Penn Octane (POCC) 10-Q 2008 Q3 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 March 31, 2008

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 (Address of Principal Executive Offices)	92211 (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, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero Accelerated Filero Non-Accelerated Filero Smaller Reporting Companyþ

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 May 19, 2008 was 15,406,187.

PENN OCTANE CORPORATION
TABLE OF CONTENTS

ITEM			PAGE NO.
PART I FINANCIAL INFORMATION
	1.	Financial Statements
		Report of Independent Registered Public Accounting Firm		3
		Consolidated Balance Sheets as of December 31, 2007 and March 31, 2008 (unaudited)		4-5
		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2007 and 2008		6
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2008		7
		Notes to Consolidated Financial Statements (Unaudited)		8-29
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30-39
	3.	Quantitative and Qualitative Disclosures About Market Risk		39
	4T.	Controls and Procedures		39
PART II OTHER INFORMATION
	1.	Legal Proceedings		40
	1A.	Risk Factors		40
	2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
	3.	Defaults Upon Senior Securities		40
	4.	Submission of Matters to a Vote of Security Holders		40
	5.	Other Information		40
	6.	Exhibits		41
	Signatures			42
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 March 31, 2008, the consolidated statements of operations for the three months ended March 31, 2007 and 2008, and the consolidated statement of cash flows for the three months ended March 31, 2007 and 2008. 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, 2007, 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 April 4, 2008, we expressed an unqualified opinion on those consolidated financial statements.

Our auditors’ report on the Company’s financial statements as of December 31, 2007 included an explanatory paragraph referring to the matters discussed in Note S of those consolidated financial statements which raised substantial doubt about the Company’s ability to continue as a going concern. As indicated in Note N to the accompanying unaudited interim consolidated financial statements, conditions continue to exist which raise substantial doubt about the Company’s ability to continue as a going concern.

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

Brownsville, Texas
May 20, 2008

3

Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31,		March 31,
	2007		2008
			(Unaudited)
Current Assets
Cash	$	4,339,000	$	2,645,000
Restricted cash		2,500,000		843,000
Trade accounts receivable (less allowance for doubtful accounts of $255,000 and $0 at December 31, 2007 and March 31, 2008, respectively)		4,261,000		7,678,000
Inventories		2,563,000		2,627,000
Deferred tax asset		608,000		608,000
Prepaid expenses and other current assets		744,000		507,000
Total current assets		15,015,000		14,908,000
Oil and gas properties and related equipment (successful efforts method) — net		26,197,000		26,430,000
Property, plant and equipment — net		12,983,000		13,083,000
Other non-current assets		11,000		11,000
Goodwill		6,463,000		6,463,000
Total assets	$	60,669,000	$	60,895,000

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

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Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS — CONTINUED

LIABILITIES AND STOCKHOLDERS’ EQUITY

	December 31,			March 31,
	2007			2008
				(Unaudited)
Current Liabilities
Current maturities of long-term debt	$	3,498,000		$	4,451,000
Short-term debt		5,493,000			5,499,000
Revolving line of credit		—			3,591,000
Fuel Products trade accounts payable		4,526,000			1,634,000
Other accounts payable		2,879,000			3,617,000
Taxes payable		618,000			582,000
Accrued liabilities		2,266,000			3,256,000
Total current liabilities		19,280,000			22,630,000
Commitments and contingencies		—			—
Long-term debt, less current maturities, net of discount		21,250,000			20,075,000
Deferred income tax — non-current		3,238,000			3,238,000
Minority interest		11,467,000			9,975,000
Stockholders’ Equity
Series A — Preferred stock-$.01 par value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2007 and March 31, 2008		—			—
Series B — Senior preferred stock-$.01 par value, $10 liquidation value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2007 and March 31, 2008		—			—
Common stock — $.01 par value, 25,000,000 shares authorized; 15,386,187 and 15,406,187 shares issued and outstanding at December 31, 2007 and March 31, 2008		154,000			154,000
Additional paid-in capital		29,271,000			29,594,000
Accumulated deficit		(23,991,000	)		(24,771,000	)
Total stockholders’ equity		5,434,000			4,977,000
Total liabilities and stockholders’ equity	$	60,669,000		$	60,895,000

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
	March 31,
	2007			2008
Revenues	$	39,382,000		$	33,403,000
Cost of goods sold		38,438,000			32,521,000
Gross profit		944,000			882,000
Selling, general and administrative expenses and other
Legal and professional fees		476,000			721,000
Salaries and payroll related expenses		407,000			1,058,000
Other		521,000			983,000
		1,404,000			2,762,000
Operating loss from operations		(460,000	)		(1,880,000	)
Other income (expense)
Interest and Fuel Products financing expense		(152,000	)		(956,000	)
Interest income		13,000			10,000
Minority interest in loss		460,000			2,051,000
Loss from operations before taxes		(139,000	)		(775,000	)
(Benefit) provision for income taxes		(27,000	)		5,000
Net loss	$	(112,000	)	$	(780,000	)
Net loss per common share	$	(0.01	)	$	(0.05	)
Weighted average common shares outstanding		15,386,187			15,406,187

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 CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2007			2008
Cash flows from operating activities:
Net loss	$	(112,000	)	$	(780,000	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, depletion and amortization		167,000			495,000
Amortization of loan discount		—			19,000
Share-based payment expense		95,000			276,000
Unit-based compensation		—			145,000
Minority interest		(460,000	)		(1,975,000	)
Beneficial conversion		—			14,000
Changes in current assets and liabilities:
Trade accounts receivable		(6,392,000	)		(3,417,000	)
Inventories		96,000			(64,000	)
Prepaid expenses and other current assets		(19,000	)		141,000
Deferred tax asset		(42,000	)		—
LPG and Fuel Products trade accounts payable		2,524,000			(2,893,000	)
Other accounts payable and accrued liabilities		656,000			2,105,000
U.S. and Foreign taxes payable		(61,000	)		(50,000	)
Net cash used in operating activities		(3,548,000	)		(5,984,000	)
Cash flows from investing activities:
Capital expenditures		(165,000	)		(827,000	)
Decrease in other non-current assets		(102,000	)		—
Net cash used in investing activities		(267,000	)		(827,000	)
Cash flows from financing activities:
Decrease (increase) in restricted cash		(318,000	)		1,656,000
Revolving credit facilities		3,119,000			3,591,000
Distributions paid to minority interests		(478,000	)		(607,000	)
Distributions paid to the minority owners of the general partner		(10,000	)		—
Stockholder’s note		41,000			—
Reduction in debt		—			(250,000	)
Exercise of options of Rio Vista		—			774,000
Costs of registration		—			(202,000	)
Other		—			155,000
Net cash provided by financing activities		2,354,000			5,117,000
Net decrease in cash		(1,461,000	)		(1,694,000	)
Cash at beginning of period		8,766,000			4,339,000
Cash at end of period	$	7,305,000		$	2,645,000
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	182,000		$	1,084,000
Taxes	$	110,000		$	—
Supplemental disclosures of noncash transactions:
Equity — common stock and warrants issued and other	$	95,000		$	—
Unit based compensation	$	—		$	145,000
Share based compensation	$	—		$	276,000

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

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A — ORGANIZATION

Penn Octane Corporation (Penn Octane), a Delaware corporation, has historically been engaged in the purchase, transportation and sale of liquefied petroleum gas (LPG) and the sale of gasoline and diesel fuel (Fuel Products) until the sale of all of Penn Octane’s LPG related assets and a portion of the LPG-related assets of Rio Vista Energy Partners, L.P. (Rio Vista) to TransMontaigne Product Services Inc. (TransMontaigne) on August 22, 2006 (Restated LPG Asset Sale). Subsequent to the Restated LPG Asset Sale, Penn Octane continued to sell Fuel Products and Rio Vista continued to operate its remaining LPG assets consisting of the LPG, terminal facility in Matamoros, Mexico and approximately 23 miles of pipelines connecting the Matamoros Terminal Facility to an LPG terminal facility in Brownsville, Texas exclusively on behalf of TransMontaigne to transport their LPG on a fee for services basis.

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 capital and 100% of Rio Vista’s limited partnership interests. The remaining 2% represented the General Partner interest. The General Partner interest is solely owned and controlled by Rio Vista GP LLC (General Partner). The General Partner is 75% owned by Penn Octane and Penn Octane has 100% voting control over the General Partner pursuant to a voting agreement with the other owner of the General Partner. Therefore, Rio Vista is consolidated with Penn Octane 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.

Until December 31, 2007, Penn Octane was focused on the operation of the LPG terminal facility and the pipelines. After August 2006, Rio Vista operated this system exclusively on behalf of TransMontaigne to transport their LPG on a fee for services basis. In addition, since June 2004, Penn Octane has been a reseller of Fuel Products. Penn Octane sells Fuel Products (Fuel Sales Business) through transactional, bulk and/or rack transactions.

In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm, together with associated improvements, leases, easements, licenses and permits; an LPG sales agreement; and all LPG inventory (Rio Vista Restated PSA). In December 2007, Rio Vista completed the disposition of its remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated rights-of-way and easements; all of the outstanding equity interests in entities owning interests in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As a result, effective January 1, 2008, the Company no longer operates the assets associated with the LPG business it had historically conducted.

In July 2007, Rio Vista acquired Regional Enterprises, Inc. (Regional), and in November 2007, Rio Vista acquired certain oil and natural gas producing properties and related assets (Oklahoma assets) in the State of Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. As a result of these acquisitions in 2007, Rio Vista is now focused on the acquisition, development and production of oil and natural gas properties and related midstream assets, and the operation and development of Regional’s business. Beginning March 1, 2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma assets and employed approximately six employees, consisting of four field workers and two office staff personnel as of such date.

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A — ORGANIZATION — Continued

The above acquisitions were funded by a combination of debt (new and assumed), private placements of Rio Vista common units and proceeds from the sale of Rio Vista’s LPG related assets. During November 2007, Rio Vista completed a private placement of common units raising gross proceeds of $4,000,000 (see note I).

In May 2008, Penn Octane’s board of directors approved a plan to sell its fuel sales inventory and to cease the Fuel Sales Business. The purpose of this decision was to provide working capital for its other business segments. The assets of the Fuel Sales Business consisted only of cash, accounts receivable and inventories.

Basis of Presentation

The accompanying unaudited consolidated financial statements include Penn Octane and its United States subsidiaries including PennWilson CNG, Inc. (PennWilson), Rio Vista GP, LLC and Penn CNG Holdings, Inc. and Rio Vista and its U.S. and Mexican subsidiaries, including RVOP, Rio Vista Operating GP LLC, Rio Vista Penny LLC, GO LLC (GO), MV Pipeline Company (MV), Operating, Regional and Penn Octane International, L.L.C., and its Mexican subsidiaries, Penn Octane de Mexico, S. de R.L. de C.V. (PennMex) and Termatsal, S. de R.L. de C.V. (Termatsal) and its consolidated affiliate, Tergas, S. de R.L. de C.V. (Tergas), collectively “the Company”. The Mexican subsidiaries were sold on December 31, 2007. All significant intercompany accounts and transactions are eliminated.

The unaudited consolidated balance sheet as of March 31, 2008, the unaudited consolidated statements of operations for the three months ended March 31, 2007 and 2008 and the unaudited consolidated statements of cash flows for the three months ended March 31, 2007 and 2008, 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 March 31, 2008, the unaudited consolidated results of operations for the three months ended March 31, 2007 and 2008 and the unaudited consolidated statements of cash flows for the three months ended March 31, 2007 and 2008.

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 for the year ended December 31, 2007 and Rio Vista’s Annual Report on Form 10-K for the year ended December 31, 2007.

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.

9

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE B — LOSS PER COMMON SHARE

The following tables present reconciliations from net loss per common share to loss from continuing operations per common share assuming dilution (see note H for the warrants):

	For the three months March 31, 2007
	Loss			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net loss	$	(112,000	)
Basic EPS
Net loss available to common stockholders		(112,000	)		15,386,189	$	(0.01	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net loss available to common stockholders		N/A			N/A		N/A

	For the three months March 31, 2008
	Loss			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Net loss	$	(780,000	)
Basic EPS
Net loss available to common stockholders		(780,000	)		15,406,187	$	(0.05	)
Effect of Dilutive Securities
Warrants		—			—
Diluted EPS
Net loss available to common stockholders		N/A			N/A		N/A

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE C — SHARE-BASED PAYMENT

The Company routinely issues warrants to purchase common stock to non-employees for goods and services and to acquire or extend debt. The Company applies the provisions of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (SFAS 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 and directors. 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). The Company recorded share-based payment expense for employees and nonemployees of $95,000 ($0.01 per common share) and $421,000 ($0.02 per common share) for the three months ended March 31, 2007 and 2008, respectively under the fair value provisions of SFAS 123R.

NOTE D — A FORMER OFFICER OF THE COMPANY NOTES

Note Receivable

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 $378,000.

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE D — A FORMER OFFICER OF THE COMPANY NOTES — Continued

Note Payable

On April 15, 2008, Mr. Richter agreed to loan Rio Vista $575,000 in exchange for a promissory note issued by Rio Vista and guaranteed by Penn Octane (Richter Note Payable). Under the terms of the Richter Note Payable, Rio Vista is required to repay the Richter Note Payable on the earlier of (i) the six (6) month anniversary of the Richter Note Payable, or (ii) the sale of all or substantially all of the assets of Rio Vista (Due Date). The Richter Note Payable will accrue interest at an annual rate of 8 percent (8%). Proceeds from the Richter Note Payable were used for working capital.

NOTE E — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	December 31,			March 31,
	2007			2008
Oklahoma:
Pipelines and equipment	$	6,756,000		$	7,048,000
Regional:
Land		237,000			237,000
Terminal and improvements		3,825,000			3,957,000
Automotive equipment		2,438,000			2,438,000
		6,500,000			6,632,000
		13,256,000			13,680,000
Other		338,000			370,000
		13,594,000			14,050,000
Less: accumulated depreciation and amortization		(611,000	)		(967,000	)
	$	12,983,000		$	13,083,000

Depreciation expense of property, plant and equipment from operations totaled $167,000 and $379,000 for the three months ended March 31, 2007 and 2008, respectively.

NOTE F — INVENTORIES

	December 31, 2007				March 31, 2008
	Gallons		LCM		Gallons		LCM
Fuel Products		1,043,000	$	2,563,000		545,000	$	2,627,000

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G — DEBT OBLIGATIONS

Short-term debt obligations were as follows:

	December 31,		March 31,
	2007		2008
RZB Note	$	5,000,000	$	5,000,000
Moores Note (net of discount of $7,000 and $1,000, respectively)		493,000		499,000
	$	5,493,000	$	5,499,000

Long-term debt obligations were as follows:

TCW Credit Facility (net of discount of $11,000 and $2,000, respectively)	$	23,689,000	$	23,698,000
Seller’s Note — Regional (net of discount of $78,000 and $59,000, respectively)		922,000		691,000
Other		137,000		137,000
		24,748,000		24,526,000
Less current portion		3,498,000		4,451,000
	$	21,250,000	$	20,075,000

Sellers’ Note — Regional

In connection with the Regional acquisition, Regional issued a promissory note in the amount of $1,000,000 to be paid in four equal semiannual installments of $250,000 beginning January 27, 2008. Rio Vista has recorded a discount of $116,000 (10% effective rate), representing the portion of interest associated with the note, which shall be amortized over the term of the note. During January 2008, the first installment was paid. For three months ended March 31, 2008, $19,000 was amortized.

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Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE G — DEBT OBLIGATIONS — Continued

TCW Credit Facility

The TCW Credit Facility is a $30,000,000 senior secured credit facility available to Rio Vista Penn LLC with a maturity date of August 29, 2010. The amount of the initial draw under the facility was $21,700,000, consisting of $16,750,000 in assumption of the existing indebtedness in the principal amount of $16,500,000 plus accrued but unpaid interest in the amount of $250,000 owed by GM Oil to TCW, $1,950,000 in consideration for TCW to enter into the TCW Credit Facility with Rio Vista Penny and for Rio Vista Penny to purchase an overriding royalty interest (ORRI) held by an affiliate of TCW, and $3,000,000 to fund the acquisition of the membership interests of GO by Rio Vista GO. TCW has also approved a plan of development (APOD) for the Oklahoma assets totaling approximately $2,000,000 which was funded during December 2007. The TCW Credit Facility is secured by a first lien on all of the Oklahoma assets and associated production proceeds pursuant to the Note Purchase Agreement, Security Agreement and related agreements, including mortgages of the Oklahoma assets in favor of TCW. The interest rate is 10.5%, increasing to 12.5% if there is an event of default. Payments under the TCW Credit Facility are interest-only until December 29, 2008. The TCW Credit Facility carries no prepayment penalty. Rio Vista ECO LLC (an indirect, wholly-owned subsidiary of Rio Vista and the direct parent of Rio Vista Penny and Rio Vista GO), Rio Vista GO, GO and MV have each agreed to guarantee payment of the Notes payable to investors under the TCW Credit Facility.

Under the terms of the Note Purchase Agreement, at any time during the period from May 19, 2008 through November 19, 2009, TCW has the right to demand payment of $2,200,000 of debt (Demand Loan). Beginning May 19, 2008, TCW also has the right to convert the outstanding principal amount of the Demand Loan into common units of Rio Vista at a price equal to the lesser of $13.33 per unit or 90% of the 20-day average trading price of such units preceding the election to convert. Beginning November 19, 2008, TCW has the right to convert the balance of the debt under the TCW Credit Facility into common units of Rio Vista at a price equal to 90% of the 20-day average trading price of such units preceding the election to convert. Rio Vista has agreed to file with the Securities and Exchange Commission (SEC) a registration statement on Form S-3 covering the common units issued pursuant to the conversion feature within 90 days following the first exercise of the conversion feature.

Rio Vista Penny and Rio Vista GO, which hold the Oklahoma assets, are prohibited from making upstream distributions to Rio Vista until December 2008. Thereafter, upstream distributions to Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to certain conditions. In addition, the TCW Credit Facility agreement requires semi-annual reserve reports by an independent engineer which is used in determining the allowable borrowing base. The initial report is due June 1, 2008.

Other

In connection with the note payable for legal services, the Company has not made all of the required payments. The Company provided a “Stipulation of Judgment” to the creditor at the time the note for legal services was issued.

Beneficial Conversion Features

In connection with the issuance of the Moores Note and TCW Credit Facility, Rio Vista recorded a beneficial conversion feature as interest expense and debt discount for the difference between carrying amount of the debt obligations and the estimated fair value of the common units to be issued upon conversion in the amount of $25,000. The amortization of the debt discount totaled approximately $14,000 for the three months ended March 31, 2008.

14

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE H — STOCK WARRANTS

2001 Warrant Plan

On January 28, 2008, the Board of Directors of Penn Octane approved the grant of warrants to purchase a total of 146,250 shares of common stock under Penn Octane’s 2001 Warrant Plan to certain outside members of the Board of Directors of Penn Octane. The exercise price for the warrants is $2.35 per share, which was the closing price for Penn Octane common stock as reported by the OTC Bulletin Board on January 28, 2008. Warrants granted to outside directors are fully vested on the date of grant and expire five years from the date of grant.

NOTE I — COMMON UNITS AND OPTIONS OF RIO VISTA

Common Units

On June 29, 2007, the Board of Managers of the General Partner of 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 vested as to 8,334 units on July 1, 2007 and an additional 8,333 units on January 1, 2008, with the remaining 8,333 units vesting on July 1, 2008 or 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 $280,000.

Private Placement of Common Units

On November 29, 2007, Rio Vista and the General Partner, entered into a Unit Purchase Agreement with Standard General Fund L.P., Credit Suisse Management LLC and Structured Finance Americas LLC (collectively, the Purchasers) dated effective as of November 29, 2007 (the Unit Purchase Agreement). Pursuant to the terms of the Unit Purchase Agreement, Rio Vista agreed to sell, and the Purchasers agreed to purchase, a total of 355,556 common units of Rio Vista (the Common Units) at a price of $11.25 per share in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act). The total purchase price of the Common Units was $4,000,000. Rio Vista agreed to pay expenses of counsel to the Purchasers in an amount not to exceed $100,000. Rio Vista used the net proceeds from the sale of the Common Units for general working capital purposes, including repayment of indebtedness. Rio Vista agreed not to offer or sell any of its equity securities (including equity securities of subsidiaries) for a period of 12 months following the closing date without first offering such securities to the Purchasers, which shall have the right to purchase up to 30% of such securities.

15

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE I — COMMON UNITS AND OPTIONS OF RIO VISTA — Continued

Private Placement of Common Units — Continued

On December 3, 2007, Rio Vista and Standard General entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which Rio Vista agreed to provide to the Purchasers registration rights with respect to the Common Units. Pursuant to the Registration Rights Agreement, Rio Vista agreed to file, within 90 days after the closing date for the sale of the Common Units, a shelf registration statement under the Securities Act to permit the public resale of the Common Units from time to time, including resale on a delayed or continuous basis as permitted by Rule 415 under the Securities Act. Rio Vista agreed to use its best efforts to cause the registration statement to become effective on or before the date of filing of Rio Vista’s Annual Report on Form 10-K for the year ending December 31, 2007 but no later than April 14, 2008. On February 13, 2008, Rio Vista filed a Form S-3 with the SEC. The form S-3 is expected to be declared effective during the second quarter of 2008. Rio Vista is required to pay liquidated damages to Standard General if the registration statement was not declared effective by April 14, 2008 as to all of the Common Units. In general, the amount of such damages equals 1% of the purchase price of the unregistered Common Units for each period of 30 days for which such units remain unregistered. If payment of such damages in cash would result in a default under any credit agreement of Rio Vista, in lieu of a cash payment Rio Vista may issue additional common units at a discount of 5% to the closing price for such units as reported by the Nasdaq Global Market. Liquidated damages in the amount of $80,000 are included in expense for the three months ended March 31, 2008.

On March 7, 2008, the Board of Managers of the General Partner approved the grant of a unit bonus of 8,812 common units under Rio Vista’s 2005 Equity Incentive Plan to an executive officer of the General Partner. The amount of units granted was based on the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ Stock Market on March 7, 2008.

On March 7, 2008, a total of 61,875 options to acquire common units of Rio Vista were exercised by holders of such options. Total proceeds received from the exercises were $774,000. In addition, on March 7, 2008, 15,625 options to acquire common units of Rio Vista were exercised by a holder through the offset of a severance obligation in connection with that employee’s termination.

16

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE I — COMMON UNITS AND OPTIONS OF RIO VISTA — Continued

Private Placement of Common Units — Continued

The common units represent limited partner interests in Rio Vista. The holders of common units are entitled to participate in Rio Vista’s distributions and exercise the rights or privileges available to limited partners under the partnership agreement. The holders of common units have only limited voting rights on matters affecting Rio Vista. Holders of common units have no right to elect the General Partner or its managers on an annual or other continuing basis. Penn Octane elects the managers of the General Partner. Although the General Partner has a fiduciary duty to manage Rio Vista in a manner beneficial to Rio Vista and its unitholders, the managers of the General Partner also have a fiduciary duty to manage the General Partner in a manner beneficial to Penn Octane and the other owners of the General Partner. The General Partner generally may not be removed except upon the vote of the holders of at least 80% of the outstanding common units; provided, however, if at any time any person or group, other than the General Partner and its affiliates, or a direct or subsequently approved transferee of the General Partner or its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. In addition, the partnership agreement contains provisions limiting the ability of holders of common units to call meetings or to acquire information about Rio Vista’s operations, as well as other provisions limiting the ability of holders of common units to influence the manner or direction of management.

The General Partner generally has unlimited liability for the obligations of Rio Vista, such as its debts and environmental liabilities, except for those contractual obligations of Rio Vista that are expressly made without recourse to the General Partner.

Distributions of Available Cash

All Rio Vista unitholders have the right to receive distributions from Rio Vista of “available cash” (as defined in the 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 entitled 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 the 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.

17

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE I — COMMON UNITS AND OPTIONS OF RIO VISTA — Continued

Distributions of Available Cash — Continued

Rio Vista made the following distributions subsequent to December 31, 2007:

					Amounts Paid
Quarter	Payment		Distribution		Common		General
Ended	Date		Per Unit		Units		Partner
December 2007		02/14/08	$	0.25	$	607,000	$	12,000
March 2008		05/16/08	$	0.25	$	629,000	$	13,000

Common Unit Options

On January 23, 2008, the board of managers of the General Partner approved the grant of options to purchase a total of 16,250 common units under Rio Vista’s 2005 Equity Incentive Plan to certain outside members of the board of managers of the General Partner. The exercise price for the options is $14.42 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 January 23, 2008. Options granted to outside managers are fully vested on the date of grant and expire five years from the date of grant. These issuances were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof because the issuances do not involve any public offering of securities.

NOTE J — 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.

18

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J — COMMITMENTS AND CONTINGENCIES — Continued

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. Discovery is being conducted and it is anticipated that a trial on a limited number of the Plaintiffs will take place during September 2008 or October 2008.

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.

On December 13, 2007, Lexington Insurance Company (Lexington) filed a declaratory action complaint against Penn Octane, Rio Vista and their related entities in the United States District Court in the Southern District of Texas (Brownsville) requesting the US Federal Court to rule that the plaintiff has no obligation to defend Penn Octane and the Rio Vista related entities in the Camacho and Gonzalez litigation based on alleged coverage exceptions. Federal jurisdiction was contested and the case moved to state court. A trial date is currently set for September 2008. According to local counsel, Gonzalez was referenced in the original complaint only because the plaintiff’s lawyers were unaware that Gonzalez had been settled prior to filing. It is unclear, however, to the extent Lexington is successful in its action, whether the plaintiff will request repayment of all settlement and litigation expenses paid by the insurance carrier in Gonzalez. Furthermore, if there is a determination that there is no insurance coverage resulting in Penn Octane and Rio Vista having to fund all defense costs as well as any material settlement or judgment amount in the Camacho suit, this could have a material adverse effect on Penn Octane’s and Rio Vista’s business, financial condition and results of operations.

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.

On November 3, 2004, there was an accident between a Regional truck driver and another motorist who allegedly sustained injuries as a result of the accident. The other motorist filed suit against Regional. The case was filed on February 26, 2007 as Nolte v. Regional Enterprises, Inc. in the United States District Court for the District of Maryland (Case No. 07 CV 0478 PJM). This case was settled within the limits of insurance coverage on or about January 28, 2008 and the case was dismissed accordingly on or about January 30, 2008.

19

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J — COMMITMENTS AND CONTINGENCIES

Legal Proceedings — Continued

On November 20, 2007, Rio Vista, Rio Vista Penny, LLC, Gary Moores, Bill Wood and GM Oil Properties, Inc. jointly filed an action for declaratory relief against Energy Spectrum Advisors, Inc. in the District Court in McIntosh County, Oklahoma. This action was filed in response to Energy Spectrum’s assertion that Rio Vista, Rio Vista Penny, LLC, as well as GM Oil Properties, Inc. owed Energy Spectrum a commission allegedly due and owing based on Rio Vista Penny, LLC’s November, 2007 purchase of certain assets from GM Oil Properties, Inc. The foundation for the Energy Spectrum claim is a January 22, 2007 written agreement signed by Energy Spectrum and GM Properties, Inc. Neither Rio Vista nor Rio Vista Penny were parties to this agreement, nor were they named in the Energy Spectrum’s counter claim. Based in part on the fact that the GM Oil Properties acquisition was an asset purchase, rather than a stock sale, management believes that the Rio Vista entities should have no liability for any obligation that GM Oil Properties, Inc. may have to Energy Spectrum. Discovery is currently pending.

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.

Credit Facility and Letters of Credit

Penn Octane finances its purchases of Fuel Products through its credit facility with RZB. As of March 31, 2008, Penn Octane had a $10,000,000 credit facility available 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, other than the Oklahoma assets. 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 (5.25% at March 31, 2008) 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, 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.

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.

20

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J — COMMITMENTS AND CONTINGENCIES — Continued

Credit Facility and Letters of Credit — Continued

Under the terms of the RZB Credit Facility, all cash from Penn Octane Fuel Products sales is 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 unaudited balance sheet at March 31, 2008 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 $453,000. At March 31, 2008, such taxes in the amount of approximately $768,000 were due. The letters of credit issued have all been secured by cash in the amount of approximately $683,000 which is included in restricted cash in the Company’s balance sheet at March 31, 2008.

Leases

Norfolk Southern Leases

On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection with Regional’s existing operations at Regional’s facilities in Hopewell, Virginia. The lease includes the right to maintain existing warehouses, storage tanks for handling petroleum and chemical products, and necessary appurtenances. The lease term was January 1, 2003 through December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30 days’ written notice. Rent is $1,500 per month subject to adjustment based on inflation.

On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land which is utilized in connection with Regional’s existing operations at Regional’s facilities in Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding lease began on August 21, 2003 and continues until terminated by either party with 30 days’ written notice. Rent is $4,875 per year, payable in advance.

21

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J — COMMITMENTS AND CONTINGENCIES — Continued

Leases — Continued

Norfolk Southern Leases — Continued

As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern for the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of land on a long-term basis. On June 1, 2007, Regional executed a letter of intent from Norfolk Southern dated May 29, 2007. Regional received a letter from Norfolk Southern dated July 26, 2007, approving the purchase of the land and the lease on the terms contained in the letter of intent. Regional is awaiting definitive documents from Norfolk Southern in order to complete the purchase and lease transactions.

Consulting Agreement

Effective November 2006, Penn Octane and Rio Vista 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. Jerome Richter, a former officer of Penn Octane. 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. In addition, in connection with the Regional transaction, JBR Capital earned a fee of $180,000 which fee was expensed. 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.

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 shall be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio Vista. In accordance with the Agreement, during April 2008, Rio Vista provided notice to CEOcast that it would not renew the Agreement upon the expiration in July 2008. As of March 31, 2008, Rio Vista was obligated to provide CEOcast a total of 6,378 Common Units. Based on the closing price of Rio Vista Common Units as of March 31, 2008, the Company recorded additional expense of $9,323 associated with the agreement.

22

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE J — COMMITMENTS AND CONTINGENCIES — Continued

Partnership Tax Treatment and Regional and MV Income Taxes

Rio Vista, excluding Regional and MV, is not a taxable entity for U.S. tax purposes (see below) and incurs no U.S. Federal income tax liability. Regional and MV are corporations and as such are subject to U.S. Federal and State corporate income tax. 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 basis in Rio Vista.

Section 7704 of the Internal Revenue Code (Code) provides that publicly traded partnerships shall, as a general rule, be 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 was 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 was 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 to reflect the impact of that law on Rio Vista.

23

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE K — OIL AND GAS HEDGING ACTIVITIES

Rio Vista sells oil and gas in the normal course of its business and utilizes hedging contracts in the form of guaranteed fixed prices to minimize the variability in forecasted cash flows due to price movements in oil and gas.

For the three months ended March 31, 2008, Rio Vista had one contract for 0.8 MMcf/d @ $6.70/Mcf. Subsequent to March 31, 2008, the following contracts are in effect:

Date	Terms
- April 2008 – October 2008:	1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production)
- April 2008 – October 2008:	0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production)
- November 2008 – March 2009:	1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)
- November 2008 – March 2009:	0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)

The hedges currently in place cover substantially all of Rio Vista’s current production.

NOTE L — RELATED PARTY TRANSACTIONS

The General Partner has a legal duty to manage Rio Vista in a manner beneficial to Rio Vista’s unitholders. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary” duty. Because of Penn Octane’s ownership and control of the General Partner, Penn Octane’s officers and managers of the General Partner also have fiduciary duties to manage the business of the General Partner in a manner beneficial to Penn Octane and its stockholders.

The partnership agreement limits the liability and reduces the fiduciary duties of the General Partner to the unitholders. The partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute breaches of the General Partner’s fiduciary duty.

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.

24

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE L — RELATED PARTY TRANSACTIONS — Continued

Guarantees

Debt Guarantee.Rio Vista is liable as guarantor on the RZB Credit Facility and will continue to pledge certain of its assets as collateral in connection with the RZB Credit Facility. Rio Vista may also be prohibited from making any distributions to unitholders if it would cause an event of default, or if an event or default is existing, under the RZB Credit Facility.

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.

NOTE M — 401K

Regional sponsors a defined contribution retirement plan (401(k) Plan) covering all eligible employees effective November 1, 1988. The 401(k) Plan allows eligible employees to contribute, subject to Internal Revenue Service limitations on total annual contributions, up to 60% of their compensation as defined in the 401(k) plan, to various investment funds. Regional matches, on a discretionary basis, 50% of the first 6% of employee compensation. Furthermore, Regional may make additional contributions on a discretionary basis at the end of the Plan year for all eligible employees. Regional has made no discretionary contributions since the acquisition of Regional to March 31, 2008. Effective February 2008, Penn Octane commenced sponsoring of a 401K Plan covering all eligible employees of Penn Octane. Since the plan’s inception to March 31, 2008, Penn Octane has made no discretionary contributions.

NOTE N — REALIZATION OF ASSETS

The accompanying consolidated balance sheet has been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company had a loss from continuing operations for each of the two years ended December 31, 2007 and the three months ended March 31, 2008 and has a deficit in working capital. Currently, all revenues generated from the Oklahoma assets are held as collateral against the TCW Credit Facility. The current portion of the TCW Credit Facility, the Moores Note, the RZB Note, and the Seller Note — Regional are all short-term in nature and amounts due in the current year are approximately $9,950,000.

The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash flow to pay general and administrative and other operating expenses of the Company and all debt service requirements. The TCW Credit Facility prohibits distributions by Rio Vista’s Oklahoma subsidiaries until December 2008 and subsequent thereto, those distributions are limited to 75% of defined available cash flow. In addition, Rio Vista requires additional funding in order to increase production levels for its Oklahoma assets.

25

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE N — REALIZATION OF ASSETS — Continued

Penn Octane has guaranteed the RZB Note. Substantially all of Rio Vista’s and Penn Octane’s assets are pledged or committed to be pledged as collateral on the TCW Credit Facility, the RZB Note and RZB Credit Facility, and therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets. Rio Vista’s Report of Independent Registered Public Accounting Firm on the consolidated financial statements of Rio Vista at December 31, 2007 contained an explanatory paragraph which describes an uncertainty about Rio Vista’s ability to continue as a going concern. If Penn Octane’s and Rio Vista’s cash flows are not adequate to pay their obligations, Penn Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure by creditors. There can be no assurance that such additional funding will be available on terms attractive to either Penn Octane or Rio Vista or available at all. If additional amounts cannot be raised and cash flow is inadequate, Penn Octane and/or Rio Vista would likely be required to seek other alternatives which could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy laws.

In view of the matters described in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying unaudited consolidated balance sheet is dependent upon the ability of the Company to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

To provide the Company with the ability it believes necessary to continue in existence, management is taking steps to restructure its existing debt obligations and raise additional debt and/or equity financing.

NOTE O — SEGMENT INFORMATION

The Company has the following reportable segments for the three months ended March 31, 2008: Transportation and Terminalling, Oil and Gas and Fuel Sales. The Transportation and Terminalling segment transports bulk liquids, including chemical and petroleum products, by truck and provides terminalling and storage services, the Oil and Gas segment produces, transports and sells oil and gas and the Fuel Sales segment is a reseller of gasoline and diesel fuel.

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 ended March 31, 2007 and 2008. The Transportation and Terminalling segment commenced August 22, 2006, the Oil and Gas segment commenced November 19, 2007 and the Fuel Sales segment commenced in 2004.

26

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE O — SEGMENT INFORMATION — Continued

Three months ended March 31, 2007:	LPG Transportation		Fuel Sales		Totals
Revenues from external customers	$	679,000	$	38,703,000	$	39,382,000
Interest expense		26,000		123,000		149,000
Interest income		—		—		—
Depreciation and amortization		165,000		—		165,000
Segment gross profit		285,000		659,000		944,000
Segment assets		16,317,000		13,247,000		29,564,000
Segment liabilities		2,094,000		12,162,000		14,256,000
Expenditure for segment assets		—		2,000		2,000
Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments					$	39,382,000
Elimination of intersegment revenues						—
Total consolidated revenues					$	39,382,000
Profit (loss)
Total gross profit for reportable segments					$	944,000
Selling, general and administrative expense						(1,404,000	)
Interest and Fuel Products financing expense						(152,000	)
Interest income						13,000
Minority interest in loss						460,000
Elimination of intersegment profits						—
Unallocated amounts
Corporate headquarters expense						—
Other expenses						—
Consolidated loss from operations before taxes					$	(139,000	)
Assets
Total assets for reportable segments					$	29,564,000
Other assets						3,371,000
Corporate headquarters						—
Other unallocated amounts						—
Total consolidated assets					$	32,935,000

27

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE O — SEGMENT INFORMATION — Continued

	Transportation
	and
Three months ended March 31, 2008:	Terminalling		Oil and Gas		Fuel Sales		Totals
Revenues from external customers	$	2,107,000	$	1,937,000	$	30,308,000	$	34,352,000
Interest expense		222,000		638,000		77,000		937,000
Interest income		—		7,000		—		7,000
Depreciation and amortization		282,000		211,000		—		493,000
Segment gross profit		345,000		325,000		202,000		872,000
Segment assets		12,519,000		35,929,000		9,234,000		57,682,000
Segment liabilities		4,472,000		26,515,000		6,168,000		37,155,000
Expenditure for segment assets		168,000		683,000		—		851,000
Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments							$	34,352,000
Elimination of intersegment revenues								(949,000	)
Other revenues								—
Total consolidated revenues							$	33,403,000
Profit (loss)
Total gross profit for reportable segments							$	872,000
Total other gross profit (loss)								10,000
Selling, general and administrative expense and other								(2,762,000	)
Interest and Fuel Products financing expense								(956,000	)
Interest income								10,000
Minority interest in loss								2,051,000
Elimination of intersegment profits								—
Unallocated amounts
Corporate headquarters expense								—
Other expenses								—
Consolidated loss from operations before taxes							$	(775,000	)
Assets
Total assets for reportable segments							$	57,682,000
Other assets								3,213,000
Corporate headquarters								—
Other unallocated amounts								—
Total consolidated assets							$	60,895,000

28

Penn Octane Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE P — INCOME TAXES

Penn Octane has losses for the three months ended March 31, 2007 and 2008 and recorded no income tax expense or income tax benefit.

Income taxes for Regional were $5,000, for the three months ended March 31, 2008 with an effective state and federal rate of 38%. MV had an immaterial loss and recorded no income tax expense or income tax benefit.

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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. and its subsidiaries (“Rio Vista”) 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 2008) refer to the Company’s fiscal year ended December 31.

Cautionary Statement Regarding 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. This Quarterly Report contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about:

• the volatility of realized natural gas prices;

• the discovery, estimation, development and replacement of oil and natural gas reserves;

• our business and financial strategy;

• our drilling locations;

• technology;

• our cash flow, liquidity and financial position;

• our production volumes;

• our lease operating expenses, general and administrative costs and finding and development costs;

• the availability of drilling and production equipment, labor and other services;

• our future operating results;

• our prospect development and property acquisitions;

• the marketing of oil and natural gas;

• competition in the oil and natural gas industry and the transportation and terminalling business;

• the impact of weather and the occurrence of natural disasters such as fires, floods, hurricanes, earthquakes and other catastrophic events and natural disasters;

• governmental regulation of the oil and natural gas industry and the transportation and terminalling business;

• required capital expenditures;

• cash distributions and qualified income;

• developments in oil producing and natural gas producing countries; and

• our strategic plans, objectives, expectations and intentions for future operations.

All of these types of statements, other than statements of historical fact included in this Quarterly Report are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this Quarterly Report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Quarterly Report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the “Risk Factors” section in Penn Octane’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. All forward-looking statements speak only as of the date of this Quarterly Report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise.

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Overview

Historical Assets and Operations

Until December 31, 2007, Penn Octane was focused on the operation of the LPG terminal facility in Matamoros, Mexico and approximately 23 miles of pipelines connecting the Matamoros Terminal Facility to an LPG terminal facility in Brownsville, Texas. After August 2006, Rio Vista operated this system exclusively on behalf of TransMontaigne Partners L.P. and its affiliates (TransMontaigne) to transport their LPG on a fee for services basis. In addition, since June 2004, the Company has been a reseller of Fuel Products. The Company sells Fuel Products (Fuel Sales Business) through transactional, bulk and/or rack transactions.

In August 2006, Rio Vista completed the disposition of substantially all of its U.S. LPG assets to TransMontaigne, including the Brownsville, Texas terminal facility and refined products tank farm, together with associated improvements, leases, easements, licenses and permits; an LPG sales agreement; and all LPG inventory (Rio Vista Restated PSA). In December 2007, Rio Vista completed the disposition of its remaining LPG assets to TransMontaigne, including the U.S. portion of the two pipelines from a Brownsville, Texas terminal owned by TransMontaigne to the U.S. border, along with all associated rights-of-way and easements; all of the outstanding equity interests in entities owning interests in the portion of the two pipelines that extend from the U.S. border to Matamoros, Mexico; and all of the rights for indirect control of an entity that owns a terminal site in Matamoros, Mexico. As a result, effective January 1, 2008, The Company no longer operates the assets associated with the LPG business it had historically conducted.

Current Assets and Operations

In July 2007, Rio Vista acquired Regional, and in November 2007, Rio Vista acquired certain oil and natural gas producing properties and related assets in the State of Oklahoma formerly owned by GM Oil Properties, Inc., Penny Petroleum Corporation and GO LLC. As a result of these acquisitions in 2007, Rio Vista is now focused on the acquisition, development and production of oil and natural gas properties and related midstream assets, and the operation and development of Regional’s business. Beginning March 1, 2008, Rio Vista Operating LLC became the operator of the Oklahoma assets and employed approximately six employees, consisting of four field workers and two office staff personnel as of such date.

The above acquisitions were funded by a combination of debt (new and assumed), private placements of Rio Vista common units and proceeds from the sale of Rio Vista’s LPG related assets. During November 2007, Rio Vista completed a private placement of common units raising gross proceeds of $4,000,000.

In May 2008, Penn Octane’s board of directors approved a plan to sell its fuel sales inventory and to cease the Fuel Sales Business. The purpose of this decision was to provide working capital for its other business segments. The assets of the Fuel Sales Business consisted only of accounts receivable and inventories.

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.

31

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.

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 March 31, 2007 and 2008, respectively:

	Three months		Three months
	ended		ended
	March 31,		March 31,
	2007		2008
Volume Sold
Fuel Products (millions of gallons)		19.5		10.9
Average sales price
Fuel Products (per gallon)	$	1.99	$	2.79

Liquidity and Capital Resources

General

As a result of the disposition of the LPG-related businesses in 2006 and 2007 and the acquisition of Regional’s business and the Oklahoma assets, the Company’s sources of operating cash flows are expected to be derived from the operations of Regional and from the revenues received from the Oklahoma assets. 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 described below under “Debt Obligations” and income taxes payable on Regional’s stand-alone taxable income. Based on the current production levels from the Oklahoma assets and current prices for oil and natural gas, there is not expected to be sufficient cash from its operations to meet debt service requirements under the TCW Credit Facility described below under “Debt Obligations” unless additional production can be realized. Rio Vista has minimal management experience operating oil and gas properties and will be relying on the assistance of its Chairman of the Board and outside consultants to provide ongoing management expertise. Additional production from the Oklahoma assets will require additional capital expenditures to fund drilling expansion opportunities. Rio Vista has only secured funding for its planned development through April 2008, and such development is not expected to increase cash flow to the levels needed for payment of operating costs and debt service. In addition, Rio Vista projects the monthly cash flows received form the Oklahoma assets during the months of April through September will be less than during the months of October through March as a result of seasonality.

32

In addition, 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. However, the TCW Credit Facility prohibits distributions by Rio Vista’s Oklahoma subsidiaries until December 2008 and subsequent thereto, those distributions are limited to 75% of defined available cash flow. As a result, Rio Vista may not have sufficient available cash to pay its separate general and administrative and other operating expenses, debt service and/or minimum quarterly distributions to unitholders. In addition, Rio Vista may not be able to distribute to its unitholders sufficient cash to meet the tax obligations of unitholders associated with the ownership of common units.

Rio Vista may obtain additional sources of revenues through the completion of future transactions, including acquisitions and/or dispositions of assets. The ability of Rio Vista to complete future acquisitions may require the use of a portion or substantially all of Rio Vista’s liquid assets, the issuance of additional debt and/or the issuance of additional units. Currently, substantially all of Rio Vista’s assets are pledged or committed to be pledged as collateral on existing debt in connection with the RZB Credit Facility described below under “Debt Obligations”, the TCW Credit Facility and the RZB Loan Agreement. Accordingly Rio Vista may be unable to obtain additional financing collateralized by those assets.

See note G to the unaudited consolidated financial statements for Rio Vista’s debt obligations and note J for a discussion of the RZB Credit Facility.

Credit Arrangements. Penn Octane finances its purchases of Fuel Products through its credit facility with RZB Finance, LLC (RZB). As of March 31, 2008, Penn Octane had a $10.0 million credit facility available with RZB for demand loans and standby letters of credit (RZB Credit Facility) to finance Penn Octane’s purchases of Fuel Products. 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, other than the Oklahoma assets. 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 (5.25% at March 31, 2008) 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.

Debt Obligations

RZB Loan Agreement

In July 2007, Rio Vista and Regional entered into a $5 million loan agreement (RZB Loan Agreement) with RZB Finance LLC (RZB) dated July 26, 2007. The loan is due on demand, with a one-year maturity. Any borrowings under the RZB Loan Agreement bear 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%. Under the RZB Loan Agreement, either Rio Vista or Penn Octane is required to maintain a minimum net worth of $10 million. In connection with the RZB Loan Agreement, Regional granted to RZB a security interest in all of Regional’s assets, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of Regional. Penn Octane, Regional and RVOP have also provided a guaranty of Rio Vista’s obligations under the RZB Loan Agreement in favor of RZB. As of March 31, 2008, Rio Vista had $5 million outstanding under the RZB Loan Agreement and was in compliance with all of the covenants thereunder.

33

TCW Credit Facility

In connection with the acquisition of certain of the Oklahoma assets, Rio Vista Penny LLC, an indirect, wholly-owned subsidiary of Rio Vista, entered into a $30 million senior secured credit facility (TCW Credit Facility) with TCW Asset Management Company and certain TCW Energy Fund X investors (collectively, TCW) in November 2007. The TCW Credit Facility has a maturity date of August 29, 2010. However, at any time during the period from May 19, 2008 through November 19, 2009, TCW has the right to demand payment of $2,200,000 of the amount outstanding under the TCW Credit Facility. The TCW Credit Facility is secured by a first lien on all of the Oklahoma assets and associated production proceeds. The interest rate on borrowings under the TCW Credit Facility is 10.5%, increasing to 12.5% if there is an event of default. Payments under the TCW Credit Facility are interest-only until December 29, 2008. The TCW Credit Facility has no prepayment penalty. Certain Rio Vista subsidiaries have guaranteed payment of the obligations outstanding under the TCW Credit Facility. Rio Vista Penny and Rio Vista GO LLC, an indirect, wholly-owned subsidiary of Rio Vista, both of which hold all of the Oklahoma assets, are prohibited from making upstream distributions to Rio Vista before November 30, 2008. Thereafter, upstream distributions to Rio Vista not in excess of 75% of quarterly cash flow are permitted subject to certain conditions. As of March 31, 2008, Rio Vista had $23.7 million outstanding under the TCW Credit Facility and was in compliance with all of the covenants thereunder.

RZB Credit Facility Guarantee

As of March 31, 2008, Penn Octane had a $10,000,000 credit facility with RZB for demand loans and standby letters of credit (RZB Credit Facility). In connection with the spin-off of the LPG business by Penn Octane to Rio Vista, Rio Vista agreed to guarantee Penn Octane’s obligations with respect to the RZB Credit Facility. In connection with Rio Vista’s guaranty, Rio Vista granted RZB a security interest and assignment in any and all of Rio Vista’s accounts, real property, buildings, pipelines, fixtures and interests therein or relating thereto, other than the Oklahoma assets. In addition, Rio Vista 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. 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.

Moores Note

As partial consideration for the acquisition of certain of the Oklahoma assets by Rio Vista Penny, Rio Vista delivered a promissory note in November 2007 to Gary Moores in the aggregate principal amount of $500,000. The note bears interest at 7% per annum and matures on May 19, 2008. Beginning February 19, 2008, Gary Moores has the option to convert the outstanding principal and interest of the note into common units of Rio Vista at a conversion price equal to 90% of the 10-day average closing price of such common units as reported by the NASDAQ Stock market at the time of conversion. The conversion option may be exercised on only one occasion and expires on May 19, 2008.

Regional Note

In connection with the Regional acquisition, Regional issued a promissory note in the amount of $1 million to be paid in four equal semiannual installments of $250,000 beginning January 27, 2008. Rio Vista has recorded a discount of $116,000 (10% effective rate), representing the portion of interest associated with the note, which shall be amortized over the term of the note. During January 2008, the first installment was paid. For the three months ended March 31, 2008, $19,000 was amortized.

Distributions of Available Cash.All Rio Vista unitholders have the right to receive distributions from Rio Vista of “available cash” (as defined in the 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 our General Partner. Our 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.

34

In addition to its 2% General Partner interest, our 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 the common units and our General Partner 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.

Rio Vista made the following distributions subsequent to December 31, 2007:

					Amounts Paid
Quarter	Payment		Distribution		Common		General
Ended	Date		Per Unit		Units		Partner
December 2007		02/14/08	$	0.25	$	607,000	$	12,000
March 2008		05/16/08	$	0.25	$	629,000	$	13,000

Leases

Norfolk Southern Leases.On January 1, 2003, Regional (as lessee) entered into a lease agreement with Norfolk Southern Railway Company (as lessor) for approximately 3.1 acres of land which is utilized in connection with Regional’s existing operations at Regional’s facilities in Hopewell, Virginia. The lease includes the right to maintain existing warehouses, storage tanks for handling petroleum and chemical products, and necessary appurtenances. The lease term was January 1, 2003 through December 31, 2005. The lease has not been renewed and may be terminated by either party upon 30 days’ written notice. Rent is $1,500 per month subject to adjustment based on inflation.

On August 21, 2003, Regional (as lessee) entered into a siding lease agreement with Norfolk Southern Railway Company (as lessor) for approximately 750 feet of railroad sidings on land which is utilized in connection with Regional’s existing operations at Regional’s facilities in Hopewell, Virginia. The sidings may be used for handling various chemical products. The siding lease began on August 21, 2003 and continues until terminated by either party with 30 days’ written notice. Rent is $4,875 per year, payable in advance.

As replacement of the foregoing leases, Regional is currently negotiating with Norfolk Southern for the purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of land on a long-term basis. On June 1, 2007, Regional executed a letter of intent from Norfolk Southern dated May 29, 2007. Regional received a letter form Norfolk Southern dated July 26, 2007, approving the purchase of the land and the lease on the terms contained in the letter of intent. Regional is awaiting definitive documents from Norfolk Southern in order to complete the purchase and lease transactions.

CEOcast Agreement

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 shall be made at the soonest practical date after March 31, 2008, based on the best efforts of Rio Vista. In accordance with the Agreement, during April 2008, Rio Vista provided notice to CEOcast that it would not renew the Agreement upon the expiration in July 2008. As of March 31, 2008, Rio Vista was obligated to provide CEOcast a total of 6,378 Common Units. Based on the closing price of Rio Vista Common Units as of March 31, 2008, the Company recorded additional expense of $9,323 associated with the agreement.

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Realization of Assets

The accompanying consolidated balance sheet has been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company had a loss from continuing operations for each of the two years ended December 31, 2007 and the three months ended March 31, 2008 and has a deficit in working capital. Currently, all revenues generated from the Oklahoma assets are held as collateral against the TCW Credit Facility. The current portion of the TCW Credit Facility, the Moores Note, the RZB Note, and the Seller Note — Regional are all short-term in nature and amounts due in the current year are approximately $10 million.

The Oklahoma assets and/or the Regional operations currently do not generate sufficient cash flow to pay general and administrative and other operating expenses of the Company and all debt service requirements. The TCW Credit Facility prohibits distributions by Rio Vista’s Oklahoma subsidiaries until December 2008 and subsequent thereto, those distributions are limited to 75% of defined available cash flow. In addition, Rio Vista requires additional funding in order to increase production levels for its Oklahoma assets.

Penn Octane has guaranteed the RZB Note. Substantially all of Rio Vista’s and Penn Octane’s assets are pledged or committed to be pledged as collateral on the TCW Credit Facility, the RZB Note and RZB Credit Facility, and therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets. Rio Vista’s Report of Independent Registered Public Accounting Firm on the consolidated financial statements of Rio Vista at December 31, 2007 contained an explanatory paragraph which describes an uncertainty about Rio Vista’s ability to continue as a going concern. If Penn Octane’s and Rio Vista’s cash flows are not adequate to pay their obligations, Penn Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure by creditors. There can be no assurance that such additional funding will be available on terms attractive to either Penn Octane or Rio Vista or available at all. If additional amounts cannot be raised and cash flow is inadequate, Penn Octane and/or Rio Vista would likely be required to seek other alternatives which could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy laws.

In view of the matters described in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying unaudited consolidated balance sheet is dependent upon the ability of the Company to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

To provide the Company with the ability it believes necessary to continue in existence, management is taking steps to restructure its existing debt obligations and raise additional debt and/or equity financing.

Rio Vista has guaranteed certain of Penn Octane’s obligations. Substantially all of Rio Vista’s and Penn Octane’s assets are pledged or committed to be pledged as collateral on The TCW Credit Facility, and the RZB Note and RZB Credit Facility, and therefore, both Rio Vista and Penn Octane may be unable to obtain additional financing collateralized by those assets. Penn Octane’s Report of Independent Registered Public Accounting Firm on the consolidated financial statements of Penn Octane at December 31, 2007 contains an explanatory paragraph which describes an uncertainty about Penn Octane’s ability to continue as a going concern. If Penn Octane’s and Rio Vista’s cash flows are not adequate to pay their obligations, Penn Octane and/or Rio Vista may be required to raise additional funds to avoid foreclosure by creditors. There can be no assurance that such additional funding will be available on terms attractive to either Penn Octane or Rio Vista or available at all. If additional amounts cannot be raised and cash flow is inadequate, Penn Octane and/or Rio Vista would likely be required to seek other alternatives which could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy laws.

In view of the matters described in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon the ability of Rio Vista to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should Rio Vista be unable to continue in existence.

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Results of Operations

Because of our rapid growth through acquisitions during this past year, our historical results of operations and period-to-period comparisons of these results and certain financial data may not be meaningful or indicative of future results. 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 assets that have been disposed, including revenues, direct costs, associated interest expenses, minority interest and income taxes, which have been reclassified as discontinued operations (see below). The results of operations from continuing operations reflect only the results associated with (i) the Transportation and Terminaling Business consisting of Regional’s transportation of bulk liquids and its related terminalling and storage services (ii) the LPG (sold December 31, 2007) operations of the US-Mexico Pipelines and Matamoros Terminal Facility, (iii) the Company’s Fuel Sales business, and (iv) the oil and gas operations associated with the Oklahoma assets, and all indirect income and expenses of the Company relating thereto. 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. Revenues from the Oil and Gas segment commenced on November 19, 2007.

Continuing Operations

Three months ended March 31, 2008 Compared with Three Months ended March 31, 2007

THREE MONTHS ENDED MARCH 31, 2008

	Fuel			Oklahoma			Regional			LPG		Corporate/
	Sales (d)			Assets (a)			Enterprises (b)			Transportation (c)		Other			Total
Revenues		30,308,000			988,000			2,107,000			—		—			33,403,000
Cost Of Goods Sold		30,106,000			663,000			1,762,000			—		(10,000	)		32,521,000
Gross Profit		202,000			325,000			345,000			—		10,000			882,000
Selling, General And Administrative Expenses		191,000			29,000			245,000			—		2,297,000			2,762,000
Operating Income (loss)		11,000			296,000			100,000			—		(2,287,000	)		(1,880,000	)
Other Income (Expense)
Interest and Fuel Products Financing Expense		(77,000	)		(638,000	)		(222,000	)		—		(19,000	)		(956,000	)
Interest Income		—			7,000			—			—		3,000			10,000
Minority Interest		—			—			—			—		2,051,000			2,051,000
Loss From Operations Before Taxes		(66,000	)		(335,000	)		(122,000	)		—		(252,000	)		(775,000	)
Provision For Income Taxes		—			—			5,000			—		—			5,000
Net Loss		(66,000	)		(335,000	)		(127,000	)		—		(252,000	)		(780,000	)

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THREE MONTHS ENDED MARCH 31, 2007

	Fuel			Oklahoma		Regional		LPG			Corporate/
	Sales (d)			Assets (a)		Enterprises (b)		Transportation (c)			Other			Total
Revenues		38,703,000			—		—		679,000			—			39,382,000
Cost Of Goods Sold		38,044,000			—		—		394,000			—			38,438,000
Gross Profit		659,000			—		—		285,000			—			944,000
Selling, General and Administrative Expenses		222,000			—		—		61,000			1,121,000			1,404,000
Operating Income (Loss)		437,000			—		—		224,000			(1,121,000	)		(460,000	)
Other Income (Expense)
Interest and Fuel Products Financing Expense		(123,000	)		—		—		(26,000	)		(3,000	)		(152,000	)
Interest Income		—			—		—		—			13,000			13,000
Minority Interest		—			—		—		—			460,000			460,000
Income (Loss) From Operations Before Taxes		314,000			—		—		198,000			(651,000	)		(139,000	)
Provision For Income Taxes (Benefit)		15,000			—		—		—			(42,000	)		(27,000	)
Net Income (Loss)		299,000			—		—		198,000			(609,000	)		(112,000	)

(a)	Acquired during November 2007
(b)	Acquired during July 2007
(c)	Business commenced in August 2006 and sold December 31, 2007
(d)	Business ceased in May 2008

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Recently Issued Financial Accounting Standards

FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, issued in September 2006, establishes a formal framework for measuring fair value under GAAP. It defines and codifies the many definitions of fair value included among various other authoritative literature, clarifies and, in some instances, expands on the guidance for implementing fair value measurements, and increases the level of disclosure required for fair value measurements. Although SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for: SFAS No. 123(R), share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. This statement was initially to have become effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As a result of FASB Staff Position 157-2, the effective date of SFAS No. 157 for nonfinancial assets and liabilities has been deferred to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Rio Vista does not expect the adoption of SFAS No. 157 to have a material impact on its consolidated results of operations, financial position, and cash flows.

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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.

Not applicable.

Item 4T. Controls and Procedures.

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (Exchange Act), such as this Form 10-Q, is reported in accordance with the rules of the SEC. Disclosure controls are also designed with the objective of ensuring that such information is accumulated appropriately and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer/chief financial officer and our controller, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).

We have only two members of management involved in the financial reporting process: the chief executive officer/chief financial officer and the controller. As a result, segregation of duties is difficult and therefore, the internal control environment is limited. As a result of this material weakness, our management concluded that our disclosure controls and procedures were not effective as of March 31, 2008. We are taking the following steps that we believe are necessary to address the matters related to the material weakness:

1. We are recruiting experienced accounting professionals with an emphasis on accounting and financial reporting.

2. We are utilizing outside consultants with extensive oil and gas financial reporting experience.

3. We are providing extensive training on our accounting software system to both new and established accounting personnel.

However, before concluding that the material weakness has been remediated, management believes that the new internal controls should be implemented and operational for a sufficient period of time to demonstrate that the controls are operating effectively.

During the quarter ended March 31, 2008, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We believe our unaudited consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in accordance with United States generally accepted accounting principles.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable.

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

See note H 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 filed as part of this report:

Exhibit No.
	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 person on behalf of the registrant and in the capacities and on the dates indicated.

	PENN OCTANE CORPORATION
May 20, 2008	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.		Description
	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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