TABLETable OF CONTENTS ITEM PAGE NO. ---- -------- Part I 1. Business 3 2. Properties 15 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 18 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 6. Selected Financial Data 23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 7A. Quantitative and Qualitative Disclosures About Market Risks 43 8. Financial Statements and Supplementary Data 44 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 90 9A. Controls and Procedures 90 Part III 10. Directors and Executive Officers of the Registrant 91 11. Executive Compensation 93 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 99 13. Certain Relationships and Related Transactions 102 14. Principal Accountant Fees and Services 104 Part IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 105Contents

~~2001~~UNITED ~~2002~~STATES SECURITIES ~~2003~~AND ~~-----------~~EXCHANGE ----------- ----------- U.S. $11,521,638 $11,568,228 $11,250,443 Mexico 6,738,746 6,782,557 6,427,387 ----------- ----------- ----------- Total $18,260,384 $18,350,785 $17,677,830 =========== =========== ===========COMMISSION

~~APPROXIMATE LEASE~~WASHINGTON, ~~OWN~~DC LOCATION TYPE OF FACILITY SIZE OR ACCESS(2) ----------------------- ------------------------------------------- ------------------------ ------------ Brownsville, Texas Pipeline interconnection and railcar and 16,071 bbls of storage Owned(1)(7) truck loading facilities, LPG storage facilities, on-site administrative offices Land 31 acres Leased(1) Brownsville, Texas Brownsville Terminal Facility building 19,200 square feet Owned(1)(7) Extending from Kleberg Seadrift Pipeline 132 miles Leased(3) County, Texas to Cameron County, Texas Markham, Texas Salt Dome Storage 500,000 bbls of storage Access(3) Markham, Texas to King Seadrift Pipeline Ranch Plant 155 mile pipeline Access(3) Extending from Nueces ECCPL Pipeline 46 miles Access(6) County, Texas to King Ranch Plant Extending from US-Mexico Pipelines 23 miles Owned Brownsville, Texas to Matamoros, Mexico Matamoros, Mexico Pipeline interconnection, LPG truck 35 acres Owned loading facilities, LPG storage facilities, on-site administration office and the land Brownsville, Texas Pipeline interconnection, Refined 300,000 bbls of Owned(5) (7) Products storage tanks storage Land 12 acres Leased(5) Palm Desert, California Penn Octane Corporation Headquarters 3,400 square feet Leased(4) 15 _____________ (1) The Company's lease with respect to the Brownsville Terminal Facility expires on November 30, 2006. (2) The Company's assets are pledged or committed to be pledged as collateral (see notes to the consolidated financial statements). (3) The Company's lease with Seadrift expires December 31, 2013. The Company has reserved for the calendar year ending December 31, 2003, 200,000 bbls of storage. (4) The Company's lease with respect to its headquarters offices expires October 31, 2003. The Company expects to renew the lease. The monthly lease payments approximate $3,400 a month. (5) The Company's lease with respect to the Tank Farm expires in November 30, 2006. (6) The Company's use of the ECCPL is pursuant to the Exxon Supply Contract, which expires on September 30, 2009. (7) The facilities can be removed upon termination of the lease.20549

~~PLAN~~FORM CATEGORY NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (a) (b) (c) Equity compensation plans approved by 2,180,000 $ 4.79 1,500,000 (1)(2) security holders Equity compensation plans not approved by 1,412,179 $ 2.69 - security holders (3) --------- ---------- Total 3,592,179 $ 3.97 1,500,000 ========= ========== (1) Pursuant to the Company's Board Plan, the outside directors are entitled to receive warrants to purchase 20,000 shares of common stock of the Company upon their initial election as a director and warrants to purchase 10,000 shares of common stock of the Company for each year of service as a director. (2) Pursuant to the Company's 2001 Warrant Plan, the Company may issue warrants to purchase up to 1.5 million shares of common stock of the Company. (3) The Company was not required to obtain shareholder approval for these securities.-K

~~Year Ended July 31, -------------------------------------------------- 1999 2000 2001 2002 2003 ---------- ------- --------- -------- -------- Revenues $35,338~~(1)Mark ~~$98,515 $150,700 $142,156 $162,490 Income (loss~~One) from continuing operations 1,125 1,461 (8,094) 4,123 1,958 Net income (loss) 545 1,461 (8,094) 4,123 1,958 Net income (loss) from continuing operations per common share .11 .11 (.57) .28 .13 Net income (loss) per common share .05 .11 (.57) .28 .13 Total assets 8,909 31,537 40,070 30,155 27,838 Long-term obligations 259 1,465 3,274 612 60 (1) The operations of PennWilson for the period from August 1, 1997 (date of incorporation) through May 25, 1999, the date operations were discontinued, are presented in the consolidated financial statements as discontinued operations.

~~2001~~þ ~~2002~~ANNUAL ~~2003~~REPORT ~~------~~PURSUANT ~~------~~TO ~~------~~SECTION ~~Volume~~13 ~~Sold~~OR ~~LPG~~ 15(~~millions of gallons~~d) -OF ~~PMI~~THE ~~167.2~~SECURITIES ~~243.5~~EXCHANGE ~~211.1~~ACT ~~LPG~~OF ~~(million of gallons) - Other 71.4 76.1 56.4 ------ ------ ------ 238.6 319.6 267.5 Average sales price LPG (per gallon) - PMI $ 0.67 $ 0.46 $ 0.63 LPG (per gallon) - Other 0.55 0.47 0.52~~1934

~~2001~~For ~~2002~~the ~~2003~~fiscal ~~--------~~year ~~--------------~~ended ~~-------- Net cash provided by operating activities . . . $ 6~~December 31,~~196~~ $ 2,394 $ 4,735 Net cash used in investing activities . . . . . (2,572) ( 717) (167) Net cash used in financing activities . . . . . (2,327) (2,839) (1,253) -------- -------------- -------- Net increase (decrease) in cash . . . . . . . . $ 1,297 $ (1,162) $ 3,315 -------- -------------- -------- Less net decrease (increase) in restricted cash (940) 942 (3,375) -------- -------------- -------- Net increase (decrease) in non-restricted cash. $ 357 $ ( 220) $ ( 60) ======== ============== ========2008

PAYMENTS DUE BY PERIOD (AMOUNTS IN MILLIONS) --------------------------------------------------- Less than 1 - 3 4 - 5 After Contractual Obligations Total 1 Year Years Years 5 Years ---------------------------------- -------- ---------- -------- --------- -------- Long-Term Debt Obligations $ - $ - $ - $ - $ - Operating Leases 12.8 1.4 2.8 2.6 6.0 LPG Purchase Obligations 540.9 117.4 163.9 163.9 95.7 Other Long-Term Obligations .1 - .1 - - -------- ---------- -------- --------- -------- Total Contractual Cash Obligations $ 553.8 $ 118.8 $ 166.8 $ 166.5 $ 101.7 ======== ========== ======== ========= ========OR

~~AMOUNT~~o OFTRANSITION ~~COMMITMENT~~REPORT ~~EXPIRATION~~PURSUANT ~~PER~~TO ~~PERIOD~~SECTION ~~(AMOUNTS~~13 INOR ~~MILLIONS~~15(d) ~~----------------------------------------------------~~OF ~~Commercial~~THE ~~Total~~SECURITIES ~~Amounts~~EXCHANGE ~~Less~~ACT ~~than~~OF 1 - 3 4 - 5 Over Commitments Committed 1 Year Years Years 5 Years ------------------------------ -------------- ---------- ------ ------ -------- Lines of Credit $ - $ - $ - $ - $ - Standby Letters of Credit 7.2 7.2 - - - Guarantees N/A N/A N/A N/A N/A Standby Repurchase Obligations N/A N/A N/A N/A N/A Other Commercial Commitments N/A N/A N/A N/A N/A -------------- ---------- ------ ------ -------- Total Commercial Commitments $ 7.2 $ 7.2 $ - $ - $ - ============== ========== ====== ====== ========1934

~~PENN~~For ~~OCTANE~~the ~~CORPORATION~~transition ~~AND~~period SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 31 ASSETS 2002 2003 ----------- ----------- Current Assets Cash (including restricted cash of $29,701 and $3,404,782 at 2002 and 2003) $ 160,655 $ 3,475,846 Trade accounts receivable (less allowance for doubtful accounts of $5,783 at 2002 and 2003) 7,653,986 4,143,458 Notes receivable - related parties 214,356 - Inventories 938,672 878,082 Assets held for sale - 720,000 Mortgage receivable 1,935,723 - Prepaid expenses and other current assets 254,654 476,109 ----------- ----------- Total current assets 11,158,046 9,693,495 Property, plant and equipment - net 18,350,785 17,677,830 Lease rights (net of accumulated amortization of $661,740 and $707,535 at 2002 and 2003) 492,299 446,504 Other non-current assets 154,209 19,913 ----------- ----------- Total assets $30,155,339 $27,837,742 =========== =========== The accompanying notes are an integral part of these statements.from to

~~PENN~~Commission ~~OCTANE~~file ~~CORPORATION~~number: AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED JULY 31 LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2003 ------------- ------------- Current Liabilities Current maturities of long-term debt $ 3,055,708 $ 746,933 Short-term debt 3,085,000 ~~1,744,128 Revolving line of credit 150,000~~ - LPG trade accounts payable 8,744,432 7,152,098 Other accounts payable 3,584,848 2,470,880 Foreign taxes payable - 60,000 Accrued liabilities 860,551 1,083,966 ------------- ------------- Total current liabilities 19,480,539 13,258,005 Long-term debt, less current maturities 612,498 60,000 Commitments and contingencies - - Stockholders' Equity Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized; No shares issued and outstanding at 2002 and 2003 - - Series B - Senior preferred stock-$.01 par value, $10 liquidation value, 5,000,000 shares authorized; No shares issued and outstanding at 2002 and 2003 - - Common stock - $.01 par value, 25,000,000 shares authorized; 14,870,977 and 15,274,749 shares issued and outstanding at 2002 and 2003 148,709 152,747 Additional paid-in capital 26,919,674 28,298,301 Notes receivable from an officer of the Company and another party for exercise of warrants, net of reserves of $754,175 and $535,736 at 2002 and 2003 (4,014,481) (2,897,520) Accumulated deficit (12,991,600) (11,033,791) ------------- ------------- Total stockholders' equity 10,062,302 14,519,737 ------------- ------------- Total liabilities and stockholders' equity $ 30,155,339 $ 27,837,742 ============= ============= The accompanying notes are an integral part of these statements.24394

~~PENN~~Penn ~~OCTANE~~Octane CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 31 2001 2002 2003 --------------- --------------- ------------------ Revenues $ 150,699,999 $ 142,156,099 $ 162,489,565 Cost of goods sold 151,475,598 131,129,110 152,375,349 --------------- --------------- ------------------ Gross profit (loss) (775,599) 11,026,989 10,114,216 Selling, general and administrative expenses Legal and professional fees 1,139,141 1,568,002 2,597,065 Salaries and payroll related expenses 1,230,456 1,646,308 2,411,843 Other 1,248,042 1,132,546 1,380,009 --------------- --------------- ------------------ 3,617,639 4,346,856 6,388,917 --------------- --------------- ------------------ Operating income (loss) (4,393,238) 6,680,133 3,725,299 Other income (expense) Interest expense ( 3,615,477) ( 2,538,395) ( 1,757,664) Interest income 39,576 27,550 95,327 Settlement of litigation (115,030) - ( 145,153) --------------- --------------- ------------------ Income (loss) before taxes (8,084,169) 4,169,288 1,917,809 Provision (benefit) for income taxes 9,641 46,693 ( 40,000) --------------- --------------- ------------------ Net income (loss) $ (8,093,810) $ 4,122,595 $ 1,957,809 =============== =============== ================== Net income (loss) per common share $ (0.57) $ 0.28 $ 0.13 =============== =============== ================== Net income (loss) per common share assuming dilution $ (0.57) $ 0.27 $ 0.13 =============== =============== ================== Weighted average common shares outstanding 14,146,980 14,766,115 15,035,220 =============== =============== ================== The accompanying notes are an integral part of these statements.Corporation

PENN OCTANE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31 2001 2002 2003 ---------------------- -------------------- -------------------- Shares Amount Shares Amount Shares Amount ----------- --------- ---------- -------- ---------- -------- PREFERRED STOCK Beginning balance - $ - - $ - - $ - =========== ========= ========== ======== ========== ======== Ending balance - $ - - $ - - $ - =========== ========= ========== ======== ========== ======== SENIOR PREFERRED STOCK Beginning balance - $ - - $ - - $ - =========== ========= ========== ======== ========== ======== Ending balance - $ - - $ - - $ - =========== ========= ========== ======== ========== ======== COMMON STOCK Beginning balance 13,435,198 $134,352 14,427,011 $144,270 14,870,977 $148,709 Issuance of common stock in connection with registration rights penalty 3,480 35 - - - - Issuance of common stock for services - August 2000 6,500 65 - - - - Issuance of common stock in connection with settlement of litigation - August 2000 12,500 125 - - - - Issuance of common stock in connection with settlement of litigation - September 2000 100,000 1,000 - - - - Issuance of common stock upon exercise of warrants - September 2000 200,000 2,000 - - - - Receipt of stock for cancellation of indebtedness (~~78,383)~~Exact ~~(784)~~Name ~~- - - - Issuance~~ of ~~common~~Registrant ~~stock~~as ~~upon~~Specified exercise of warrants - October 2000 7,500 75 - - - - Issuance of common stock for services - November 2000 4,716 47 - - - - Issuance of common stock upon exercise of warrants - November 2000 700,000 7,000 - - - - Issuance of common stock in ~~connection~~Its with bonus - December 2000 14,500 145 - - - - Issuance of common stock for services - December 2000 - January 2001 6,000 60 - - - - Issuance of common stock upon exercise of warrants - July 2001 15,000 150 - - - - Issuance of common stock upon exercise of warrants in exchange for debt obligations owed to the holder of the warrants - August 2001 - - 37,500 375 - - Issuance of common stock upon exercise of warrants in exchange for debt obligations owed to the holder of the warrants - September 2001 - - 275,933 2,759 - - Issuance of common stock in connection with bonus - September 2001 - - 1,000 10 - - Issuance of common stock for services - September 2001 - - 37,500 375 - - The accompanying notes are an integral part of these statements.Charter)

PENN OCTANE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED FOR THE YEARS ENDED JULY 31 2001 2002 2003 -------------------- ---------------------- ------------------------ Shares Amount Shares Amount Shares Amount ---------- -------- ----------- --------- ----------- ----------- COMMON STOCK - CONTINUED Receipt of stock for payment of indebtedness - October 2001 - - ( 36,717) (367) - - Issuance of common stock upon exercise of warrants - November 2001 - - 78,750 787 - - Issuance of common stock upon exercise of warrants - June 2002 - - 25,000 250 - - Issuance of common stock upon exercise of warrants - July 2002 - - 25,000 250 - - Receipt of stock for payment of indebtedness - - - - ( 7,620) (76) Issuance of common stock upon exercise of warrants in exchange for debt obligations owed to the holder of the warrants - March 2003 - - - - 250,000 2,500 Issuance of common stock in exchange for debt obligations - March 2003 - - - - 161,392 1,614 ---------- -------- ----------- --------- ----------- ----------- Ending balance 14,427,011 $144,270 14,870,977 $148,709 15,274,749 $ 152,747 ========== ======== =========== ========= =========== =========== The accompanying notes are an integral part of these statements.


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

77-530 Enfield Lane, Building D, Palm Desert, California		92211
(Address of Principal Executive Offices)		(Zip Code)

~~PENN~~Registrant’s ~~OCTANE~~Telephone CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED FOR THE YEARS ENDED JULY 31 2001 2002 2003 --------------- ----------------- ----------------- Amount Amount Amount --------------- ----------------- ----------------- ADDITIONAL PAID-IN CAPITAL Beginning balance $ 21Number,~~782,638~~ $Including ~~25,833,822~~Area $Code: 26,919,674 Sale of common stock - - 401,866 Issuance of warrants in connection with settlement 300,000 - - Loan discount 1,620,403 207,283 384,665 Grant of stock for bonus 43,355 2,790 - Grant of stock for services 87,595 149,625 - Common stock distributed in connection with the settlement of a lawsuit (~~1,125~~760) 772- - Grant of warrants for services 499,480 - - Grant of warrants in connection with registration rights agreement (35) - - Receipt of common stock for cancellation of debt (554,877) - - Receipt of stock for payment of indebtedness - (146,502) (30,404) Exercise of warrants 2,142,025 872,967 622,500 Cost of registering securities (85,637) (311) - --------------- ----------------- ----------------- Ending balance $ 25,833,822 $ 26,919,674 $ 28,298,301 =============== ================= ================= STOCKHOLDERS' NOTES Beginning balance $ (3,263,350) $ (3,986,048) $ (4,014,481) Note receivable from an officer of the Company and another party for exercise of warrants (698,000) - - Note receivable from an officer and director of the Company - (200,000) 200,000 Interest on another party note receivable (24,698) - - Reserve of interest - 24,698 - Reduction in notes receivable - 146,869 30,480 Forgiveness of note receivable in connection with severance pay - - 448,077 Receipt of assets for cancellation of note receivable - - 438,404 --------------- ----------------- ----------------- Ending balance $ (3,986,048) $ (4,014,481) $ (2,897,520) =============== ================= ================= ACCUMULATED DEFICIT Beginning balance $ (9,020,385) $ (17,114,195) $ (12,991,600) Net income (loss) for the year (8,093,810) 4,122,595 1,957,809 --------------- ----------------- ----------------- Ending balance $ (17,114,195) $ (12,991,600) $ (11,033,791) =============== ================= ================= The accompanying notes are an integral part of these statements.9080

~~PENN~~Securities ~~OCTANE~~registered ~~CORPORATION~~pursuant AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31 2001 2002 2003 -------------- ------------- ------------ Cash flows from operating activities: Net income (loss) $ (8,093,810) $ 4,122,595 $ 1,957,809 Adjustments to ~~reconcile net income~~ Section 12(~~loss~~b) ~~to net cash provided by (used in) operating activities: Depreciation and amortization 758,911 843,436 976,054 Amortization~~ of lease rights 45,795 45,795 45,795 Non-employee stock based costs and other 222,988 374,870 166,537 Amortization of loan discount 1,887,442 956,853 240,043 Gain on sale of land - (17,001) - Gain on sale of equipment - - (231,925) Gain on settlement of litigation - - (50,000) Interest expense associated with exchange of debt - - 68,000 Interest income - officer note - - (67,241) Salaries and payroll related expenses - - 523,349 Other 106,570 33,281 58,834 Changes in current assets and liabilities: Trade accounts receivable (986,213) (2,856,873) 3,510,529 Notes receivable - related parties - (200,000) - Inventories (5,061,638) 11,246,407 60,590 Prepaid and other current assets 22,562 (180,697) (387,992) LPG trade accounts payable 4,310,867 (793,393) (1,592,334) Obligation to deliver LPG 11,495,333 (11,495,333) - Other assets and liabilities, net (4,649) 158,599 134,296 Other accounts payable and accrued liabilities 1,491,810 155,671 (737,343) Foreign taxes payable - - 60,000 -------------- ------------- ------------ Net cash provided by (used in) operating activities 6,195,968 2,394,210 4,735,001 Cash flows from investing activities: Capital expenditures (2,572,367) (789,069) (534,883) Sale of land - 72,001 - Proceeds from sale of equipment - - 368,303 -------------- ------------- ------------ Net cash used in investing activities (2,572,367) (717,068) (166,580) Cash flows from financing activities: Revolving credit facilities (3,538,394) 150,000 (150,000) Issuance of debt 1,046,000 381,032 584,711 Debt issuance costs (326,232) - - Issuance of common stock 1,453,249 287,511 - Costs of registration (85,637) (568) - Reduction in debt (875,518) (3,632,324) (1,687,941) Reserve of interest on note receivable from another party - (24,698) - -------------- ------------- ------------ Net cash provided by (used in) financing activities (2,326,532) (2,839,047) (1,253,230) -------------- ------------- ------------ Net increase (decrease) in cash 1,297,069 (1,161,905) 3,315,191 Cash at beginning of period 25,491 1,322,560 160,655 -------------- ------------- ------------ Cash at end of period $ 1,322,560 $ 160,655 $ 3,475,846 ============== ============= ============ Supplemental disclosures of cash flow information: Cash paid during the ~~year for~~Act: Interest (including capitalized interest of $120,000 in 2001) $ 1,806,356 $ 1,756,998 $ 1,522,960 ============== ============= ============ Taxes $ 27,141 $ - $ - ============== ============= ============ Supplemental disclosures of noncash transactions: Equity - common stock and warrants issued and other $ 3,575,382 $ 974,915 $ 1,345,145 ============== ============= ============ Notes receivable exchanged for common stock $ (555,661) $ (146,869) $ (30,480) ============== ============= ============ Mortgage receivable $ (1,934,872) $ (851) $ 1,935,723 ============== ============= ============ Equipment exchange for notes receivable $ - $ - $ 720,000 ============== ============= ============ The accompanying notes are an integral part of these statements.None

~~LPG~~Securities ~~terminals,~~registered ~~building~~pursuant ~~and~~to ~~leasehold improvements~~ Section 12(ag) 8of tothe 19Act: ~~years~~Common ~~Automobiles 3-5 years Furniture~~Stock, ~~fixtures~~par ~~and~~value ~~equipment 3-5 years Trailers 8 years Pipelines 30 years~~$.01

~~For~~Indicate ~~the~~by ~~year~~check ~~ended~~mark ~~July~~if ~~31,~~the ~~2001~~registrant ~~-------------------------------------------~~is ~~Income~~a ~~(Loss) Shares Per~~well-~~Share~~known ~~(Numerator)~~seasonal ~~(Denominator) Amount --------------- ------------- ----------- Net income (loss) $ (8~~issuer,~~093,810)~~ ~~BASIC~~as ~~EPS~~defined ~~Net~~in ~~income~~Rule 405 ~~(loss)~~of ~~available to common stockholders (8,093,810) 14,146,980 $( 0.57 ) =========== EFFECT OF DILUTIVE SECURITIES Warrants - - DILUTED EPS Net income (loss) available to common N/A N/A N/A stockholders For~~ the ~~year~~Securities ended July 31, 2002 ------------------------------------------- Income (Loss) Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------- ----------- Net income (loss) $ 4,122,595 BASIC EPS Net income (loss) available to common stockholders 4,122,595 14,766,115 $ 0Act.28 Yes ~~===========~~o ~~EFFECT~~No OF DILUTIVE SECURITIES Warrants - 351,424 --------------- ------------- DILUTED EPS Net income (loss) available to common stockholders $ 4,122,595 15,117,539 $ 0.27 =============== ============= ===========þ

~~NOTE~~Indicate Cby -check ~~INCOME~~mark ~~(LOSS)~~if ~~PER COMMON SHARE - CONTINUED For~~ the ~~year~~registrant ~~ended~~is ~~July~~not ~~31,~~required ~~2003~~to ~~-------------------------------------------~~file ~~Income~~reports ~~(Loss)~~pursuant ~~Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------- ----------- Net income (loss) $ 1,957,809 BASIC EPS Net income (loss) available~~ to ~~common 1,957,809 15,035,220 $ 0.~~Section 13 ~~Stockholders~~or ~~============~~Section ~~EFFECT OF DILUTIVE SECURITIES Warrants - 80,610 Convertible Preferred Stock - - -------------- ------------- DILUTED EPS Net income~~ 15(~~loss~~d) ~~available~~of tothe ~~common stockholders $ 1,957,809 15,115,830 $ 0~~Act.13 Yes ~~==============~~o ~~=============~~No ~~==========~~þ

~~2002~~Indicate ~~2003~~by ~~------------~~check ~~------------~~mark ~~LPG:~~if ~~Midline~~the ~~pump station $ 2,449,628 $ 2,443,988 Brownsville Terminal Facility~~registrant: (a1) has ~~Building~~filed ~~173,500~~all ~~173,500~~reports ~~Terminal~~required ~~facilities~~to ~~3,631,207~~be ~~3,631,207~~filed ~~Tank~~by Section 13 ~~Farm~~or 370,855 373,945 Leasehold improvements 302,657 302,657 Capital construction in progress 96,212 96,212 Equipment 502,557 226,285 ------------ ------------ 7,526,616 7,247,794 ------------ ------------ US - Mexico Pipelines and Matamoros Terminal Facility: 15(ad) ~~U.S. Pipelines and Rights~~ of ~~Way~~the ~~6,497,471~~Securities ~~6,680,242~~Exchange ~~Mexico~~Act ~~Pipelines and Rights~~ of ~~Way~~1934 ~~993,300~~during ~~993,300~~the ~~Matamoros~~preceding ~~Terminal~~12 months ~~Facility~~(or ~~5,074,087~~for such ~~5,107,514~~shorter ~~Saltillo~~period ~~Terminal~~that ~~1,027,267~~the ~~1,027,267~~registrant ~~Land~~was ~~856,358~~required ~~856,358~~to ~~------------~~file ~~------------~~such 14reports),~~448,483~~ 14,664,681 ------------ ------------ Total LPG 21,975,099 21,912,475 ------------ ------------ Other: Automobile 10,800 - Office equipment 72,728 93,201 Software - 75,890 ------------ ------------ 83,528 169,091 ------------ ------------ 22,058,627 22,081,566 Less: accumulated depreciation and ~~amortization~~ (~~3,707,842~~2) has ~~(4,403,736)~~been subject ~~------------~~to ~~------------~~such ~~$18,350,785~~filing ~~$17,677,830~~requirements ~~============~~for ~~============~~the ~~(a)~~past ~~See~~90 days. ~~note~~Yes R.þ No o

~~2002~~Indicate ~~2003~~by ~~-------------------~~check ~~-------------------~~mark ~~Gallons~~if ~~Cost~~disclosure ~~Gallons~~of ~~Cost~~delinquent ~~---------~~filers ~~--------~~pursuant ~~---------~~to Item 405 of Regulation S-~~-------~~K ~~LPG:~~is ~~Leased~~not ~~Pipeline~~contained 1herein,~~175,958~~ ~~$458,091~~and ~~1,175,958~~will ~~$638,623~~not ~~Brownsville~~be ~~Terminal~~contained, ~~Facility~~to ~~Matamoros~~the ~~Terminal~~best ~~Facility~~of ~~and~~registrant’s ~~railcars~~knowledge, ~~leased~~in definitive byproxy ~~the~~or ~~Company~~information ~~806,688~~statements ~~314,243~~incorporated ~~440,771~~by ~~239,368~~reference ~~Markham~~in ~~Storage~~Part III ~~and~~of ~~other~~this ~~427,003~~Form ~~166,338~~10-K or ~~168~~any 91amendment ~~---------~~to ~~--------~~this ~~---------~~Form 10-~~-------~~K ~~2,409,649~~or ~~$938,672~~any ~~1,616,897~~amendment ~~$878,082~~to ~~=========~~this ~~========~~Form ~~=========~~10-K. ~~========~~þ

~~2002~~Indicate ~~2003~~by ~~----------------------------------------~~check ~~----------------------------------------~~mark ~~Assets~~whether ~~Liabilities~~the ~~Assets~~registrant ~~Liabilities~~is ~~-------------------~~a ~~-------------------~~large ~~-------------------~~accelerated ~~------------------- Depreciation Bad debt reserve $ - $ 133~~filer,~~000~~ $an ~~- $ 193~~accelerated filer,~~000~~ ~~Receivable~~or ~~140,000~~a non-accelerated ~~2,000~~filer -or ~~Alternative~~a ~~minimum~~smaller ~~tax~~reporting ~~credits~~company. ~~12,000~~See -the -definitions -of “accelerated ~~Deferred~~filer” ~~interest~~and ~~cost~~“large -accelerated -filer” ~~84,000~~and -“smaller ~~Deferred~~reporting ~~other~~company” ~~cost~~in ~~1,552,000~~ Rule 12b- ~~1,346,000 - Rio Vista Registration costs 172,000 - 228,000 - Net operating loss carryforward - - 156,000 -~~ 2~~,277,000~~ -of the ~~1,797,000~~Exchange - ------------------- ------------------- ------------------- ------------------- 4,153,000 133,000 3,613,000 193,000 Less: valuation allowance 4,153,000 133,000 3,613,000 193,000 ------------------- ------------------- ------------------- ------------------- $ - $ - $ - $ - =================== =================== =================== ===================Act.

~~Debt~~Large ~~consists~~Accelerated ofFiler ~~the~~o ~~following~~Accelerated asFiler ofo ~~July 31,: 2002 2003~~ Non-~~---------~~Accelerated ~~----------~~Filer ~~Promissory~~o ~~note~~Smaller ~~issued~~Reporting inCompany connection with the acquisition of the US - Mexico Pipelines $ 837,918 $ 284,731 and the Matamoros Terminal Facility (see note L). Promissory note issued in connection with the acquisition of the US - Mexico Pipelines 554,159 198,178 and the Matamoros Terminal Facility (see note L). Promissory note issued in connection with the purchase of property (see note L). 1,935,723 - Noninterest-bearing note payable, discounted at 7%, for legal services; due in February 2001. 137,500 137,500 Extending Noteholders' notes and $250,000 Note 3,085,000 1,744,128 Other debt 202,906 186,524 ---------- ---------- Total debt 6,753,206 2,551,061 Less: Current maturities 3,055,708 746,933 Short-term debt 3,085,000 1,744,128 ---------- ---------- Long-term debt $ 612,498 $ 60,000 ========== ==========þ

~~Year~~Indicate ~~ending~~by ~~July~~check ~~31,~~mark ~~--------------------~~whether ~~2005~~the ~~$20,000~~registrant ~~2006~~is ~~20,000~~a ~~2007~~shell ~~20,000~~company (as defined in Rule 12b-~~------~~2 ~~60,000~~of the ~~=======~~Exchange Act) Yes o No þ

~~2001~~The ~~2002~~aggregate ~~2003~~market ~~------------------- -------------- -------------- Net income (loss) as reported $ (8,093,810) $ 4,122,595 $ 1,957,809 Less: Total stock-based employee compensation expense determined under fair~~ value ~~based method for all awards, net~~ of ~~related~~the ~~tax~~voting ~~effects~~stock ~~(2,761,767)~~held ~~(2,013,203)~~by ~~(1,317,073)~~ non-~~------------------~~affiliates ~~--------------~~of ~~--------------~~the ~~Net~~Registrant ~~income~~was ~~(loss) pro forma (10~~$ 14,~~855~~331,~~577)~~476 ~~2,109,392 640,736 Net income (loss) per common share,~~ as ~~reported~~of ~~(.57) .28 .13 Net income (loss) per common share~~June 30, ~~pro forma (~~2008.~~77) .14 .04 Net income (loss) per common share assuming (.57) .27 .13 dilution, as reported Net income (loss) per common share assuming (.77) .14 .04 dilution, pro forma~~

~~2001~~The ~~2002~~number ~~2003~~of ~~---------------------------~~shares --------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Warrants Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------ ---------- --------------- ---------- --------------- ---------- --------------- Outstanding at beginning of ~~year~~Common 4Stock,~~154,988~~ $par ~~3.82~~value ~~4,377,488~~ $ 30.6701 ~~3,911,555~~per ~~$ 3.87 Granted 1~~share,~~395,000~~ ~~3.82~~outstanding ~~60,000~~on ~~3.84~~ March 30,~~000~~ ~~2.82~~2009 was ~~Exercised ( 922~~15,~~500) 2.33 (442~~416,~~183) 1~~187.98 ( 250,000) 2.50 Expired (250,000) 6.00 ( 83,750) 3.69 (99,376) 3.66 ---------- ---------- ---------- Outstanding at end of year 4,377,488 3.67 3,911,555 3.87 3,592,179 3.97 ========== ========== ========== Warrants exercisable at end of year 3,451,251 3,574,027 3,556,189

~~2001~~DOCUMENTS ~~2002~~INCORPORATED ~~2003~~BY ---------------------------- ---------------------------- ---------------------------- For warrants granted For warrants granted For warrants granted Weighted Weighted Weighted Weighted Weighted Weighted Exercise price compared to average average average average average average market price on grant date fair value exercise price fair value exercise price fair value exercise price -------------------------- ----------- --------------- ----------- --------------- ----------- --------------- Equals market price $ 5.06 $ 6.77 $ 2.69 $ 3.84 $ 1.82 $ 2.82 Exceeds market price 1.84 4.16 - - - - Less than market price 2.30 2.50 - - - -REFERENCE

Warrants Outstanding Warrants Exercisable -------------------------- ------------------------ Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average at Contractual Exercise at Exercise Range of Exercise Prices July 31, 2003 Life Price July 31, 2003 Price ------------------------- ------------- ----------- --------- ------------- --------- 2None.27 to $3.66 1,477,179 1.40 years $ 2.53 1,474,208 $ 2.53 3.99 to $4.60 1,705,000 1.39 4.53 1,705,000 4.53 6.37 to $7.00 410,000 2.09 6.79 376,981 6.82 ------------- ------------- 2.27 to $7.00 3,592,179 1.47 $ 3.97 3,556,189 $ 3.94 ============= =============

~~2001~~TABLE ~~2002~~OF 2003 ----------- ----------- ----------- Brownsville Lease and $ 113,056 $ 108,744 $ 96,760 Other (a) Minimum Rent Expense 1,954,564 1,911,385 1,396,431 Variable Rent Expense 783,297 1,218,843 1,202,893 ----------- ----------- ----------- Total $ 2,850,917 $ 3,238,972 $ 2,696,084 =========== =========== ===========CONTENTS

Year ending July 31, -------------------- 2004 $1,434,805 2005 1,425,368 2006 1,407,779 2007 1,310,822 2008 1,275,000 Thereafter 5,950,000 ---------- 12,803,774 ==========


ITEM	PAGE NO.

Part I

1 and 2. Business and Properties		1

1A. Risk Factors		19

1B. Unresolved Staff Comments		30

3. Legal Proceedings		31

4. Submission of Matters to a Vote of Security Holders		33

Part II

5. Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities		34

6. Selected Financial Data		35

7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35

7A. Quantitative and Qualitative Disclosures About Market Risks		56

8. Financial Statements and Supplementary Data		57

9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		118

9A(T). Controls and Procedures		118

9B. Other Information		119

Part III

10. Directors, Executive Officers and Corporate Governance		120

11. Executive Compensation		124

12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters		127

13. Certain Relationships and Related Transactions, and Director Independence		131

14. Principal Accountant Fees and Services		134

Part IV

15. Exhibits and Financial Statement Schedules		135

Exhibit 10.78
Exhibit 10.79
Exhibit 10.80
Exhibit 10.81
Exhibit 10.82
Exhibit 10.83
Exhibit 10.84
Exhibit 10.85
Exhibit 10.86
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32

NOTE R - SPIN-OFF OF SUBSIDIARY - CONTINUED PENN OCTANE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET JULY 31, 2003 (UNAUDITED) AS REPORTED PRO FORMA PRO FORMA JULY 31, 2003 ADJUSTMENTS JULY 31, 2003 ---------------- ------------------- -------------- ASSETS: Current Assets Cash (restricted cash of $3,404,782) $ 3,475,846 $ 154,669 (1) $ 3,630,515 Trade accounts receivable, net 4,143,458 - 4,143,458 Inventories 878,082 - 878,082 Assets held for sale 720,000 - 720,000 Prepaid expenses and other current assets 476,109 476,109 ---------------- ------------------- -------------- Total Current Assets 9,693,495 154,669 9,848,164 Investment in Subsidiary - 15,466,943 (2) - - (154,669) (1) (15,033,939) (3) (216,502) (5) (61,833) (6) Property Plant And Equipment - net 17,677,830 (15,466,943) (2) 17,677,830 15,466,943 (5) Lease rights (net of accumulated amortization of $707,535) 446,504 - 446,504 Other non-current assets 19,913 - 19,913 ---------------- ------------------- -------------- Total Assets $ 27,837,742 $ 154,669 $ 27,992,411 ================ =================== ==============i

NOTETable R - SPIN-OFF OF SUBSIDIARY - CONTINUED PENN OCTANE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET-CONTINUED JULY 31, 2003 (UNAUDITED) AS REPORTED PRO FORMA PRO FORMA JULY 31, 2003 ADJUSTMENTS JULY 31, 2003 ---------------- ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities Current maturities of long-term debt $ 746,933 $ - $ 746,933 Short-term debt 1,744,128 - 1,744,128 Revolving line of credit - - - LPG trade accounts payable 7,152,098 - 7,152,098 Other accounts payable 2,470,880 - (10) 2,470,880 Foreign taxes payable 60,000 - 60,000 Accrued liabilities 1,083,966 - 1,083,966 ---------------- ----------------- ---------------- Total Current Liabilities 13,258,005 - 13,258,005 ---------------- ----------------- ---------------- Long-term debt, less current maturities 60,000 - 60,000 Commitments and contingencies - - - Minority interest in equity earnings of subsidiary - 15,250,441 (4) 15,250,441 Stockholders Equity: Common stock - $.01 par value, 25,000,000 shares authorized; 15,274,749 shares issued and outstanding 152,747 - - 152,747 Additional paid-in-capital 28,298,301 (15,250,441) (4) 28,985,643 15,250,441 (5) 687,342 (6) Notes receivable from an officer and another party for exercise of warrants, net of reserves of $535,736 (2,897,520) - - (2,897,520) Accumulated deficit (11,033,791) (749,175) (6) (26,816,905) (15,033,939) (3) - (10) ---------------- ----------------- ---------------- Total Stockholders' equity 14,519,737 (15,095,772) (576,035) ---------------- ----------------- ---------------- Total Liabilities and Stockholders' equity $ 27,837,742 $ 154,669 $ 27,992,411 ================ ================= ================Contents

~~NOTE~~Cautionary RStatement -Regarding ~~SPIN~~Forward-~~OFF~~Looking OF SUBSIDIARY - CONTINUED PENN OCTANE CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 2003 (UNAUDITED) AS REPORTED PRO FORMA AUGUST 1, 2002 - PRO FORMA AUGUST 1, 2002- JULY 31, 2003 ADJUSTMENTS JULY 31, 2003 ------------------ ---------------- ----------------- Revenues $ 162,489,565 $ - $ 162,489,565 Cost of goods sold 152,375,349 - 152,375,349 ------------------ ---------------- ----------------- Gross Profit 10,114,216 - 10,114,216 ------------------ ---------------- ----------------- Selling, general and administrative expenses Legal and professional fees 2,597,065 300,000 (7) 2,897,065 Salaries and payroll related expenses 2,411,843 749,175 (6) 3,161,018 Other 1,380,009 150,000 (7) 1,530,009 ------------------ ---------------- ----------------- 6,388,917 1,199,175 7,588,092 ------------------ ---------------- ----------------- Operating income (loss) 3,725,299 (1,199,175) 2,526,124 Other income (expense) Interest expense (1,757,664) - (1,757,664) Interest income 95,327 - 95,327 Settlement of litigation (145,153) - (145,153) Minority interest in equity earnings of subsidiary - ( 1,997,499)(8) (1,997,499) ------------------ ---------------- ----------------- Income (loss) before taxes 1,917,809 (3,196,674) (1,278,865) Provision (benefit) for income taxes (40,000) -(10) (40,000) ------------------ ---------------- ----------------- Net income (loss) $ 1,957,809 $ (3,196,674) $ (1,238,865) ------------------ ================ ----------------- Net income (loss) per common share $ 0.13 $ (.08) ================== ================ Net income (loss) per common share assuming dilution $ 0.13 $ (.08) ================== ================ Weighted average common shares outstanding 15,035,220 15,035,220 ================== ================Statements

~~SCHEDULE~~The IIstatements ~~PENN~~contained ~~OCTANE~~in ~~CORPORATION~~this ~~AND~~Annual ~~SUBSIDIARIES~~Report ~~VALUATION~~that ~~AND~~are ~~QUALIFYING~~not ~~ACCOUNTS~~historical ~~YEARS~~facts ~~ENDED~~are ~~JULY~~forward-looking statements ~~31,~~within ~~2003,~~the ~~2002~~meaning ~~AND~~of ~~2001~~Section 27A ~~Balance~~of atthe ~~Charged~~Securities toAct ~~Beginning~~ of ~~Costs~~1933 and ~~Charged~~Section 21E toof ~~Balance~~the Securities atExchange ~~End~~Act ~~Description Period Expenses Other Accounts Deductions~~ of ~~Period~~1934. ~~----------------------------------------~~This ~~-------------~~Annual ~~-----------~~Report ~~---------------~~contains forward-~~---------------~~looking ~~----------~~statements ~~Year~~that ~~ended~~are subject ~~July~~to ~~----------------~~a ~~31,~~number ~~2003~~of ~~--------~~risks ~~Allowance~~and ~~for doubtful accounts $ 5~~uncertainties,~~783~~ $many -of $which -are $beyond -our ~~$ 5~~control,~~783~~ ~~Year~~which ~~ended~~may include ~~July~~statements ---------------- 31, 2002 -------- Allowance for doubtful accounts $ 779,663 $ 5,783 $ - $ ( 779,663) $ 5,783 Year ended July ---------------- 31, 2001 -------- Allowance for doubtful accounts $ 562,950 $ 216,713 $ - $ - $ 779,663about:

~~DIRECTOR~~• ~~NAME~~the OFvolatility ~~DIRECTOR~~of ~~AGE~~realized ~~POSITION~~natural ~~WITH~~gas ~~COMPANY~~prices; ~~SINCE~~• ~~-------------------------~~the ~~--------~~discovery, ~~--------------------------------------------------------------------------~~estimation, ~~-----~~development ~~Jerome~~and B.replacement ~~Richter~~of 67oil ~~Chairman~~and ofnatural ~~the~~gas ~~Board~~reserves; of• ~~Directors~~our business and ~~Chief~~financial ~~Executive~~strategy; ~~Officer~~• ~~1992~~our ~~Richard~~drilling ~~"Beau"~~locations; ~~Shore,~~• ~~Jr.~~technology; 37• ~~Director~~our cash flow, liquidity and ~~President~~financial ~~2003~~position; ~~Charles~~• ~~Handly~~our 66production ~~Director~~volumes; • our lease operating expenses, ~~Chief~~general ~~Operating~~and ~~Officer~~administrative costs and ~~Executive~~finding ~~Vice~~and ~~President~~development ~~2003~~costs; ~~Ian~~• T.the ~~Bothwell~~availability 43of ~~Director~~drilling and production equipment, ~~Vice~~labor ~~President~~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 terminaling business; • the impact of weather and the occurrence of natural disasters such as fires, ~~Treasurer~~floods, ~~Chief~~hurricanes, ~~Financial~~earthquakes ~~Officer~~and other catastrophic events and ~~Assistant~~natural ~~1997~~disasters; ~~Secretary~~• ~~Jerry~~governmental L.regulation ~~Lockett~~of 62the ~~Director~~oil and ~~Vice~~natural ~~President~~gas ~~1999~~industry ~~Stewart~~and J.the ~~Paperin~~transportation 55and ~~Director~~terminaling ~~1996~~business; ~~Harvey~~• L.required ~~Benenson~~capital 55expenditures; ~~Director~~• ~~2000~~cash ~~Emmett~~distributions M.and ~~Murphy~~qualified 52income; ~~Director~~• ~~2001~~developments in oil producing and natural gas producing countries; and • our strategic plans, objectives, expectations and intentions for future operations • our ability to restructure the TCW Credit Facility and/or the RZB Note under terms satisfactory to us.

~~SUMMARY~~All ~~COMPENSATION~~of ~~TABLE~~these ~~ANNUAL~~types ~~COMPENSATION~~of LONG-TERM COMPENSATION ------------------------------------------ ------------------------------------ AWARDS PAYOUTS ------------ --------- ALL OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING NAME AND PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP POSITION YEAR SALARY ($) BONUS ($) SATION ($) AWARDS ($) SARS (#) PAYOUTS ($) Jerome B. Richterstatements, ~~2003~~other ~~300,000~~than ~~208,832(3)~~statements ~~- - - - Chairman~~ of ~~the~~historical ~~2002~~fact ~~300,000~~included ~~319,436(3)~~in -this -Annual Report -are forward-looking ~~Board and Chief 2001 300,000 - - - - - Executive Officer Richard Shore, Jr~~statements., ~~2003~~In ~~78,462~~some ~~- - - - - President 2002 - - - - - - 2001 - - - - - - Charles Handly~~cases, ~~2003 138,461~~ forward-looking -statements -can -be -identified by ~~Chief~~terminology ~~Operating~~such ~~Officer~~as ~~2002 6~~“may,~~923~~” ~~- - - - - and Executive Vice 2001 - - - - - - President Ian T. Bothwell~~“could,” ~~2003 180~~“should,~~000~~” ~~- - - - - Vice President~~“expect,” ~~Treasurer~~“plan,” ~~2002 168~~“project,~~000~~” ~~- - - - - Assistant Secretary and 2001 168~~“intend,~~000 1~~” “anticipate,~~026,351(2)~~” ~~- - - - Chief Financial Officer Jorge R. Bracamontes 2003 - - - - - - 2002 - - - - - - 2001 - - - - - - Jerry L. Lockett~~“believe,” ~~2003 132~~“estimate,~~000~~” ~~- - - - - Vice President 2002 132~~“predict,~~000~~” ~~- - - - - 2001 132~~“potential,~~000~~” ~~- - - - - ALL OTHER NAME AND PRINCIPAL COMPENSATION POSITION ($) Jerome B. Richter~~“pursue,” 54“target,~~733(4)~~” ~~Chairman of the - Board and Chief - Executive Officer Richard Shore~~“continue,” Jr., - President - Charles Handly, - Chief Operating Officer - and Executive Vice President Ian T. Bothwell, - Vice President, Treasurer, - Assistant Secretary and - Chief Financial Officer Jorge R. Bracamontes 703,349(1) 180,000(1) 180,000(1) Jerry L. Lockett, - Vice President - _____________________________________________ (1) Mr. Bracamontes received consulting fees totaling $180,000, $180,000 and $180,000 for services performed on behalf of the negative ~~Company in Mexico for the years ended July 31, 2001, 2002 and 2003. Mr. Bracamontes also received $523,349 in severance costs for the year ended July 31, 2003. (2) The fair market value~~ of ~~non-cash~~such ~~bonuses~~terms ~~issued~~or inother ~~the~~comparable ~~form of stock warrants are determined by using the Black-Scholes Option Pricing Model~~terminology. ~~(3) Includes amounts to be paid in cash. (4) In connection with Mr. Richter's employment contract, the Company paid $54,733 in life insurance premiums on behalf of Mr. Richter.~~

~~AGGREGATED~~The ~~WARRANT~~forward-looking ~~EXERCISES~~statements ~~DURING~~contained ~~FISCAL~~in ~~2003~~this ~~AND~~Annual ~~WARRANT~~Report ~~VALUES~~are ONlargely ~~JULY~~based 31on our expectations, ~~2003~~which ~~NUMBER~~reflect OFestimates ~~SECURITIES~~and ~~VALUE~~assumptions OFmade ~~UNEXERCISED~~by ~~NUMBER~~our OFmanagement. ~~SHARES~~These ~~UNDERLYING~~estimates ~~UNEXERCISED~~and assumptions ~~IN-THE-MONEY~~reflect ~~ACQUIRED~~our ~~UPON~~best ~~VALUE~~judgment ~~REALIZED~~based ~~WARRANTS~~on ATcurrently ~~JULY~~known 31market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, ~~2003~~they ~~WARRANTS~~are ATinherently ~~JULY~~uncertain and 31involve a number of risks and uncertainties that are beyond our control. In addition, management’s ~~2003~~assumptions ~~EXERCISE~~about OFfuture ~~WARRANTS~~events ~~UPON~~may ~~EXERCISE~~prove ~~(#)~~to ~~EXERCISABLE/~~be ~~EXERCISABLE/UNEXERCISABLE~~inaccurate. ~~NAME~~Management ~~(#)~~cautions ~~($)~~all readers ~~UNEXERCISABLE~~that ~~($)(1)~~the forward-~~-------------------~~looking ~~---------------------~~statements ~~---------------~~contained ~~-------------------------~~in ~~--------------------------~~this ~~Jerome~~Annual B.Report ~~Richter~~are 0not 0guarantees ~~540,000/0~~of future 24performance,~~300/0~~ ~~Richard~~and ~~Shore,~~we ~~Jr.~~cannot 0assure 0any ~~0/0~~reader ~~0/0~~that ~~Charles~~such ~~Handly~~statements 0will 0be ~~114,470/25,530~~realized ~~0/0~~or ~~Ian~~the forward-looking Tevents and circumstances will occur. ~~Bothwell~~Actual 0results 0may ~~332,511/7,489~~differ ~~24,300/0~~materially ~~Jorge~~from those R.anticipated ~~Bracamontes~~or 0implied 0in ~~340,000/0~~the ~~24,300/0~~forward-looking ~~Jerry~~statements L.due ~~Lockett~~to 0factors 0listed ~~240,000/0~~in ~~24,300/0~~the ~~(1)~~“Risk Factors” ~~Based~~section onand a“Management’s ~~closing~~Discussion ~~price~~and Analysis of $3Financial Condition and Results of Operations” section and elsewhere in this Annual Report.31 ~~per~~All ~~share~~forward-looking statements speak only as of ~~Common~~the ~~Stock~~date onof ~~July~~this 31Annual Report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, ~~2003~~future events or otherwise.

PENN OCTANE CORPORATION STOCK PERFORMANCE GRAPH JULY 31, 2003 [GRAPHIC OMITTED] -------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 ----------------------- ----- ------- ------- ------- ------ ------- Penn Octane Corporation $ 100 $ 60.00 $180.00 $100.00 $77.00 $ 83.00 ----------------------- ----- ------- ------- ------- ------ ------- Russell 2000 Index $ 100 $105.96 $119.27 $115.49 $93.49 $113.41 ----------------------- ----- ------- ------- ------- ------ ------- NASDAQ Index $ 100 $140.92 $201.19 $108.26 $70.94 $ 92.66 --------------------------------------------------------------------------ii

AMOUNTTable ANDof NATURE OF BENEFICIAL OWNERSHIP OF PERCENT OF CLASS OF NAME OF BENEFICIAL OWNER COMMON STOCK(1) COMMON STOCK --------------------------------------------------- ------------------------ -------------------- Jerome B. Richter (2) . . . . . . . . . . . . . . . 4,453,750 28.07% CEC, Inc. (3) . . . . . . . . . . . . . . . . . . . 1,417,667 9.20% The Apogee Fund, Paradigm Capital Corporation, and Emmett M. Murphy (4) . . . . . . . . . . . . . . . 1,155,500 7.52% Trellus Management Company, LLC(5). . . . . . . . . 836,392 5.46% . . . . . . . . . . . . .Contents

~~AMOUNT~~GLOSSARY ~~AND NATURE~~ OF BENEFICIAL OWNERSHIP OF PERCENT OF CLASS OF NAME OF BENEFICIAL OWNER COMMON STOCK(1) COMMON STOCK ------------------------------------------------------ ------------------------ -------------------- Jerome B. Richter (2). . . . . . . . . . . . . . . . . 4,453,750 28.07% Emmett M. Murphy (3) . . . . . . . . . . . . . . . . . 1,155,500 7.52% Jorge R. Bracamontes (4) . . . . . . . . . . . . . . . 555,500 3.55% Ian T. Bothwell (5). . . . . . . . . . . . . . . . . . 446,718 2.85% Jerry L. Lockett (6) . . . . . . . . . . . . . . . . . 266,225 1.71% Stewart J. Paperin (7) . . . . . . . . . . . . . . . . 213,762 1.38% Charles Handly(8). . . . . . . . . . . . . . . . . . . 143,436 * Harvey L. Benenson (9) . . . . . . . . . . . . . . . . 53,562 * Richard "Beau" Shore, Jr . . . . . . . . . . . . . . . 16,000 * All Directors and Named Executive Officers as a group (9 people) (10 . . . . . . . . . . . . . . . . . . . . 7,304,453 42.54%TERMS

~~PLAN~~As ~~CATEGORY~~commonly ~~NUMBER~~used OFin ~~SECURITIES~~the TOoil ~~WEIGHTED-AVERAGE~~and ~~NUMBER~~gas OFindustry ~~SECURITIES~~and BEas ~~ISSUED~~used ~~UPON~~in ~~EXERCISE~~this ~~EXERCISE~~Annual ~~PRICE~~Report OFon ~~REMAINING~~Form AVAILABLE FOR OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (a) (b) (c) Equity compensation plans approved by 2,180,000 $ 4.79 1,500,000 (1)(2) security holders Equity compensation plans not approved by 1,412,179 $ 2.69 10- ~~security holders (3) __________ __________ Total 3~~K,~~592,179~~ $the following ~~3.97~~terms ~~1,500,000~~have ~~==========~~the ~~==========~~following meanings:

~~2002~~Bbl. ~~2003~~One ~~----------~~stock ~~-----------~~tank ~~Audit~~barrel ~~Fees~~or $42 ~~245,304~~United $States ~~263,229~~gallons ~~Audit~~liquid ~~- Related Fees $ - $ - Tax Fees (1) $ 17,139 $ 12,420 All Other Fees $ 16,587(2) $ 165,746 (3)~~volume.

~~SIGNATURE TITLE DATE ---------------------------------- -------------------------------- ---------------- /s/Jerome B~~Bcf. ~~Richter~~One ~~Jerome~~billion B.cubic ~~Richter October 31, 2003 ---------------------------------- Chairman and Chief Executive Officer /s/Richard "Beau" Shore, Jr~~feet. Richard "Beau" Shore, Jr. October 31, 2003 ---------------------------------- President /s/Charles Handly Charles Handly October 31, 2003 ---------------------------------- Chief Operating Officer and Executive Vice President /s/Ian T. Bothwell Ian T. Bothwell October 31, 2003 ---------------------------------- Vice President, Treasurer, Assistant Secretary, Chief Financial Officer, Principal Accounting Officer and Director /s/Jerry Lockett Jerry Lockett October 31, 2003 ---------------------------------- Vice President /s/Stewart J. Paperin Stewart J. Paperin October 31, 2003 ---------------------------------- Director /s/Harvey L. Benenson Harvey L. Benenson October 31, 2003 ---------------------------------- Director /s/Emmett Murphy Emmett Murphy October 31, 2003 ---------------------------------- Director

Bcfe. One billion cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.

Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

FERC. Federal Energy Regulatory Commission.

Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.

Hp. Horsepower.

MBbls. One thousand barrels of oil or other liquid hydrocarbons.

Mcf. One thousand cubic feet.

Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.

MMBbls. One million barrels of oil or other liquid hydrocarbons.

MMBtu. One million Btus.

MMcf. One million cubic feet.

MMcf/d. One MMcf per day.

MMcfe. One million cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.

MMcfe/d. One MMcfe per day.

MMMBtu. One billion Btus.

Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.

NYMEX. The New York Mercantile Exchange.

Oil. Crude oil, condensate and natural gas liquids.

iii

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceeds production expenses and taxes.

Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved reserves. Proved oil and gas reserves are the estimated quantities of gas, natural gas liquids and oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based on future conditions. The definition of proved reserves is in accordance with the Securities and Exchange Commission’s definition set forth in Regulation S-X Rule 4-10 (a) and its subsequent staff interpretations and guidance.

Proved undeveloped drilling location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

Proved undeveloped reserves or PUDs. Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

Recompletion. The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reservoir. A porous and permeable underground formation containing a natural accumulation of economically productive oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Standardized Measure. Standardized Measure, or standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities, is the present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the Securities and Exchange Commission (using prices and costs in effect as of the date of estimation) without giving effect to non-property related expenses, such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. Our Standardized Measure does not include future income tax expenses because our reserves are owned by our subsidiary Rio Vista Penny LLC, which is not subject to income taxes.

Successful well. A well capable of producing oil and/or gas in commercial quantities.

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves.

Unproved reserves. Lease acreage on which wells have not been drilled and where it is either probable or possible that the acreage contains reserves.

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover. Operations on a producing well to restore or increase production.

Part I

Items 1 and 2. Business and Properties.

Penn Octane Corporation (Penn Octane), a Delaware corporation and its consolidated subsidiaries, including Rio Vista Energy Partners L.P. and its subsidiaries (Rio Vista), are collectively hereinafter referred to as “Penn Octane” or “the Company”. When referring to Penn Octane and using phrases such as “we,” “our,” “us,” or the “Company,” our intent is to refer to Penn Octane and its consolidated subsidiaries as a whole or on an entity basis, depending on the context in which the statements are made.

General

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 and certain immaterial liabilities 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.

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. However, as discussed under “Managements Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt Obligations — TCW Credit Facility,” we may dispose of some of our assets, including our oil and gas properties in connection with the restructuring of our debt. Beginning March 1, 2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma Assets.

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 M).

Our principal executive offices are located at 7-530 Enfield Lane, Building D, Palm Desert, California 92211, and its telephone number is (760) 772-9080. Or website is located at http://www.pennoctane.com.

The General Partner is entitled to receive distributions on its General Partner interest and additional incentive distributions as provided for in Rio Vista’s partnership agreement. The General Partner has sole responsibility for conducting Rio Vista’s business and for managing Rio Vista’s operations in accordance with the partnership agreement. The General Partner does not receive any management fee or other compensation in connection with its management of Rio Vista’s business, but is entitled to be reimbursed for all direct and indirect expenses incurred on Rio Vista’s behalf.

Fuel Sales Business

The Company sold Fuel Products (Fuel Sales Business) through transactional, bulk and/or rack transactions. Typical transactional and bulk sales were 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 were based on variable sale prices charged by the Company which were tied to posted daily spot prices and purchase costs which were based on a monthly average or 3 day average based on posted prices. The Company paid pipeline and terminal fees based on regulated rates.

For bulk and transactional sales, the Company entered into individual sales contracts for each sale. Fuel Products sales were subject to credit limitations imposed on each individual buyer by the Company. The Company had several supply contracts for each of the Fuel Products it sold. The supply contracts were for annual periods with flexible volumes. Also the Company’s ability to access its various terminal locations was based on maintaining minimum thru-put volumes at each terminal. The Company purchased volumes of Fuel Products under its supply contracts, but the Company did not have corresponding sales contracts with its customers. To the extent the Company maintained quantities of Fuel Products inventory, the Company was exposed to market risk related to the volatility of Fuel Products prices. The Company’s cost for Fuel Products was 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 could have resulted in gains or losses.

In May 2008, Penn Octane’s board of directors approved a plan to sell its Fuel Products 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.

Regional Enterprises

In July 2007, Rio Vista acquired the business of Regional Enterprises, Inc., a Virginia Corporation. The principal business of Regional is storage, transportation and railcar transloading of bulk liquids, including chemical and petroleum products owned by its customers.

Regional’s principal facilities are located on the James River in Hopewell, Virginia, where it receives bulk chemicals and petroleum products from ships and barges into approximately 10,400,000 gallons of available storage. Regional also receives product from a rail spur which is capable of receiving 15 rail cars at any one time for transloading of chemical and petroleum liquids for delivery throughout the mid-Atlantic region.

Regional utilizes its fleet of 32 tractors and 48 tankers to distribute the various products it receives as well as to perform direct hauling operations on behalf of its customers.

For the year ended December 31, 2008, Regional’s revenues were divided among transportation, storage and transloading as follows:


Year Ended December 31, 2008
	Revenue		%
Transportation	$	6,687,000		78	%
Storage		1,543,000		18	%
Transloading		343,000		4	%

Total	$	8,573,000		100	%

Transportation. Regional transports a broad range of hazardous and non-hazardous liquid products, including the following: aluminum sulfate solution, sulfuric acid, sodium hydroxide, hydrogen peroxide, ferric chloride, ferric sulfate, hypochlorite solution, hydrochloric acid, ferrous chloride and aqua ammonia. Regional’s transportation services are primarily for the most part short-haul in nature, with an estimated 85% of Regional’s deliveries being made within 150 miles of its Hopewell, Virginia terminal. Virtually all of Regional’s transportation services are provided within the states of Virginia, North Carolina, South Carolina, Georgia, Tennessee, Maryland, Pennsylvania and Delaware.

Regional currently has a fleet of approximately 48 tankers units and 32 tractors dedicated to its transportation services. The majority of tankers are constructed of stainless steel, with 11 being rubber or chlorobutyl lined, which enables them to carry the toughest corrosives. The tanker fleet also includes four aluminum-constructed tanks, which are equipped with vapor recovery. Rio Vista believes that this extensive inventory of tankers enables Regional to service the majority of its customers’ needs. The tractor fleet consists of late model, Western Star and Mack units.

Storage. Regional’s Hopewell facility has a total of 15 tanks, six of which have capacities in excess of one million gallons; of these 15 tanks, 13 tanks are for customer utilization. These tanks have a combined storage capacity of 10.4 million gallons. As of December 31, 2008, Regional had two vacant tanks with a combined storage capacity of 76,000 gallons.

Regional’s loading dock is parallel to the main shipping channel with berthing dolphin clusters approximately 210 feet in length. Two six-inch and one ten-inch steel pipelines service the various tanks. All of the tanks are constructed of carbon steel, both insulated and bare skin and some with internal walls lined and unlined. Several tanks and all of the associated piping are equipped with heat via either heat transfer (hot oil) or steam. As of December 31, 2008, Regional stored the following products: two grades of asphalt, asphalt additive, sodium hydroxide and #2 oil.

Regional receives the products it stores by ship, barge, rail and truck. The products Regional stores are owned by its customers. Certain customers for whom Regional provides storage services also use Regional’s transportation services.

There is approximately 2.25 acres of undeveloped acreage at Regional’s Hopewell facility, which could be used to accommodate construction of up to an additional 4.2 million gallons of storage capacity.

Transloading. Regional provides transloading services utilizing its rail siding and off-loading facilities to transfer products from railcars to tanker trucks. Open rail access to the Norfolk Southern and CSX rail lines offers competitive rail economics and flexibility for Regional’s customers. Customers who utilize Regional’s transloading services typically do so because either their own rail service is at full capacity or Regional’s strategic location provides them with an important distribution point not available in their own distribution system. Transloading products, either from storage tanks or tankers, in railcar quantities provides a logistical pricing advantage over long-haul transportation in tanker trucks. Steam heat and compressed air is available at each railcar spot.

Regional has two transloading facilities. Regional leases siding tracks and 15 railcar slots at its Hopewell, Virginia facility, with Norfolk Southern conducting switching operations. As of December 31, 2008, Regional had no vacant slots but anticipates acquiring an additional 900 feet of track, which would result in 16 additional rail slots. Regional also has a transloading facility in Johnson City, Tennessee, where it leases siding tracks and six railcar slots. Switching operations for the Johnson City, Tennessee facility are provided by East Tennessee Railway, which services tracks over which both the CSX and Norfolk Southern railroads operate.

Headquarters Facility. Regional has approximately 2,000 square feet of office facilities at its Hopewell, Virginia headquarters from which it provides most of its management, administrative and marketing operations.

Customers. For the fiscal year ended December 31, 2008, Suffolk Sales, General Chemical Corporation and Kemira Chemicals Canada Inc. accounted for approximately 14% 10% and 12% of Regional’s revenues, respectively, and approximately 19%, 8% and 10% of Regional’s accounts receivable, respectively, with no other individual customer accounting for more than 10% of Regional’s revenues and accounts receivable.

Competition. The terminaling and transportation industry is highly competitive. We encounter strong competition from other independent operators and from companies in acquiring equipment and securing trained personnel. Many of these competitors have financial and technical resources and staffs substantially larger than ours. As a result, our competitors may be able to bid for contracts at rates which are more attractive to customers than our financial or human resources permit.

We are also affected by competition for availability of specialized equipment. Certain trucking equipment, including tankers, require significant lead time and possible higher prices to obtain. Accordingly, we may not be able to bid for additional business which require equipment not currently available to us.

Employees. As of December 31, 2008, Regional had a total of approximately 61 full- and part-time employees, consisting of 28 drivers, 17 terminal operators, two mechanics and 14 office staff.

Environmental and Regulatory. Regional is a licensed contract or common carrier and holds permits with the Hopewell wastewater treatment facility for treatment and disposal of its wastewater generated through rainwater runoff and tanker washing operations. Regional is subject to various laws and regulations, including those relating to labor, maritime, transportation, environment and motor carrier.

Tax Structure. Regional’s assets and operations are conducted within a C-Corp for federal income tax purposes, as many of its activities are not considered “Qualified Income”. Rio Vista intends to explore options regarding the reorganization of some or all of its Regional assets that produce qualifying income into a more efficient tax structure.

Other. Regional qualifies as a small business contractor and vendor capable of storing, transporting and supplying bulk chemical and petroleum products on behalf of U.S. government agencies. Regional intends to seek contracts with the Department of Defense and the Defense Energy Support Center based on the proximity of its Hopewell facilities to multiple U.S. military bases.

Oklahoma Assets

In November 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary of Rio Vista, completed the purchase of assets from GM Oil Properties, Inc., an Oklahoma corporation (GM Oil) and Penny Petroleum Corporation, an Oklahoma corporation (Penny Petroleum) pursuant to which we acquired real and personal property interests in certain oil and gas properties located in Haskell, McIntosh and Pittsburg counties in Oklahoma, including all of the outstanding capital stock of MV Pipeline Company (MV), an Oklahoma corporation.

In addition, in November 2007, Rio Vista GO LLC (Rio Vista GO), an indirect, wholly-owned subsidiary of Rio Vista, acquired all of the membership interests of GO LLC, an Oklahoma limited liability company (GO). GO operates an oil and gas pipeline business located in Haskell and Pittsburg counties in Oklahoma.

Exploration and Production Assets. The Oklahoma Assets include approximately 15,100 net acres located in McIntosh, Haskell and Pittsburg counties in Oklahoma. The Oklahoma Assets also include a 25% participation interest on 4,800 acres owned by Concorde Resources. These assets represent a majority interest in 114 wells that we now operate and 24 non-operated wells in the Booch Sand, Hartshorne Cold Bed Methane, Georgia’s Fork and Spiro formations.

Gathering. The Oklahoma Assets also include the wholly-owned and operated 25-mile Brooken pipeline that gathers natural gas from several properties located in Haskell and Pittsburg counties, as well as MV’s wholly-owned and operated 40-mile pipeline that receives natural gas from leases in the Texanna area north of Lake Eufaula and delivers product to the ONEOK intrastate pipeline in McIntosh County, Oklahoma. The pipeline consists of 40 miles of class I pipelines, a low-pressure gas gathering system and a 3,000 horsepower central compressor station with a capacity of 50 MMcf per day.

Proved Reserves. Our proved reserves at December 31, 2008 were 22.5 Bcfe, all of which were gas. Approximately 8.1 Bcf were classified as proved developed, with a total Standardized Measure value of $9.0 million. At December 31, 2008, we operated 114 wells, or 83%, of our 138 productive wells. Our average proved reserves-to-production ratio, or average reserve life, is approximately 82.5 years, based on our December 31, 2008 reserve report and annualized production of current production levels.

Core Operating Fields

The long-lived proved producing properties are principally comprised of majority interests in 177 operated wells (63 undeveloped as of December 31, 2008) and 24 non-operated wells located on either side of Lake Eufaula in the “Crouch Area”, the “Texanna Area”, the “Brooken Area” and the “Canadian Area” with production derived primarily from the Booch sand and Hartshorne Coal Bed Methane reservoirs. We also derive a smaller portion of our reserves from the George’s Fork and Spiro reservoirs. Rio Vista estimates that it has an average revenue interest of approximately 56.0% in these leased interests. Characteristics of our reservoirs are as follows:

Booch sand:

	•		Acreage surrounding Lake Eufaula has net sand thickness of 25 feet

	•		Land surrounding the edges and underneath Lake Eufaula has locations with net sand thickness up to 200 feet

	•		Well potential: 732 MMcf – 827 MMcf per well

Hartshorne coal bed methane:

	•		Coal thickness contours ranging from a minimum of 2 feet to over 4 feet in select areas

	•		Well potential: 90-100 vertical, 5-10 horizontal, 250 – 900 MMcf per well

The following diagram illustrates the location of the principal fields and pipeline facilities associated with the Oklahoma assets.

Texanna. The Texanna Area, which is located on the north side of Lake Eufaula, is the area where there has been a significant amount of Booch operating history. Historically, over 200 Bcf has been produced from this formation in this area. Our current proved reserves in this region are based on a second Booch formation which overlays the original Booch formation. In addition there is current production from Hartshorne formations.

Crouch. The Crouch Area, which is located on the north side of Lake Eufaula, immediately north of the Texanna Area currently produces from the Booch, Georges Fork, Spiro, Hartshorne and Cromwell formations.

The Texanna and Crouch Areas are located within our MV Pipeline gathering system. The MV pipeline gathers natural gas from leases in the Texanna and Crouch Areas north of Lake Eufaula and delivers to the ONEOK Gas Transportation, LLC (Oneok) intrastate pipeline in McIntosh County. The MV Pipeline is 40 miles in length, Class I, low-pressure gas gathering system and is joined to a 3,000 hp central compressor station with capacity of 50 MMcf/d. This gathering system was originally constructed in 1984, upgraded in 1998 and 2 new compressors were added during 2006.

All of our production associated with the MV Pipeline and Brooken Pipeline (see below) is sold to Clearwater Enterprises LLC (Clearwater). The price we receive (excluding the impact of hedges) is based on the Oneok monthly index price (MV Pipeline production) or the Centerpoint Energy Gas Transmission (CEGT) index less fuel, gathering and compression. The Oneok and CEGT indexes historically trade at an approximate 10% discount to the NYMEX monthly averages.

Brooken. The Brooken Area is located on the south side of Lake Eufaula at the intersection of Haskell, McIntosh and Pittsburg counties. Our proven reserves in this are primarily relate to the Booch sand, and Hartshorne Coal Bed Methane formations. All of the production in this area is gathered by our Brooken pipeline gathering system. The Brooken pipeline is 25 miles long and has a capacity of 10MMcf/d. The Brooken Pipeline was originally constructed in 1992. All of the production on the Brooken Pipeline connects to the Centerpoint Energy Field Services gathering system and is sold by Clearwater based on the monthly CEGT index less fuel, gathering, and compression.

We also perform limited gas gathering activities for third parties which utilize our Brooken pipeline system. The fee charged to third-party producers is set by contract and ranges from $0.70 to $0.75 per Mcf plus the costs of line loss and any compressor fuel. We aggregate these volumes with our production and sell all the gas through our meters to the same purchasers. These revenues are collected and distributed to the third-party producers in the normal course of our revenue distribution cycle. We do not take any commodity risk associated with third party gas as we buy and sell this production on similarly posted indexes which provide a guaranteed fixed margin. Most of our gas gathering lines are not subject to United States Department of Transportation (US DOT) safety regulations.

Canadian. The Canadian Area is located southwest of the Brooken Area. It is an area characterized by horizontal drilling for the Hartshorne coal beds. These wells typically produce at significantly higher rates and higher ultimate reserve recovery than the wells in the vertical drilling areas. The cost for the horizontal wells is about three times greater than drilling a vertical well for the same Hartshorne target. Most of the wells currently producing in this area are operated by third parties. All of the wells operated and non-operated feed into third party gathering systems. All of the production from this area is sold under sales agreements which provide for prices that are tied to the CEGT monthly and/or beginning of month indexes, less fuel, gathering, compression and marketing fees.

Drilling Activity

During the year ended December 31, 2008, we drilled the following wells:


				Net
	Working			Revenue
Well Name	Interest			Interest			Type of well	Net Cost
Urquhart 2		100.0	%		82.8	%	Vert. — Coal	$	152,887
Brinsfield #3		92.8	%		75.4	%	Vert. — U. Booch	$	75,790
Haskett #2		99.5	%		81.5	%	Vert. — Coal	$	175,404
Groseclos #3V-17		100.0	%		85.2	%	Vert. — U. Booch	$	198,191
Davis B #2		99.9	%		85.1	%	Vert. — Coal	$	151,725
Tom 1A-1		100.0	%		81.4	%	Vert. — Coal	$	131,666
Donna 1		100.0	%		80.1	%	Vert. — Coal	$	166,849
Cannon 1-31		100.0	%		76.8	%	Vert. — Spiro	$	740,501
Belt 2V-24		100.0	%		81.3	%	Vert. — Savannah	$	76,577
Ace #2-36		51.0	%		41.4	%	Horiz. — Coal	$	672,412

The above wells produced a combined 12,595 Mcf (net) during the month of December 2008.

We are currently not drilling any additional wells based on the current economics associated with natural gas in the area of our leased properties and due to our inability to obtain additional sources of funding for drilling.

If drilling activity were to resume, we intend to concentrate our drilling activity on lower risk, development properties. The number, types, and location of wells we drill will vary depending on our capital budget, the cost of each well, anticipated production and the estimated recoverable reserves attributable to each well. We currently require additional funding to allow us to complete the remainder of our development program.

We currently estimate that the cost to drill a new vertical well (gross) will be approximately $172,000, and the cost to drill a new horizontal well will be approximately $780,000.

The information contained in this report about past operations of our wells should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of oil and gas, regardless of whether they generate a reasonable rate of return. The ability for us to develop a portion or all of the above wells is contingent on our having adequate capital on hand.

As shown in the tables below, as of December 31, 2008, we had 63 proved undeveloped drilling locations (specific drilling locations as to which our independent engineering firm, Lee Keeling and Associates, Inc., assigned proved undeveloped reserves as of such date).

GAS RESERVES BY FIELD


	OPERATED
			GAS RESERVES-MCF
	WELLS		GROSS		NET
FIELD

BROOKEN		22		6,569.530		2,935.658
CANADIAN		6		4,330.734		1,272.063
TEXANNA		35		13,499.604		10,204.398


TOTAL PROVED UNDEVELOPED		63		24,399.868		14,412.119

GAS RESERVES BY RESERVOIR

OPERATED

GAS RESERVES-MCF

WELLS

GROSS

NET

RESERVOIR

BOOCH

6,150.338

4,623.062

HARTSHORNE COAL

18,249.530

9,789.057

TOTAL PROVED UNDEVELOPED

24,399.868

14,412.119

Oil and Natural Gas Prices

Our natural gas production is sold to purchasers based on the local monthly index price, which typically is approximately 70% — 90% of the NYMEX monthly average gas prices less any direct costs for transportation, fuel and shrinkage. We recoup certain of the transportation costs that we pay related to our own gathering systems.

We enter into forward sales contracts to reduce the impact of commodity price volatility on our cash flow from operations. By removing the price volatility from a significant portion of our oil and gas production, we mitigate, but not eliminate, the potential effects of fluctuating oil and gas prices on our cash flow from operations for those periods. We must obtain approval from TCW before we actually enter into any future sales contracts.

Oil and Gas Data

Proved Reserves

Proved oil and gas reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided by contractual arrangements, but not escalations based on future conditions. For additional information regarding estimates of oil and gas reserves, including estimates of proved and proved developed reserves, the standardized measure of discounted future cash flows and the changes in discounted future cash flows, see Supplementary Oil and Gas Data (Unaudited) in Item 8. “Financial Statements and Supplementary Data.”

The following table presents our estimated net proved oil and gas reserves and the present value of our estimated proved reserves at December 31, 2007 and 2008, based on the reserve reports prepared by Lee Keeling and Associates, Inc. The Standardized Measure values shown in the table are not intended to represent the market value of our estimated oil and gas reserves at such date.


	December 31, 2007			December 31, 2008
Reserve Data:
Estimated net proved reserves:
Gas (Bcf)		35.589			22.494
Oil (MMbls)		0.0			0.0
Total (Bcfe)		35.589			22.494
Proved developed (Bcfe)		12.766			8.082
Proved undeveloped (Bcfe)		22.823			14.412
Proved developed reserves as a % of total proved reserves		35.87	%		35.93	%
Standardized Measure (in millions)⁽¹⁾	$	41.272		$	13.305
Representative Gas Price per MCF⁽²⁾:	$	5.03		$	3.60


(1)		Does not give effect to forward sales related contracts.

(2)		Rio Vista sells its production based on monthly average index prices and therefore the price of gas used to determine the Standardized Measure was based on the monthly weighted average price received by Rio Vista for all its production during December 2007 regardless of whether Rio Vista was the operator. The weighted average price excludes any impact associated with sales contracts in effect during the period.

The data in the above table are estimates. Oil and gas reserve engineering is inherently a subjective process of estimating underground accumulations of oil and gas that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil and gas that are ultimately recovered.

Breakdown of Gas Sales — December 2008


	Price
	Realized (a)		Gas Production
	(MFC)		(MCF)

Total Operated Wells	$	3.69		40,488
Total Non-operated Wells	$	2.25		2,688
Weighted Average Price Realized	$	3.60		43,176

Relevant Indexes (b)
NYMEX December 2008	$	6.89

Oneok December 2008 Index	$	4.80

CEGT Index — Daily Average December 2008	$	4.64

CEGT Index — December 2008	$	4.21


(a)		Ignores impact of forward sales contracts and includes fuel, compression, gathering charges and marketing

(b)		Excludes fuel, compression, gathering and marketing charges

These reserve estimates are reviewed internally by management, with final approval by our Chairman of the Board. The process performed by Lee Keeling and Associates, Inc. to estimate the December 31, 2008 reserve amounts included their preparation of our estimated reserve quantities, future producing rates, future net revenue and the present value of such future net revenue. The independent engineering firm also prepared our estimates with respect to reserve categorization, using the definitions for proved reserves set forth in Regulation S-X Rule 4-10 (a) and subsequent Securities and Exchange Commission (SEC) staff interpretations and guidance. In the conduct of their preparation of the reserve estimates, Lee Keeling and Associates, Inc. did not independently verify the accuracy and completeness of information and data furnished by the Company with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, and any agreements relating to current and future operations of the properties and sales of production. However, if in the course of their work, something came to their attention which brought into question the validity or sufficiency of any such information or data, they did not rely on such information or data until they had satisfactorily resolved their questions relating thereto. Their estimates of reserves conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years, under existing economic and operating conditions. We have not filed reserve estimates with any Federal authority or agency.

Future prices received for production may vary, perhaps significantly, from the prices assumed for purposes of our estimate of Standardized Measure. The Standardized Measure shown should not be construed as the market value of the reserves at the date shown. The 10% discount factor used to calculate Standardized Measure, which is required by Statement of Financial Accounting Standards (SFAS) No. 69, “Disclosures about Oil and Gas Producing Activities,” is not necessarily the most appropriate discount rate. The Standardized Measure, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate.

Production and Price History

The following table sets forth information regarding net production of oil and gas and certain price information for the period November 19, 2007 to December 31, 2007 and the year ended December 31, 2008, which are the periods during which we owned the Oklahoma Assets:


	November 19, 2007 to December 31, 2007						Year ended December 31, 2008
			Non-						Non-
	Operated		Operated				Operated		Operated
	Wells		Wells		Total		Wells		Wells		Total
Production:
Gas production (Mcf)		64,391		15,905		80,296		450,395		70,730		521,125
Oil production (MBbls)		—		—		—		—		—		—

Total production (Mcfe)		64,391		15,905		80,296		450,395		70,730		521,125

Average daily production (Mcfe/d)		1,056		260		1,316		1,234		194		1,428

Weighted Average Realized Prices ^(1),(2):
Gas (Mcf)	$	5.33	$	4.23	$	5.11	$	5.99	$	5.38	$	5.91
Oil (Bbl)	$	—	$	—	$	—	$	—	$	—	$	—

Total (Mcfe)	$	5.33	$	4.23	$	5.11	$	5.99	$	5.38	$	5.91


⁽¹⁾		Includes the effect of realized prices from forward sales contracts.

⁽²⁾		The final NYMEX settled price for December 2007 and 2008 was $7.20 (Mcf) and $6.89 (Mcf) before fuel, gathering and compression, respectively.

Productive Wells

The following table sets forth information relating to the productive wells in which we owned a working interest as of December 31, 2008. Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections to commence deliveries. “Gross” wells refers to the total number of producing wells in which we have an interest, and “net” wells refers to the sum of our fractional revenue interests owned in gross wells.

GAS RESERVES BY FIELD


	OPERATED
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BROOKEN		39		4,999		6,713.831		4,392.880		65.43	%
CANADIAN		16		574		3,068.581		1,119.642		36.49	%
CROUCH AREA		47		6,620		915.424		670.909		73.29	%
TEXANNA		4		0		347.268		295.630		85.13	%
OTHER		8		2,242		1,193.858		926.516		77.61	%


TOTAL PROVED DEVELOPED		114		14,435		12,238.962		7,405.577		60.51	%


	NON-OPERATED
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BROOKEN		12		217		523.986		101.864		19.44	%
CANADIAN		6		199		2,373.143		569.554		24.00	%
CROUCH AREA		2		0		0		0		0.00	%
TEXANNA		0		0		0		0		0.00	%
OTHER		4		160		601.020		5.134		0.85	%


TOTAL PROVED DEVELOPED		24		576		3,498.149		676.552		19.34	%


	TOTAL
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BROOKEN		51		5,216		7,237.817		4,494.744		62.10	%
CANADIAN		22		773		5,441.724		1,689.196		31.04	%
CROUCH AREA		49		6,620		915.424		670.909		73.29	%
TEXANNA		4		0		347.268		295.630		85.13	%
OTHER		12		2,402		1,794.878		931.650		51.91	%


TOTAL PROVED DEVELOPED		138		15,011		15,737.111		8,082.129		51.36	%

GAS RESERVES BY RESERVOIR


	OPERATED
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BOOCH		33		6,072		4,983.136		3,359.632		67.42	%
GEORGES FORK		33		4,939		231.275		190.753		82.48	%
HARTSHORNE COAL		27		669		4,254.925		2,187.801		51.42	%
PITTSBURG CBM AREA		4		54		945.588		492.540		52.09	%
SPIRO		8		1,721		492.177		379.794		77.17	%
OTHER		9		980		1,331.861		795.056		59.70	%


TOTAL PROVED DEVELOPED		114		14,435		12,238.962		7,405.576		60.51	%


	NON-OPERATED
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BOOCH		12		217		523.986		101.864		19.44	%
GEORGES FORK		0		0		0		0		0.00	%
HARTSHORNE COAL		11		199		2,974.163		574.689		19.32	%
PITTSBURG CBM AREA		1		160		0				0.00	%
SPIRO		0		0		0		0		0.00	%
OTHER		0		0		0		0		0.00	%


TOTAL PROVED DEVELOPED		24		576		3,498.149		676.553		19.34	%


	TOTAL
			NET		GAS RESERVES-MCF				NET REVENUE
	WELLS		ACRES		GROSS		NET		INTERESTS

BOOCH		45		6,289		5,507.122		3,461.496		62.85	%
GEORGES FORK		33		4,939		231.275		190.753		82.48	%
HARTSHORNE COAL		38		868		7,229.088		2,762.490		38.21	%
PITTSBURG CBM AREA		5		214		945.588		492.540		52.09	%
SPIRO		8		1,721		492.177		379.794		77.17	%
OTHER		9		980		1,331.861		795.056		59.70	%


TOTAL PROVED DEVELOPED		138		15,011		15,737.111		8,082.129		51.36	%

Developed and Undeveloped Acreage

The following table sets forth information as of December 31, 2008, relating to our leasehold acreage:


	Developed				Undeveloped				Total
	Acreage				Acreage				Acreage
	Gross		Net		Gross		Net		Gross		Net
Operated		18,640		14,435		0		0		18,640		14,435
Non-operated		2,880		576		0		0		2,880		576

Total		21,520		15,011		0		0		21,520		15,011

Oil and Gas Operational Overview

We seek to be the operator of wells in which we have an interest. Effective March 1, 2008, Rio Vista Penny LLC became the operator of the wells which were previously operated, under a transition operating agreement, by the predecessor entity, GM Oil Properties Inc., from the date of acquisition of the Oklahoma assets through February 28, 2008. As operator, we design and manage the drilling and enhancement activities and supervise operation and maintenance activities on a day-to-day basis. In connection with the acquisition of the Oklahoma Assets, we obtained a completion and drilling rig (which we subsequently sold), and we enter into consulting arrangements with an outside third party to supervise certain aspects of our drilling operations. We plan to enter contracts for additional third-party drilling rigs as needed to carry out our future drilling program. In addition, we utilize drilling, production and reservoir engineers, geologists and other specialists who work to improve production rates, increase reserves and lower the cost of operating our oil and gas properties.

Seasonal weather conditions and lease stipulations can limit our drilling and producing activities and other operations in Oklahoma, and, as a result, we perform the majority of our drilling during the summer months in these areas. These seasonal anomalies can pose challenges for meeting our well drilling objectives and increase competition for equipment, supplies and personnel during the spring and summer months, which could lead to employee shortages, increased costs or delays in operations. The demand for gas typically decreases during the summer months and increases during the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation. In addition, certain gas users utilize gas storage facilities and purchase some of their anticipated winter requirements during the summer. This can also lessen seasonal demand fluctuations.

Employees. At December 31, 2008, Rio Vista did not employ any personnel in connection with operation of the Oklahoma Assets. Beginning March 1, 2008, Rio Vista Operating LLC became the operator of the Oklahoma assets and employed approximately six employees, consisting of eight field workers and three office staff personnel as of such date.

Principal Customers

For the year ended December 31, 2008, approximately 68% of our gas production was sold through Clearwater Enterprises LLC (Clearwater) and approximately 22% was sold to Unimark, LLC. Clearwater, in turn, sells our production to retail customers within proximity of our gathering system. We believe that if we were to lose Clearwater as a customer, we would be able to sell our production to other customers under similar sales terms.

Competition

The oil and gas industry is highly competitive. We encounter strong competition from other independent operators and from major oil companies in acquiring properties, contracting for drilling equipment and securing trained personnel. Many of these competitors have financial and technical resources and staffs substantially larger than ours. As a result, our competitors may be able to pay more for desirable leases, or to evaluate, bid for and purchase a greater number of properties or prospects, than our financial or human resources permit.

We are also affected by competition for drilling rigs and the availability of related equipment. In the past, the oil and gas industry has experienced shortages of drilling rigs, equipment, pipe and personnel, which has delayed development drilling and has caused significant price increases. We are unable to predict when, or if, such shortages may occur or how they would affect our drilling program.

Competition is also strong for attractive oil and gas producing properties, undeveloped leases and drilling rights, and we cannot guarantee that we will be able to compete satisfactorily when attempting to make further acquisitions.

Environmental Matters and Regulation

We believe that our properties and operations are in substantial compliance with applicable environmental laws and regulations, and our operations to date have not resulted in any material environmental liabilities. To protect against potential environmental risk, we typically obtain Phase I environmental assessments of any properties to be acquired prior to completing each acquisition.

General. Our operations are subject to stringent federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our operations are subject to the same environmental laws and regulations as other companies in the oil and gas industry. These laws and regulations may:

	•		require the acquisition of various permits before drilling commences;

	•		require the installation of expensive pollution control equipment;

	•		restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;

	•		limit or prohibit drilling activities on lands lying within wilderness, wetlands and other protected areas;

	•		require remedial measures to prevent pollution from former operations, such as pit closure and plugging of abandoned wells;

	•		impose substantial liabilities for pollution resulting from our operations; and

	•		with respect to operations affecting federal lands or leases, require preparation of a Resource Management Plan, an Environmental Assessment, and/or an Environmental Impact Statement.

These laws, rules and regulations may also restrict the rate of oil and gas production below the rate that would otherwise be possible. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects profitability. In addition, Congress and federal and state agencies frequently revise environmental laws and regulations, and any changes that result in more stringent and costly waste handling, disposal and clean-up requirements for the oil and gas industry could have a significant impact on our operating costs. We believe that we substantially comply with all current applicable environmental laws and regulations and that our continued compliance with existing requirements will not have a material adverse impact on our financial condition and results of operations. However, we cannot predict how future environmental laws and regulations may impact our properties or operations. For the year ended December 31, 2008, we did not incur any material capital expenditures for installation of remediation or pollution control equipment at any of our facilities. We are not aware of any environmental issues or claims that will require material capital expenditures during 2009 or that will otherwise have a material impact on our financial position or results of operations.

Environmental laws and regulations that have a material impact on the oil and gas industry include the following:

National Environmental Policy Act. Oil and gas production activities on federal lands are subject to the National Environmental Policy Act (NEPA). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will typically prepare an Environmental Assessment to assess the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement that may be made available for public review and comment. All of our current development and production activities, as well as proposed development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and gas projects.

Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act (RCRA), and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of “hazardous wastes” and the disposal of non-hazardous wastes. Under the auspices of the Environmental Protection Agency (EPA), individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters and most of the other wastes associated with the development and production of oil, gas or geothermal energy constitute “solid wastes,” which are regulated under the less stringent non-hazardous waste provisions, but there is no guarantee that the EPA or individual states will not adopt more stringent requirements for the handling of non-hazardous wastes or recategorize some non-hazardous wastes as hazardous for future regulation.

We believe that we are currently in substantial compliance with the requirements of RCRA and related state and local laws and regulations, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes as they are presently classified to be significant, any legislative or regulatory reclassification of oil and gas development and production wastes could increase our costs to manage and dispose of such wastes.

Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as the “Superfund” law, imposes joint and several liability, without regard to fault or legality of conduct, on persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substance at the site. Under CERCLA, such persons may be liable for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

We currently own, lease, or operate numerous properties that have been used for oil and gas development and production for many years. Although we believe we have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes or hydrocarbons may have been released on or under the properties owned or leased by us, or on or under other locations, including off-site locations, where such substances have been taken for disposal. In addition, some of these properties have been operated by third parties or by previous owners or operators whose treatment and disposal of hazardous substances, wastes or hydrocarbons was not under our control. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property or perform remedial plugging or pit closure operations to prevent future contamination.

Water Pollution Control Act. The Federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws impose restrictions and strict controls on the discharge of pollutants, including produced waters and other oil and gas wastes, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the relevant state. The Clean Water Act also prohibits the discharge of dredge and fill material in regulated waters, including wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the federal Clean Water Act and analogous state laws and regulations. We believe that we are in substantial compliance with the requirements of the Clean Water Act.

Clean Air Act. The Clean Air Act, and associated state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. In addition, the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. Some of our new facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to comply with new emission limitations. These regulations may increase the costs of compliance for some facilities, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance. We believe that we are in substantial compliance with the requirements of the Clean Air Act.

Oil Pollution Act. The Federal Oil Pollution Act (OPA) requires owners and operators of facilities that could be the source of an oil spill into waters of the U.S. (a term defined to include rivers, creeks, wetlands and coastal waters) to adopt and implement plans and procedures to prevent any such oil spill. OPA also requires affected facility owners and operators to demonstrate that they have at least $35 million in financial resources to pay the costs of cleaning up an oil spill and to compensate any parties damaged by an oil spill. Such financial assurances may be increased to as much as $150 million if a formal assessment indicates such an increase is warranted.

Other Laws and Regulation. The Kyoto Protocol to the United Nations Framework Convention on Climate Change (the “Protocol”) became effective in February 2005. Under the Protocol, participating nations are required to implement programs to reduce emissions of certain gases, typically referred to as greenhouse gases, that are suspected of contributing to global warming. The United States is not currently a participant in the Protocol, and Congress has resisted recent proposed legislation directed at reducing greenhouse gas emissions. However, there has been support in various regions of the country for legislation that requires reductions in greenhouse gas emissions, and some states have already adopted legislation addressing greenhouse gas emissions from various sources, primarily power plants. The oil and gas industry is a direct source of certain greenhouse gas emissions, namely carbon dioxide and methane, and future restrictions on such emissions could impact our future operations. Our operations are not adversely impacted by current state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.

Other Regulation of the Oil and Gas Industry

The oil and gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, which frequently increases the regulatory burden. In addition, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production.

Legislation continues to be introduced in Congress, and development of regulations continues in the Department of Homeland Security and other agencies concerning the security of industrial facilities, including oil and gas facilities. Our operations may be subject to such laws and regulations. Presently, it is not possible to accurately estimate the costs we would incur to comply with any such facility security laws or regulations, but such expenditures could be substantial.

Drilling and Production. Our operations are subject to various types of regulation at the federal, state and local levels. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. Most states, and some counties and municipalities, in which we operate regulate one or more of the following:

	•		the location of wells;

	•		the method of drilling and casing wells;

	•		rates of production from wells;

	•		the surface use and restoration of properties upon which wells are drilled;

	•		the plugging and abandoning of wells; and

	•		notice to surface owners and other third parties.

State laws regulate the size and shape of drilling and spacing of units or proportion of units governing the pooling of oil and gas properties. Some states allow forced pooling or integration of tracts to facilitate development while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, prohibit the venting or flaring of gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and gas we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state typically imposes a production or severance tax with respect to the production and sale of oil, gas and natural gas liquids within its jurisdiction.

Oil and Gas Transportation and Pricing. The availability, terms and cost of transportation significantly affect sales of oil and gas. The interstate transportation and sale of oil and gas are subject to federal regulation, primarily by the FERC, including regulation of the terms, conditions and rates for interstate transportation, storage and various other matters. Federal and state regulations govern the price and terms for access to oil and gas pipeline transportation. The FERC’s regulations for interstate oil and gas transmission in some circumstances may also affect the intrastate transportation of oil and gas.

Although oil and gas prices are currently unregulated, Congress historically has been active in the area of oil and gas regulation. We cannot predict whether new legislation to regulate oil and gas operations might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on the operations of the underlying properties.

Employees

As of December 31, 2008, the Company had 7 employees, including three in finance, two in sale and two in administration. The business of Rio Vista is managed by the General Partner. Penn Octane employs all persons, other than Rio Vista’s employees referred to herein, including executive officers, necessary for the operation of Rio Vista’s business. Rio Vista has no employees. At December 31, 2008, Rio Vista’s subsidiaries employed personnel in connection with the operation of those businesses (see above).

Item 1A. Risk Factors

You should carefully consider the risk factors discussed in this Annual Report. The described risks could materially and adversely affect our business, financial condition or results of operation. If any of the described risks actually were to occur, we may not be able to make future dividends on our common stock, the trading price of our common stock could decline and you could lose part or all of your investment in our Company.

Risks Related to Our Business

We may not have sufficient cash flow from operations to meet our current obligations.

The amount of cash we actually generate will depend upon numerous factors related to our business that may be beyond our control, including, among other things, the risks described in Risk Factors. In addition, the actual amount of cash that we will have available to meet obligations will depend on other factors, including:

	•		the level of our capital expenditures;

	•		our ability to make borrowings under our revolving credit facilities, if any;

	•		limitations on our subsidiaries’ ability to make distributions to us under the TCW credit facility, as discussed under Item 7 “Management’s Discussion and Analysis of Financial condition and Results of Operations”;

	•		sources of cash used to fund acquisitions;

	•		debt service requirements and restrictions on distributions contained in our existing and future debt agreements;

	•		interest payments;

	•		fluctuations in our working capital needs;

	•		general and administrative expenses, including expenses we will incur as a result of being a public company;

	•		timing and collectibility of receivables; and

	•		the amount of cash reserves, which we expect to be substantial, established by the General Partner for the proper conduct of our business.

Our oil and natural gas reserves naturally decline, and we will need to make accretive acquisitions or incur substantial capital expenditures in order to maintain or grow our asset base.

Our future oil and natural gas reserves, production volumes and cash flow depend on our success in developing and exploiting our current reserves efficiently and finding or acquiring additional recoverable reserves economically. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs, which would adversely affect our business, financial condition and results of operations.

Because our oil and natural gas properties are a depleting asset, we will need to make substantial capital expenditures to maintain and grow our asset base. Because the timing and amount of these capital expenditures fluctuate each quarter, we expect to reserve substantial amounts of cash each quarter to finance these expenditures over time. We may use the reserved cash to reduce indebtedness until we make the capital expenditures.

If our reserves decrease and if we do not make sufficient growth capital expenditures, we will be unable to expand our business operations.

To fund our substantial capital expenditures, we will be required to use cash generated from our operations, additional borrowings or the issuance of additional equity or debt securities, or some combination thereof.

Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business, results of operations and financial condition.

Even if we are successful in obtaining the necessary funds, the terms of such financings could limit our ability to grow or meet current obligations, either directly or indirectly. For example, our existing credit facility with TCW prohibits our Oklahoma subsidiaries from making any distributions to us unless we meet certain conditions which we do not currently expect to meet. If we are not able to receive sufficient operating cash from our subsidiaries, our ability to grow or meet current obligations could be adversely affected.

In addition, incurring additional debt may significantly increase our interest expense and financial leverage. Issuing additional common shares may result in significant shareholder dilution.

Oil and natural gas prices are very volatile. A decline in commodity prices will cause a decline in our cash flow from operations.

The oil and natural gas markets are very volatile, and we cannot predict future oil and natural gas prices. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:

	•		our ability to make borrowings under our revolving credit facilities, if any, to make distributions;

	•		domestic and foreign supply of and demand for oil and natural gas;

	•		weather conditions;

	•		overall domestic and global economic conditions;

	•		political and economic conditions in oil and natural gas producing countries, including those in the Middle East and South America;

	•		actions of the Organization of Petroleum Exporting Countries, or OPEC, and other state-controlled oil companies relating to oil price and production controls;

	•		impact of the U.S. dollar exchange rates on oil and natural gas prices;

	•		technological advances affecting energy consumption and energy supply;

	•		domestic and foreign governmental regulations and taxation;

	•		the impact of energy conservation efforts;

	•		the proximity, capacity, cost and availability of oil and natural gas pipelines and other transportation facilities;

	•		the availability of refining capacity; and

	•		the price and availability of alternative fuels.

Our revenue, profitability and cash flow depend upon the prices of and demand for oil and natural gas, and a drop in prices can significantly affect our financial results and impede our growth. In particular, declines in commodity prices will:

	•		negatively impact the value of our reserves, because declines in oil and natural gas prices would reduce the amount of oil and natural gas that we can produce economically;

	•		reduce the amount of cash flow available for capital expenditures; and

	•		limit our ability to borrow money or raise additional capital.

An increase in the differential between the NYMEX or other benchmark prices of oil and natural gas and the wellhead price we receive could adversely affect our financial condition.

The prices that we receive for our oil and natural gas production sometimes trade at a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating commodity derivative positions. The difference between the benchmark price and the price we receive is called a differential. We cannot accurately predict oil and natural gas differentials. Increases in the differential between the benchmark price for oil and natural gas and the wellhead price we receive could significantly reduce our cash available for distribution and adversely affect our financial condition.

Future price declines may result in a write-down of our asset carrying values, which could have a material adverse effect on our results of operations and limit our ability to borrow.

Declines in oil and natural gas prices may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs, or if our estimates of development costs increase, production data factors change or development results deteriorate, accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties for impairments. If we incur impairment charges in the future, it could have a material adverse effect on our results of operations in the period incurred and on our ability to borrow funds under our revolving credit facility.

Our commodity derivative contract activities could result in financial losses or could reduce our income, which may adversely affect our results of operations.

To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of oil and natural gas, we may in the future enter into derivative arrangements for a significant portion of our oil and natural gas production that could result in both realized and unrealized commodity derivative losses. The extent of our commodity price exposure is related largely to the effectiveness and scope of our derivative activities. For example, the derivative instruments we may utilize are based on posted market prices, which may differ significantly from the actual crude oil, natural gas and natural gas liquids prices we realize in our operations.

Our actual future production may be significantly higher or lower than we estimate at the time we enter into derivative transactions for such period. If the actual amount is higher than we estimate, we will have greater commodity price exposure than we intended. If the actual amount is lower than the nominal amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution of our liquidity. As a result of these factors, our derivative activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows. In addition, our derivative activities are subject to the following risks:

	•		a counterparty may not perform its obligation under the applicable derivative instrument; and

	•		there may be a change in the expected differential between the underlying commodity price in the derivative instrument and the actual price received, which may result in payments to our derivative counterparty that are not accompanied by our receipt of higher prices from our production in the field.

Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

It is not possible to measure underground accumulations of oil or natural gas in an exact way. Oil and natural gas reserve engineering requires subjective estimates of underground accumulations of oil and natural gas and assumptions concerning future oil and natural gas prices, future production levels and operating and development costs. In estimating our level of oil and natural gas reserves, we and our independent reserve engineer make certain assumptions that may prove to be incorrect, including assumptions relating to the level of oil and natural gas prices, future production levels, capital expenditures, operating and development costs, the effects of regulation and availability of funds. If these assumptions prove to be incorrect, our estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery and our estimates of the future net cash flows from our reserves could change significantly.

Our Standardized Measure is calculated using prices and costs in effect as of the date of estimation, less future development, production and income tax expenses, and discounted to reflect the timing of future net revenue in accordance with the rules and regulations of the SEC. Over time, we may make material changes to reserve estimates to take into account changes in our assumptions and the results of actual development and production.

The reserve estimates we make for fields that do not have a lengthy production history are less reliable than estimates for fields with lengthy production histories. A lack of production history may contribute to inaccuracy in our estimates of proved reserves, future production rates and the timing of development expenditures.

The Standardized Measure of our estimated proved reserves is not necessarily the same as the current market value of our estimated proved oil and natural gas reserves. We base the estimated discounted future net cash flows from our estimated proved reserves on prices and costs in effect on the day of estimate.

The timing of both our production and our incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows in compliance with SFAS No. 69, “Disclosures about Oil and Gas Producing Activities,” may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.

Developing and producing oil and natural gas are costly and high-risk activities with many uncertainties that could adversely affect our financial condition or results of operations.

The cost of developing, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a well. Our efforts will be uneconomical if we drill dry holes or wells that are productive but do not produce as much oil and natural gas as we had estimated. Furthermore, our development and producing operations may be curtailed, delayed or canceled as a result of other factors, including:

	•		high costs, shortages or delivery delays of rigs, equipment, labor or other services;

	•		unexpected operational events and/or conditions;

	•		reductions in oil and natural gas prices;

	•		increases in severance taxes;

	•		limitations in the market for oil and natural gas;

	•		adverse weather conditions and natural disasters;

	•		facility or equipment malfunctions, and equipment failures or accidents;

	•		title problems;

	•		pipe or cement failures and casing collapses;

	•		compliance with environmental and other governmental requirements;

	•		environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases;

	•		lost or damaged oilfield development and service tools;

	•		unusual or unexpected geological formations, and pressure or irregularities in formations;

	•		loss of drilling fluid circulation;

	•		fires, blowouts, surface craterings and explosions;

	•		uncontrollable flows of oil, natural gas or well fluids; and

	•		loss of leases due to incorrect payment of royalties.

If any of these factors were to occur with respect to a particular field, we could lose all or a part of our investment in the field, or we could fail to realize the expected benefits from the field, either of which could materially and adversely affect our revenue and profitability.

Shortages of rigs, equipment and crews could delay our operations and reduce our cash available for distribution.

Higher oil and natural gas prices generally increase the demand for rigs, equipment and crews and can lead to shortages of, and increasing costs for, development equipment, services and personnel. Shortages of, or increasing costs for, experienced development crews and oil field equipment and services could restrict our ability to drill the wells and conduct the operations that we currently have planned. Any delay in the development of new wells or a significant increase in development costs could reduce our revenues.

If we do not make acquisitions on economically acceptable terms, our future growth will be limited.

Our ability to grow depends in part on our ability to make acquisitions that result in an increase in pro forma available cash. We may be unable to make such acquisitions because we are:

	•		unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;

	•		unable to obtain financing for these acquisitions on economically acceptable terms; or

	•		outbid by competitors.

If we are unable to acquire properties containing proved reserves, our total level of proved reserves will decline as a result of our production, and we will be limited in our ability to increase or possibly even to maintain our existing level of revenues.

Any acquisitions we complete are subject to substantial risks.

Even if we do make acquisitions, any acquisition involves potential risks, including, among other things:

	•		the validity of our assumptions about reserves, future production, revenues, capital expenditures, operating expenses and costs, including synergies;

	•		an inability to integrate the businesses we acquire successfully;

	•		a decrease in our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions;

	•		a significant increase in our interest expense or financial leverage if we incur additional debt to finance acquisitions;

	•		the assumption of unknown liabilities, losses or costs for which we are not indemnified or for which our indemnity is inadequate;

	•		the diversion of management’s attention from other business concerns;

	•		an inability to hire, train or retain qualified personnel to manage and operate our growing business and assets;

	•		natural disasters;

	•		the incurrences of other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges;

	•		unforeseen difficulties encountered in operating in new geographic areas; and

	•		customer or key employee losses at the acquired businesses.

Our decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often inconclusive and subject to various interpretations.

In addition, our reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition given time constraints imposed by sellers. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken.

Due to our lack of geographic diversification, adverse developments in our operating areas would reduce our results from operations.

Currently, our only oil and natural gas properties and related assets are located in Oklahoma and the greatest part of Regional’s operations are conducted within a 150-mile radius of its principal facility in southeastern Virginia. Due to our lack of diversification in location, an adverse development in the relevant businesses within our geographic areas would have a significantly greater impact on our results of operations than if we maintained more diverse locations.

We may be unable to compete effectively with larger companies, which may adversely affect our results from operations.

The oil and natural gas industry is intensely competitive with respect to acquiring prospects and productive properties, marketing oil and natural gas and securing equipment and trained personnel, and we compete with other companies that have greater resources. Many of our competitors are major and large independent oil and natural gas companies, and possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. Our ability to acquire additional properties and to discover reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce oil and natural gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for oil and natural gas properties and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, there is substantial competition for investment capital in the oil and natural gas industry. These larger companies may have a greater ability to continue development activities during periods of low oil and natural gas prices and to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

Our future debt levels may limit our flexibility to obtain additional financing and pursue other business opportunities and may affect our results of operations.

As of December 31, 2008, we had approximately $31.5 million of debt. We may incur additional debt in the future. Our future indebtedness could have important consequences to us, including:

•

our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

•

covenants contained in our future debt arrangements may require us to meet financial tests that may affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities;

•

we may need a substantial portion of our cash flow to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations and future business opportunities; and

•

our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally.

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all.

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.

There are a variety of operating risks inherent in our wells, gathering systems, pipelines, transportation, storage, transloading and other facilities, such as leaks, accidents, fires, explosions, mechanical problems, hurricanes, adverse weather conditions, hazardous materials releases, mechanical failures and other events beyond our control, all of which could cause substantial financial losses. Any of these or other similar occurrences could result in the disruption of our operations, substantial repair costs, personal injury or loss of human life, significant damage to property, fines, environmental pollution, impairment of our operations and substantial revenue losses. The location of our facilities near populated areas, including residential areas, commercial business centers and industrial sites, could significantly increase the level of damages resulting from these risks. As a result of the foregoing, we are, and are likely to continue to be, a defendant in various legal proceedings and litigation arising in the ordinary course of business.

We are not fully insured against all risks, including development and completion risks that are generally not recoverable from third parties or insurance. In addition, pollution and environmental risks generally are not fully insurable. We may also elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Moreover, insurance may not be available in the future at commercially reasonable costs and on commercially reasonable terms. Changes in the insurance markets due to terrorist attacks and hurricanes have made it more difficult for us to obtain certain types of coverage. We may not be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes, and our insurance may contain large deductibles or fail to cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our unitholders.

Our business depends in part on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities could interfere with our ability to market our oil and natural gas production and could harm our business.

The marketability of our oil and natural gas production depends in part on the availability, proximity and capacity of pipelines, oil and natural gas gathering systems and processing facilities. The amount of oil and natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we are provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any significant curtailment in gathering system or pipeline capacity could reduce our ability to market our oil and natural gas production and harm our business.

We have limited control over the activities on properties we do not operate.

Other companies operated approximately 17.4% of our wells on a pro forma basis as of December 31, 2008. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.

Our oil and natural gas exploration and production operations are subject to complex and stringent laws and regulations. Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon oil and natural gas wells and related pipeline and processing facilities. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations.

Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and production of, oil and natural gas. Failure to comply with such laws and regulations, as interpreted and enforced, could have a material adverse effect on our business, financial condition and results of operations.

Our pipeline integrity program may subject us to significant costs and liabilities.

As a result of pipeline integrity testing under the Pipeline Safety Improvement Act of 2002, we may incur significant and unanticipated operating and capital expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines. Furthermore, the Act or an increase in public expectations for pipeline safety may require additional reporting, the replacement of our pipeline segments, additional monitoring equipment and more frequent inspection or testing of our pipeline facilities. Any repair, remediation, preventative or mitigating actions may require significant capital and operating expenditures. Should we fail to comply with the U.S. Department of Transportation rules and related regulations and orders, we could be subject to penalties and fines, which could have a material adverse effect on our results of operation.

Our business would be adversely affected if operations at our terminaling, transportation and distribution facilities experienced significant interruptions. Our business would also be adversely affected if the operations of our customers and suppliers experienced significant interruptions.

Our operations are dependent upon our terminaling and storage facilities and various means of transportation. We are also dependent upon the uninterrupted operations of certain facilities owned or operated by our suppliers and customers. Any significant interruption at these facilities or inability to transport products to or from these facilities or to or from our customers for any reason would adversely affect our results of operations, cash flow or to make principal and interest payments on our debt securities. Operations at our facilities and at the facilities owned or operated by our suppliers and customers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

•

weather conditions;

•

environmental remediations;

•

labor difficulties; and

•

disruptions in the supply of our products to our facilities or means of transportation.

In addition, terrorist attacks and acts of sabotage could target oil and gas production facilities, refineries, processing plants, terminals and other infrastructure facilities. Any significant interruptions at our facilities, facilities owned or operated by our suppliers or customers, or in the oil and gas industry as a whole caused by such attacks or acts could have a material adverse affect on our results of operations, cash flow or to make principal and interest payments on our debt securities.

The occurrence or threat of extraordinary events, including domestic and international terrorist attacks, and laws and regulations related thereto may disrupt our operations and decrease demand for our products and services.

Chemical-related assets such as those handled at our terminaling and storage facilities, may be at greater risk of future terrorist attacks than other possible targets in the United States. Federal legislation is under consideration that could impose new site security requirements, specifically on chemical facilities, which may increase our overhead expenses. Our business or our customers’ businesses could be adversely affected because of the cost of complying with new security regulations.

New federal regulations have already been adopted to increase the security of the transportation of hazardous chemicals in the United States. We believe we have met these requirements but additional federal and local regulations that limit the distribution of hazardous materials are being considered. We store, ship and receive materials that are classified as hazardous. Bans on movement of hazardous materials through certain cities could affect the efficiency of our logistical operations. Broader restrictions on hazardous material movements could lead to additional investment to produce hazardous raw materials and change where and what products we provide and transport.

The occurrence of extraordinary events, including future terrorist attacks and the outbreak or escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to affect negatively the economy in general, and specifically the markets for our products. The resulting damage from a direct attack on our assets, or assets used by us, could include loss of life and property damage. In addition, available insurance coverage may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive.

We are subject to many environmental and safety regulations that may result in significant unanticipated costs or liabilities or cause interruptions in our operations.

Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic and that are extensively regulated by environmental and health and safety laws, regulations and permit requirements. We may incur substantial costs, including fines, damages and criminal or civil sanctions, or experience interruptions in our operations for actual or alleged violations or compliance requirements arising under environmental laws, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Our operations could result in violations of environmental laws, including spills or other releases of hazardous substances to the environment. In the event of a catastrophic incident, we could incur material costs. Furthermore, we may be liable for the costs of investigating and cleaning up environmental contamination on or from our properties or at off-site locations where we disposed of or arranged for the disposal or treatment of hazardous materials. We own or lease a number of properties that have been used to store or distribute refined products for many years. Many of these properties, such as the assets acquired from Regional Enterprises, Inc. in 2007 and the Oklahoma assets, were operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes was not under our control. If significant previously unknown contamination is discovered, or if existing laws or their enforcement change, then the resulting expenditures could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Environmental, health and safety laws, regulations and permit requirements, and the potential for further expanded laws, regulations and permit requirements may increase our costs or reduce demand for our products and thereby negatively affect our business. Environmental permits required for our operations are subject to periodic renewal and may be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements and the potential for further expanded regulation may increase our costs and can affect the manufacturing, handling, processing, distribution and use of our products. If so affected, our business and operations may be materially and adversely affected. In addition, changes in these requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal and other waste handling practices and equipment. For these reasons, we may need to make capital expenditures beyond those currently anticipated to comply with existing or future environmental or safety laws.

We store and transport hazardous or volatile chemicals at some of our facilities. If our safety procedures are not effective, an accident involving these other hazardous or volatile chemicals could result in serious injuries or death, or result in the shutdown of our facilities.

We store and transport hazardous chemicals such as aqua ammonia, phosphoric acid, hydrochloric acid and sulfuric acid. An accident involving any of these chemicals could result in serious injuries or death, or evacuation of areas near an accident. An accident could also result in third-party property damage or shutdown of our terminaling facilities, or cause us to expend significant amounts to remediate safety issues or to repair damaged facilities. As a result, an accident involving any of these chemicals could have a material adverse effect on our results of operations, liquidity or financial condition.

Risks Inherent in an Investment in Us

We may issue additional common stock, including common stock that are senior to the common stock, without stockholder approval, which would dilute the ownership interests of our existing stockholders.

We may issue an unlimited number of common or preferred stock that are senior to the common shares in right of distribution, liquidation and voting. The issuance by us of additional common shares or other equity securities of equal or senior rank will have the following effect:

•

our shareholders’ proportionate ownership interest in us will decrease;

•

the amount of cash available for distribution on each common share may decrease;

•

the relative voting strength of each previously outstanding common share may be diminished; and

•

the market price of the common shares may decline.

An increase in interest rates may cause the market price of our common shares to decline.

Like all equity investments, an investment in our common shares is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded corporate interests. Reduced demand for our common shares resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common shares to decline.

Item 1B. Unresolved Staff Comments.

None.

Item 3. 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. Furthermore, 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.

Even though the accident took place in Mexico, these lawsuits were filed in Texas. The first case is captioned Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane International LLC, et al and 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.

In December of 2008, one of the insurance carriers, Ace Insurance, tendered its limit of one million in settlement of all claims brought by American citizens who were injured in the explosion. Those claims were dismissed. The legal damages that can be recovered by the remaining plaintiffs will be governed by Mexican law, which provides limited, scheduled recovery. This is deemed favorable to Rio Vista. Rio Vista’s legal fees and settlement costs were covered by insurance.

Since that settlement, the remaining insurance carrier was Lexington Insurance Company (Lexington). On December 13, 2007, 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 litigation based on alleged coverage exceptions. Federal jurisdiction was contested and the case moved to state court. In a subsequent pleading, Lexington assumed the defense of Penn Octane and Rio Vista. However, there remains undetermined the obligation by Lexington to provide indemnification to Penn Octane and Rio Vista from any judgment resulting from the Camacho suit. Cross motions for summary judgment were filed by the parties, and the court ruled that the insurance policy issued by Lexington did cover the incident which accrued in Mexico. Lexington has subsequently filed a Notice of Appeal, and is proceeding to appeal the trial court’s ruling. Nevertheless, Lexington continues to provide a defense to Rio Vista in the Camacho case. As the case currently stands, the trial court has ruled that insurance coverage does exist to provide coverage in the Camacho case.

The Camacho case is not presently set for trial. It is anticipated that a small group of plaintiffs will be identified by the court, and that group will be set for trial. It is anticipated that the trial group will not be set until the fall of 2009. No judgment following that trial will become final until all plaintiffs have gone to trial.

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 in excess of anticipated insurance coverage. 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 20, 2007, Rio Vista, Rio Vista Penny, LLC, Gary Moores, Bill Wood and GM Oil Properties, Inc. (GM) jointly filed an action for declaratory relief against Energy Spectrum Advisors, Inc. in the District Court of 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 owed Energy Spectrum a commission based on Rio Vista Penny, LLC’s November, 2007 purchase of certain assets from GM. Energy Spectrum counterclaimed asserting that Rio Vista and Rio Vista Penny tortiously interfered with the commission agreement between Energy Spectrum and GM. Neither Rio Vista nor Rio Vista Penny were parties to this agreement. Management believes that the Rio Vista entities should have no liability for any commission obligation that GM may owe to Energy Spectrum. However the outcome of litigation cannot reliably be predicted. Discovery in the case is ongoing. No trial date has been set.

On August 19, 2008, Rio Vista, Rio Vista GP LLC, Rio Vista Penny LLC, Jerome B. Richter and Douglas G. Manner (Defendants) were named in a lawsuit filed by Northport Production Company and Eugene A. Viele (Plaintiffs). Mr. Viele is currently a director of Penn Octane Corporation and is also the principal owner of Northport Production Company. Mr. Manner currently serves as a director of Penn Octane Corporation and the General Partner in connection with the acquisition of the Oklahoma Assets. Plaintiffs allege breach of contract, negligent misrepresentation, and fraud in connection with the acquisition of the Oklahoma Assets. Plaintiffs are seeking judgment for compensatory damages of $487,000 and exemplary damages of not less than $200,000 as well as attorneys’ fees and other such relief as may be shown. Discovery is currently pending. Rio Vista believes that the liability, if any, ultimately resulting from this lawsuit should not materially affect its consolidated financial results.

In the Greco-Roman, Inc. dba Trinity Oil Co. (Trinity) bankruptcy, pending in the United States Bankruptcy Court for the District of Arizona, the court-appointed Chapter 7 Trustee, on November 6, 2008, filed an adversary proceeding against Penn Octane Corporation (Penn Octane). The complaint was served on March 6, 2009. The Trustee seeks to recover, as preferential payments made within 90 days of Trinity’s bankruptcy filing on September 22, 2006, at least $357,000 paid to Penn Octane. Penn Octane believes valid defenses barring the turnover of these funds to the Trustee will show that the payment were made in the ordinary course of business for the delivery of petroleum products to Trinity and on ordinary business terms. The Trustee also seeks the turnover of more than $4,348,000 Trinity paid to Penn Octane within the two year period preceding Trinity’s bankruptcy filing. Valid defenses will show that Trinity, in receiving petroleum product, was given reasonably equivalent value in exchange for these payments, and, it is believed, the payments were not made to defraud Trinity’s creditors. These defenses, and others, have been presented in Penn Octane’s Answer to the Complaint filed on April 6, 2009. At this early stage of the proceeding, Penn Octane does not believe that this case will have a material adverse effect on its business, financial condition and results of operations.

On December 12, 2008, SFPP, Inc. filed a Complaint against Penn Octane in the Los Angeles Superior Court entitled SFPP, Inc. v. Penn Octane Corporation, Case No. BC403789. The Complaint alleges causes of action for Open Book Account, Account Stated and Breach of Contract, and seeks $376.216.80 in damages, plus SFPP’s attorneys’ fees and costs. Penn octane was served with copies of the Summons and Complaint in the referenced action and on February 10, 2009 timely filed its Answer thereto generally denying the allegations of the Complaint and asserting various affirmative defenses. To date, no discovery has been propounded by either party. Penn Octane is currently engaged in discussions with SFPP exploring the possibility of negotiating a mutually acceptable resolution of the allegations but, to date, no settlement has been reached.

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

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

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Penn Octane’s common stock began trading on the NASDAQ Capital Market under the symbol “POCC” in December 1995. On July 19, 2006 pursuant to a written determination received from The NASDAQ Stock Market’s Listing Qualification Department dated July 17, 2006, Penn Octane’s common stock was delisted from the NASDAQ Stock Market. As a result of the delisting, Penn Octane’s common stock began trading on the Pink Sheets, a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time. On March 22, 2007 the Company received clearance to enter quotations on the OTC Bulletin Board for Penn Octane’s common stock and began trading on or about March 26, 2007 on the OTC Bulletin Board.

The following table sets forth the reported high ask and low bid quotations of the common stock for the periods indicated. Such quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.


	LOW		HIGH

Fiscal Year Ended December 31, 2008:
First Quarter	$	1.75	$	2.75
Second Quarter		1.25		2.40
Third Quarter		1.80		2.40
Fourth Quarter		1.20		2.33

Fiscal Year Ended December 31, 2007:
First Quarter	$	0.41	$	0.60
Second Quarter		0.48		0.72
Third Quarter		0.58		1.94
Fourth Quarter		1.25		2.39

On March 30, 2009, the closing bid price of the common stock as reported on the OTC Bulletin Board was $1.14 per share. On March 30, 2008, Penn Octane had 15,416,187 shares of common stock outstanding and approximately 580 holders of record of the common stock.

Recent Sales of Unregistered Securities

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

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

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.

On May 28, 2008, Penn Octane and Strategic Growth International (SGI), entered into a one year consulting agreement whereby SGI has agreed to provide public relations consulting services. The agreement could be cancelled after 6 months and was cancelled effective December 1, 2008. In connection with the agreement, Penn Octane granted SGI 400,000 warrants to purchase common shares of the Company at an exercise price of $1.70 per share which was the closing price for Penn Octane common as reported by the OTC Bulletin Board on the grant date. The warrants cannot be exercised for one year from the date of issuance and the warrants will expire three years from the date of issuance. Total cost recorded at the grant date was $515,000. As a result of the cancellation, the number of warrants granted was reduced to 200,000.

During November 2008, warrants to purchase a total of 10,000 shares of common stock of Penn Octane were exercised resulting in cash proceeds to the Company of approximately $10,000.

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

Item 6. Selected Financial Data.

Not applicable.

Item 7. 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.

Overview

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 consisting of transportation and terminaling. Beginning March 1, 2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma Assets.

Fuel Sales Business

The Company sold Fuel Products through transactional, bulk and/or rack transactions. Typical transactional and bulk sales were 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 were based on variable sale prices charged by the Company which were tied to posted daily spot prices and purchase costs which were based on a monthly average or 3 day average based on posted prices. The Company paid pipeline and terminal fees based on regulated rates.

For bulk and transactional sales, the Company entered into individual sales contracts for each sale. Fuel Products sales were subject to credit limitations imposed on each individual buyer by the Company. The Company had several supply contracts for each of the Fuel Products it sold. The supply contracts were for annual periods with flexible volumes. The Company’s ability to access its various terminal locations was based on maintaining through-put volumes at each terminal. The Company purchased volumes of Fuel Products under its supply contracts, but the Company did not have corresponding sales contracts with its customers. To the extent the Company maintained inventory of Fuel Products, the Company was exposed to market risk related to the volatility of Fuel Product prices. The Company’s cost for Fuel Products was 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 could have resulted in gains or losses.

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 $316,000. At December 31, 2008, such taxes plus associated interest and penalties in the amount of approximately $1.9 million were due.

Results of Operations

Because of the sale of the LPG sales business during August 2006, the commencement and sale of our LPG Transportation business during August 2006 and December 2007, respectively, our rapid growth through the acquisitions of Regional and the Oklahoma Assets during 2007, and the ceasing of our Fuel Sales business in May 2008, our historical results of operations and period-to-period comparisons of these results during the years ended 2006, 2007 and 2008 are not that meaningful or indicative of future results.

The results of operations from continuing operations during the years ended December 2007 and 2008 reflect the results associated with the i.) the Transportation and Terminaling Business associated with bulk and petroleum products associated with Regional operations which was acquired during July 2007 and LPG, which was commenced during August 2006 and was sold on December 31, 2007 (including all costs associated with operation of the US-Mexico Pipelines and Matamoros Terminal Facility), ii.) the operation of the Oklahoma Assets, which was acquired during November 2007, iii.) the Fuel Sales business until May 2008, and iii.) all indirect income and expenses of the Company.

Continuing Operations

Year Ended December 31, 2008 Compared With Year Ended December 31, 2007


	YEAR ENDED DECEMBER 31, 2008
	Fuel			Oklahoma			Regional			LPG			Corporate/
	Sales			Assets (a)			Enterprises (b)			Transportation (c)			Other			Total

Revenues		43,511,000			5,247,000			8,573,000			—			1,000			57,332,000
Cost Of Goods Sold		43,080,000			4,322,000			6,444,000			—			(8,000	)		53,838,000

Gross Profit		431,000			925,000			2,129,000			—			9,000			3,494,000

Selling, General And Administrative Expenses		872,000			493,000			1,167,000			—			6,052,000			8,584,000

Loss on sale of remaining LPG-related assets		—			—			—			351,000			—			351,000

Operating Income (loss)		(441,000	)		432,000			962,000			(351,000	)		(6,043,000	)		(5,441,000	)
Other Income (Expense)
Interest Expense		(188,000	)		(2,849,000	)		(631,000	)		—			(196,000	)		(3,864,000	)
Interest Income		—			7,000			—			—			12,000			19,000
Minority Interest		—			—			—			—			6,040,000			6,040,000


Income (Loss) From Continuing Operations Before Taxes		(629,000	)		(2,410,000	)		331,000			(351,000	)		(187,000	)		(3,246,000	)

Provision For Income Taxes (Benefit)		—			(103,000	)		66,000			—			—			(37,000	)


Income (loss) From Continuing Operations		(629,000	)		(2,307,000	)		265,000			(351,000	)		(187,000	)		(3,209,000	)

Year Ended December 31, 2007 Compared With Year Ended December 31, 2006


	YEAR ENDED DECEMBER 31, 2007
	Fuel			Oklahoma			Regional			LPG			Corporate/
	Sales			Assets (a)			Enterprises (b)			Transportation (c)			Other			Total

Revenues		150,114,000			527,000			3,038,000			2,341,000			142,000			156,162,000
Cost Of Goods Sold		148,637,000			390,000			2,399,000			1,971,000			—			153,397,000

Gross Profit		1,477,000			137,000			639,000			370,000			142,000			2,765,000

Selling, General And Administrative Expenses		652,000			41,000			363,000			258,000			6,252,000			7,566,000

Loss on sale of remaining LPG-related assets		—			—			—			406,000			—			406,000

Operating Income (loss)		825,000			96,000			276,000			(294,000	)		(6,110,000	)		(5,207,000	)
Other Income (Expense)
Interest Expense		(443,000	)		(275,000	)		(322,000	)		(281,000	)		(23,000	)		(1,344,000	)
Interest Income		—			—			14,000			1,000			31,000			46,000
Minority Interest		—			—			—			—			4,729,000			4,729,000


Income (Loss) From Continuing Operations Before Taxes		382,000			(179,000	)		(32,000	)		(574,000	)		(1,373,000	)		(1,776,000	)

Provision For Income Taxes (Benefit)		15,000			(4,000	)		(51,000	)		34,000			27,000			21,000


Income (loss) From Continuing Operations		367,000			(175,000	)		19,000			(608,000	)		(1,400,000	)		(1,797,000	)


	YEAR ENDED DECEMBER 31, 2006
	Fuel			Oklahoma		Regional		LPG			Corporate/
	Sales			Assets (a)		Enterprises (b)		Transportation (c)			Other			Total

Revenues		143,429,000			—		—		908,000			—			144,337,000
Cost Of Goods Sold		142,827,000			—		—		1,814,000			56,000			144,697,000

Gross Profit		602,000			—		—		(906,000	)		(56,000	)		(360,000	)

Selling, General And Administrative Expenses		809,000			—		—		183,000			4,524,000			5,516,000

Loss on sale of remaining LPG-related assets		—			—		—		—			—			—

Operating Income (loss)		(207,000	)		—		—		(1,089,000	)		(4,580,000	)		(5,876,000	)
Other Income (Expense)
Interest Expense		(464,000	)		—		—		(354,000	)		35,000			(783,000	)
Interest Income		23,000			—		—		—			43,000			66,000
Minority Interest		—			—		—		—			3,849,000			3,849,000


Income (Loss) From Continuing Operations Before Taxes		(648,000	)		—		—		(1,443,000	)		(653,000	)		(2,744,000	)

Provision For Income Taxes (Benefit)		16,000			—		—		37,000			(53,000	)		—


Loss From Continuing Operations		(664,000	)		—		—		(1,480,000	)		(600,000	)		(2,744,000	)


	CHANGES FOR YEAR ENDED DECEMBER 31, 2008 COMPARED
	WITH YEAR ENDED DECEMBER 31, 2007
	Fuel			Oklahoma			Regional			LPG			Corporate/
	Sales			Assets (a)			Enterprises (b)			Transportation (c)			Other			Total

Revenues		(106,603,000	)		4,720,000			5,535,000			(2,341,000	)		(141,000	)		(98,830,000	)
Cost Of Goods Sold		(105,557,000	)		3,932,000			4,045,000			(1,971,000	)		(8,000	)		(99,559,000	)

Gross Profit		(1,046,000	)		788,000			1,490,000			(370,000	)		(133,000	)		729,000

Selling, General And Administrative Expenses		220,000			452,000			804,000			(258,000	)		(200,000	)		1,018,000

Loss on sale of remaining LPG-related assets		—			—			—			(55,000	)		—			(55,000	)

Operating Income (Loss)		(1,266,000	)		336,000			686,000			(57,000	)		67,000			(234,000	)
Other Income (Expense)
Interest Expense		255,000			(2,574,000	)		(309,000	)		281,000			(173,000	)		(2,520,000	)
Interest Income		—			7,000			(14,000	)		(1,000	)		(19,000	)		(27,000	)
Minority Interest		—			—			—			—			1,311,000			1,311,000


Income From Continuing Operations Before Taxes		(1,011,000	)		(2,231,000	)		363,000			223,000			1,186,000			(1,470,000	)

(Benefit) Provision For Income Taxes		(15,000	)		(99,000	)		117,000			(34,000	)		(27,000	)		(58,000	)


Income (loss) From Continuing Operations		(996,000	)		(2,132,000	)		246,000			257,000			1,213,000			(1,412,000	)


	CHANGES FOR YEAR ENDED DECEMBER 31, 2007 COMPARED
	WITH YEAR ENDED DECEMBER 31, 2006
	Fuel			Oklahoma			Regional			LPG			Corporate/
	Sales			Assets (a)			Enterprises (b)			Transportation (c)			Other			Total

Revenues		6,685,000			527,000			3,038,000			1,433,000			142,000			11,825,000
Cost Of Goods Sold		5,810,000			390,000			2,399,000			157,000			(56,000	)		8,700,000

Gross Profit		875,000			137,000			639,000			1,276,000			198,000			3,125,000

Selling, General And Administrative Expenses		(157,000	)		41,000			363,000			75,000			1,728,000			2,050,000

Loss on sale of remaining Mexican assets		—			—			—			406,000			—			406,000

Operating Income		1,032,000			96,000			276,000			795,000			(1,530,000	)		669,000
Other Income (Expense)
Interest Expense		21,000			(275,000	)		(322,000	)		73,000			(58,000	)		(561,000	)
Interest Income		(23,000	)		—			14,000			1,000			(12,000	)		(20,000	)

Minority Interest		—			—			—			—			880,000			880,000


Income (Loss) From Continuing Operations Before Taxes		1,030,000			(179,000	)		(32,000	)		869,000			(720,000	)		968,000

(Benefit) Provision For Income Taxes		(1,000	)		(4,000	)		(51,000	)		(3,000	)		80,000			21,000


Income (loss) From Continuing Operations		1,031,000			(175,000	)		19,000			872,000			(800,000	)		947,000


(a)		Acquired during November 2007

(b)		Acquired during July 2007

(c)		Business commenced in August 2006 sold December 31, 2007

Year Ended December 31, 2008 Compared With Year Ended December 31, 2007

Revenues. Revenues for the year ended December 31, 2008 were $57.3 million and includes the results of the Fuel Sales business for the five months ended May 31, 2008 and results of Regional and the Oklahoma Assets for the twelve months during 2008. Revenues during the year ended December 31, 2007 were $156.2 million and includes the results of the Fuel Sales business for the year ended December 31, 2007, the results of Regional for the period July 28, 2007 to December 31, 2007, the results of the Oklahoma Assets for the period November 19, 2007 to December 31, 2007 and the results of the LPG transportation for the full twelve months. The results for the two periods are not comparative since each period contains different business operations for different periods of time.

During the year ended December 31, 2006, there were only revenues from the LPG Transportation business from August 22, 2006, the date that the LPG Transportation business commenced, through December 31, 2006 and the Fuel Sales business for the year ended December 31, 2006. All revenues prior to August 22, 2006 associated from Rio Vista’s LPG sales business were reclassified as discontinued operations.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2008 was $53.8 million and includes the results of the Fuel Sales business for the five months ended May 31, 2008 and the results of Regional and the Oklahoma Assets for the twelve months during 2008. Cost of goods sold during the year ended December 31, 2007 were $153.4 million and includes the costs of goods sold of the Fuel Sales business for the year ended December 31, 2007, the costs of goods sold of Regional for the period July 28, 2007 to December 31, 2007, the cost of goods sold of the Oklahoma Assets for the period November 19, 2007 to December 31, 2007 and the cost of goods sold of the LPG transportation for the full twelve months. The results for the two periods are not comparative since each period contains different business operations for different periods of time.

During the year ended December 31, 2006, cost of goods sold consisted of those costs associated with operation of the US — Mexico Pipelines and Matamoros Terminal Facility and the Fuel Sales business. All costs associated with Rio Vista’s LPG sales business prior to its sale, except for costs associated with the US — Mexico Pipelines and Matamoros Terminal Facility, which were used for Rio Vista’s LPG transportation business, were reclassified as discontinued operations.

Selling, general and administrative expenses. Selling, general and administrative expenses were $7.5 million for the year ended December 31, 2008. Excluding the selling, general and administrative expenses associated with the acquisitions, sales or ceasing of operations of Regional, the Oklahoma Assets, the Fuel Sales business and/or the LPG Transportation business, the remaining selling, general and administrative expenses were associated with corporate related activities. These selling, general and administrative costs were $6.0 million during the year ended December 31, 2008 compared with $6.2 million during the year ended December 31, 2007. These costs were comprised of indirect selling, general and administrative expenses directly incurred by the Company. The costs consisted of salary related costs, legal, accounting and other professional fees, and other corporate related costs, including insurance, taxes other than income, and public company expenses.

Other income (expense). Other income during the year ended December 31, 2008 consisted primarily of minority interest in the losses of Rio Vista of $2.2 million.

Liquidity and Capital Resources

General

As a result of the disposition of the LPG-related businesses in 2006 and 2007 and the cessation of the Fuel Sales Business in May 2008 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 Note 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 gas, there is not expected to be sufficient cash from operations to meet debt service requirements under the TCW Credit Facility described below under “Debt Obligations” unless additional production can be realized. Additional production will require additional capital expenditures to fund drilling expansion opportunities. Rio Vista currently does not have funding available to perform additional development. In addition, Rio Vista projects that monthly cash flows received from 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. Rio Vista does not expect that the Oklahoma Assets will be a source of generating cash flow for the foreseeable future based on current cash flow levels and the required debt covenants associated with the TCW Credit Facility, which prohibits distributions by Rio Vista’s Oklahoma subsidiaries unless certain conditions are met. Rio Vista is currently in discussion with TCW to restructure the TCW Credit Facility. See “Debt Obligations — TCW Credit Facility” below.

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. 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 unless Rio Vista is able to restructure the TCW Credit Facility and the RZB Note under terms which would provide an acceptable debt service and cash flow arrangement.

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

At December 31, 2008, the Company had a working capital deficit of approximately $36 million. The Company cannot be certain that future cash flows from Regional’s business or the Oklahoma Assets’ and future investments, if any, will be adequate to cover all of its future working capital requirements, including minimum distributions to unitholders.

Debt Obligations

RZB Note

In connection with the acquisition of Regional during July 2007, Rio Vista funded a portion of the acquisition through a loan of $5.0 million (RZB Note) from RZB Finance LLC (RZB) dated July 26, 2007. The RZB Note was due on demand and if no demand, with a one-year maturity. The RZB Note carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” (7.25% at December 31, 2007), 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% (Base Rate Margin). On July 27, 2008, the RZB Note was amended whereby the maturity date was extended until August 29, 2008. The RZB Note was not paid on August 29, 2008. During December 2008, Rio Vista entered into a third amendment to the RZB Note (Third Amendment). Under the terms of the Third Amendment, the maturity date of the RZB Note was extended to February 27, 2009. In addition, the interest rate calculation was modified to include a cost of funds rate definition in determining the base rate and the Base Rate Margin was increased to 7.0%. Under the terms of the Third Amendment, the net worth of Penn Octane, as defined, is required to be in excess of $3.3 million. In addition, the Third Amendment required Rio Vista to repay $1.0 million of the RZB Note. Effective January 1, 2009, Penn Octane agreed to loan Rio Vista the $1.0 million of cash collateral held by RZB for purpose of making the required payment described above. At December 31, 2008, RZB held Penn Octane’s $1.0 million which the company classified as restricted cash in the accompanying balance sheet.

During February 2009, Rio Vista entered into a fourth amendment to the RZB Note which extended the maturity date of the RZB Note through March 31, 2009. During March 2009, Rio Vista entered into a fifth amendment to the RZB Note which extends the maturity date of the RZB Note through April 30, 2009. Rio Vista and RZB are currently negotiating an additional extension of the RZB Note (Extended RZB Note). Rio Vista expects that the Extended RZB Note will have a three year maturity, with monthly amortization, and will provide Regional with the ability to make minimum monthly payments to Rio Vista to cover a portion of Rio Vista’s corporate overhead subject to Regional meeting required debt service covenants. In addition, Rio Vista will be required to subordinate repayment of its intercompany loan with Regional and Regional will be required to enter into a control agreement with its banks which will provide RZB with the ability to access Regional’s cash in the event of a default. The Extended RZB Note has not been executed and is subject to due diligence, final loan documents and approval of both parties.

In connection with the RZB Note, Regional granted to RZB a security interest in all of Regional’s assets, including a deed of trust on real property owned by Regional, and Rio Vista delivered to RZB a pledge of the outstanding capital stock of Regional. On July 26, 2007, as a further condition of the Loan Agreement, Penn Octane also entered into a Guaranty & Agreement (Guaranty) with RZB. Pursuant to the Guaranty, Penn Octane agreed to guaranty all of the indebtedness, liabilities and obligations of Rio Vista to RZB under the Loan Agreement and otherwise. The RZB Note is also guaranteed by Regional and RVOP.

TCW Credit Facility

The TCW Credit Facility is a $30.0 million senior secured credit facility available to Rio Vista Penny LLC with a maturity date of August 29, 2010. The amount of the initial draw under the facility was $21.7 million, consisting of $16.75 million in assumption of the existing indebtedness in the principal amount of $16.5 million plus accrued but unpaid interest in the amount of $250,000 owed by GM Oil to TCW, $1.95 million 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 $3.0 million to fund the acquisition of the membership interests of GO by Rio Vista GO. TCW also approved a plan of development (APOD) for the Oklahoma assets totaling approximately $2.0 million, 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 an additional 2% if there is an event of default (see below). Payments under the TCW Credit Facility were 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 the lenders 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 $2.2 million 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. The conversion rights of TCW as described above were formalized through the issuance of a warrant by Rio Vista (TCW Warrant). Rio Vista has agreed to file with the SEC a registration statement on Form S-3 covering the common units issued pursuant to the TCW Warrant within 90 days following the first exercise of the TCW Warrant.

Rio Vista Penny and Rio Vista GO, which hold the Oklahoma Assets, are prohibited from making upstream distributions to Rio Vista unless certain conditions are met which currently are not expected to be met in the future. In addition, the TCW Credit Facility requires semi-annual reserve reports by an independent engineer which is used in determining the allowable borrowing base.

On September 29, 2008, Rio Vista Penny entered into a First Amendment to the Note Purchase Agreement (First TCW Amendment) with TCW. Under the terms of the First TCW Amendment, TCW agreed to fund Rio Vista Penny an additional $1.0 million under the TCW Credit Facility for certain APOD costs as described in the First TCW Amendment. In addition, under the terms of the First TCW Amendment, the interest rate under the TCW Credit Facility increased from 10.5% per annum to 12.5% per annum beginning July 1, 2008. Under the terms of the First TCW Amendment, TCW agreed to change the period for which a notice to demand repayment from Rio Vista Penny of up to $2.2 million of indebtedness under the TCW Credit Facility from May 19, 2008 to January 1, 2009 and Rio Vista Penny also agreed to extend the demand repayment option on the $2.2 million through the date of maturity of the TCW Credit Facility. In addition, under the terms of the First TCW Amendment, TCW has agreed to waive other defaults identified in the First TCW Amendment which either occurred and/or were existing prior to the date of the First TCW Amendment.

In addition, on September 29, 2008, in connection with the TCW Credit Facility, Rio Vista Penny, Rio Vista, Operating and TCW entered into an Amended and Restated Management Services Agreement (Amended MSA). Under the terms of the Amended MSA, Operating was named as manager of the Oklahoma properties, replacing Northport Production Company, an Oklahoma corporation, which was previously named as manager under the original management services agreement.

Rio Vista Penny and TCW have entered into several letter agreements whereby TCW agreed to extend the payment obligations under the TCW Credit Facility (including the December 2008 principal payment and interest payment due) and other requirements pursuant to the TCW Credit Facility until April 13, 2009 (TCW Waiver). In connection with one of the extensions, TCW agreed to provide Rio Vista with 62 days advance written notice to exercise the TCW Warrant, except for up to 400,000 common units of Rio Vista.

Rio Vista’s management is in discussion with TCW to restructure the TCW Credit Facility.

However, if Rio Vista’s management is unable to restructure the TCW Credit Facility or obtain additional extension or waivers of its requirements of payment terms and covenants contained in the TCW Credit Facility, then Rio Vista Penny will be in default under the terms of the TCW Credit Facility.

TCW has the right to foreclose against Rio Vista Penny under the terms of the TCW Credit Facility. TCW has no recourse against Rio Vista, except that TCW holds the TCW Warrant, granting it the right, but not the obligation, to convert a portion or all of the value of the debt owing under the TCW Credit Facility, including accrued interest and penalties, into Rio Vista common units at the exercise price defined in the TCW Warrant (approximately 90% of the market value of the common units on the 20 trading days preceding the conversion date).

If TCW converts any amounts owing under the TCW Credit Facility into Rio Vista common units then the current Rio Vista common unit holders will be significantly diluted.

As of December 31, 2008, the net book value Oklahoma Assets were approximately $36.1 million. As a result of a foreclosure, based on December 31, 2008 balances, Rio Vista would record a loss related to the Oklahoma Assets which could approximate $7.8 million. The exercise by TCW of any amount under the TCW Warrant would reduce the amount of the recordable loss by a corresponding amount.

Moores Note

In connection with the purchase of the Penny Assets, Rio Vista issued a promissory note with the principal amount of $500,000 bearing interest at 7% per annum (Moores Note) payable to Gary Moores on May 19, 2008. Under the terms of the Moores Note, beginning February 19, 2008, Gary Moores had the option to convert the outstanding principal and interest of the Moores Note into common units of Rio Vista which option was not exercised and expired on May 19, 2008. The Moores Note was not paid upon maturity.

On June 27, 2008, the Moores Note was amended (Amended Moores Note). In connection with the Amended Moores Note, Rio Vista made a principal payment of $100,000, plus accrued interest through that date and the maturity date of the remaining principal balance was extended to November 19, 2008. In addition, the interest rate on the remaining balance of the Moores Note was increased to 10% per annum. Simultaneously with the amendment of the Moores Note, Penny agreed to the sale and transfer of certain goods and chattels to Gary Moores in exchange for $100,000 which was paid through a credit against the outstanding principal balance due under the Moores Note and Penny also received from a company owned by Gary Moores, a used vehicle with nominal value, to be used by Penny for general operations. The Amended Moores Note was not paid upon maturity. In November 2008, Gary Moores filed a civil action against Rio Vista as a result of the non-payment (Civil Action).

On January 20, 2009, the Moores Note was once again amended (Second Amended Moores Note). In connection with the Second Amended Moores Note, Rio Vista agreed to make monthly principal payments of $12,500 plus interest beginning May 10, 2009 and to continue such payments for 5 consecutive months. Each month thereafter, Rio Vista is required to make principal payments of $37,500 plus interest until all amounts due and payable have been paid. In addition, in connection with the Second Amended Moores Note, Gary Moores agreed to dismiss the Civil Action.

Seller’s Note — Regional

In connection with the Regional acquisition, Regional issued a promissory note in the amount of $1.0 million to be paid in four equal semiannual installments of $250,000 beginning January 27, 2008. Rio Vista recorded a discount of $116,000 (10% effective rate), representing the portion of interest associated with the note, which was to be amortized over the term of the note. During January 2008, the first installment was paid. On July 27, 2008 and January 27, 2009, the second and third installment was due to be paid. Regional did not make the second or third installment payments as it believes that there exists offsets in connection with the acquisition of Regional in excess of the payments. For the period of July 28, 2007 through December 31, 2007 and the year ended December 31, 2008, $37,000 and $72,000, respectively, of the discount was amortized.

Richter Note Payable

On April 15, 2008, Mr. Jerome B. Richter, a former officer of Penn Octane, agreed to loan Rio Vista $575,000 in exchange for a promissory note issued by Rio Vista, guaranteed by Penn Octane (Richter Note Payable) and collateralized by the assets of Rio Vista, subject to the consent of RZB and TCW. Under the terms of the Richter Note Payable, Rio Vista is required to repay the Richter Note Payable on the earlier of (1) the six (6) month anniversary of the Richter Note Payable, which date was extended to November 15, 2008 or (ii) the sale of all or substantially all of the assets of Rio Vista. The Richter Note Payable was not paid on November 15, 2008. Rio Vista and Mr. Richter are negotiating an extension of the due date. The Richter Note Payable accrues interest at an annual rate of 8 percent (8%). Proceeds from the Richter Note Payable were used for working capital.

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 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 the 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.

During July 2008, Penn Octane approved the loan of approximately $700,000 to Rio Vista which amount is included in due to Penn Octane Corporation in the accompanying consolidated balance sheet for the specific purpose of funding Rio Vista’s June 2008 quarterly distribution. Rio Vista made the following distributions during the years ended December 31, 2007 and 2008:


					Amounts Paid
	Payment		Distribution		Common		General
Quarter Ended	Date		Per Unit		Units		Partner

Dec 2006		01/18/07	$	0.25	$	478,000	$	10,000
Mar 2007		05/04/07	$	0.25	$	478,000	$	10,000
Jun 2007		07/31/07	$	0.25	$	484,000	$	10,000
Sep 2007		11/14/07	$	0.25	$	484,000	$	10,000
Jun 2005 – Jun 2006 Arrearages		12/10/07	$	1.25	$	2,420,000	$	49,000
Dec 2007		02/14/08	$	0.25	$	607,000	$	12,000
March 2008		05/16/08	$	0.25	$	629,000	$	13,000
June 2008		08/14/08	$	0.25	$	679,000	$	14,000

The amount of the distributions paid through the June 2008 quarterly distribution represents the minimum quarterly distribution required to be made by Rio Vista pursuant to the partnership agreement.

Rio Vista has not declared a distribution for the quarters ended September 30, 2008 and December 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.

On June 1, 2007, Regional executed a letter of intent with Norfolk Southern dated May 29, 2007 which provides for the replacement of the foregoing leases, through a purchase of approximately 3.5 acres of land and the lease of approximately 1.9 acres of land on a long-term basis. 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.

Other. Regional has several leases for parking and other facilities which are short term in nature and can be terminated by the lessors or Regional upon giving 60 days notice of cancellation. Penn Octane has several leases which on a month to month basis or for a period of less than a year.

Agreements

Gas Service and Sales Agreements

GO entered into an agreement with Clearwater Enterprises, LLC (Clearwater) to provide monthly services in relationship to the Brooken system pipeline. In accordance with terms of the agreement, Clearwater would (i) receive pipeline nominations from the various shippers on the Brooken system, (ii) allocate volumes to the wellhead based upon the volumes delivered to the Brooken interconnect, (iii) prepare gathering and compression fee invoices on behalf of the Company, and (iv) prepare pipeline imbalance and cashout statements. The monthly gathering management fee that GO pays for these services is $3,000. The agreement is month-to-month unless and until terminated by either party upon 30 days notice.

Substantially all of the gas sales associated with Rio Vista’s oil and gas properties were made to Clearwater. These gas sales were governed by an agreement that expires in 2009 and continues yearly thereafter, until canceled by either party within thirty days notice.

During March 2008, certain of the Clearwater agreements were amended to name Rio Vista Operating LLC as the contracting party based on Rio Vista Operating LLC’s assumption of operations of the oil and gas properties.

Gas Compression Agreements

GO entered into a one year lease agreement with Hanover Compression Limited Partnership for the use of a compressor. The lease is dated October 11, 2006 and is guaranteed for a minimum of twelve months and continues monthly until cancelled by either party with 30 day notice. Minimum base lease payments of $11,000 plus taxes and are due monthly. The base amount is subject to semi-annual adjustments.

MV entered into a Gas Compression Master Service Agreement with USA Compression Partners, LP on November 1, 2007. This agreement replaces an earlier agreement for gas compression services. The agreement provides for monthly payments of approximately $17,000 per month through August 31, 2009.

Consulting Agreement

During November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting agreement whereby Mr. Richter shall served as a special advisor to the board of directors of Penn Octane and the board of managers of the General Partner and provided the following services (Services) to both Penn Octane and Rio Vista: assistance with the sale of all or part of their LPG assets, assistance with other transactions (including restructurings) involving the companies as mutually agreed by the parties and such other services that the companies may reasonably request.

In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and Rio Vista paid the following fees (Fees) to Mr. Richter: an amount equal to two percent (2%) of (i) the net proceeds, as defined, to the companies resulting from a sale of assets to a third party, and (ii) the net proceeds, as defined, to the companies from sales of LPG to PMI for any calendar month in which such sales exceed the volumes pursuant to the previous agreement with PMI. Amounts expensed pursuant to (i) above (see note D) were $138,000 and have been paid to Mr. Richter.

Mr. Richter’s consulting agreement expired on November 14, 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. Richter. The provisions of the Consulting Agreement dated March 5, 2007 are effective as of November 15, 2006 (Effective Date).

Pursuant to the Consulting Agreement, JBR Capital has agreed to assist Penn Octane and Rio Vista with the potential acquisition and disposition of assets and with other transactions involving Penn Octane or Rio Vista. In exchange for these services, Penn Octane has agreed to pay JBR Capital a fee based on approved services rendered by JBR Capital plus a fee based on the net proceeds to Penn Octane resulting from a sale of assets to a third party introduced to Penn Octane by JBR Capital. For the year ended December 31, 2007 and 2008, the Company expensed approximately $434,000 and $486,000, respectively in connection with the Consulting Agreement. In addition, in connection with the Regional transaction, JBR Capital earned a fee of $180,000 which fee was expensed. The initial term of the Consulting Agreement was six months and continues to renew for additional six-month terms unless terminated by either party at least 30 days before the end of each term.

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 received cash fees of $7,500 per month and Rio Vista agreed to 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 as more fully described in the consulting agreement. The delivery of any Common Units was to 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. In connection with the CEOcast agreement, on July 23, 2008, Rio Vista issued to CEOcast a total of 6,378 Common Units. Based on the closing price of Rio Vista Common Units as of July 23, 2008, the date that the units were issued to CEOcast, the Company recorded additional expense of $80,000 associated with the issuance of the common units.

Asphalt Agreement

On November 30, 2000, Regional entered into a Storage and Product Handling Agreement with a customer with an effective date of December 1, 2000 (Asphalt Agreement). The Asphalt Agreement provides for the pricing, terms and conditions under which the customer will purchase terminal services and facility usage from Regional for the storage and handling of the customer’s asphalt products. The Asphalt Agreement was amended on October 15, 2002 with an effective date of December 1, 2002 (Amended Asphalt Agreement). The term of the Amended Asphalt Agreement is five years with an option by the customer for an additional five-year renewal term, which the customer exercised in July 2007. After the additional five-year term, the Amended Asphalt Agreement renews automatically for successive one-year terms unless terminated upon 120 days advance written notice by either party. The annual fee payable to Regional for the initial five-year term of the Amended Asphalt Agreement is approximately $500,000, payable in equal monthly installments, subject to adjustments for inflation and certain facility improvements. In exchange for the annual fee, Regional agrees to provide minimum annual throughput of 610,000 net barrels per contract year, with additional volume to be paid on a per barrel basis. During the term of the amended Asphalt Agreement, Regional agrees to provide three storage tanks and certain related equipment to the customer on an exclusive basis as well as access to Regional’s barge docking facility.

Fuel Oil Agreement

On November 16, 1998, Regional entered into a Terminal Agreement with a customer with an effective date of November 1, 1998, as amended on April 5, 2001, October 11, 2001 and August 1, 2003 (Fuel Oil Agreement). The Fuel Oil Agreement provides for the pricing, terms and conditions under which Regional will provide terminal facilities and services to the customers for the delivery of fuel oil. The agreement renews automatically for successive one-year terms unless terminated upon 365 days advance written notice by either party. Pursuant to the agreement, as amended, Regional agrees to provide three storage tanks, certain related pipelines and equipment, and at least two tractor tankers to the customer on an exclusive basis, as well as access to Regional’s barge docking facility. In exchange for use of Regional’s facilities and services, the customer pays an annual tank rental amount of approximately $300,000 plus a product transportation fee calculated on a per gallon basis, each subject to annual adjustment for inflation. Regional agrees to deliver a minimum daily quantity of fuel oil on behalf of the customer.

Employment Agreement

During June 2008, the Board of Managers of the General Partner of Rio Vista approved an employment agreement with an officer of the General Partner. Under the terms of the employment agreement, the officer is entitled to receive a grant of 30,000 restricted common units under Rio Vista’s 2005 Equity Incentive Plan in accordance with the following vesting schedule: 5,000 common units after the officer has been employed for six months, another 5,000 common units after one year of employment, another 10,000 common units after two years of employment and another 10,000 common units after three years of employment. The common units were granted on October 17, 2008. Total compensation cost recorded under the aforementioned grant was approximately $205,000 of which $34,000 was expensed during the year ended December 31, 2008.

Strategic Growth International.

On May 28, 2008, Penn Octane and SGI and Rio Vista and SGI each entered into a one year consulting agreement whereby SGI agreed to provide public relations consulting services. The agreements could be cancelled after 6 months and were cancelled on October 29, 2008 with an effective date of December 1, 2008. In connection with the agreements, Penn Octane and Rio Vista were each required to pay monthly fees of $9,000 per month. In addition, under the agreement between Penn Octane and SGI, Penn Octane granted SGI 400,000 warrants to purchase common shares of Penn Octane at an exercise price of $1.70 per share. In addition, under the agreement between Rio Vista and SGI, Rio Vista granted SGI 50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The warrants cannot be exercised for one year from the date of issuance and the warrants will expire three years from the date of issuance. As a result of the aforementioned cancellation, the number of Penn Octane warrants granted was reduced to 200,000 and the number of Rio Vista warrants granted was reduced to 25,000.

Private Placements

During November 2008, warrants to purchase a total of 10,000 shares of common stock of Penn Octane were exercised resulting in cash proceeds to the Company of approximately $10,000.

Related Party Transactions

Sale-Purchase of Rio Vista Common Units

At meetings held on May 30, 2008, in connection with the previously disclosed discussions between Rio Vista and the NASDAQ National Market (NASDAQ) regarding Rio Vista’s compliance with NASDAQ’s Marketplace Rule 4450(a)(3) on capital adequacy, the board of managers authorized the issuance and sale by Rio Vista of 197,628 of Rio Vista’s common units to Penn Octane at $10.12 per unit, and Penn Octane’s board authorized its purchase of such Rio Vista units at that price, for an aggregate price of approximately $2.0 million. Thereafter, Rio Vista’s officers continued to formulate a plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to NASDAQ, and notified NASDAQ regarding the proposed issuance of its units. Rio Vista also filed a listing of additional units notification with NASDAQ (LAS) based on its intention to go forward with the proposed purchase and sale. Following further discussions with NASDAQ, at board meetings on July 15, 2008, the board of managers and the board of directors of Penn Octane confirmed their desire to implement promptly the previously authorized purchase and sale, and the companies agreed to complete the transaction, subject to NASDAQ approval of Rio Vista’s LAS. On July 23, 2008, after the period of review for the LAS passed, the common units were issued to Penn Octane. In connection with the transaction, Penn Octane recorded $1.8 million in goodwill which represented the amount of the purchase price which was in excess of tangible book value of the units purchased allocable to minority interests.

Loans To Rio Vista

As of July 23, 2008, Rio Vista offset $2.0 million owed to Penn Octane against the amounts owed by Penn Octane to acquire Rio Vista common units (see above). In addition, Penn Octane has loaned additional amounts to Rio Vista for the sole purpose of allowing Rio Vista to fund ongoing operations and the June 2008 quarterly distribution.

In connection with the Third Amendment of the RZB Note, Rio Vista was required to repay $1.0 million of the RZB Note. Effective January 1, 2009, Penn Octane loaned Rio Vista $1.0 million of its cash collateral held by RZB for the purpose of funding Rio Vista’s obligation to make the required payment described above.

Note Receivable from A Former Officer of the Company

On July 9, 2007, the board of directors of Penn Octane agreed to amend the note receivable from Mr. Jerome B. Richter, a former officer of the Company, (Richter Note) whereby the Richter Note was extended from July 29, 2007 until January 1, 2009, and agreed to reduce the balance of the Richter Note to an outstanding total amount of $1.5 million as consideration for Mr. Richter’s services to Penn Octane and his agreement not to provide services for any competitors until January 1, 2009. Furthermore, on August 10, 2007, the board of directors of Penn Octane agreed to discount the amount of the Richter Note to $1.2 million as inducement for Mr. Richter to prepay his loan by August 15, 2007. On July 25, 2007 and August 10, 2007, Mr. Richter paid the Company $600,000 and $600,000, respectively, as full satisfaction of all amounts owing under the Richter Note. As a result of the foregoing, the Company recorded a charge to compensation expense during the quarter ended June 30, 2007 in the amount of $378,000.

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 has a loss from continuing operations for each of the two years ended December 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 TCW Credit Facility, $150,000 of the Moores Note, the RZB Note, the Sellers’ Note — Regional and the Richter Note total approximately $31.3 million and are all classified as current liabilities. Penn Octane also owes excise and other taxes, including computed interest and penalties collected from customers in connection with the sale of Fuel Products in the amount of $1.9 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, excise and other taxes of Fuel Products and all debt service requirements. The TCW Credit Facility prohibits distributions by Rio Vista’s Oklahoma subsidiaries unless certain conditions are met which currently are not expected to be met in the future. 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 the Richter Note 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, 2008 contains 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, existing debt restructured 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 the Company to restructure the TCW Credit Facility and the RZB Note, pay the excise and other taxes and 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 the Company be unable to restructure such debt and 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, raise additional debt and/or equity financing and reduce its general and administrative and other operating expenses.

Off-Balance Sheet Arrangements

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

Recently Issued Financial Accounting Standards

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

In December 2007, the FASB released SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51, which establishes accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interests and requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Previously, net income attributable to the noncontrolling interest was reported as an expense or other deduction in arriving at consolidated net income. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Rio Vista believes the adoption of this statement will not have a material impact on its consolidated financial statements.

In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161 (SFAS No. 161), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Rio Vista does not expect the adoption of the new accounting standard to have an impact on Rio Vista’s financial statements.

In May 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.162 (SFAS No. 162), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the U.S. The hierarchy guidance provided by SFAS No. 162 did not have a significant impact on Rio Vista’s financial statements.

Critical Accounting Policies

The consolidated financial statements of the Company reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note B to the consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008, “Summary of Significant Accounting Policies”. The Company believes that the following reflect the more critical accounting policies that affect the financial position and results of operations.

Impairment of long-lived assets — The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to assets in future periods. If impairment has occurred, the amount of the impairment loss recognized will be determined by estimating the fair value of the assets and recording a loss if the fair value is less than the carrying value. Assessments of impairment are subject to management’s judgments and based on estimates that management is required to make.

Goodwill — Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FASB 142). Under FASB 142, goodwill is not amortized. The Company is required to make at least an annual test of the fair value of the intangible to determine if impairment has occurred. The Company performs an annual impairment test for goodwill in the fourth quarter of each calendar year.

Depreciation and amortization expenses — Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization rates are based on management’s estimate of the future utilization and useful lives of the assets. Should the nature of the Company’s business change future utilization and useful lives of depreciable and amortizable assets may also change. This could result in increases or decreases in depreciation and amortization expense compared with historical amounts.

Share-based compensation — The Company utilizes unit-based awards as a form of compensation for employees, officers and managers of the General Partner and to non-employees for goods and services and to acquire or extend debt. Effective January 1, 2006, Rio Vista adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123R) using the modified prospective transition method. Under this method, previously reported amounts should not be restated to reflect the provisions of SFAS 123R. SFAS 123R requires the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. 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.

Allowance for doubtful accounts — The carrying value of trade accounts receivable is based on estimated fair value. The determination of fair value is subject to management’s judgments and is based on estimates that management is required to make. Those estimates are made based on the creditworthiness of customers and payment history. The Company has made no provisions for doubtful accounts since its inception.

We account for oil and gas properties by the successful efforts method. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Under this method of accounting, costs relating to the development of proved areas are capitalized when incurred.

Depreciation and depletion of producing oil and gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for acquisition costs using all proved reserves. SFAS No. 19, "Financial Accounting and Reporting for Oil and Gas Producing Companies” (SFAS 19) requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves. As more fully described in the Supplementary Oil and Gas Data (Unaudited) in Item 8. “Financial Statements and Supplementary Data,” our proved reserves at December 31, 2008 were estimated by an independent petroleum engineering firm, Lee Keeling and Associates, Inc.

Geological, geophysical, annual lease rentals and dry hole costs on oil and gas properties relating to unsuccessful wells are charged to expense as incurred.

Upon sale or retirement of complete fields of depreciable or depleted property, the book value thereof, less proceeds or salvage value, is charged or credited to income. On sale or retirement of an individual well the proceeds are credited to accumulated depreciation and depletion.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess proved oil and gas properties for possible impairment when events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. We recognize an impairment loss as a result of a triggering event and when the estimated undiscounted future cash flows from a property are less than the carrying value. If an impairment is indicated, the cash flows are discounted at a rate approximate to our cost of capital and compared to the carrying value for determining the amount of the impairment loss to record. Estimated future cash flows are based on management’s expectations for the future and include estimates of oil and gas reserves and future commodity prices and operating costs. Downward revisions in estimates of reserve quantities or expectations of falling commodity prices or rising operating costs could result in a reduction in undiscounted future cash flows and could indicate property impairment.

Unproved properties that are individually insignificant are amortized. Unproved properties that are individually significant are assessed for impairment on a property-by-property basis. If considered impaired, costs are charged to expense when such impairment is deemed to have occurred.

Rio Vista’s estimates of proved reserves are based on the quantities of oil and gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Lee Keeling and Associates, Inc. prepared a reserve and economic evaluation of all our properties on a well-by-well basis as of December 31, 2008.

Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from those estimates are prepared in accordance with SEC guidelines. The accuracy of our reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates.

Rio Vista’s proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of gas, natural gas liquids and oil eventually recovered.

Gas and oil production revenue and related natural gas liquids revenue are recognized based on actual volumes of gas, oil, and natural gas liquids sold to purchasers. Sales require delivery of the product to the purchaser, passage of title, and probability of collection of purchaser amounts owed. Gas and oil production revenue and related natural gas liquids revenue are reported net of royalties. Rio Vista uses the sales method of accounting for gas imbalances. Gas imbalances result from the gas volumes sold by Rio Vista from a property being different from its actual entitled volumes. Under the sales method, revenues are recognized based on actual volumes of gas sold. The volumes sold may differ from the entitled volumes. Direct operating expenses are recognized on an accrual basis and consist of costs required to operate gas and oil properties, product transportation expenses, and production and property taxes.

Gas revenues are recognized based on actual volumes of gas purchased from third-party producers and sold to customers. Sales are recorded only upon the delivery of the product to the purchaser, passage of title, and collectability is reasonably assured. Losses, if any, resulting from imbalances from such sales are recognized currently, and gains, if any, are recognized at final delivery.

Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of Rio Vista’s contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain competitive with other available oil and gas suppliers.

We use forward sales contracts to minimize the variability of cash flow from our oil and gas production by reducing our exposure to price fluctuations. Currently, these transactions consist of fixed price contracts. We account for these activities pursuant to SFAS 133. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair market value and included in the balance sheet as assets or liabilities.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	PAGE NO.
Penn Octane Corporation

Report of Independent Registered Public Accounting Firm		58

Consolidated Balance Sheets as of December 31, 2007 and 2008		59

Consolidated Statements of Operations for the years ended December 31, 2007 and 2008		61

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007 and 2008		62

Consolidated Statements of Cash flows for the years ended December 31, 2007 and 2008		64

Notes to Consolidated Financial Statements		66

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Penn Octane Corporation

We have audited the accompanying consolidated balance sheets of Penn Octane Corporation and its subsidiaries (Company) as of December 31, 2007 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flow for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007 and 2008, and the consolidated results of their operations and their consolidated cash flow for each of the two years in the period ended December 31, 2008 in conformity with United States generally accepted accounting principles.

We have also audited Schedule II of the Company for each of the two years in the period ended December 31, 2008. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note R to the consolidated financial statements, conditions exist which raise substantial doubt about the Company’s ability to continue as a going concern including the Company’s ability to generate sufficient cash flow to pay its expenses and its current debt obligations as they become due. Management’s plans in regard to these matters are also described in note R. 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 the Company be unable to continue in existence.

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

Brownsville, Texas
April 3, 2009

Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

ASSETS


	2007		2008
Current Assets
Cash	$	4,339,000	$	376,000
Restricted cash		2,500,000		1,316,000
Trade accounts receivable net of allowance for doubtful accounts of $0 and $60,000 at December 31, 2007 and December 31, 2008, respectively)		4,261,000		1,662,000
Income tax receivable		608,000		608,000
Inventories		2,563,000		—
Deferred tax asset		—		99,000
Prepaid expenses and other current assets		699,000		725,000

Total current assets		14,970,000		4,786,000
Oil and gas properties and related equipment (successful efforts method) — net		26,197,000		28,243,000
Property, plant and equipment — net		12,983,000		12,690,000
Other non-current assets		11,000		31,000
Goodwill		6,463,000		8,290,000

Total assets	$	60,624,000	$	54,040,000

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS — CONTINUED

December 31,

LIABILITIES AND STOCKHOLDERS’ EQUITY


	2007			2008
Current Liabilities
Current maturities of long-term debt	$	3,498,000		$	25,731,000
Short-term debt		5,493,000			5,575,000
Fuel Products trade accounts payable		4,526,000			—
Other accounts payable		2,879,000			3,315,000
Taxes payable		603,000			921,000
Accrued liabilities		2,157,000			5,200,000

Total current liabilities		19,156,000			40,742,000
Commitments and contingencies		—			—
Long-term debt, less current maturities, net of discount		21,250,000			150,000
Deferred income tax		3,238,000			2,909,000
Minority interest in Rio Vista Energy Partners L.P.		11,545,000			7,095,000
Stockholders’ Equity
Series A — Preferred stock-$.01 par value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2007 and December 31, 2008		—			—
Series B — Senior preferred stock-$.01 par value, $10 liquidation value, 5,000,000 shares authorized; No shares issued and outstanding at December 31, 2007 and December 31, 2008		—			—
Common stock — $.01 par value, 25,000,000 shares authorized; 15,406,187 and 15,416,187 shares issued and outstanding at December 31, 2007 and December 31, 2008		154,000			154,000
Additional paid-in capital		29,271,000			30,189,000
Accumulated deficit		(23,990,000	)		(27,199,000	)

Total stockholders’ equity		5,435,000			3,144,000

Total liabilities and stockholders’ equity	$	60,624,000		$	54,040,000

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended			Year Ended
	December 31, 2007			December 31, 2008
Revenues	$	156,162,000		$	57,332,000
Cost of goods sold		153,397,000			53,838,000


Gross profit		2,765,000			3,494,000
Selling, general and administrative expenses and other
Legal and professional fees		2,793,000			2,138,000
Salaries and payroll related expenses		2,308,000			2,746,000
Other		2,465,000			3,700,000
Loss on sale of remaining LPG-related assets		406,000			351,000


		7,972,000			8,935,000

Operating loss from continuing operations		(5,207,000	)		(5,441,000	)
Other income (expense)
Interest and Fuel Products financing expense		(1,344,000	)		(3,864,000	)
Interest income		46,000			19,000
Minority interest in loss of Rio Vista Energy Partners L.P.		4,729,000			6,040,000

Loss before taxes		(1,776,000	)		(3,246,000	)
Provision (benefit) for income taxes		21,000			(37,000	)

Net loss	$	(1,797,000	)	$	(3,209,000	)


Net loss per common share	$	(0.12	)	$	(0.21	)

Weighted average common shares outstanding		15,391,639			15,407,471

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Year ended				Year ended
	December 31, 2007				December 31, 2008
	Shares		Amount		Shares		Amount
Preferred Stock
Beginning balance		—	$	—		—	$	—

Ending balance		—	$	—		—	$	—


Senior Preferred Stock
Beginning balance		—	$	—		—	$	—

Ending balance		—	$	—		—	$	—


Common Stock
Beginning balance		15,386,187	$	154,000		15,406,187	$	154,000
Issuance of common stock upon exercise of warrants — August 2007		10,000		—		—		—
Issuance of common stock upon exercise of warrants — November 2007		10,000		—		—		—
Issuance of common stock upon exercise of warrants — November 2008		—		—		10,000		—


Ending balance		15,406,187	$	154,000		15,416,187	$	154,000

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — Continued


	Year ended			Year ended
	December 31, 2007			December 31, 2008
Additional Paid-In Capital
Beginning balance	$	29,106,000		$	29,271,000

Exercise of warrants		20,000			10,000
Issuance of equity		26,000			18,000
Share-based compensation		146,000			826,000
Other		(27,000	)		64,000

Ending balance	$	29,271,000		$	30,189,000


Notes Receivable in connection with the exercise of warrants
Beginning balance	$	(1,688,000	)	$	—
Reduction in notes receivable		1,310,000			—
Discount of note receivable as compensation		378,000			—

Ending balance	$	—		$	—


Accumulated Deficit
Beginning balance	$	(22,193,000	)	$	(23,990,000	)
Net loss		(1,797,000	)		(3,209,000	)

Ending balance	$	(23,990,000	)	$	(27,199,000	)

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year ended			Year ended
	December 31, 2007			December 31, 2008
Cash flows from operating activities:
Net loss	$	(1,797,000	)	$	(3,209,000	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation depletion and amortization		1,133,000			2,162,000
Amortization of loan discount related to detachable warrants		37,000			72,000
Share-based payment expense		390,000			826,000
Unit-based compensation		94,000			479,000
Loss on sale of remaining LPG-related assets		406,000			351,000
Gain on sale of assets		—			(20,000	)
Beneficial conversion		7,000			18,000
Discount of note receivable from former officer		378,000			—
Minority interest in Rio Vista Energy Partners L.P.		(4,729,000	)		(6,040,000	)
Reserve for doubtful accounts		—			60,000
Changes in current assets and liabilities:
Trade accounts receivable		(1,000	)		2,599,000
Inventories		(960,000	)		2,563,000
Prepaid expenses and other current assets		(19,000	)		146,000
Deferred tax asset		39,000			(428,000	)
LPG and Fuel Products trade accounts payable		1,424,000			(4,526,000	)
Other accounts payable and accrued liabilities		1,653,000			3,697,000
U.S. and Foreign taxes payable		127,000			318,000

Net cash used in operating activities		(1,818,000	)		(932,000	)
Cash flows from investing activities:
Capital expenditures		(156,000	)		(3,925,000	)
Proceeds from sale of remaining LPG-related assets		9,187,000			—
Cost to acquire Regional Enterprises, Inc.		(8,399,000	)		—
Cost to acquire Oklahoma assets		(10,070,000	)		—
Acquisition of GP Interest		(1,400,000	)		—
Decrease in other non-current assets		5,000			(19,000	)

Net cash used in investing activities		(10,833,000	)		(3,944,000	)
Cash flows from financing activities:
(Increase) decrease in restricted cash		(637,000	)		1,184,000
Revolving credit facilities		(804,000	)		—
Issuance of debt		10,000,000			1,575,000
Issuance of equity, net		3,704,000			(314,000	)
Distributions paid to minority interests		(4,464,000	)		(1,928,000	)
Stockholder’s note		1,310,000			—
Reduction in debt		(1,000,000	)		(350,000	)
Exercise of warrants		20,000			785,000
Minority interest		95,000			(39,000	)

Net cash provided by financing activities		8,224,000			913,000

Net decrease in cash		(4,427,000	)		(3,963,000	)
Cash at beginning of period		8,766,000			4,339,000

Cash at end of period	$	4,339,000		$	376,000

The accompanying notes are an integral part of these consolidated financial statements.

Penn Octane Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued


	Year ended		Year ended
	December 31, 2007		December 31, 2008

Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	1,757,000	$	3,658,000

Taxes	$	30,000	$	—

Supplemental disclosures of noncash transactions:
Equity — common stock and warrants issued and other	$	—	$	—

Minority interest in Rio Vista Energy Partners L.P.	$	—	$	1,827,000

Notes issued in acquisition	$	1,500,000	$	—

Units issued in acquisition	$	1,500,000	$	—

TCW Credit Facility	$	18,700,000	$	—

Unit based compensation	$	240,000	$	445,000

Units issued for compensation and penalties	$	280,000	$	774,000

Share based compensation	$	390,000	$	826,000

Beneficial conversion feature	$	7,000	$	18,000

Exchange of assets for note reduction	$	—	$	100,000

The accompanying notes are an integral part of these consolidated financial statements.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — ORGANIZATION

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 consisting of transportation and terminaling. Beginning March 1, 2008, Rio Vista Operating LLC (Operating) became the operator of the Oklahoma Assets.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — ORGANIZATION — Continued

Basis of Presentation

The accompanying 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.

In accordance with the guidance of the SEC Staff Accounting Bulletin No. 108 which the Company adopted in September 2006, the Company corrected immaterial misstatements in its December 31, 2007 financial statements related to errors in the over accrual of interest expense, legal expense and under expensed insurance expense in the net amount of $79,000, and a corresponding overstatement of reported net loss of $1,000 and understatement of Minority Interest of $78,000.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows.

1. Inventories

Inventories were stated at the lower of cost or market. Cost was determined on the first-in, first-out method.

2. Oil and Gas Properties

Rio Vista accounts for oil and gas properties by the successful efforts method. Leasehold acquisition costs are capitalized. If proved reserves are found on an undeveloped property, leasehold costs are transferred to proved properties. Under this method of accounting, costs relating to the development of proved areas are capitalized when incurred.

Depreciation and depletion of producing oil and gas properties is recorded based on units of production. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized acquisition costs using all proved reserves. Statement of Financial Accounting Standards (SFAS) No. 19, as amended, “Financial Accounting and Reporting by Oil and Gas Producing Companies” (SFAS 19) requires that acquisition costs of proved properties be amortized on the basis of all proved reserves, developed and undeveloped, and that capitalized development costs (wells and related equipment and facilities) be amortized on the basis of proved developed reserves.

Proved reserves are estimated by an independent petroleum engineering firm and are subject to future revisions based on availability of additional information.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

2. Oil and Gas Properties — Continued

Geological, geophysical, annual lease rentals and exploratory dry hole costs on oil and gas properties relating to unsuccessful exploratory wells are charged to expense as incurred.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” Rio Vista assesses proved oil and gas properties for possible impairment when events or circumstances indicate that the recorded carrying value of the properties may not be recoverable (see note B4).

Unproved properties are assessed for impairment on a property-by-property basis. If considered impaired, costs are charged to expense when such impairment is deemed to have occurred. Rio Vista has no unproved properties at December 31, 2008.

3. Contracts and Derivative Instruments

Rio Vista seeks to enter into contracts for the future sale of a portion of its existing production based on favorable price levels. As of December 31, 2008, these transactions were in the form of contracts to sell a certain amount of production at a fixed price. Rio Vista marks these contracts to market if losses are anticipated on the contracts.

Rio Vista has adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, which requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities. As of December 31, 2008, Rio Vista had no derivative financial instruments.

4. Property, Plant and Equipment

Property, plant and equipment are recorded at historical cost. After being placed into service, assets are depreciated using the straight-line method over their estimated useful lives as follows:


Terminal Facility and improvements		5–30 years
Pipelines		30 years
Automotive equipment		5–20 years
Machinery and equipment		5–10 years
Office equipment		3–10 years

Maintenance and repair costs are charged to expense as incurred.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

4. Property, Plant and Equipment — Continued

In August 2001 Statement SFAS No. 144 was issued. SFAS No. 144 supersedes the provisions of Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of”. SFAS No. 144 requires the Company to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment has occurred, the amount of the impairment is charged to operations.

5. Income Taxes

Penn Octane will file a consolidated income tax return for the year ended December 31, 2008 with its subsidiary Penn Wilson. Rio Vista is not included in the consolidated U.S. income tax return (see below and in note I).

The Company accounts for deferred taxes in accordance with SFAS 109, “Accounting For Income Taxes”. Under the liability method specified therein, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and income tax purposes are reserves for various expenses, depreciation, asset basis differences, and deferred compensation expense.

Rio Vista is a public limited partnership and is not subject to federal or state income taxes. However, some of Rio Vista’s operating subsidiaries are subject to foreign and U.S. corporate income taxes as follows:

Mexican subsidiaries:

Rio Vista’s Mexican subsidiaries were taxed on their income directly by the Mexican government and file their own separate income tax returns in Mexico. Rio Vista’s Mexican subsidiaries elected pass-through treatment for U.S. income tax purposes. Accordingly, the income/loss of Rio Vista’s Mexican subsidiaries was included in the U.S. partnership income tax return of Rio Vista. The holders of the common units and General Partner interest are entitled to their proportionate share of any tax credits resulting from any income taxes paid to the Mexican government. The Mexican subsidiaries were disposed of in December 2007.

Regional and MV:

Regional and MV are taxed as U.S. corporations. A valuation allowance is provided when it is determined that it is more likely than not that a portion of a deferred tax asset balance will not be realized. Prior to November 1, 2004 Regional used the cash basis of accounting for determining taxable income and MV uses the cash basis of accounting for determining taxable income.

6. Income (Loss) Per Common Share

Net income (loss) per share of common stock is computed on the weighted average number of shares outstanding in accordance with SFAS 128, “Earnings Per Share”. During periods in which the Company incurs losses from continuing operations, giving effect to common stock equivalents is not included in the computation as it would be antidilutive.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

7. Cash Equivalents

For purposes of the cash flow statement, the Company considers cash in banks and securities purchased with a maturity of three months or less to be cash equivalents.

8. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

9. Fair Value of Financial Instruments

SFAS 107, “Disclosures about Fair Value of Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate the value. SFAS 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts are not intended to represent the underlying value of the Company. The carrying amounts of cash and cash equivalents, current receivables and payables approximate fair value because of the short-term nature of these instruments. Notes payable bear market rates of interest.

10. Share-Based Payments and Unit Based Payments

Share-Based Payments

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).

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

10. Share-Based Payments and Unit Based Payments — Continued

Share-Based Payments — Continued

The Company recorded share-based payment expense for employees and nonemployees of $146,000 ($0.01 per common share) and $826,000 ($0.05 per common share) for the years ended December 31, 2007 and 2008, respectively under the fair value provisions of SFAS 123R.

Unit-Based Payments

Rio Vista may issue warrants to purchase common units to non-employees for goods and services and to acquire or extend debt. Rio Vista applies the provisions of Statement of Financial Accounting Standards No. 123R “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.

Rio Vista utilizes unit-based awards as a form of compensation for employees, officers, managers and consultants of the General Partner. During the quarter ended March 31, 2006, Rio Vista adopted the provisions of SFAS 123R for unit-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 unit-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, Rio Vista 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. Rio Vista 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, Rio Vista 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). Rio Vista recorded unit-based payment expense for employees and non-employees of $249,000 ($0.12 per common unit) and $445,000 ($0.17 per common unit) for years ended December 31, 2007 and 2008, respectively under the fair-value provisions of SFAS 123R.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

11. Revenue Recognition

Fuel Sales, LPG Transportation Fees and Regional:

The Company recorded revenue from sales of Fuel Products on transactional sales based upon the actual gallons of Fuel Products delivered to its customers at the terminal facilities at the agreed upon price per gallon. For bulk sales of Fuel Products, revenue was recorded at the time the title passed to the bulk sale customer. Fuel Sales revenues were recorded net of excise and related taxes.

Rio Vista recorded revenue only upon the actual gallons of LPG delivered to its customers at either the Matamoros Terminal Facility or Brownsville Terminal Facility at the agreed upon price per gallon.

Rio Vista recorded revenue under its LPG Transportation Agreement (see note D) when gallons of LPG were delivered to customers designated by TransMontaigne at the Matamoros Terminal Facility.

Regional records revenue for storage, transportation and transloading as the services are performed and delivery occurs.

Revenues for LPG transportation fees, Fuel Sales and Regional are recorded based on the following criteria:

	(1)		Persuasive evidence of an arrangement existed and the price is determined

	(2)		Delivery occurred

	(3)		Collectability is reasonably assured

Oil & Gas Revenues:

Sales of Natural Gas

Gas revenues are recognized based on actual volumes of gas purchased from third party producers and sold to customers. Sales are recorded only upon the delivery of the product to the purchaser, passage of title, and collectability is reasonably assured. Losses, if any, resulting from imbalances from such sales are recognized currently, and gains, if any, are recognized at final delivery.

Oil and gas is sold by Rio Vista on a monthly basis. Virtually all of the Company’s contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of oil and gas, and prevailing supply and demand conditions, so that the price of the oil and gas fluctuate to remain competitive with other available oil and gas suppliers.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

Gathering fees

Gas gathering fees are recorded as the services are performed and delivery has occurred and collectibility is reasonably assured.

12. Foreign Currency Translation

Rio Vista followed FASB No. 52 “Foreign Currency Translation” in consolidation of Rio Vista’s Mexican subsidiaries, whose functional currency was the US dollar. Non monetary balance sheet items and related revenue and expense were remeasured using historical rates. Monetary balance sheet items and related revenue and expense were remeasured using exchange rates in effect at the balance sheet dates.

13. Reclassifications

Certain reclassifications have been made to prior year balances to conform to the current presentation.

14. Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are accounted for at fair value. Trade accounts receivable do not bear interest and are short-term in nature. An allowance for doubtful accounts for trade accounts receivable is established when the fair value is less than the carrying value. Trade accounts receivable are charged to the allowance when it is determined that collection is remote.

15. Consolidation of Variable Interest Entities

During 2004, the Company adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Entities” (FIN 46), which was amended by FIN 46R. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, addresses consolidation by business enterprises of variable interest entities (VIE) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support. FIN 46R requires the beneficiary of a VIE to consolidate in its financial statements the assets, liabilities and results of operations of the VIE. Tergas, a former affiliate of Rio Vista, was a VIE and therefore, its assets, liabilities and results of operations were included in the accompanying consolidated financial statements of the Company for the year ended December 31, 2007.

16. Guarantees

In November 2002, the Financial Accounting Standards board issued Financial Accounting Standards Board Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others” (FIN 45). This interpretation requires guarantors to disclose certain information about guarantees of indebtedness of others (see note H). In addition, under certain circumstances, those guarantees may result in such debts being recorded in the guarantor’s financial statements.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

17. Environmental Matters

The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. The Company has established procedures for the ongoing evaluation of its operations, to identify potential environmental exposures and to comply with regulatory policies and procedures.

The Company accounts for environmental contingencies in accordance with SFAS No. 5 “Accounting for Contingencies.” Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities for environmental contingencies are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain types of environmental contingencies. For the year ended December 31, 2008, the Company had no environmental contingencies requiring specific disclosure or the recording of a liability.

18. Asset Retirement Obligations

The Company accounts for asset retirement obligations in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). In accordance with SFAS 143, estimated asset retirement costs are recognized when the obligation is incurred, and are amortized over proved developed reserves using the units of production method. Asset retirement costs are estimated by the Company using existing regulatory requirements and anticipated future inflation rates. The Company had no estimated asset retirement obligations at December 31, 2008.

19. Segment Information

The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131). Under SFAS 131, all publicly traded companies are required to report certain information about the operating segments, products, services and geographical areas in which they operate and their major customers. Operating segments are components of the Company for which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and assess performance. This information is reported on the basis that it is used internally for evaluating segment performance. The Company operates as three- business segments: Transportation and Terminaling and Oil, Gas business and Fuel Sales (ceased operations in May 2008) (see note T).

20. Fair Value

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157), which establishes a framework for reporting fair value and expands disclosures about fair value measurements, SFAS 157 was effective for Rio Vista on January 1, 2008, with the exception that the applicability of SFAS 157’s fair value measurement requirements to nonfinancial assets and liabilities that are not required or permitted to be recognized or disclosed at fair value on a recurring basis has been delayed by the FASB for one year.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

21. Business Combinations

In December 2007, the FASB released Statement of Financial Accounting Standards No. 141(R), Business Combinations (revised 2007) (SFAS 141(R)), which changes many well-established business combination accounting practices and significantly affects how acquisition transactions are reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies negotiate and structure transactions, model financial projections of acquisitions and communicate to unitholders. SFAS 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

Under SFAS 141(R), contingent consideration or earn outs will be recorded at their fair value at the acquisition date. Except in bargain purchase situations, contingent considerations typically will result in additional goodwill being recognized. Contingent consideration classified as an asset or liability will be adjusted to fair value at each reporting date through earnings until the contingency is resolved.

These estimates are subject to change upon the finalization of the valuation of certain assets and liabilities and may be adjusted in accordance with SFAS 141(R).

In accordance with SFAS 141(R), acquisition transaction costs, such as certain investment banking fees, due diligence costs and attorney fees are to be recorded as a reduction of earnings in the period they are incurred. Prior to the effective date, SFAS 141(R), acquisition transaction costs were included in the cost of the acquired business.

22. Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets associated with acquisition transactions. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FASB 142). Under FASB 142, goodwill is not amortized. The Company is required to make at least an annual test of the fair value of the intangible to determine if impairment has occurred. The Company performs an annual impairment test for goodwill in the fourth quarter of each calendar year.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C — LOSS PER COMMON SHARE

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

For the year ended December 31, 2007

Loss

Per-Share

(Numerator)

(Denominator)

Amount

Net loss from continuing operations

(1,797,000

)

Basic EPS

Net loss available to common stockholders

(1,797,000

)

15,391,639

(0.12

)

Effect of Dilutive Securities

Warrants

—

Diluted EPS

Net loss available to common stockholders

N/A

For the year ended December 31, 2008

Loss

Per-Share

(Numerator)

(Denominator)

Amount

Net loss from continuing operations

(3,209,000

)

Basic EPS

Net loss available to common stockholders

(3,209,000

)

15,407,471

(0.21

)

Effect of Dilutive Securities

Warrants

—

Diluted EPS

Net loss available to common stockholders

N/A

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D — DISPOSITIONS

SALE OF LPG ASSETS / DISCONTINUED OPERATIONS

On August 22, 2006, Rio Vista completed the sale and assignment to TransMontaigne of certain LPG assets, including the Brownsville Terminal Facility, the refined products tank farm and associated leases, and LPG inventory, wherever located (collectively, the Brownsville Terminal Assets) and assignment of the 2006 PMI agreement (Brownsville Terminal Assets and the 2006 PMI agreement collectively, the Rio Vista Sold Assets) pursuant to an amended and restated purchase and sale agreement (Rio Vista Restated PSA). The Rio Vista Restated PSA replaced the previous purchase and sale agreement entered into between Rio Vista and TransMontaigne on August 15, 2005. Rio Vista retained its owned pipelines located in the United States, including land, leases and rights of way and 100% of the outstanding stock of its Mexican subsidiaries. Rio Vista’s Mexican subsidiaries and consolidated affiliate own pipelines in Mexico and the Matamoros Terminal Facility, including land and rights of way (collectively, the Retained Assets).

Also on August 22, 2006, Penn Octane completed the sale and assignment to TransMontaigne of all of Penn Octane’s LPG assets, including assignment of the lease of its leased pipeline (Leased Pipeline) and the Exxon Supply Contract (Penn Octane Sold Assets) pursuant to an amended and restated purchase and sale agreement (Penn Octane Restated PSA). The terms of the Penn Octane Restated PSA were substantially similar to the original purchase and sale agreement entered into between Penn Octane and TransMontaigne on August 15, 2005. Penn Octane retained assets related to its Fuel Sales Business, and its interest in the General Partner.

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

The sale of the Penn Octane Sold Assets and Rio Vista Sold Assets (collectively the Sold Assets) constituted a disposal of a business in accordance with FAS 144. Accordingly, the financial statements reflect the results associated with the Sold Assets prior to the sale as discontinued operations in the accompanying financial statements. Costs related to the Retained Assets, consisting of depreciation expense and the expenses related to the US-Mexico Pipelines and Matamoros Terminal Facility have been included in costs of goods sold since these costs have continued to be incurred in connection with the LPG Transportation Agreement.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D — DISPOSITION — Continued

SALE OF REMAINING LPG ASSETS

On December 27, 2007, RVOP and RVOP’s wholly-owned subsidiary, Penn Octane International, LLC, entered into a definitive Purchase and Sale Agreement (the Purchase and Sale Agreement) with a wholly-owned subsidiary (TMOC Corp.) and two affiliates (TLP MEX L.L.C. and RAZORBACK L.L.C.) of TransMontaigne Partners L.P. (collectively, TLP) regarding TLP’s acquisition of RVOP’s remaining liquefied petroleum gas (LPG) assets. The Purchase and Sale Agreement was effective as of December 26, 2007. The transaction closed on December 31, 2007. The Purchase and Sale Agreement was executed pursuant to the letter of intent between RVOP and TLP dated September 12, 2007 and amended December 4, 2007.

Pursuant to the Purchase and Sale Agreement, subject to its terms and conditions, TLP agreed to purchase from RVOP: (a) the United States portion of the two pipelines from the Brownsville, Texas terminal owned by TLP to the United States border (the US Pipelines) with all associated rights-of-way and easements (the US Easements); (b) all of the outstanding equity interests of PennMex, which holds the Mexican energy regulatory commission (CRE) permit, and Termatsal, which owns the portion of the two pipelines that extend from the US border to Matamoros, Mexico (the Mexican Pipelines); and (c) all of RVOP’s rights for indirect control of Tergas, which owns the Matamoros, Mexico terminal site (the Mexican Terminal). PennMex and Termatsal are 100% owned subsidiaries of RVOP and Tergas is an affiliate of RVOP, and each of the three companies (collectively, the Included Subsidiaries) is organized under the laws of Mexico. The US Pipelines, the US Easements, the Included Subsidiaries, the Mexican Pipelines and the Mexican Terminal, are collectively referred to as the “LPG Assets.”

The total purchase price for the LPG Assets was $10,825,000, subject to adjustment as provided in the Purchase and Sale Agreement. TLP previously paid to RVOP deposits totaling $8,000,000 (the Deposits) which was credited to the purchase price at closing. The remaining $2,825,000 was paid at closing, subject to adjustments and less a holdback of $500,000 (Holdback) as security for RVOP’s indemnification obligations under the Purchase and Sale Agreement. In addition, RVOP’s existing $1,000,000 promissory note (the Existing Loan) payable to TransMontaigne Product Services Inc. (TPSI), an affiliate of TLP, was paid from the proceeds at closing. Prior to the execution of the Purchase and Sale Agreement, and until the closing, RVOP provided LPG transportation services to TLP or its affiliates under the terms of an LPG Transportation Agreement with TPSI.

On December 31, 2008, Rio Vista received a claim from TransMontaigne related to the Holdback diligence deductions and working capital adjustment, pursuant to the Purchase and Sale Agreement. TransMontaigne claims a $316,000 working capital adjustment and $1,373,000 in connection with the indemnification obligations included in the Purchase and Sale Agreement. Rio Vista is working with TransMontaigne to define the scope of the adjustments to an amount which Rio Vista considers to be more realistic. Any amount which may subsequently be agreed to by TransMontaigne and Rio Vista shall first be charged to the $500,000 Holdback, and also is subject to the $1,000,000 limitation of indemnification. As of December 31, 2008, Rio Vista has provided a charge of $351,000 to provide for these adjustments, in addition to the Holdback. Rio Vista’s management and its legal counsel believe that the amount of the TransMontaigne claim will be resolved within the amounts already provided.

In connection with the sale of the LPG Assets to TLP, RVOP and TPSI agreed to terminate the LPG Transportation Agreement and the U.S. Pipeline Service Agreement as of such closing date.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E — ACQUISITIONS

REGIONAL

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

Regional utilizes its fleet of 32 tractors and 48 tankers to distribute the various products it receives as well as to perform direct hauling operations on behalf of its customers.

For the fiscal year ended December 31, 2008, Suffolk Sales, General Chemical Corporation and Kemira Chemicals Canada Inc. accounted for approximately 14% 10% and 12% of Regional’s revenues, respectively, and approximately 19%, 8% and 10% of Regional’s accounts receivable, respectively, with no other individual customer accounting for more than 10% of Regional’s revenues and accounts receivable.

The accompanying consolidated balance sheet includes goodwill in the amount of $5,121,000 resulting from the acquisition.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E — ACQUISITIONS — Continued

OKLAHOMA ASSETS

On November 19, 2007, Rio Vista Penny LLC (Rio Vista Penny), an indirect, wholly-owned subsidiary of Rio Vista, entered into a Note Purchase Agreement, Promissory Notes, Security Agreement, Common Unit Purchase Warrant and related agreements with TCW Asset Management Company (TAMCO) as agent and TCW Energy Fund X investors as holders (the TCW Noteholders) (TAMCO and the TCW Noteholders collectively, TCW) in connection with a first lien senior credit facility (the TCW Credit Facility) between TCW and Rio Vista Penny. The purpose of the TCW Credit Facility was to provide financing of the acquisition of certain of the assets of G M Oil Properties, Inc., an Oklahoma corporation (GM Oil) and assets of Penny Petroleum Corporation, an Oklahoma corporation (Penny Petroleum) by Rio Vista Penny and the acquisition of the membership interests of GO, by Rio Vista GO LLC (Rio Vista GO), an indirect, wholly-owned subsidiary of Rio Vista. The assets of GM Oil, Penny Petroleum and GO are collectively referred to as the “Oklahoma assets.”

GM Oil Properties Inc.

On November 19, 2007, Rio Vista Penny completed the purchase of assets from GM Oil pursuant to the Asset Purchase Agreement between Rio Vista Penny and GM Oil dated as of October 1, 2007, as amended on November 16, 2007 (the Amended GM Agreement). The assets acquired pursuant to the Amended GM Agreement consist of the real and personal property interests of GM Oil in certain oil and gas properties located in Haskell, McIntosh and Pittsburg counties in Oklahoma, including approximately 33.33% of the outstanding capital stock of MV (collectively, the GM Assets). The total purchase price for the GM Assets was paid by assumption of the TCW Credit Facility in the amount of $16,750,000 (including $250,000 of unpaid interest included in the TCW Credit Facility plus payment of additional accrued but unpaid interest in the amount of $340,000. The TCW Credit Facility is payable to the TCW Noteholders and is administered by TAMCO as agent pursuant to the TCW Credit Facility. No cash or equity consideration was paid to GM Oil or its shareholders as part of the purchase price of the GM Assets.

Penny Petroleum Corporation

On November 19, 2007, Rio Vista Penny completed the purchase of assets from Penny Petroleum pursuant to the Asset Purchase Agreement between Rio Vista Penny, Penny Petroleum and Gary Moores (a shareholder of Penny Petroleum), dated as of October 1, 2007, as amended on October 25 and November 16, 2007 (the Amended Penny Agreement). The assets acquired pursuant to the Amended Penny Agreement consisted of the real and personal property interests of Penny Petroleum in certain oil and gas properties located in McIntosh, Pittsburg and Haskell counties in Oklahoma, including approximately 66.66% of the outstanding capital stock of MV (collectively, the Penny Assets).

The total purchase price paid for the Penny Assets was $7,400,000, consisting of cash, a promissory note and equity interests in Rio Vista. The cash portion of the purchase price was $6,400,000, together with a promissory note with the principal amount of $500,000 bearing interest at 7% per annum (the Moores Note) payable to Gary Moores on May 19, 2008. Beginning February 19, 2008, Gary Moores had the option to convert the outstanding principal and interest of the Moores Note into common units of Rio Vista which option was not exercised and expired on May 19, 2008. The equity portion of the purchase price was paid by delivery of 45,998 common units of Rio Vista (the Penny Units).

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E — ACQUISITIONS — Continued

OKLAHOMA ASSETS — Continued

GO LLC

On November 19, 2007, Rio Vista GO completed the purchase of membership interests of GO pursuant to the Membership Interest Purchase and Sale Agreement between Rio Vista GO, GO, Outback Production Inc. (Outback) (the owner of all of the outstanding membership interests of GO), and Gary Moores and Bill Wood (each a shareholder of Outback), dated as of October 2, 2007, as amended on November 16, 2007 (the Amended GO Agreement). The total purchase price paid for the membership interests of GO was $4,000,000, consisting of cash and equity interests in Rio Vista. The cash portion of the purchase price was $3,000,000. The equity portion of the purchase price was paid by delivery of 91,996 common units of Rio Vista (the GO Units) to Gary Moores and Bill Wood.

On the date the GO Registration Statement is declared effective by the SEC (the Registration Date), if the closing price of Rio Vista’s common units as reported by the NASDAQ National Market (the Registration Date Price) is less than 80% of $10.87 (the Minimum Price), Rio Vista GO will deliver to Outback either (i) additional common units of Rio Vista (the Additional GO Units) in such number as necessary so that the total value of the GO Units and the Additional GO Units, in each case based on the Registration Date Price, is at least 80% of the value of the Purchase Price Units based on the Minimum Price or (ii) additional cash (the Additional Cash) in such amount as necessary so that the total value of the GO Units, based on the Registration Date Price, together with the Additional Cash, is at least 80% of the value of the GO Units based on the Minimum Price. In lieu of delivery of Additional GO Units or Additional Cash to supplement the GO Units, Rio Vista GO has the alternate option to pay the entire value of the GO Units based on the Minimum Price in cash (the All Cash Payment). Upon delivery of the All Cash Payment to the seller, all GO Units shall be returned to Rio Vista GO and/or cancelled by Rio Vista.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:


	December 31,			December 31,
	2007			2008

Oklahoma:
Pipelines and equipment	$	6,756,000		$	7,417,000

Regional:
Land		237,000			237,000
Terminal and improvements		3,825,000			4,084,000
Automotive equipment		2,438,000			2,644,000

		6,500,000			6,965,000


		13,256,000			14,382,000
Other		338,000			290,000

		13,594,000			14,672,000
Less: accumulated depreciation and amortization		(611,000	)		(1,982,000	)

	$	12,983,000		$	12,690,000

On June 26, 2008, MV Pipeline and Concorde Resources Corporation (Concorde) entered into a pipeline construction and transportation agreement whereby MV granted the right to Concorde to construct gathering lines to connect Concorde wells to the MV transportation system. In connection with the agreement, MV has agreed to waive any transportation fees with respect to any gas which flows through the MV transportation system from these newly constructed gathering systems until such time that Concorde has received 200% of the costs associated with the construction of the gathering lines based on the usual rate charged by MV for transportation of product through its system.

Depreciation expense of property, plant and equipment from continuing operations totaled $1,075,000 and $1,497,000 for each of the two years in the period ended December 31, 2008, respectively.

Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities

Costs incurred in oil and gas property development for the year ended December 31, 2008 are presented below:


Development costs of leased properties:	$	2,549,000
Capitalized pipeline infrastructure costs:	$	568,000

Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat and gather oil and gas.

The Company capitalizes costs related to drilling and development of oil and gas properties for specific activities related to drilling its wells, which includes site preparation, drilling labor, meter installation, pipeline connection and site reclamation.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G — INVENTORIES


	December 31, 2007				December 31, 2008
	Gallons		LCM		Gallons		LCM

Fuel Products		1,043,000	$	2,563,000		—	$	—

NOTE H — DEBT OBLIGATIONS


	December 31,		December 31,
	2007		2008

RZB Note	$	5,000,000	$	5,000,000
Moores Note		493,000		—
Richter Note Payable		—		575,000

	$	5,493,000	$	5,575,000

Long-term debt obligations were as follows:


TCW Credit Facility	$	23,689,000	$	24,700,000
Sellers’ Note — Regional		922,000		744,000
Moores Note		—		300,000
Other		137,000		137,000

		24,748,000		25,881,000
Less current portion		3,498,000		25,731,000

	$	21,250,000	$	150,000

Maturities of long-term debt are as follows:


2009	$	25,731,000
2010		150,000
2011		—
2012		—
2013		—
Thereafter		—

	$	25,881,000

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H — DEBT OBLIGATIONS — Continued

RZB Note

In connection with the acquisition of Regional during July 2007, Rio Vista funded a portion of the acquisition through a loan of $5,000,000 (RZB Note) from RZB Finance LLC (RZB) dated July 26, 2007. The RZB Note was due on demand and if no demand, with a one-year maturity. The RZB Note carries a variable annual rate of interest equal to the higher of (a) the rate of interest established from time to time by JPMorgan Chase Bank, N.A. as its “base rate” or its “prime rate,” (7.25% at December 31, 2007), 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% (Base Rate Margin). On July 27, 2008, the RZB Note was amended whereby the maturity date was extended until August 29, 2008. The RZB Note was not paid on August 29, 2008. During December 2008, Rio Vista entered into a third amendment to the RZB Note (Third Amendment). Under the terms of the Third Amendment, the maturity date of the RZB Note was extended to February 27, 2009. In addition, the interest rate calculation was modified to include a cost of funds rate definition in determining the base rate and the Base Rate Margin was increased to 7.0%. Under the terms of the Third Amendment, the net worth of Penn Octane, as defined, is required to be in excess of $3,300,000. In addition, the Third Amendment required Rio Vista to repay $1,000,000 of the RZB Note. Effective January 1, 2009, Penn Octane agreed to loan Rio Vista the $1,000,000 of cash collateral held by RZB for purpose of making the required payment described above. At December 31, 2008, RZB held Penn Octane’s $1,000,000 which the Company classified as restricted cash in the accompanying balance sheet.

Moores Note

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H — DEBT OBLIGATIONS — Continued

Moores Note — Continued

Richter Note Payable

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H — DEBT OBLIGATIONS — Continued

TCW Credit Facility

The TCW Credit Facility is a $30,000,000 senior secured credit facility available to Rio Vista Penny 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 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 an additional 2% if there is an event of default (see below). Payments under the TCW Credit Facility were 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 the lenders 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 had 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. The conversion rights of TCW as described above were formalized through the issuance of a warrant by Rio Vista (TCW Warrant). 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 TCW Warrant within 90 days following the first exercise of the TCW Warrant.

Rio Vista Penny and Rio Vista GO, which hold the Oklahoma Assets, are prohibited from making upstream distributions to Rio Vista unless certain conditions are met. In addition, the TCW Credit Facility requires semi-annual reserve reports by an independent engineer which is used in determining the allowable borrowing base.

On September 29, 2008, Rio Vista Penny entered into a First Amendment to the Note Purchase Agreement (First TCW Amendment) with TCW. Under the terms of the First TCW Amendment, TCW agreed to fund Rio Vista Penny an additional $1,000,000 under the TCW Credit Facility for certain APOD costs as described in the First TCW Amendment. In addition, under the terms of the First TCW Amendment, the interest rate under the TCW Credit Facility increased from 10.5% per annum to 12.5% per annum beginning July 1, 2008. Under the terms of the First TCW Amendment, TCW agreed to change the period for which a notice to demand repayment from Rio Vista Penny of up to $2,200,000 of indebtedness under the TCW Credit Facility from May 19, 2008 to January 1, 2009 and Rio Vista Penny also agreed to extend the demand repayment option on the $2,200,000 through the date of maturity of the TCW Credit Facility. In addition, under the terms of the First TCW Amendment, TCW has agreed to waive other defaults identified in the First TCW Amendment which either occurred and/or were existing prior to the date of the First TCW Amendment.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H — DEBT OBLIGATIONS — Continued

TCW Credit Facility — Continued

Rio Vista Penny and TCW entered into several letter agreements whereby TCW agreed to extend the payment obligations under the TCW Credit Facility (including the December 2008 principal payment and interest payment due) and other requirements pursuant to the TCW Credit Facility until April 13, 2009 (TCW Waiver). In connection with one of the extensions, the TCW Waiver was modified whereby TCW agreed to provide Rio Vista with 62 days advance written notice to exercise the TCW Warrant, except for up to 400,000 common units of Rio Vista.

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 recorded a discount of $116,000 (10% effective rate), representing the portion of interest associated with the note, which was to be amortized over the term of the note. During January 2008, the first installment was paid. On July 27, 2008 and January 27, 2009, the second and third installment was due to be paid. Regional did not make the second or third installment payments as it believes that there exists offsets in connection with the acquisition of Regional in excess of the payments. For the period of July 28, 2007 through December 31, 2007 and the year ended December 31, 2008, $37,000 and $72,000, respectively, of the discount was amortized.

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 TWC 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 $7,000 and $18,000 for the years ended December 31, 2007 and 2008, respectively.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I — INCOME TAXES

The tax effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities were as follows at:


	December 31, 2007				December 31, 2008
	Assets		Liabilities		Assets		Liabilities

Depreciation	$	1,000	$	1,180,000	$	66,000	$	2,096,000
Asset basis differences		—		1,973,000		143,000		1,022,000
Allowance for doubtful accounts		—		—		23,000		—
Alternative minimum tax credits		—		—		271,000		—
Accrued expenses		90,000		—		55,000		—
Deferred other cost		333,000		85,000		661,000		—
Rio Vista Registration costs		61,000		—		61,000		—
Net operating loss carryforward		1,349,000		—		880,000		—

		1,834,000		3,238,000		2,160,000		3,118,000

Less: valuation allowance		1,226,000		—		1,852,000		—

	$	608,000	$	3,238,000	$	308,000	$	3,118,000


	December 31, 2007				December 31, 2008

Net Deferred Tax Assets (Current)	$	608,000			$	99,000
Net Deferred Tax Assets (Non-Current)		—				—
Net Deferred Tax Liabilities (Current)			$	—			$	—
Net Deferred Tax Liabilities (Non-Current)				3,238,000				2,909,000

Tax Expense was as follows at:


	December 31,			December 31,
	2007			2008

Current Tax Expense	$	125,000		$	312,000
State Tax Expense		25,000			37,000
Deferred Tax Benefit		(163,000	)		(386,000	)
Mexican Tax Expense		34,000			—


Total	$	21,000		$	(37,000	)


Net operating loss carryforwards expire in the following tax years:

2027	$	732,000
2028		1,583,000


	$	2,315,000

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I — INCOME TAXES — Continued

Current taxes payable of $921,000 relate entirely to Regional Enterprises, Inc.

In 2007 and 2008, the Company increased its valuation allowance by $787,000 and $626,000, respectively.

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

The tax years that remain open to examination are 2003 – 2008 for foreign jurisdictions, and 2004 – 2008 for domestic entities.

Rio Vista’s Mexican subsidiaries incurred income tax expense in Mexico on their taxable income. The Mexican subsidiaries were sold in December 2007 (see note D). Although Rio Vista no longer owns its Mexican subsidiaries, adjustments by the taxing authorities for the years open to examination are subject to the indemnification provision of the purchase agreement entered into with TransMontaigne.

A reconciliation of the U.S. Federal statutory tax rate to the Company’s effective tax rate is as follows:


	December 31,			December 31,
	2007			2008

Net loss from continuing operations	$	(1,776,000	)	$	(3,246,000	)
Income tax benefit at statutory rate (38%)		(675,000	)		(1,234,000	)

Reconciling items:
Change in valuation allowance		787,000			626,000
Mexican taxes		34,000			—
Permanent and other		(125,000	)		571,000


Provision (benefit) for income taxes	$	21,000		$	(37,000	)

The majority of the Company’s deferred tax assets pertaining to net operating loss carryforwards and tax credits have been fully reserved due to uncertainty that the Company will be able to utilize them in future periods.

The valuation allowance in 2007 and 2008 was increased to reduce the deferred tax assets to the value the Company feels is more likely than not to be realized.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE I — INCOME TAXES — Continued

Rio Vista is taxed as a partnership under Code Section 701 of the Internal Revenue Code. All of Rio Vista’s subsidiaries except for Regional and MV are taxed at the partner level, therefore, Rio Vista has no U.S. income tax expense or liability. The Partnership’s significant basis differences between the tax bases and the financial statement bases of its assets and liabilities are the cost basis and depreciation differences of the depreciable assets and deferred compensation costs on unexercised warrants. The net reversal of cost basis and depreciation differences vary considerably from limited partner to limited partner due to allocations under Section 734 and 743 of the Internal Revenue Code. The deferred compensation cost for tax purposes is $700,000. Compensation expense may or may not be recognized for tax purposes depending on the exercise of related warrants prior to their expiration.

NOTE J — STOCKHOLDERS’ EQUITY

Common Stock

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

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

During November 2008, warrants to purchase a total of 10,000 shares of common stock of Penn Octane were exercised resulting in cash proceeds to the Company of approximately $10,000.

NOTE K — STOCK WARRANTS

The Penn Octane Board in November 2001 approved the 2001 warrant plan (2001 Warrant Plan). The purpose of the 2001 Warrant Plan is to provide the Company with a vehicle to attract, compensate, and motivate selected employees, particularly executive officers, by issuing stock purchase warrants which will afford recipients an opportunity to share in potential capital appreciation in Penn Octane’s common stock.

The 2001 Warrant Plan provides for issuance of warrants to purchase up to a maximum of 1,500,000 shares of common stock of Penn Octane, subject to adjustment in the event of adjustments to the Company’s capitalization (such as stock dividends, splits or reverse splits, mergers, recapitalizations, consolidations, etc.). Any warrants which expire without being exercised are added back to the number of shares for which warrants may be issued. The 2001 Warrant Plan has a term of 10 years, and no warrants may be granted after that time.

The warrants may be issued to any person who, at the time of the grant under the 2001 Warrant Plan, is an employee or director of, and/or consultant or advisor to, the Company, or to any person who is about to enter into any such relationship with the Company.

The warrants will be issued in the discretion of the compensation committee and/or the Board (Administrator), which will determine when and who will receive grants, the number of shares purchasable under the warrants, the manner, conditions and timing of vesting, the exercise price, antidilution adjustments to be applied, and forfeiture and vesting acceleration terms.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K — STOCK WARRANTS — Continued

The exercise price of the warrants are determined in the discretion of the Administrator, but may not be less than 100% of the fair market value of the common stock of Penn Octane on the date of the grant. The fair market value is the closing price of Penn Octane’s common stock on the grant date. Warrants may be exercised only for cash.

The term of the warrants may not exceed ten years from the date of grant and may be exercised only during the term specified in the warrants. In the discretion of the Administrator, warrants may continue in effect and continue to vest even after termination of the holder’s employment by the Company.

The amount of total compensation not yet recognized as of December 31, 2008 was $30,000. Such amounts will be recognized over the remaining life of the grants.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L — STOCK WARRANTS SUMMARY INFORMATION

For warrants granted to non-employees, the Company applies the provisions of SFAS 123R to determine the fair value of the warrants issued.

A summary of the status of the Company’s warrants for each of the two years in the period ended December 31, 2008 is presented below:


	Year ended					Year ended
	December 31, 2007					December 31, 2008
				Weighted Average					Weighted Average
Warrants	Shares			Exercise Price		Shares			Exercise Price
Outstanding at beginning of year		1,338,750		$	1.36		1,586,250		$	1.24

Granted		277,500			.61		546,250			1.87
Exercised		(20,000	)		.99		(10,000	)		.96
Expired		(10,000	)		1.14		(463,750	)		1.27

Outstanding at end of year		1,586,250			1.24		1,658,750			1.44


Warrants exercisable at end of year		1,436,703					1,597,572

The intrinsic value of warrants exercised during the year ended December 31, 2007 and 2008 was $10,000, respectively.

The following table depicts the weighted-average exercise price and weighted average fair value of warrants granted during the year ended December 31, 2008, by the relationship of the exercise price of the warrants granted to the market price on the grant date:


	Year ended				Year ended
	December 31, 2007				December 31, 2008
	For warrants granted				For warrants granted
Exercise price compared to	Weighted average		Weighted average		Weighted average		Weighted average
market price on grant date	fair value		fair value		fair value		exercise price

Equals market price	$	0.44	$	0.61	$	1.41	$	1.87
Exceeds market price		—		—		—		—
Less than market price		—		—		—		—

The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the year ended December 31, 2007, dividend yield of 0%; expected volatility of 88% to 92%; risk-free interest rate of 4.85% depending on expected lives; and expected lives of 5 years.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L — STOCK WARRANTS SUMMARY INFORMATION — Continued

The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the year ended December 31, 2008, dividend yield of 0%; expected volatility of 96% to 109%; risk-free interest rate of 2.91 to 3.52% depending on expected lives; and expected lives of 3 to 5 years.

The following table summarizes information about the warrants outstanding at December 31, 2008:


	Warrants Outstanding					Warrants Exercisable
			Weighted
	Number		Average	Weighted		Number		Weighted
	Outstanding at		Remaining	Average		Exercisable at		Average
	December 31,		Contractual	Exercise		December 31,		Exercise
Range of Exercise Prices	2008		Life	Price		2008		Price

$0.51 to $0.96		297,500	3.18 years	$	0.62		236,322	$	0.61

$1.30 to $1.50		1,015,000	1.20		1.50		1,015,000		1.50

$1.70 to $2.35		346,250	3.15		1.97		346,250		1.97


$0.51 to $2.35		1,658,750	1.96	$	1.44		1,597,572	$	1.47

A summary of the status of nonvested shares as of December 31, 2008 and changes during the year ended December 31, 2008 is presented below:


				Weighted
				Average Grant-
Nonvested shares	Shares			Date Fair Value

Nonvested at January 1, 2008		149,547		$	0.76
Granted		—			—
Vested		(88,369	)		0.82
Forfeited		—

Nonvested at December 31, 2008		61,178			0.67

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M — COMMON UNITS AND OPTIONS OF RIO VISTA

Common Units

On June 29, 2007, the Board of Managers of the General Partner 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, an additional 8,333 units on January 1, 2008, and an additional 8,333 units on July 1, 2008. 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 to the award of restricted units granted to him. Total compensation recorded under the aforementioned grant of units as they vest totals $280,000.

On November 19, 2007, in connection with the acquisition of the Oklahoma assets, Rio Vista issued a total of 137,994 common units of Rio Vista to the sellers of GO and Penny Petroleum.

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 (Common Units) at a price of $11.25 per unit in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (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.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M — 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 (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 ended December 31, 2007 but no later than April 14, 2008. On February 13, 2008, Rio Vista filed a Form S-3 with the SEC. On August 1, 2008, the Form S-3 was declared effective. Rio Vista was required to pay liquidated damages to the holders of the Common Units for the period of time that the registration statement was not declared effective beginning April 14, 2008 as to all of the Common Units. In general, the amount of such damages equaled 1% of the purchase price of the unregistered Common Units for each period of 30 days for which such units remained unregistered. Rio Vista recorded a charge of liquidated damages of $144,000 and in lieu of a cash payment, Rio Vista agreed to issue additional common units, at a discount of 5% to the average closing price for such units as reported by the NASDAQ National Market for the 10 trading days immediately preceding each thirty day delay in the S-3 becoming effective. On October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units in satisfaction of all liquidated damages due.

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 National 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.

On July 23, 2008, a total of 6,378 common units of Rio Vista were issued to CEOcast in connection with a consulting agreement. Based on the closing price of Rio Vista’s common units on July 22, 2008, the total amount recorded as an expense on the issuance date was $80,000.

On July 23, 2008, the board of managers authorized the issuance and sale by Rio Vista of 197,628 of Rio Vista’s common units to Penn Octane at $10.12 per unit, and Penn Octane’s board authorized its purchase of such Rio Vista units at that price, for an aggregate price of approximately $2,000,000. The price per unit was the closing price for Rio Vista common units on May 30, 2008 as reported by the Nasdaq Global Market (see note P).

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M — 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 holders of common units ability to influence the manner or direction of management.

Distributions of Available Cash

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.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Distributions of Available Cash — Continued


				Amounts Paid
	Payment	Distribution		Common		General
Quarter Ended	Date	Per Unit		Units		Partner

Dec 2006	01/18/07	$	0.25	$	478,000	$	10,000
Mar 2007	05/04/07	$	0.25	$	478,000	$	10,000
Jun 2007	07/31/07	$	0.25	$	484,000	$	10,000
Sep 2007	11/14/07	$	0.25	$	484,000	$	10,000
Jun 2005 – Jun 2006 Arrearages	12/10/07	$	1.25	$	2,420,000	$	49,000
Dec 2007	02/14/08	$	0.25	$	607,000	$	12,000
March 2008	05/16/08	$	0.25	$	629,000	$	13,000
June 2008	08/14/08	$	0.25	$	679,000	$	14,000

Rio Vista has not declared a distribution for the quarters ended September 30, 2008 and December 31, 2008.

General Partner Options

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

On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that provided Penn Octane with the option (Purchase Option) to purchase the 25% interest in the General Partner held by Shore Trading. Penn Octane exercised its option on July 19, 2007 and acquired the 25% interest for a total cost of $1,400,000.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

General Partner Options — Continued

The difference between the net book value of the 25% interest purchased and the purchase price totaling approximately $1,342,000 has been included in goodwill in the accompanying consolidated balance sheet.

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.

Common Unit Options

Under the terms of the Note Purchase Agreement, TCW 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. In addition, TCW has the right to convert any balance of the debt under the TCW Credit Facility other than the Demand Loan 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. The conversion rights of TCW as described above were formalized through the issuance of a warrant by Rio Vista (TCW Warrant). At December 31, 2008, the outstanding balance owing under the TCW Credit Facility was approximately $24,700,000 plus accrued interest since September 29, 2008.

On March 9, 2005, the board of managers of the General Partner of Rio Vista approved the Rio Vista 2005 Equity Incentive Plan (2005 Plan). The 2005 Plan permits the grant of common unit options, common unit appreciation rights, restricted common units and phantom common units to any person who is an employee (including to any executive officer) or consultant of Rio Vista or the General Partner or any affiliate of Rio Vista or the General Partner. The 2005 Plan provides that each outside manager of the General Partner shall be granted a common unit option once each fiscal year for not more than 5,000 common units, in an equal amount as determined by the board of managers. The aggregate number of common units authorized for issuance as awards under the 2005 Plan is 750,000. The 2005 Plan shall remain available for the grant of awards until March 9, 2015, or such earlier date as the board of managers may determine. The 2005 Plan is administered by the compensation committee of the board of managers. In addition the board of managers may exercise any authority of the compensation committee under the 2005 Plan. Under the terms of the partnership agreement and applicable rules of the NASDAQ National Market, no approval of the 2005 Plan by the common unitholders of Rio Vista was required.

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

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Common Unit Options — Continued

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

On June 15, 2007, in connection with the Board Consulting Agreement with Mr. Canney (see note N), Rio Vista granted Mr. Canney an option to purchase 26,963 common units of Rio Vista. The exercise price for the option is $11.14 per unit, which was the average of the high and low sale prices as reported by the NASDAQ National Market on June 15, 2007. The Board Consulting Agreement was terminated by Mr. Canney effective September 30, 2007 resulting in the termination of the options.

On June 29, 2007, the board of managers of the General Partner Rio Vista approved the grant of an option to purchase 75,000 common units of Rio Vista under Rio Vista’s 2005 Plan to an executive officer of the General Partner. The exercise price for the options is $11.21 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ National Market on June 29, 2007. The unit option vests in equal monthly installments over a period of 36 months beginning January 1, 2007, becomes fully vested and exercisable upon a change in control event, and expires five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $294,000.

In connection with the employment agreement with an executive of Regional, Rio Vista grated options to purchase a total of 25,000 common units under Rio Vista’s 2005 Plan to the executive. The exercise price for the options is $16.66 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ National Market on July 27, 2007. The options vest over a two year period.

On August 23, 2007, the board of managers of the General Partner approved the grant of options to purchase a total of 8,125 common units under Rio Vista’s 2005 Plan to outside managers of the General Partner. The exercise price for the options is $15.15 per unit, which was the average of the high and low sale prices for Rio Vista common units as reported by the NASDAQ National Market on August 23, 2007. Options granted to outside managers are fully vested on the date of grant and expire five years from the date of grant. Total compensation to be recorded under the aforementioned grant of options as they vest totals approximately $58,000.

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 the 2005 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 National 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.

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Common Unit Options — Continued

On May 28, 2008, Rio Vista and Strategic Growth International (SGI), entered into a one year consulting agreement whereby SGI has agreed to provide public relations consulting services. The agreement could be cancelled after 6 months and was cancelled on October 29, 2008 with an effective date of December 1, 2008. In connection with the agreement, Rio Vista granted SGI 50,000 warrants to purchase common units of Rio Vista at an exercise price of $12.00 per common unit. The warrants cannot be exercised for one year from the date of issuance and the warrants will expire three years from the date of issuance. Total cost recorded at the grant date was $161,000. As a result of the aforementioned cancellation, the number of Rio Vista warrants granted was reduced to 25,000.

The amount of total compensation not yet recognized as of December 31, 2008 was $30,000. Such amounts will be recognized over the remaining life of the grants.

For warrants granted to non-employees of the General Partner, Rio Vista applies the provisions of SFAS 123R to determine the fair value of the warrants issued. No warrants were granted to non-employees of the General Partner for the years ended December 31, 2007 and 2008.

NOTE N — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

100

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Legal Proceedings — Continued

In December of 2008, one of the insurance carriers, Ace Insurance, tendered its limit of $1,000,000 in settlement of all claims brought by American citizens who were injured in the explosion. Those claims were dismissed. The legal damages that can be recovered by the remaining plaintiffs will be governed by Mexican law, which provides limited, scheduled recovery. This is deemed favorable to Rio Vista. Rio Vista’s legal fees and settlement costs were covered by insurance.

101

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Legal Proceedings — Continued

On August 19, 2008, Rio Vista, Rio Vista GP LLC, Rio Vista Penny LLC, Jerome B. Richter and Douglas G. Manner (Defendants) were named in a lawsuit filed by Northport Production Company and Eugene A. Viele (Plaintiffs). Mr. Viele is currently a director of Penn Octane Corporation and is also the principal owner of Northport Production Company. Mr. Manner currently serves as a director of Penn Octane Corporation and the General Partner. Plaintiffs allege breach of contract, negligent misrepresentation, and fraud in connection with the acquisition of the Oklahoma Assets. . Plaintiffs are seeking judgment for compensatory damages of $487,000 and exemplary damages of not less than $200,000 as well as attorneys’ fees and other such relief as may be shown. Discovery is currently pending. Rio Vista believes that the liability, if any, ultimately resulting from this lawsuit should not materially affect its consolidated financial results.

In the Greco-Roman, Inc. dba Trinity Oil Co. (Trinity) bankruptcy, pending in the United States Bankruptcy Court for the District of Arizona, the court-appointed Chapter 7 Trustee, on November 6, 2008, filed an adversary proceeding against Penn Octane Corporation (Penn Octane). The complaint was served on March 6, 2009. The Trustee seeks to recover, as preferential payments made within 90 days of Trinity’s bankruptcy filing on September 22, 2006, at least $357,000 paid to Penn Octane. Penn Octane believes valid defenses barring the turnover of these funds to the Trustee will show that the payment were made in the ordinary course of business for the delivery of petroleum products to Trinity and on ordinary business terms. The Trustee also seeks the turnover of more than $4,348,000 Trinity paid to Penn Octane within the two year period preceding Trinity’s bankruptcy filing. Valid defenses will show that Trinity, in receiving petroleum product, was given reasonably equivalent value in exchange for these payments, and, it is believed, the payments were not made to defraud Trinity’s creditors. These defenses, and others, have been presented in Penn Octane’s Answer to the Complaint filed in April 2009. At this early stage of the proceeding, Penn Octane does not believe that this case will have a material adverse effect on its business, financial condition and results of operations.

102

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Legal Proceedings — Continued

On December 12, 2008, SFPP, Inc. filed a Complaint against Penn Octane in the Los Angeles Superior Court entitled SFPP, Inc. v. Penn Octane Corporation, Case No. BC403789. The Complaint alleges causes of action for Open Book Account, Account Stated and Breach of Contract, and seeks $376,000 in damages, plus SFPP’s attorneys’ fees and costs. Penn octane was served with copies of the Summons and Complaint in the referenced action and on February 10, 2009 timely filed its Answer thereto generally denying the allegations of the Complaint and asserting various affirmative defenses. To date, no discovery has been propounded by either party. Penn Octane is currently engaged in discussions with SFPP exploring the possibility of negotiating a mutually acceptable resolution of the allegations but, to date, no settlement has been reached.

Credit Facility and Letters of Credit

Before May 2008 Penn Octane financed its purchases of Fuel Products through its credit facility with RZB. After May 2008 Penn Octane no longer purchased Fuel Products (see note A). During December 2008, Penn Octane received notice that the RZB Credit Facility for demand loans and standby letters of credit was cancelled effective August 29, 2008.

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 a letter of credit for $273,000. At December 31, 2008, such taxes plus associated interest and penalties in the amount of approximately $1,888,000 were due.

103

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Leases

Norfolk Southern Leases

Other

Regional has several leases for parking and other facilities which are short term in nature and can be terminated by the lessors or Regional upon giving sixty days notice of cancellation. Penn Octane has several leases which on a month to month basis or for a period of less than one year.

Rio Vista Energy Partners L.P. entered into a lease for office space for administrative purposes in Plano, Texas starting August 2008 for a period of 37 months. Rent of $7,000 plus utilities is payable each month. Future rents are $84,000 for years 2009 and 2010, and $56,000 for the year ended 2011.

Rent expense for all operating leases was $111,000 for the years ended December 31, 2007 and 2008.

104

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Leases — Continued

Asphalt Agreement

Fuel Oil Agreement

Gas Service and Sales Agreements

For the year ended December 31, 2008, approximately 68% of our gas production was sold through Clearwater and approximately 22% was sold to Unimark, LLC. In addition, approximately 82% of the oil and gas segment trade accounts receivables were from Clearwater. These gas sales are governed by an agreement that expires in 2009 and continues yearly thereafter, until canceled by either party within thirty days notice.

105

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Leases — Continued

Gas Compression Agreements

Consulting Agreement

Mr. Richter’s consulting agreement expired on November 14, 2006.

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. For the years ended December 31, 2007 and 2008, the Company expensed approximately $434,000 and $486,000, respectively, in connection with the Consulting Agreement. In addition, in connection with the Regional transaction, JBR Capital earned a fee of $180,000 which fee was expensed. The initial term of the Consulting Agreement was six months and continues to renew for additional six-month terms unless terminated by either party at least 30 days before the end of each term.

106

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Richard R. Canney

On June 15, 2007, Penn Octane and Rio Vista entered into the Board Consulting Agreement regarding consulting services to be rendered by Mr. Canney to Penn Octane and to Rio Vista. Pursuant to the Board Consulting Agreement, Mr. Canney has agreed to assist Penn Octane and Rio Vista with the potential acquisition and disposition of assets, obtaining financing, other transactions, and recommending candidates for management and board service. In exchange for these services, Penn Octane and Rio Vista paid Mr. Canney a combined total monthly fee of $12,500, inclusive of all fees payable in connection with Mr. Canney’s services as a director and chairman of the board of Penn Octane and Rio Vista, retroactive to November 1, 2006. The monthly fee was paid equally by Penn Octane and Rio Vista. During August 2007, Mr. Canney provided notice to Rio Vista of the termination of the Board Consulting Agreement effective September 30, 2007.

CEOcast

Strategic Growth International

Concentrations of Credit Risk

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

107

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Environmental Indemnification

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

Partnership Tax Treatment and Mexican Subsidiaries, 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”. Non qualifying income which is held and taxed through a taxable entity (such as Regional) is excluded from the calculation in determining whether the publicly traded partnership meets the qualifying income test.

Rio Vista estimates that more than 90% of its gross income (excluding Regional) 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.

108

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N — COMMITMENTS AND CONTINGENCIES — Continued

Partnership Tax Treatment and Mexican Subsidiaries, Regional and MV Income Taxes — Continued

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.

NOTE O — OIL AND GAS SALES CONTRACTS

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

At December 31, 2008, Rio Vista had the following contracts:


Date		Terms
- January 2009 – March 2009:		1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)
- January 2009 – March 2009:		0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)

The contracts in place at December 31, 2008 cover substantially all of Rio Vista’s current production.

During January 2009, Rio Vista entered into an agreement to sell its February 2009 and March 2009 sales contracts. In connection with the settlement of the contracts, Rio Vista received approximately $400,000. As a result of the above, beginning February 1, 2009, none of Rio Vista’s oil and gas production is subject to forward sales contract.

109

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE P — 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.

Sale — Purchase of Rio Vista Common Units

At meetings held on May 30, 2008, in connection with the previously disclosed discussions between Rio Vista and the NASDAQ National Market (NASDAQ) regarding Rio Vista’s compliance with NASDAQ’s Marketplace Rule 4450(a)(3) on capital adequacy, the Board of Managers of the General Partner authorized the issuance and sale by Rio Vista of 197,628 of Rio Vista’s common units to Penn Octane at $10.12 per unit, and Penn Octane’s board authorized its purchase of such Rio Vista units at that price, for an aggregate price of approximately $2,000,000. Thereafter, Rio Vista’s officers continued to formulate a plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to NASDAQ, and notified NASDAQ regarding the proposed issuance of its units. Rio Vista also filed a listing of additional units notification with NASDAQ (LAS) based on its intention to go forward with the proposed purchase and sale. Following further discussions with NASDAQ, at board meetings on July 15, 2008, the Board of Managers of the General Partner and the Board of Directors of Penn Octane confirmed their desire to implement promptly the previously authorized purchase and sale, and the companies agreed to complete the transaction, subject to NASDAQ approval of Rio Vista’s LAS. On July 23, 2008, after the period of review for the LAS passed, the common units were issued to Penn Octane. In connection with the transaction, Penn Octane recorded $1,827,000 in goodwill which represented the amount of the purchase price allocable to minority interests.

Loans To Rio Vista

As of July 23, 2008, Rio Vista offset $2,000,000 owed to Penn Octane against the amounts owed by Penn Octane to acquire Rio Vista common units (see above). In addition, Penn Octane has loaned additional amounts to Rio Vista for the sole purpose of allowing Rio Vista to fund ongoing operations and the June 2008 quarterly distribution.

In connection with the Third Amendment of the RZB Note, Rio Vista was required to repay $1,000,000 of the RZB Note. Effective January 1, 2009, Penn Octane loaned Rio Vista $1,000,000 of its cash collateral held by RZB for the purpose of funding Rio Vista’s obligation to make the required payment described above.

110

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE P — RELATED PARTY TRANSACTIONS — Continued

Note Receivable from A Former Officer of the Company

On July 9, 2007, the board of directors of Penn Octane agreed to amend the note receivable from Mr. Richter (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.

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.

111

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE Q — 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 December 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 December 31, 2008, Penn Octane has made no discretionary contributions.

NOTE R — 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 has a loss from continuing operations for each of the two years ended December 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 TCW Credit Facility, $150,000 of the Moores Note, the RZB Note, the Sellers’ Note — Regional and the Richter Note total approximately $31,319,000 and are all classified as current liabilities. Penn Octane also owes excise and other taxes, including computed interest and penalties collected from customers in connection with the sale of Fuel Products in the amount of $1,888,000.

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, excise and other taxes of Fuel Products and all debt service requirements. The TCW Credit Facility prohibits distributions by Rio Vista’s Oklahoma subsidiaries unless certain conditions are met which currently are not expected to be met. 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 the Richter Note 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, 2008 contains 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, existing debts restructured 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.

112

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R — REALIZATION OF ASSETS — Continued

NOTE S — SUPPLEMENTARY OIL AND GAS DATA (Unaudited)

(A) Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities

Costs incurred in oil and gas property acquisition and development are presented below:


	Year Ended		Year Ended
	December 31,		December 31,
	2007		2008
	(in thousands)		(in thousands)

Property acquisition costs:
Proved	$	26,255	$	—
Unproved		—		—
Development costs		—		2,549
Gas compression and pipelines		—		568

Total costs incurred	$	26,255	$	3,117

Property acquisition costs include costs incurred to purchase, lease, or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat and gather oil and gas.

The Company capitalizes costs related to drilling and development of oil and gas properties for specific activities related to drilling its wells, which include site preparation, drilling labor, meter installation, pipeline connection and site reclamation. There were no drilling and development costs during the year ended December 31, 2007 (acquisition of Oklahoma Assets occurred in November 2007).

(B) Oil and Gas Capitalized Costs

Aggregate capitalized costs related to oil and gas production activities with applicable accumulated depreciation, depletion and amortization are presented below:


	December 31,			December 31,
	2007			2008
	(in thousands)			(in thousands)

Proved properties:
Leasehold, equipment and drilling	$	26,255		$	28,962
Less accumulated depreciation, depletion and amortization		(58	)		(719	)

Net capitalized costs	$	26,197		$	28,243

113

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S — SUPPLEMENTARY OIL AND GAS DATA (Unaudited)

(C) Results of Oil and Gas Producing Activities

The results of operations for oil and gas producing activities (excluding corporate overhead and interest costs) are presented below:


	Year		Year
	Ended		Ended
	December 31,		December 31,
	2007		2008
	(in thousands)		(in thousands)

Revenues:
Oil and gas sales	$	396	$	4,506
Gain (loss) on oil and gas derivatives		—		—

Net oil and gas sales		396		4,506

Expenses:
Production costs		212		2,503
Depreciation, depletion and amortization		58		669

Total expenses		270		3,172

Results of operations for oil and gas producing activities (excluding corporate overhead and interest costs)	$	126	$	1,334

Production costs include those costs incurred to operate and maintain productive wells and related equipment, including such costs as labor, repairs, maintenance, materials, supplies, fuel consumed, insurance and other production taxes. In addition, production costs include administrative expenses applicable to support equipment associated with these activities.

(D) Net Proved Oil and Gas Reserves

The net proved reserves of oil and gas of Rio Vista have been estimated by an independent petroleum engineering firm, Lee Keeling and Associates, Inc., at December 31, 2007 and 2008. These reserve estimates have been prepared in compliance with the SEC rules based on year-end prices. An analysis of the change in estimated net quantities of oil and gas reserves, as reported December 31, 2007 and current estimates as of December 31, 2008 are shown below:


	Year Ended December 31, 2008
	Gas (Bcf)			Oil (MMbls)		Total (Bcfe)
Net Proved developed and undeveloped reserves:
Beginning of year		35.589			—		35.589
Revisions of previous estimates		(13.979	)				(13.979	)
Extensions and discoveries		1.405			—		1.405
Production		(.521	)		—		(.521	)

End of year		22.494			—		22.494

Net Proved developed reserves:
Beginning of year		12.766			—		12.766

End of year		8.082			—		8.082

114

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S — SUPPLEMENTARY OIL AND GAS DATA (Unaudited) — Continued

(E) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves

Summarized in the following table is information for the Company with respect to the standardized measure of discounted future net cash flows relating to proved reserves as estimated by an independent petroleum engineering firm, Lee keeling and Associates, Inc., at December 31, 2007 and 2008. Future cash inflows are computed by applying year-end prices relating to the Company’s proved reserves to the year- end quantities of those reserves. Future production, development, site restoration and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. There are no future income tax expenses because Rio Vista is a nontaxable entity.

The following represents changes in the standard measure of discounted future estimated net cash flow during the year ended December 31, 2008 from the December 31, 2007 estimated amounts (amounts in thousands).


	Year ended December 31,
	2008			2007			Change

Future cash inflows	$	80,979		$	179,015		$	(98,036	)
Future production costs		(31,338	)		(63,693	)		32,355
Future development costs		(8,831	)		(10,891	)		2,060


Future cash flows before income taxes	$	40,810		$	104,431		$	(63,621	)


Future net cash flows before income, taxes, discounted at 10%	$	13,304		$	41,272		$	(27,968	)


Future net gas price (Mcf)	$	3.60		$	5.03		$	(1.43	)

It is necessary to emphasize that the data presented should not be viewed as representing the expected cash flow from, or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. The required projection of production and related expenditures over time requires further estimates with respect to pipeline availability, rates of demand and governmental control. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts. Any analysis or evaluation of the reported amounts should give specific recognition to the computational methods utilized and the limitations inherent therein.

115

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE T — SEGMENT INFORMATION

The Company has the following reportable segments for the years ended December 31, 2007 and 2008: Transportation and Terminaling, Oil and Gas and Fuel Sales. The Transportation and Terminaling segment transports bulk liquids, including chemical and petroleum products, by truck and provides terminaling and storage services and 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.

The accounting policies used to develop segment information correspond to those described in the summary of significant accounting policies. Segment profit (loss) is based on gross profit (loss) from operations before selling, general and administrative expenses, other income (expense) and income tax. The reportable segments are distinct business units operating in similar industries. They are separately managed, with separate marketing and distribution systems. The following information about the segments is for the years ended December 31, 2008 and 2007. The LPG Transportation segment commenced August 22, 2006, the oil and gas segment commenced November 19, 2007 and the Fuel Sales segment commenced in 2004 and ceased operations in May 2008.


	Transportation
	and
Year ended December 31, 2008:	Terminaling		Oil and Gas			Fuel Sales		Totals

Revenues from external customers	$	8,573,000	$	5,247,000		$	43,511,000	$	57,331,000
Interest expense		631,000		2,849,000			188,000		3,668,000
Interest income		—		7,000			—		7,000
Depreciation and amortization		996,000		1,145,000			3,000		2,144,000
Segment gross profit		2,129,000		925,000			431,000		3,485,000
Segment assets		11,891,000		36,239,000			1,000,000		49,130,000
Segment liabilities		4,465,000		28,623,000			2,310,000		35,398,000
Expenditure for segment assets		463,000		3,451,000			—		3,914,000

Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments			$	57,331,000
Elimination of intersegment revenues				—
Other revenues				1,000

Total consolidated revenues			$	57,332,000


Profit (loss)
Total gross profit (loss) for reportable segments			$	3,485,000
Total other gross profit (loss)				9,000
Selling, general and administrative expense and other				(8,935,000	)
Interest and Fuel Products financing expense				(3,864,000	)
Interest income				19,000
Minority interest in loss of Rio Vista Energy Partners L.P.				6,040,000
Elimination of intersegment profits				—
Unallocated amounts
Corporate headquarters expense				—
Other expenses				—


Consolidated income from continuing operations before income tax			$	(3,246,000	)


Assets
Total assets for reportable segments			$	49,130,000
Other assets				4,910,000
Corporate headquarters				—
Other unallocated amounts				—

Total consolidated assets			$	54,040,000

116

PENN OCTANE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE T — SEGMENT INFORMATION — Continued


	Transportation
	and
Year ended December 31, 2007:	Terminaling		Oil and Gas			Fuel Sales		Totals

Revenues from external customers	$	5,379,000	$	527,000		$	150,114,000	$	156,020,000
Interest expense		603,000		275,000			443,000		1,321,000
Interest income		15,000		—			—		15,000
Depreciation and amortization		1,033,000		96,000			1,000		1,130,000
Segment gross profit		1,009,000		137,000			1,477,000		2,623,000
Segment assets		13,881,000		35,368,000			8,311,000		57,560,000
Segment liabilities		6,391,000		21,604,000			5,257,000		33,252,000
Expenditure for segment assets		125,000		—			2,000		127,000

Reconciliation to Consolidated Amounts:
Revenues
Total revenues for reportable segments			$	156,020,000
Elimination of intersegment revenues				—
Other revenues				142,000

Total consolidated revenues			$	156,162,000


Profit (loss)
Total gross profit (loss) for reportable Segments			$	2,623,000
Total other gross profit (loss)				142,000
Selling, general and administrative expense and other				(7,972,000	)
Interest and Fuel Products financing expense				(1,344,000	)
Interest income				46,000
Minority interest in loss of Rio Vista Energy Partners L.P.				4,729,000
Elimination of intersegment profits				—
Unallocated amounts
Corporate headquarters expense				—
Other expenses				—


Consolidated loss from continuing operations before income tax			$	(1,776,000	)


Assets
Total assets for reportable segments			$	57,560,000
Other assets				3,064,000
Corporate headquarters				—
Other unallocated amounts				—

Total consolidated assets			$	60,624,000

117

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A(T). 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-K, 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 the Company’s management, including the Company’s chief executive officer/chief financial officer and the Company’s 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).

During 2007 and the first three months of 2008, Penn Octane’s accounting department consisted of only the controller, an accounting clerk, who worked solely with our Fuel Products business, and the chief financial officer. In late 2006, Penn Octane’s chief executive officer resigned and the chief financial officer assumed both the duties of the chief executive officer and the chief financial officer. Prior to his departure, the former chief executive officer provided some additional controls over financial reporting and accounting, although the internal control environment was still limited. Thus, the material weakness was compounded when the chief financial officer began functioning in a dual capacity beginning in 2006. In March 2008, the accounting clerk resigned. Such a limited number of financial and accounting personnel makes segregation of duties difficult

In November 2007, we acquired the Oklahoma Assets and began accounting for the entities owning those assets and conducting those operations. We have only one accountant in Oklahoma who performs almost all accounting functions related to those assets and operations under the supervision of the chief financial officer until May 2008 and thereafter under the supervision of a newly hired (see following paragraph) assistant to the chief financial officer. Regional, which was acquired in July 2007, has sufficient accounting personnel to provide adequate internal controls over financial reporting for that subsidiary’s separate financial statements, but such personnel are not involved directly with consolidated financial reporting of the Company.

In May 2008, Penn Octane hired an assistant to the chief financial officer to provide additional assistance with internal accounting responsibilities and financial reporting related to the Oklahoma Assets and the entities owning those assets and conducting those operations. The newly hired assistant has previous oil and gas experience. In June 2008, the Company hired a vice president, who is primarily responsible for overseeing the operations of our oil and gas properties. Despite the additional personnel, the Company’s internal control environment is limited in such a manner that there is less than the desired internal control over financial reporting and accounting, except as it relates to Regional and therefore, a system of checks and balances is lacking. As a result of this material weakness, our management concluded that our disclosure controls and procedures were not effective as of December 31, 2008.

118

The Company continues to seek solutions to improve internal control over financial reporting. However because there are currently limited financial resources, the Company does not expect to immediately be able to take additional steps to improve its internal control over financial reporting. In particular, the Company may not be able to complete its intended goal of implementing a new accounting software system which would provide enhanced internal controls over financial reporting as well as to provide for multiple user access, timely access to accounting information and additional data security. Furthermore, the Company may be limited in its ability to attract and/or retain qualified employees.

During the year ended December 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 consolidated financial statements included in this Annual Report on Form 10-K 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.

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). The Company’s internal control over financial reporting includes those policies and procedures that:

	•		pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	•		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on its assessment and those criteria, management concluded that the Company disclosure controls and procedures over financial reporting were not effective as of December 31, 2008.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B. Other Information

None.

119

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors of the Company

The names of the Company’s directors and certain information about them are set forth below:


				Director
Name of Director	Age		Position with Company	Since

Richard R. Canney		53	Director and Chairman of the Board		2006
Bruce I. Raben		54	Director		2006
Eugene A. Viele		53	Director		2006
Douglas G. Manner		52	Director		2008
Nicholas J. Singer		28	Director		2008

All directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified or until their earlier resignation or removal.

Richard R. Canney. Mr. Canney has been employed in the mergers and acquisitions and new ventures division of Shell Oil Company since 1997. Mr. Canney was a director and managing partner of Corporacion Mercantile Internacional, S.A. de C.V. in Mexico City. From 1994 to 1996, Mr. Canney was a professor of finance at Instituto Technological Autonomo de Mexico in Mexico City. In August 2004, Mr. Canney was elected as a member of the board of managers of Rio Vista. Mr. Canney earned a Masters of Business Administration from the University of Chicago in June 1989.

Bruce I. Raben. Mr. Raben is founding Partner of Hudson Capital Advisors, LLC, a provider of investment banking advisory, placement and capital raising services formed in 2004. Mr. Raben has been an investment banker, merchant banker and private investor for approximately 25 years. From 1979 until 1990, Mr. Raben worked at Drexel Burnham Lambert, an investment banking firm. From 1990 through 1995, he was an executive vice president with Jeffries & Company, an investment banking firm. From 1995 until 2002, Mr. Raben served as a managing director of CIBC World Markets, an investment banking firm. He continued to serve as a consultant to CIBC in 2003. Mr. Raben has previously served on the boards of numerous public and private companies. Mr. Raben received a bachelor’s degree from Vassar College in 1975 and a master of business administration degree from Columbia University in 1979.

Eugene A. Viele. Mr. Viele is the Chairman, Chief Executive Officer and President of Northport Production Company, an oil and gas production company formed in 1991. Northport Production drills and operates wells in Oklahoma, Texas, New Mexico, Alabama and West Virginia. Mr. Viele has 27 years of experience in the oil and gas industry, including management, drilling and production. Mr. Viele is an active member of the American Association of Petroleum Landmen and the Oklahoma City Association of Petroleum Landmen. Mr. Viele received a bachelor’s degree in business administration from the University of Oklahoma in 1978.

120

Douglas G. Manner was elected as a member of the board of managers of the General Partner in August 2004. Mr. Manner was a former CEO of Westside Energy Corporation, an oil and gas company based in Texas until June 2008. Prior to joining Westside Energy Corporation, Mr. Manner was the Senior Vice President and Chief Operating Officer of Kosmos Energy, LLC, a private oil and gas exploration company. Prior to Kosmos Energy, Mr. Manner served as President and Chief Operating Officer of White Stone Energy since August 2002. For the two years prior to joining White Stone Energy, Mr. Manner was Chairman and Chief Executive Officer of Mission Resources and Chairman of the Board of one of Mission’s predecessor companies, Bellwether Exploration. Prior to joining Bellwether, Mr. Manner was employed by Ryder Scott Petroleum Engineers for fifteen years and by Gulf Canada Resources Limited. Mr. Manner is a member of the board of directors of Blizzard Energy, Inc., an oil and gas company based in Alberta, Canada; Resolute Energy Inc., an oil and gas company based in Alberta, Canada and Cordero Energy Inc., an oil and gas company based in Alberta, Canada. Mr. Manner holds a B.S. degree in mechanical engineering from Rice University. In January 2008, Mr. Manner was also elected to the board of directors of Penn Octane Corporation, an affiliate of Rio Vista.

Nicholas J. Singer was elected as a member of the board of directors in January 2008. Mr. Singer is a Co-Managing Member of Standard General Management LLC, an investment management firm based in New York City. Before joining Standard General Management LLC in 2007, Mr. Singer was a Founding Partner at Cyrus Capital Partners during 2005 and 2006. Prior to joining Cyrus Capital Partners, he was a senior research analyst and principal at Och-Ziff Capital Management from 2002 until 2005. Concurrent with his election to the board of directors of Penn Octane, Mr. Singer was also services on the board of managers of Rio Vista GP LLC, the General Partner of Rio Vista, an affiliate of Penn Octane.

Information Regarding The Board Of Directors

The business of the Company is managed under the direction of the board of directors of Penn Octane. The board conducts its business through meetings of the board and its committees. During 2008, the board held five meetings and the audit committee held four meetings. No member of the board attended less than 75% of the meetings of the board and committees of which he was a member.

The board of directors currently consists of three members, none of whom are members of the management of Penn Octane. The OTC Bulletin Board does not have rules regarding director independence. The following directors are considered “independent” as defined under the rules of the NASDAQ National Market: Messrs. Canney, Raben, and Viele. Accordingly, the entire board is comprised of independent directors under the NASDAQ definition.

Communication with the Board of Directors

Stockholders and other interested parties may communicate with the board of directors or the Chairman of the Board by sending written communication in an envelope addressed to “Board of Directors” or “Chairman of the Board of Directors” in care of Company Secretary, Penn Octane Corporation, 77-530 Enfield Lane, Bldg D, Palm Desert, CA 92211.

Audit Committee

The Company’s audit committee consists of Mr. Canney (Chairman), Mr. Raben, and Mr. Viele. Mr. Canney, Mr. Raben and Mr. Viele are considered “audit committee financial experts” as defined in applicable rules of the Securities and Exchange Commission. The OTC Bulletin Board does not have rules regarding the independence of audit committee members. The board has determined that all three members of the audit committee meet the audit committee independence requirements under the rules of the NASDAQ National Market.

The audit committee reviews and reports to the board on various auditing and accounting matters, including the quality, objectivity and performance of the Company’s internal and external accountants and auditors, the adequacy of its financial controls and the reliability of financial information reported to the public.

121

Compensation Committee

The Company has a compensation committee composed of two directors whom the board has determined to be independent. During the year ended December 31, 2007, Bruce I. Raben and Eugene A. Viele served as the members of the Compensation Committee.

Report of the Audit Committee for Fiscal Year 2008

The primary function of the Audit Committee is oversight of the Company’s financial reporting process, public financial reports, internal accounting and financial controls, and the independent audit of the annual consolidated financial statements. The Audit Committee acts under a written charter filed periodically with the Company’s annual proxy statement. The Audit Committee reviews the adequacy of the charter at least annually. All of the committee’s members are independent and two of its members are audit committee financial experts under Securities and Exchange Commission rules. The committee held four meetings in 2008 at which, as discussed in more detail below, the committee had extensive reports and discussions with members of management and Burton, McCumber & Cortez, L.L.P. (BMC), the Company’s independent registered accounting firm. At each meeting, the committee met with management and BMC, both with and without management present.

In performing its oversight function, the committee reviewed and discussed the consolidated financial statements with management and BMC. Management and BMC informed the committee that the Company’s consolidated financial statements were fairly stated in accordance with generally accepted accounting principles. The committee discussed with BMC matters covered by the Statement on Auditing Standards No. 61 (Communication with Audit Committees), as modified or supplemented. In addition, the committee discussed management’s evaluation of internal control over financial reporting.

The committee also discussed with BMC its independence from the Company and management, including the matters in Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and the letter and disclosures from BMC to the committee pursuant to Standard No. 1. The committee considered the non-audit services provided by BMC to the Company and concluded that the auditors’ independence has been maintained.

Based on the reviews and discussions referred to above, in reliance on management and BMC, and subject to the limitations of its role described below, the committee recommended to the board, and the board has approved, the inclusion of the audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, for filing with the Securities and Exchange Commission.

In carrying out its responsibilities, the committee looks to management and the independent auditors. Management is responsible for the preparation and fair presentation of the Company’s financial statements and for maintaining effective internal control. Management is also responsible for assessing and maintaining the effectiveness of internal control over the financial reporting process. The independent auditors are responsible for auditing the Company’s annual financial statements and expressing an opinion as to whether the statements are fairly stated in conformity with generally accepted accounting principles. The independent auditors perform their responsibilities in accordance with the standards of the Public Company Accounting Oversight Board.

BY THE AUDIT COMMITTEE

RICHARD R. CANNEY
BRUCE I. RABEN
EUGENE A. VIELE

122

Executive Officers of the Company

The names of the Company’s executive officer and certain information about him are set forth below:


				Officer
Name of Executive Officer	Age		Position with Company	Since

Ian T. Bothwell		49	Acting Chief Executive Officer, Acting President, Vice President, Treasurer, Chief Financial Officer and Assistant Secretary		1996

Ian T. Bothwell, 48, has served as Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Penn Octane since October 1996. In November 2006, he was appointed as Acting Chief Executive Officer and Acting President of Penn Octane and the General Partner. He also served as Vice President, Chief Financial Officer and Assistant Secretary of the General Partner since September 2004 and as Treasurer of the General Partner since July 2003. He also served as a director of Penn Octane from March 1997 until July 2004. Since July 1993, Mr. Bothwell has been a principal of Bothwell & Asociados, S.A. de C.V., a Mexican management consulting and financial advisory company that was founded by Mr. Bothwell in 1993 and specializes in financing infrastructure projects in Mexico. Mr. Bothwell also serves as Chief Executive Officer of B & A Eco-Holdings, Inc., the company which purchased the Company’s CNG assets in October 2002.

Code of Business Conduct

The Company adopted a code of conduct applicable to its principal executive officer, principal accounting officer and principal financial officer. This code charges the executive officers of the Company with responsibilities regarding honest and ethical conduct, the preparation of quality of the disclosures in the documents and reports the Company files with the SEC and compliance with applicable laws, rules and regulations. In April 2007, the board of directors approved a revised code of conduct that incorporates a formal policy for the approval of transactions with related persons. See “Certain Relationships and Related Transactions and Director Independence.”

Compliance under Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by the SEC to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of Forms 3, 4 and 5 filed by the SEC, the Company believes that all directors, officers and 10% stockholders complied with such filing requirements.

123

Item 11. Executive Compensation.

SUMMARY COMPENSATION TABLE

The following table sets forth annual and all other compensation to Mr. Bothwell, our only executive officer in 2008, for services rendered in all capacities to the Company and its subsidiaries during each of the periods indicated. This information includes the dollar values of base salaries, bonus awards, the number of warrants granted and certain other compensation, if any, whether paid or deferred. The Company does not grant stock appreciation rights or other long-term compensation plans for employees.


																Changes in
																Pension Value and
																Nonqualified
								Stock			Option			Non-Equity		Deferred
Name and Principal			Salary					Awards			Awards			Incentive Plan		Compensation		All Other			Total
Position	Year		($)		Bonus ($)			($)			($)			Compensation		Earnings ($)		Compensation ($)			($)

Ian T. Bothwell		2008		220,000		156,000	⁽⁶⁾		237,000	⁽⁵⁾		—			—		—		—			613,000
Acting Chief		2007		219,000		58,000			93,000	⁽⁴⁾		309,000	⁽²⁾		—		—		88,000	⁽³⁾		767,000
Executive Officer, Acting		2006		180,000		70,000			—			—			—		—		—			250,000
President, Chief Financial Officer, Vice President, Treasurer And Assistant Secretary⁽¹⁾


(1)		Mr. Bothwell was appointed Acting President and Acting Chief Executive Officer of Penn Octane and the General Partner in November 2006.

(2)		Represents warrants to purchase 180,000 common stock of Penn Octane valued using the SFAS 123(R) See note K to the consolidated financial statements.

(3)		Represents warrants to purchase 100,000 common units of Rio Vista valued using SFAS 123(R), granted on June 29, 2007, exercise price of $11.21 and vests over 5 years.

(4)		Represents 8,333 common units granted.

(5)		Represents 16,166 common units granted.

(6)		Represents bonus accrued, not paid.

124

Outstanding Equity Awards at December 31, 2008

The following table sets forth the number of options outstanding as of December 31, 2008 for the sole executive officer. Mr. Bothwell did not hold any stock awards at December 31, 2008.

Option Awards

Equity Incentive

Number of

Plan Awards:

Securities

Number of

Underlying

Securities

Unexercised

Underlying

Options

Unexercised

Option

Exercisable

Unexercisable

Unearned Options

Exercise

Expiration

Name

(#)

Price ($)

Date

Ian T. Bothwell

18,822

—

11,178

0.51

2/12/2012

Ian T. Bothwell

100,000

—

50,000

0.70

6/28/2012

The Company does not have an employment agreement with Mr. Bothwell.

Termination and Change in Control

Penn Octane’s 2001 Warrant Plan and the associated form of warrant agreement provide for acceleration of vesting of outstanding warrants in the discretion of the Board of Directors (or Compensation Committee) in connection with the following events: a dissolution or liquidation of Penn Octane; a merger or consolidation in which Penn Octane does not survive, if the surviving entity in the transaction does not assume the warrants or substitute equivalent warrants; or a sale of all or substantially all of the assets of Penn Octane in which the stockholders of the Penn Octane receive securities of the acquiring entity, if the acquiring entity in the transaction does not assume the warrants or substitute equivalent warrants.

In the event of a change in control, Mr. Bothwell’s unvested warrants would immediately vest. Assuming a change of control as of December 31, 2008, based on the trading price of Penn Octane at December 31, 2008, Mr. Bothwell’s benefit would be approximately $3,000.

125

Compensation of Directors

The following table lists all compensation to directors during the year ended December 31, 2008.

Director Compensation


										Change in
										Pension Value
	Fee									and
	Earned							Non-Equity		Nonqualified		All Other
	or Paid		Stock		Option			Incentive Plan		Deferred		Compen-
	in Cash		Awards		Awards			Compensation		Compensation		sation		Total
Name	($)⁽¹⁾		($)		($)			($)		Earnings		($)⁽⁴⁾		($)

Richard R. Canney⁽⁵⁾		50,000		—		98,000	⁽²⁾		—		—		—		148,000
Bruce I. Raben⁽⁶⁾		40,000		—		78,000	⁽³⁾		—		—		—		118,000
Eugene A. Viele⁽⁷⁾		40,000		—		78,000	⁽³⁾		—		—		—		118,000
Nicholas J. Singer		39,000		—		—			—		—		—		39,000
Douglas G. Manner		39,000		—		—			—		—		—		39,000


(1)		Amounts represents fees paid for the quarter ended March 2008 and amounts earned for the quarters ended June 30, 2008, September 30, 2008 and December 31, 2008.

(2)		Amount represents options to purchase 56,250 common shares of Penn octane valued using SFAS 123(R).

(3)		Amounts represents option to purchase 45,000 common shares of Penn Octane valued using SFAS 123(R).

(4)		Amount represents consulting fees.

(5)		93,750 warrants to purchase common stock of the Company as of December 31, 2008.

(6)		75,000 warrants to purchase common stock of the Company as of December 31, 2008.

(7)		75,000 warrants to purchase common stock of the Company as of December 31, 2008.

On April 10, 2007, the Board of Directors approved a form of Chairman Services Agreement and Director Services Agreement. Pursuant to these agreements, the non-employee chairman of the board receives annual cash compensation of $50,000, payable quarterly, and an annual grant of warrants to purchase 56,250 of our common stock. Other non-employee directors will receive annual cash compensation of $40,000, payable quarterly, and an annual grant of warrants to purchase 45,000 of our common stock

126

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the amount of stock of the Company beneficially owned as of March 30, 2009 by each person known by the Company to own beneficially more than 5% of the outstanding shares of Penn Octane’s outstanding common stock (Common Stock).


	Amount and
	Nature of
	Beneficial
Name and Address of Beneficial Owner	Ownership⁽¹⁾			Percent of Class

Jerome B. Richter		4,380,092	⁽²⁾		27.98	%
335 Tomahawk Drive, Palm Desert, CA 92211

Standard General L.P.,		3,161,418			20.52	%
Standard General Fund, L.P., Soohyung Kim and Nicholas J. Singer⁽³⁾ 650 Madison Avenue, 26^th Floor New York, NY 10022

Swank Group, LLC, Swank Energy Income		1,451,215	⁽⁴⁾		9.42	%
Advisors, L.P. and Jerry V. Swank 3300 Oak Lawn Ave., Suite 650 Dallas, TX 75219

The Apogee Fund, Paradigm Capital		1,220,500	⁽⁵⁾		7.87	%
Corporation, and Emmett M. Murphy 201 Main Street, Suite 1555 Fort Worth, TX 76102


(1)		Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock which are purchasable under warrants which are currently exercisable, or which will become exercisable no later than 60 days after March 28, 2008, are deemed outstanding for computing the percentage of the person holding such warrants but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

127


(2)		Includes 37,850 shares of Common Stock owned by Mr. Richter’s spouse and 250,000 shares of Common Stock issuable upon exercise of Common Stock purchase warrants.

(3)		Standard General, Mr. Kim and Mr. Singer do not directly own any of the Common Stock. By reason of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of the Standard General, Mr. Kim and Mr. Singer may be deemed to own beneficially 3,161,418 Common Shares, (constituting approximately 20.52% of the Common Shares outstanding). Each of the Standard General, Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of the securities covered by this statement.

(4)		Swank Group, LLC serves as the General Partner of Swank Energy Income Advisors, L.P. (Advisor) and may direct the Advisor to direct the vote and disposition of the 1,451,215 shares of Common Stock of Penn Octane held by the Cushing Fund, L.P and/or Swank MLP Conveyance Fund, L.P (collectively Swank Funds). The Advisor is the General Partner of the Swank Funds. The principal of Swank Group, LLC, Mr. Jerry V. Swank, may direct the vote and disposition of the 1,451,215 shares of common stock of Penn Octane held by the Swank Funds, and may also vote and dispose of the 10,000 shares of Penn Octane’s Common Stock held by him in a personal account.

(5)		Mr. Murphy is the president of Paradigm Capital Corporation, a Texas corporation, which in turn, is the sole General Partner of The Apogee Fund, L.P., a Delaware limited partnership. All of the referenced stock is owned of record by The Apogee Fund, and beneficial ownership of such securities is attributable to Mr. Murphy and Paradigm Capital Corporation by reason of their shared voting and disposition power with respect The Apogee Fund assets. Includes 105,000 shares of Common Stock issuable upon exercise of Common Stock purchase warrants granted to Mr. Murphy.

128

The following table sets forth the amount of Common Stock of the Company beneficially owned as of March 28, 2009 by each director of the Company, each Named Executive Officer, and all directors and Named Executive Officers as a group. The address of each person is c/o Penn Octane Corporation, 77-530 Enfield Lane, Bldg. D, Palm Desert, California.


	Amount and Nature
	of Beneficial
Name of Beneficial Owner	Ownership⁽¹⁾			Percent of Class

Nicholas J. Singer		3,161,418	⁽²⁾		20.52	%
Bruce I. Raben		275,400	⁽³⁾		1.78	%
Ian T. Bothwell		190,452	⁽⁴⁾		1.22	%
Richard R. Canney		93,750	⁽⁵⁾		*
Eugene A. Viele		76,602	⁽⁶⁾		*
Douglas G. Manner		—			*
All Directors and Named Executive Officers as a group (6 persons)		3,797,622	⁽⁷⁾		23.97	%


*		Less than 1%

(1)		Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock which are purchasable under warrants which are currently exercisable, or which will become exercisable no later than 60 days after March 28, 2008, are deemed outstanding for computing the percentage of the person holding such warrants but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

(2)		Standard General, Mr. Kim and Mr. Singer do not directly own any of the Common Stock. By reason of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, each of the Standard General, Mr. Kim and Mr. Singer may be deemed to own beneficially 3,161,418 Common Shares, (constituting approximately 10.52% of the Common Shares outstanding). Each of the Standard General, Mr. Kim and Mr. Singer disclaim direct beneficial ownership of any of the securities covered by this statement.

(3)		Includes 75,000 shares of Common Stock issuable upon exercise of Common Stock purchase warrants exercisable within 60 days from March 30, 2009.

(4)		Includes 190,452 shares of Common Stock issuable upon exercise of Common Stock purchase warrants exercisable within 60 days from March 30, 2009.

(5)		Includes 93,750 shares of Common Stock issuable upon exercise of Common Stock purchase warrants exercisable within 60 days from March 30, 2009.

(6)		Includes 75,000 shares of Common Stock issuable upon exercise of Common Stock purchase warrants exercisable within 60 days from March 30, 2009.

(7)		Includes 434,202 shares of Common Stock issuable upon exercise of Common Stock purchase warrants exercisable within 60 days from March 30, 2009.

129

Equity Compensation Plans

The following table provides information concerning Penn Octane’s equity compensation plans as of December 31, 2008.

Number of securities

Weighted-average

remaining available for

Number of securities to

exercise price of

future issuance under

be issued upon exercise

outstanding options,

equity compensation

of outstanding options,

warrants and rights

plans (excluding securities

warrants and rights

(per share)

reflected in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

1,530,000

1.42

—

Equity compensation plans not approved by security holders

128,750

1.70

—

Total

1,658,750

1.44

—


(1)		Where applicable, exercise prices adjusted for the Spin-Off.

130

Item 13. Certain Relationships and Related Transactions and Director Independence.

Certain Relationships and Related Transactions

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.

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

The difference between the net book value of the 25% interest purchased and the purchase price totaling approximately $1,343,000 has been included in goodwill in the accompanying consolidated balance sheet.

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. For the years ended December 31, 2007 and 2008, the Company expensed approximately $434,000 and $486,000, respectively, in connection with the Consulting Agreement. In addition, in connection with the Regional transaction, JBR Capital earned a fee of $180,000 which fee was expensed. The initial term of the Consulting Agreement was six months and continues to renew for additional six-month terms unless terminated by either party at least 30 days before the end of each term.

On April 10, 2007, the Board of Directors approved a form of Chairman Services Agreement and Director Services Agreement. Pursuant to these agreements, the non-employee chairman of the board will receive annual cash compensation of $25,000, payable quarterly, and an annual grant of warrants valued at approximately $6,250. Other non-employee directors will receive annual cash compensation of $20,000, payable quarterly, and an annual grant of warrants valued at approximately $5,000.

On April 10, 2007, the Board of Directors approved a form of Indemnification Agreement for the directors and officers of Penn Octane. The agreement provides for indemnification against liabilities in the case of legal proceedings brought by a third party or by or in the right of Penn Octane. The agreement also provides for advancement of expenses to an indemnified director or officer.

131

On December 3, 2007, Rio Vista and Standard General entered into a Registration Rights Agreement (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. On August 1, 2008, the Form S-3 was declared effective. Rio Vista was required to pay liquidated damages to the holders of the Common Units for the period of time that the registration statement was not declared effective beginning 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. Rio Vista recorded a charge of liquidated damages of $144,000 and in lieu of a cash payment, Rio Vista agreed to issue additional common units, at a discount of 5% to the average closing price for such units as reported by the NASDAQ National Market for the 10 trading days immediately preceding each thirty day delay in the S-3 becoming effective. On October 17, 2008, Rio Vista issued an aggregate of 12,939 Rio Vista common units in satisfaction of all liquidated damages due.

132

At meetings held on May 30, 2008, in connection with the previously disclosed discussions between Rio Vista and the NASDAQ National Market (NASDAQ) regarding Rio Vista’s compliance with NASDAQ’s Marketplace Rule 4450(a)(3) on capital adequacy, the Board of Managers of the General Partner authorized the issuance and sale by Rio Vista of 197,628 of Rio Vista’s common units to Penn Octane at $10.12 per unit, and Penn Octane’s board authorized its purchase of such Rio Vista units at that price, for an aggregate price of approximately $2,000,000. Thereafter, Rio Vista’s officers continued to formulate a plan of ongoing compliance with Rule 4450(a)(3) on terms satisfactory to NASDAQ, and notified NASDAQ regarding the proposed issuance of its units. Rio Vista also filed a listing of additional units notification with NASDAQ (LAS) based on its intention to go forward with the proposed purchase and sale. Following further discussions with NASDAQ, at board meetings on July 15, 2008, the Board of Managers of the General Partner and the Board of Directors of Penn Octane confirmed their desire to implement promptly the previously authorized purchase and sale, and the companies agreed to complete the transaction, subject to NASDAQ approval of Rio Vista’s LAS. On July 23, 2008, after the period of review for the LAS passed, the common units were issued to Penn Octane.

Director Independence

The board of directors is currently composed of five members, none of whom are members of the management of Penn Octane. The OTC Bulletin Board does not have rules regarding director independence. The following directors are considered “independent” as defined under the rules of the NASDAQ National Market: Messrs. Canney, Raben, Viele, Singer and Manner. Accordingly, the entire board is comprised of independent directors under the NASDAQ definition.

The Company’s audit committee (Audit Committee) consists of Mr. Canney (Chairman), Mr. Raben, and Mr. Viele. The OTC Bulletin Board does not have rules regarding the independence of audit committee members. The board has determined that all three members of the audit committee meet the audit committee independence requirements under the rules of the NASDAQ Stock Market.

133

Item 14. Principal Accountant Fees and Services.

The Company has been billed as follows for the professional services of Burton McCumber & Cortez, L.L.P. rendered during the years ended:


	December 31, 2007			December 31, 2008

Audit Fees	$	918,000		$	894,000

Audit — Related Fees	$	122,000	⁽³⁾	$	2,000

Tax Fees ⁽¹⁾	$	67,000		$	101,000

All Other Fees	$	4,000	⁽²⁾	$	9,000


(1)		Represents fees billed for tax compliance, tax advice and tax planning services.

(2)		Represents fees related to the Mexican subsidiaries.

(3)		Represents fees related to the Restated LPG Asset Sale.

The Company’s audit committee approves the engagement of its independent auditor to perform audit related services. The audit committee does not formally approve specific amounts to be spent on non-audit related services which in the aggregate do not exceed amounts to be spent on audit related services. In determining the reasonableness of audit fees, the audit committee considers historical amounts paid and the scope of services to be performed.

134

PART IV

Item 15. Exhibits and Financial Statement Schedules

	a.		Financial Statements and Financial Statement Schedules.

			The following documents are filed as part of this report:

	(1)		Consolidated Financial Statements:

			Penn Octane Corporation

			Report of Independent Registered Public Accounting Firm

			Consolidated Balance Sheet as of December 31, 2007 and December 31, 2008

			Consolidated Statement of Operations for each of the two years in the period ended December 31, 2008

			Consolidated Statement of Stockholders’ Equity for each of the two years in the period ended December 31, 2008

			Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2008

			Notes to Consolidated Financial Statements

	(2)		Financial Statement Schedules:

			Schedule II — Valuation and Qualifying Accounts

b. Exhibits.


Exhibit No.

	2.1	Purchase and Sale Agreement dated August 15, 2005 as amended and restated on August 15, 2006 entered into by and between Penn Octane Corporation and TransMontaigne Product Services, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).

	2.2	Purchase and Sale Agreement dated August 15, 2005 as amended and restated on August 15, 2006 entered into by and between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).

	2.3	Agreement And Plan Of Merger, Made As Of The 27th Day Of July, 2007, By And Among Rio Vista Energy Partners L.P., (Buyer); Regional Enterprises, Inc., A Virginia Corporation And Newly Formed, Wholly Owned Subsidiary Of Buyer (Merger Sub); Regional Enterprizes, Inc. (Also Known As Regional Enterprises, Inc.), A Virginia Corporation (Company); The Shareholders Of Company; And W. Gary Farrar, Jr. (Principal). (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

135


Exhibit No.

	2.4	Articles Of Merger Of Regional Enterprises, Inc. A Virginia Corporation, And Regional Enterprizes, Inc., A Virginia Corporation Dated July 27 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	2.5	Asset Purchase Agreement, dated October 1, 2007, by and between Rio Vista Penny LLC and G M Oil Properties, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.6	Amendment to Asset Purchase Agreement, dated November 16, 2007, by and between Rio Vista Penny LLC and G M Oil Properties, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.7	Asset Purchase Agreement, dated as of October 1, 2007, by and between Rio Vista Penny LLC, Penny Petroleum Corporation and Gary Moores. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.8	Amendment to Asset Purchase Agreement, dated October 25, 2007, by and among Rio Vista Energy Partners L.P., Rio Vista Penny LLC, Penny Petroleum Corporation and Gary Moores. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.9	Second Amendment to Asset Purchase Agreement, dated November 16, 2007, by and among Rio Vista Energy Partners L.P., Rio Vista Penny LLC, Penny Petroleum Corporation and Gary Moores. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.10	Stock Purchase Agreement, dated October 2, 2007, by and between Rio Vista GO, GO LLC, Outback Production Inc., Gary Moores and Bill Wood. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.11	Amendment to Membership Interest Purchase and Sale Agreement, dated November 16, 2007, by and between Rio Vista Energy Partners L.P., Rio Vista GO LLC, Outback Production Inc., GO LLC, and Gary Moores and Bill Wood. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	2.12	Purchase and Sale Agreement, dated December 26, 2007, by and among Rio Vista Operating Partnership L.P., Penn Octane International, LLC, TMOC Corp., TLP MEX L.L.C. and RAZORBACK L.L.C. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	3.1	Restated Certificate of Incorporation, as amended. (Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).

	3.2	Amended and Restated By-Laws of the Company. (Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1997 filed on June 16, 1997, SEC File No. 000-24394).

	3.3	Certificate of the Designation, Powers, Preferences and Rights of the Series B Convertible Redeemable Preferred Stock, filed with the State of Delaware. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1999 filed on November 10, 1999, SEC File No. 000-24394).

136


Exhibit No.

	10.1	General Security Agreement dated October 14, 1997 between RZB Finance LLC and the Company. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1997 filed on November 13, 1997, SEC File No. 000-24394).

	10.2	Permit issued on July 26, 1999 by the United States Department of State authorizing the Company to construct two pipelines crossing the international boundary line between the United States and Mexico for the transport of liquefied petroleum gas (LPG) and refined product (motor gasoline and diesel fuel). (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 1999 filed on November 9, 1999, SEC File No. 000-24394).

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

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

	10.5	Contribution, Conveyance and Assumption Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners L.P., Rio Vista Operating GP LLC and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.6	Conveyance Agreement effective September 30, 2004 from Penn Octane Corporation in favor of Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.7	Distribution Agreement dated September 16, 2004 by and among Penn Octane Corporation, Rio Vista Energy Partners L.P. and Subsidiaries. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.8	Omnibus Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners, L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.9	Amendment No. 1 to Omnibus Agreement entered into as of September 16, 2004 by and among Penn Octane Corporation, Rio Vista GP LLC, Rio Vista Energy Partners L.P. and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.10	Purchase Contract made and entered into effective as of October 1, 2004 by and between Penn Octane Corporation and Rio Vista Operating Partnership L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.11	Rio Vista GP LLC Unit Purchase Option dated July 10, 2003 granted by Penn Octane Corporation to Shore Capital LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.12	Rio Vista GP LLC Unit Purchase Option dated July 10, 2003 granted by Penn Octane Corporation to Jerome B. Richter. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

137


Exhibit No.

	10.13	First Amended and Restated Agreement of Limited Partnership of Rio Vista Energy Partners L.P. dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.14	Rio Vista GP LLC Amended and Restated Limited Liability Company Agreement dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.15	Form of RVGP Voting Agreement by and among Rio Vista GP LLC, Penn Octane Corporation and the members of Rio Vista GP LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.16	First Amended and Restated Agreement of Limited Partnership of Rio Vista Operating Partnership L.P. dated as of September 16, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.17	Amended and Restated Line Letter dated September 15, 2004 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.18	Replacement Promissory Note dated September 15, 2004 by Penn Octane Corporation to RZB Finance LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.19	Consent Letter dated September 15, 2004 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.20	Assignment of Easements from Penn Octane to Rio Vista Operating Partnership L.P. dated September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.21	Guaranty & Agreement between Rio Vista Energy Partners L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.22	Guaranty & Agreement between Rio Vista Operating Partnership L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.23	General Security Agreement between Rio Vista Energy Partners L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.24	General Security Agreement between Rio Vista Operating Partnership L.P. and RZB Finance LLC dated as of September 15, 2004. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed on November 9, 2004, SEC File No. 000-24394).

	10.25	Penn Octane Corporation 2001 Warrant Plan (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed on May 20, 2006, SEC File No. 000-24394).

138


Exhibit No.

	10.26	First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Energy Partners L.P. dated as of October 26, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).

	10.27	First Amendment to the First Amended and Restated Agreement of Limited Partnership of Rio Vista Operating Partnership L.P. dated as of October 26, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).

	10.28	Amended and Restated Promissory Note by Jerome B. Richter to the Company dated November 15, 2005. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).

	10.29	Agreement dated as of November 15, 2005 by and between Penn Octane Corporation and Jerome B. Richter. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed on November 21, 2005, SEC File No. 000-24394).

	10.30	Ella-Brownsville Pipeline Lease Agreement effective as of August 1, 2006 between Seadrift Pipeline Corporation and Penn Octane Corporation. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on August 14, 2006, SEC File No. 000-24394).

	10.31	Amendment to Pledge and Security Agreement between the Penn Octane Corporation and Jerome B. Richter dated October 13, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 20, 2006, SEC File No. 000-24394).

	10.32	First Amendment to Amended and Restated Limited Liability Company Agreement of Rio Vista GP LLC dated October 6, 2006. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed on November 20, 2006, SEC File No. 000-24394).

	10.33	Unit Purchase Option effective February 6, 2007 between Shore Trading LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.34	Consent to Transfer of Units, Acknowledgement of Representation, and Waiver of Conflicts dated February 6, 2007 among Penn Octane Corporation, Rio Vista GP LLC, and Shore Trading LLC. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.35	Consulting Agreement entered into March 5, 2007, with an effective date of November 15, 2006 by and between Penn Octane Corporation, and Rio Vista Energy Partners L.P., and JBR Capital Resources, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.36	Letter agreement dated March 5, 2007 by and between Penn Octane Corporation, Rio Vista Energy Partners L.P. and JBR Capital Resources, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.37	Amended Form of Common Stock Purchase Warrant under the Penn Octane Corporation 2001 Warrant Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.38	Form of Penn Octane Corporation Chairman Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

139


Exhibit No.

	10.39	Form of Penn Octane Corporation Director and Officer Indemnification Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.40	Form of Penn Octane Corporation Director Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.41	Form of Rio Vista GP LLC Chairman Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.42	Form of Rio Vista GP LLC Manager Services Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.43	Form of Rio Vista GP LLC Manager and Officer Indemnification Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.44	Form of Nonqualified Unit Option Agreement under the 2005 Rio Vista Energy Partners L.P. Equity Incentive Plan. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.45	Amended and Restated Line Letter dated December 7, 2006 between RZB Finance LLC and Penn Octane Corporation. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394).

	10.46	Consulting Agreement with An Effective Date Of November 1, 2006 By And Between Penn Octane Corporation And Rio Vista Energy Partners L.P. And Ricardo Rodriguez Canney. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.47	Consulting Agreement Made And Entered Into As Of The 2nd Day Of July, 2007 Between Rio Vista Energy Partners, L.P. And Ceocast, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.48	Employment And Non-Competition Agreement Effective As Of The 27th Day Of July, 2007 Made By And Between Regional Enterprises, Inc. And W. Gary Farrar, III. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.49	Escrow Agreement Between Rio Vista Energy Partners L.P., Regional Enterprises, Inc., W. Gary Farrar, Jr., A Resident Of The Commonwealth Of Virginia, And First Capital Bank, Effective As Of The 27th Day Of July, 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.50	Loan Agreement Dated As Of July 26, 2007, And Entered Into Between Rio Vista Energy Partners L.P. And RZB Finance LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.51	Guaranty And Agreement Between Regional Enterprises, Inc. And RZB Finance LLC Dated As Of July 26, 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.52	Guaranty And Agreement Between Penn Octane Corporation and RZB Finance LLC Dated As Of July 26, 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

140


Exhibit No.

	10.53	Guaranty And Agreement Between Rio Vista Operating Partnership L.P. and RZB Finance LLC Dated As Of July 26, 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.54	$5,000,000 Promissory Note Dated July 26, 2007 Issued By Rio Vista Energy Partners L.P., To RZB Finance LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.55	General Security Agreement dated July 26, 2007 between RZB Finance LLC and Regional Enterprises, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.56	Pledge Agreement, Made This 26th Day Of July, 2007, By And Between: Rio Vista Energy Partners L.P. And RZB Finance LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.57	First Amendment To Line Letter Dated As Of July 26, 2007, Between RZB Finance LLC And Penn Octane Corporation. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.58	Debt Assumption Agreement Made As Of The 26th Day Of July, 2007, By And Between Rio Vista Energy Partners L.P. And Regional Enterprises, Inc., A Virginia Corporation. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.59	$5,000,000 Debt Assumption Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., To Rio Vista Energy Partners L.P. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

141


Exhibit No.

	10.60	$2,500.000 Promissory Note Dated July 26, 2007 Issued By Regional Enterprises, Inc., To Rio Vista Energy Partners L.P. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.61	Environmental Indemnity Agreement Made As Of The 26th Day Of July, 2007 By Regional Enterprises, Inc. And RZB Finance LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.62	Reaffirmation Of Security Agreements, Dated As Of July 26, 2007 By And Among Rio Vista Energy Partners L.P., Penn Octane Corporation And Rio Vista Operating Partnership L.P. And RZB Finance LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 20, 2007, SEC File No. 000-24394).

	10.63	Binding Letter of Intent made and entered into by and between TransMontaigne Partners L.P. and Rio Vista Operating Partnership L.P. effective and binding as of September 12, 2007. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.64	Restated and amended Promissory Note dated September 12, 2007 between Rio Vista Operating Partnership L.P. and TransMontaigne Product Services Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.65	Restated and Amended Security Agreement made this 12th day of September 2007, among Rio Vista Operating Partnership, L.P. and TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.66	First Priority Equity Interest Pledge Agreement entered into on this 12th day of September, 2007 by and among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC, and TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P. with the acknowledgment of Penn Octane de Mexico, S. de R.L. de C.V. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.67	First Priority Equity Interest Pledge Agreement entered into on this 12th day of September, 2007 by and among Rio Vista Operating Partnership, L.P., Penn Octane International, LLC , and TransMontaigne Product Services, Inc. and TransMontaigne Partners L.P. with the acknowledgment of Termatsal, S. de R.L. de C.V. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.68	Assignment Agreement entered into on this 12th day of September, 2007 by and between Rio Vista Operating Partnership L.P., and TransMontaigne Partners L.P. and TransMontaigne Product Services, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

	10.69	Note Purchase Agreement between Rio Vista Penny LLC, TCW Asset Management Company and TCW Energy Fund X Investors dated November 19, 2007. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

142


Exhibit No.

	10.70	Guaranty made as of November 19, 2007 by Rio Vista Eco LLC, Rio Vista GO LLC, GO LLC, MV Pipeline Company in favor of TCW Asset Management Company as administrative agent for Holders. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	10.71	Security Agreement dated as of November 19, 2007 by Rio Vista Penny LLC in favor of TCW Asset Management Company, as administrative agent. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	10.72	Assumption Agreement dated November 19, 2007 by and among GM Oil Properties, Inc., Rio Vista Penny LLC, TCW Asset Management Company, as administrative agent and the holders party to the Note Purchase Agreement. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	10.73	Rio Vista Energy Partners L.P. Common Unit Purchase Warrant issued to TCW Energy Funds X Holdings, L.P. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	10.74	Promissory note dated November 19, 2007 issued by Rio Vista to Gary Moores. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on April 15, 2008, SEC File No. 000-24394).

	10.75	First Amendment to Note Purchase Agreement dated as of September 29, 2008 by and among Rio Vista Penny LLC, TCW Asset Management Company, and the Holders party to the Original Note Purchase Agreement. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 filed on November 17, 2008, SEC File No. 000-24394).

	10.76	Amended and Restated Management Services Agreement, dated and effective as of September 29, 2008, is made by and among Rio Vista Operating LLC, Rio Vista Energy Partners L.P., and Rio Vista Penny LLC. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 filed on November 17, 2008, SEC File No. 000-24394).

	10.77	Promissory Note dated April 15, 2008 between Rio Vista Energy Partners L.P. and Jerome B. Richter. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 filed on November 17, 2008, SEC File No. 000-24394).

	14.1	Penn Octane Corporation Code of Business Conduct (2007) (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on April 17, 2007, SEC File No. 000-24394). (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed on November 19, 2007, SEC File No. 000-24394).

The following Exhibits are filed as part of this report:


Exhibit No.

	10.78	Amendment to Promissory note dated June 27, 2008 issued by Rio Vista to Gary Moores.

	10.79	Second Amendment to Promissory note dated January 20, 2009 issued by Rio Vista to Gary Moores.

	10.80	Second Amendment to Loan Agreement dated as of July 2008 between RZB Finance LLC and Rio Vista.

143


Exhibit No.

	10.81	Third Amendment to Loan Agreement dated as of December 2008 between RZB Finance LLC and Rio Vista.

	10.82	Fourth Amendment to Loan Agreement dated as of February 28, 2009 between RZB Finance LLC and Rio Vista.

	10.83	Fifth Amendment to Loan Agreement dated as of March 31, 2009 between RZB Finance LLC and Rio Vista.

	10.84	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated December 30, 2008 between Rio Vista Penny LLC and TCW Asset Management Company.

	10.85	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated February 28, 2009 between Rio Vista Penny LLC and TCW Asset Management Company.

	10.86	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW Asset Management Company.

	21	Subsidiaries of the Registrant.

	23.1	Consent of Burton McCumber & Cortez, L.L.P.

	23.2	Consent of Lee Keeling and Associates, Inc.

	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


*		indicates management contract or compensatory plan or arrangement.

All of the Exhibits are available from the SEC’s website at www.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.

144

Schedule II

Penn Octane Corporation and Subsidiaries

VALUATION AND QUALIFYING ACCOUNTS


	Balance at		Charged to
	Beginning of		Costs and		Charged to				Balance at End
Description	Period		Expenses		Other Accounts		Deductions		of Period

Year ended December 31, 2008

Allowance for doubtful accounts	$	—	$	60,000	$	—	$	—	$	60,000

Year ended December 31, 2007

Allowance for doubtful accounts	$	—	$	—	$	—	$	—	$	—

145

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PENN OCTANE CORPORATION
	By:
		Ian T. Bothwell
		Acting Chief Executive Officer, Acting President, Vice-President, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Executive, Financial and Accounting Officer)

April 14, 2009

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


Signature	Title	Date

/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)	April 14, 2009

/s/ Richard R. Canney	Richard R. Canney Director	April 14, 2009

/s/ Bruce I. Raben	Bruce I. Raben Director	April 14, 2009

/s/ Eugene A. Viele	Eugene A. Viele Director	April 14, 2009

/s/ Douglas G. Manner	Douglas G. Manner Director	April 14, 2009

/s/ Nicholas J. Singer	Nicholas J. Singer Director	April 14, 2009

146

EXHIBIT INDEX


Exhibit No.

	10.78	Amendment to Promissory note dated June 27, 2008 issued by Rio Vista to Gary Moores.

	10.79	Second Amendment to Promissory note dated January 20, 2009 issued by Rio Vista to Gary Moores.

	10.80	Second Amendment to Loan Agreement dated as of July 2008 between RZB Finance LLC and Rio Vista.

	10.81	Third Amendment to Loan Agreement dated as of December 2008 between RZB Finance LLC and Rio Vista.

	10.82	Fourth Amendment to Loan Agreement dated as of February 28, 2009 between RZB Finance LLC and Rio Vista.

	10.83	Fifth Amendment to Loan Agreement dated as of March 31, 2009 between RZB Finance LLC and Rio Vista.

	10.84	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated December 30, 2008 between Rio Vista Penny LLC and TCW Asset Management Company.

	10.85	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated February 28, 2009 between Rio Vista Penny LLC and TCW Asset Management Company.

	10.86	Letter agreement to extend payments and other requirements pursuant to Note Purchase Agreement dated March 23, 2009 between Rio Vista Penny LLC and TCW Asset Management Company.

	21	Subsidiaries of the Registrant

	23.1	Consent of Burton McCumber & Cortez, L.L.P.

	23.2	Consent of Lee Keeling and Associates, Inc.

	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


*		indicates management contract or compensatory plan or arrangement.

147

Filing Compare · PENN OCTANE CORP