costs.

The Company may be adversely impacted as a result of increases in Fuel Products prices, which are related to oil and natural gas prices, because of limits on the RZB Credit Facility.

Environmental Matters

The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. Under the Omnibus Agreement, Penn Octane will indemnify Rio Vista for five years after the completion of the Spin-Off against certain potential environmental liabilities associated with the assets it contributed to Rio Vista relating to events or conditions that existed before the completion of the Spin-Off.

On July 21, 2006, the Company and Seadrift entered into an amended and restated lease agreement (Amended Lease) for the Leased Pipeline. The Amended Lease was effective August 1, 2006 and expires on December 31, 2013. In connection with the Restated LPG Asset Sale, the Amended Lease was assumed by TransMontaigne. The Company is still obligated to indemnify Seadrift for environmental liabilities, including claims relating to the condition of the leased property and any environmental remediation costs, arising after the inception date of the lease, September 1, 1993 through the date of the Restated LPG Asset Sale and assumption by TransMontaigne. Seadrift has agreed to indemnify the Company for similar environmental liabilities arising before that date.

Recently Issued Financial Accounting Standards

In February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FAS 115”, (SFAS 159) was issued which allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. SFAS 159 is effective for us on January 1, 2008. The Company has not assessed the impact of SFAS 159 on its consolidated results of operations, cash flows or financial position.

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Statement by Management Concerning Review of Interim Information by An Independent Registered Public Accounting Firm.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company purchases volumes of Fuel Products under its supply contracts, but the Company does not have corresponding sales contracts with its customers. To the extent the Company maintains quantities of Fuel Products inventory, the Company is exposed to market risk related to the volatility of Fuel Products prices. The Company’s cost for Fuel Products is based on a monthly average or 3 day average, to be pre-determined by the Company, based on posted prices. Timing of sales and changes in market prices can result in gains or losses.

The Company has existing debt at both fixed and variable interest rates (see notes E and I to the unaudited consolidated financial statements). Trade accounts receivable from the Company’s customers and the Company’s trade and other accounts payable generally do not bear interest. The Company’s credit facility with RZB provides for cash advances at a current variable interest rate. Fees paid to RZB for letters of credit are based on a fixed schedule as provided in the Company’s agreement with RZB. The Company currently has limited, if any, interest rate risk.

The Company routinely converts U.S. dollars into Mexican pesos to pay terminal operating costs and income taxes. Such costs have historically been less than $1 million per year and the Company expects such costs will remain at less than $1 million in any year. The Company does not maintain Mexican peso bank accounts with other than nominal balances. Therefore, the Company has limited, if any, risk related to foreign currency exchange rates.

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

Item 4T. Controls and Procedures.

The Company’s management, including the principal executive officer/principal financial officer, is responsible for establishing and maintaining disclosure controls and procedures and therefore has conducted an evaluation of the Company’s disclosure controls and procedures; as such term is defined under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as of June 30, 2007. Based on their evaluation, the Company’s principal executive officer/principal accounting officer concluded that the Company’s disclosure controls and procedures are effective.

There was no change in the Company’s internal control over financial reporting during the second quarter of the year ended December 31, 2007 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See note M to the Company’s unaudited consolidated financial statements included in this Report.

Item 1A. Risk Factors

Business Factors.As a result of the Restated LPG Asset Sale, Penn Octane’s sources of cash flows are expected to be derived from the Fuel Sales Business and from distributions from its interest in the General Partner, if any. The Fuel Sales Business may not provide Penn Octane with sufficient cash flow to meet its cash operating expenses. Rio Vista’s sources of cash flows are expected to be derived from the LPG Transportation Agreement and beginning July 27, 2007 from the operations of Regional. Under the LPG Transportation Agreement, Rio Vista may only transport LPG on behalf of TransMontaigne using the Retained Assets. Accordingly, there is no assurance that TransMontaigne will utilize the Retained Assets and if so, at capacity levels which provide Rio Vista with gross profit. In addition, although TransMontaigne’s agreement with PMI expired on March 31, 2007, and TransMontaigne has continued to utilize the Retained Assets at historical levels, there can be no assurance that TransMontaigne will continue selling LPG to PMI. From April 1, 2007 through July 31, 2007 TransMontaigne has continued to sell LPG to PMI which has been transported using the Retained Assets in the volumes reflected above. Although the operations of Regional are expected to be profitable, the cash flows of Regional are subject to payments required under the RZB Loan Agreement and income taxes on Regional’s stand-alone consolidated earnings. The RZB Loan is required to be paid within one year. The additional $1.0 million loan due in connection with the Regional Acquisition requires four semi-annual payments beginning December 27, 2007. There is no assurance that Regional’s operations will continue to be profitable and/or sufficient to cover the additional tax and debt obligations. There is no assurance that the LPG Transportation Agreement and Regional operations will provide sufficient cash flow for Rio Vista to meet its future cash operating expenses. Both Penn Octane and/or Rio Vista may obtain additional sources of revenues through the completion of future transactions, including acquisitions and/or dispositions of assets. The ability of Penn Octane and/or Rio Vista to complete future acquisitions may require the use of a portion or substantially all of Penn Octane’s and/or Rio Vista’s liquid assets, the issuance of additional debt and/or the issuance of additional stock and/or units. Currently, substantially all of the Company’s assets are pledged or committed to be pledged as collateral on existing debt in connection with the RZB Credit Facility, the TransMontaigne Note and the RZB Loan Agreement. Accordingly Penn Octane and/or Rio Vista may be unable to obtain additional financing collateralized by those assets. Future acquisitions and expansions may not be successful, may substantially increase the Company’s indebtedness and contingent liabilities, and may create integration difficulties. The Company’s business would be adversely affected if operations at its transportation, terminal and distribution facilities were interrupted.

Acquisition Factors.The advancement, cost and results of particular projects sought by the Company, including projects and/or acquisitions which do not specifically fall within the areas of the Company’s current lines of business will depend on: the outcome of negotiations for such projects and/or acquisitions; the ability of the Company’s management to manage such businesses; the ability of the Company to obtain financing for such acquisitions; business integration issues; changes in operating conditions or costs; and the occurrence of unforeseen operational difficulties.

Market Listing. On July 19, 2006 pursuant to a written determination received from The NASDAQ Stock Market’s Listing Qualification Department, Penn Octane’s common stock was delisted from the NASDAQ Capital Market. As a result of the delisting, Penn Octane’s common stock began trading on the Pink Sheets, a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time. On March 22, 2007 the Company received clearance for entry of quotations on the OTC Bulletin Board for Penn Octane’s common stock and began trading on or about March 26, 2007 on the OTC Bulletin Board. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter securities. There is no assurance that Penn Octane will remain quoted on the OTC Bulletin Board. Penn Octane will continue to file all required reports with the Securities and Exchange Commission. The delisting by NASDAQ could result in decreased market interest in Penn Octane common stock, investors and stockholders may experience more difficulty in buying and selling Penn Octane common stock and Penn Octane’s common stock price may decline. In addition, Penn Octane may experience greater difficulty in obtaining necessary debt and equity capital for potential acquisitions or the operation of its business.

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Competitive Factors.The energy industry is highly competitive. There is competition within the industries and also with other industries in supplying the energy and fuel needs of the industrial and individual consumers. The Company competes with other companies in the sale or purchase of Fuel Products as well as the transportation of these products in the US and Mexican markets and employs all methods of competition which are lawful and appropriate for such purposes. A key component of the Company’s competitive position, particularly given the commodity nature of its products and services, is its ability to manage its expenses successfully, which requires continuous management focus on reducing costs and improving efficiency and its ability to secure unique opportunities for the purchase, sale and/or delivery methods of its products.

International Factors.Mexican economic, political and social conditions may change and adversely affect the Company’s operations. The Company may not be able to continue operations in Mexico if Mexico restricts the existing ownership structure of its Mexican operations, requiring the Company to increase its reliance on Mexican nationals to conduct its business. The LPG market in Mexico has yet to be deregulated. Upon deregulation the Company will still be dependent on TransMontaigne because the Company can only transport LPG on behalf of TransMontaigne using the Retained Assets. The Company cannot predict the effect of deregulation on the Company. The Company’s contracts and Mexican business operations are subject to volatility in currency exchange rates which could negatively impact its earnings.

Political Factors.The operations and earnings of the Company in the U.S. and Mexico have been, and may in the future be, affected from time to time in varying degree by political instability and by other political developments and laws and regulations, such as forced divestiture of assets; restrictions on production, imports and exports; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of the Company’s facilities; price controls; tax increases and retroactive tax claims; expropriation of property; cancellation of contract rights; and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the Company vary greatly and are not predictable.

Industry and Economic Factors.The operations and earnings of the Company throughout the U.S. and Mexico are affected by local, regional and global events or conditions that affect supply and demand for the Company’s products and services. These events or conditions are generally not predictable and include, among other things, general economic growth rates and the occurrence of economic recessions; the development of new supply sources for its products; supply disruptions; weather, including seasonal patterns that affect energy demand and severe weather events that can disrupt operations; technological advances, including advances in exploration, production, refining and advances in technology relating to energy usage; changes in demographics, including population growth rates and consumer preferences; and the competitiveness of alternative hydrocarbon or other energy sources or product substitutes.

Market Risk Factors.See “Notes to Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in this report for discussion of the impact of market risks, inflation and other uncertainties.

Internal Control Factors.Pursuant to Section 404 of the Sarbanes Oxley Act of 2002, beginning with the year ending December 31, 2007, the Company is required to complete an annual evaluation of its internal control systems. In addition, the Company’s independent auditors are required to provide an opinion regarding such evaluation and the adequacy of the Company’s internal accounting controls for the year ending December 31, 2008. The Company’s internal controls may be found to be inadequate, deficiencies or weaknesses may be discovered, and remediation may not be successful. If the Company acquires an existing business, the internal control systems of the acquired business may be inadequate and may require additional strengthening.

Projections. Projections, estimates and descriptions of the Company’s plans and objectives included or incorporated in Part I. Items 1. and 2. and Part II. Items 1. and 1A. of this report are forward-looking statements. Actual future results could differ materially due to, among other things, the factors discussed above and elsewhere in this report.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

See notes J and K to the unaudited consolidated financial statements included in this report.

The above transactions were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof because the issuance did not involve a public offering of securities.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

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Item 6.Exhibits

The following exhibits are incorporated by reference to previously filed reports, as noted.

Exhibit No.
2.1	Purchase and Sale Agreement dated August 15, 2005 as amended and restated on August 15, 2006 entered into by and between Penn Octane Corporation and TransMontaigne Product Services, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).
2.2	Purchase and Sale Agreement dated August 15, 2005 as amended and restated on August 15, 2006 entered into by and between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).
3.1	Restated Certificate of Incorporation, as amended. (Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
3.2	Amended and Restated By-Laws of the Company. (Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).
3.3	Certificate of the Designation, Powers, Preferences and Rights of the Series B Convertible Redeemable Preferred Stock, filed with the State of Delaware. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1999 filed on November 10, 1999, SEC File No. 000-24394).
10.1	General Security Agreement dated October 14, 1997 between RZB Finance LLC and the Company. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394).
10.2	Permit issued on July 26, 1999 by the United States Department of State authorizing the Company to construct two pipelines crossing the international boundary line between the United States and Mexico for the transport of liquefied petroleum gas (LPG) and refined product (motor gasoline and diesel fuel). (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1999 filed on November 9, 1999, SEC File No. 000-24394).
10.3	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).
10.4	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 form 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).
10.5	Contribution, Conveyance and Assumption Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners L.P., Rio Vista Operating GP LLC and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

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Exhibit No.
10.6	Conveyance Agreement effective September 30, 2004 from Penn Octane Corporation in favor of Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.7	Distribution Agreement dated September 16, 2004 by and among Penn Octane Corporation, Rio Vista Energy Partners L.P. and Subsidiaries. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.8	Omnibus Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners, L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.9	Amendment No. 1 to Omnibus Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.10	Purchase Contract made and entered into effective as of October 1, 2004 by and between Penn Octane Corporation and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.11	Rio Vista GP LLC Unit Purchase Option dated July 10, 2003 granted by Penn Octane Corporation to Shore Capital LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.12	Rio Vista GP LLC Unit Purchase Option dated July 10, 2003 granted by Penn Octane Corporation to Jerome B. Richter. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.13	First Amended and Restated Agreement of Limited Partnership of Rio Vista Energy Partners L.P. dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.14	Rio Vista GP LLC Amended and Restated Limited Liability Company Agreement dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.15	Form of RVGP Voting Agreement by and among Rio Vista GP LLC, Penn Octane Corporation and the members of Rio Vista GP LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.16	First Amended and Restated Agreement of Limited Partnership of Rio Vista Operating Partnership L.P. dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

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Exhibit No.
10.17	Amended and Restated Line Letter dated September 15, 2004 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.18	Replacement Promissory Note dated September 15, 2004 by Penn Octane Corporation to RZB Finance LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.19	Consent Letter dated September 15, 2004 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.20	Assignment of Easements from Penn Octane to Rio Vista Operating Partnership L.P. dated September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.21	Guaranty & Agreement between Rio Vista Energy Partners L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.22	Guaranty & Agreement between Rio Vista Operating Partnership L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.23	General Security Agreement between Rio Vista Energy Partners L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.24	General Security Agreement between Rio Vista Operating Partnership L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).
10.25	Penn Octane Corporation 2001 Warrant Plan (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed on May 20, 2006, SEC File No. 000-24394).
10.26	First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Energy Partners L.P. dated as of October 26, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).
10.27	First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Operating Partnership L.P. dated as of October 26, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).

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Exhibit No.
10.28	Amended and Restated Promissory Note by Jerome B. Richter to the Company dated November 15, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).
10.29	Agreement dated as of November 15, 2005 by and between Penn Octane Corporation and Jerome B. Richter. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).
10.30	Ella-Brownsville Pipeline Lease Agreement effective as of August 1, 2006 between Seadrift Pipeline Corporation and Penn Octane Corporation. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).
10.31	Amendment to Pledge and Security Agreement between the Penn Octane Corporation and Jerome B. Richter dated October 13, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 20, 2006, SEC File No. 000-24394).
10.32	First Amendment to Amended and Restated Limited Liability Company Agreement of Rio Vista GP LLC dated October 6, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 20, 2006, SEC File No. 000-24394).
10.33	Unit Purchase Option effective February 6, 2007 between Shore Trading LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.34	Consent to Transfer of Units, Acknowledgement of Representation, and Waiver of Conflicts dated February 6, 2007 among Penn Octane Corporation, Rio Vista GP LLC, and Shore Trading LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.35	Consulting Agreement entered into March 5, 2007, with an effective date of November 15, 2006 by and between Penn Octane Corporation, and Rio Vista Energy Partners L.P., and JBR Capital Resources, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.36	Letter agreement dated March 5, 2007 by and between Penn Octane Corporation, Rio Vista Energy Partners L.P. and JBR Capital Resources, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.37	Amended Form of Common Stock Purchase Warrant under the Penn Octane Corporation 2001 Warrant Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.38	Form of Penn Octane Corporation Chairman Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.39	Form of Penn Octane Corporation Director and Officer Indemnification Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

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Exhibit No.
10.40	Form of Penn Octane Corporation Director Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.41	Form of Rio Vista GP LLC Chairman Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.42	Form of Rio Vista GP LLC Manager Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.43	Form of Rio Vista GP LLC Manager and Officer Indemnification Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.44	Form of Nonqualified Unit Option Agreement under the 2005 Rio Vista Energy Partners L.P. Equity Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
10.45	Amended and Restated Line Letter dated December 7, 2006 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
14.1	Penn Octane Corporation Code of Business Conduct (2007) (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).
The following Exhibits are filed as part of this report:
2.3	Agreement And Plan Of Merger, Made As Of The 27th Day Of July, 2007, By And Among Rio Vista Energy Partners L.P., (“Buyer”); Regional Enterprises, Inc., A Virginia Corporation And Newly Formed, Wholly Owned Subsidiary Of Buyer (“Merger Sub”); Regional Enterprizes, Inc. (Also Known As Regional Enterprises, Inc.), A Virginia Corporation (“Company”); The Shareholders Of Company; And W. Gary Farrar, Jr. (“Principal”).
2.4	Articles Of Merger Of Regional Enterprises, Inc. A Virginia Corporation, And Regional Enterprizes, Inc., A Virginia Corporation Dated July 27, 2007.
10.46	Consulting Agreement (This “Agreement”) Is Entered Into On This ___Th Day Of June, 2007, With An Effective Date Of November 1, 2006 By And Between Penn Octane Corporation, A Delaware Corporation And Rio Vista Energy Partners L.P., A Delaware Limited Partnership And Ricardo Rodriguez Canney.
10.47	Consulting Agreement Made And Entered Into As Of The 2nd Day Of July, 2007 Between Rio Vista Energy Partners, L.P. And Ceocast, Inc.
10.48	Employment And Non-Competition Agreement Effective As Of The 27th Day Of July, 2007 Made By And Between Regional Enterprises, Inc., A Virginia Corporation And W. Gary Farrar, III.

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10.49	Escrow Agreement Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership, Regional Enterprises, Inc., A Virginia Corporation, W. Gary Farrar, Jr., A Resident Of The Commonwealth Of Virginia, And First Capital Bank, A Virginia Banking Corporation (The “Escrow Agent”), Effective As Of The 27th Day Of July, 2007.
10.50	Loan Agreement Dated As Of July 26, 2007, And Entered Into Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership And RZB Finance LLC.
10.51	Guaranty And Agreement Between Regional Enterprises, Inc., A Virginia Corporation And RZB Finance LLC Dated As Of July 26, 2007.
10.52	Guaranty And Agreement Between Penn Octane Corporation, A Delaware Corporation And RZB Finance LLC Dated As Of July 26, 2007.
10.53	Guaranty And Agreement Between Rio Vista Operating Partnership L.P., A Delaware Limited Partnership And RZB Finance LLC Dated As Of July 26, 2007.
10.54	$5,000,000 Promissory Note Dated July 26, 2007 Issued By Rio Vista Energy Partners L.P., A Delaware Limited Partnership To RZB Finance LLC.
10.55	General Security Agreement dated July 26, 2007 between RZB Finance LLC and Regional Enterprises, Inc., A Virginia Corporation.
10.56	Pledge Agreement, Made This 26th Day Of July, 2007, By And Between: Rio Vista Energy Partners L.P., A Delaware Limited Partnership And RZB Finance LLC.
10.57	First Amendment To Line Letter Dated As Of July 26, 2007, Between RZB Finance LLC (“RZB”) And Penn Octane Corporation (The “Borrower”).
10.58	Debt Assumption Agreement Made As Of The 26th Day Of July, 2007, By And Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership And Regional Enterprises, Inc., A Virginia Corporation.
10.59	$5,000,000 Debt Assumption Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., A Virginia Corporation To Rio Vista Energy Partners L.P., A Delaware Limited Partnership.
10.60	$2,500.000 Promissory Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., A Virginia Corporation To Rio Vista Energy Partners L.P., A Delaware Limited Partnership.
10.61	Environmental Indemnity Agreement Made As Of The 26th Day Of July, 2007 By Regional Enterprises, Inc., A Virginia Corporation And RZB Finance LLC.
10.62	Reaffirmation Of Security Agreements, Dated As Of July 26, 2007 By And Among Rio Vista Energy Partners L.P., A Delaware Limited Partnership, Penn Octane Corporation, A Delaware Corporation And Rio Vista Operating Partnership L.P., A Delaware Limited Partnership And RZB Finance LLC.

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15	Accountant’s Acknowledgment.
31.1	Certification Pursuant to Rule 13a – 14(a) / 15d – 14(a) of the Exchange Act.
31.2	Certification Pursuant to Rule 13a – 14(a) / 15d – 14(a) of the Exchange Act.
32	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes –Oxley Act of 2002.

All of the Exhibits are available from the SEC’s website atwww.sec.gov. In addition, Penn Octane will furnish a copy of any Exhibit upon payment of a fee (based on the estimated actual cost which shall be determined at the time of a request) together with a request addressed to Ian T. Bothwell, Penn Octane Corporation, 77-530 Enfield Lane, Bldg. D, Palm Desert, California 92211.

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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
August 20, 2007	By:	/s/Ian T. Bothwell
		Ian T. Bothwell
		Acting Chief Executive Officer, Acting President, Vice President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Executive, Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.
2.3	Agreement And Plan Of Merger, Made As Of The 27th Day Of July, 2007, By And Among Rio Vista Energy Partners L.P., (“Buyer”); Regional Enterprises, Inc., A Virginia Corporation And Newly Formed, Wholly Owned Subsidiary Of Buyer (“Merger Sub”); Regional Enterprizes, Inc. (Also Known As Regional Enterprises, Inc.), A Virginia Corporation (“Company”); The Shareholders Of Company; And W. Gary Farrar, Jr. (“Principal”).
2.4	Articles Of Merger Of Regional Enterprises, Inc. A Virginia Corporation, And Regional Enterprizes, Inc., A Virginia Corporation Dated July 27 2007.
10.46	Consulting Agreement (This “Agreement”) Is Entered Into On This ___Th Day Of June, 2007, With An Effective Date Of November 1, 2006 By And Between Penn Octane Corporation, A Delaware Corporation And Rio Vista Energy Partners L.P., A Delaware Limited Partnership And Ricardo Rodriguez Canney.
10.47	Consulting Agreement Made And Entered Into As Of The 2nd Day Of July, 2007 Between Rio Vista Energy Partners, L.P. And Ceocast, Inc.
10.48*	Employment And Non-Competition Agreement Effective As Of The 27th Day Of July, 2007 Made By And Between Regional Enterprises, Inc., A Virginia Corporation And W. Gary Farrar, III.
10.49	Escrow Agreement Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership, Regional Enterprises, Inc., A Virginia Corporation, W. Gary Farrar, Jr., A Resident Of The Commonwealth Of Virginia, And First Capital Bank, A Virginia Banking Corporation (The “Escrow Agent”), Effective As Of The 27th Day Of July, 2007.
10.50	Loan Agreement Dated As Of July 26, 2007, And Entered Into Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership And RZB Finance LLC.
10.51	Guaranty And Agreement Between Regional Enterprises, Inc., A Virginia Corporation And RZB Finance LLC Dated As Of July 26, 2007.
10.52	Guaranty And Agreement Between Penn Octane Corporation, A Delaware Corporation And RZB Finance LLC Dated As Of July 26, 2007.
10.53	Guaranty And Agreement Between Rio Vista Operating Partnership L.P., A Delaware Limited Partnership And RZB Finance LLC Dated As Of July 26, 2007.
10.54	$5,000,000 Promissory Note Dated July 26, 2007 Issued By Rio Vista Energy Partners L.P., A Delaware Limited Partnership To RZB Finance LLC.
10.55	General Security Agreement dated July 26, 2007 between RZB Finance LLC and Regional Enterprises, Inc., A Virginia Corporation.
10.56	Pledge Agreement, Made This 26th Day Of July, 2007, By And Between: Rio Vista Energy Partners L.P., A Delaware Limited Partnership And RZB Finance LLC.

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Exhibit No.
10.57	First Amendment To Line Letter Dated As Of July 26, 2007, Between RZB Finance LLC (“RZB”) And Penn Octane Corporation (The “Borrower”).
10.58	Debt Assumption Agreement Made As Of The 26th Day Of July, 2007, By And Between Rio Vista Energy Partners L.P., A Delaware Limited Partnership And Regional Enterprises, Inc., A Virginia Corporation.
10.59	$5,000,000 Debt Assumption Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., A Virginia Corporation To Rio Vista Energy Partners L.P., A Delaware Limited Partnership.
10.60	$2,500.000 Promissory Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., A Virginia Corporation To Rio Vista Energy Partners L.P., A Delaware Limited Partnership.
10.61	Environmental Indemnity Agreement Made As Of The 26th Day Of July, 2007 By Regional Enterprises, Inc., A Virginia Corporation And RZB Finance LLC.
10.62	Reaffirmation Of Security Agreements, Dated As Of July 26, 2007 By And Among Rio Vista Energy Partners L.P., A Delaware Limited Partnership, Penn Octane Corporation, A Delaware Corporation And Rio Vista Operating Partnership L.P., A Delaware Limited Partnership And RZB Finance LLC.
15	Accountant’s Acknowledgment.
31.1	Certification Pursuant to Rule 13a – 14(a) / 15d – 14(a) of the Exchange Act.
31.2	Certification Pursuant to Rule 13a – 14(a) / 15d – 14(a) of the Exchange Act.
32	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes –Oxley Act of 2002.

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