**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
 
  **FORM
        10-Q**
 
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        quarterly period ended September 30, 2005
 
 OR
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        transition period from ____________ to _____________
 
 Commission
        file number: **000-24394**
 
 **Penn
        Octane Corporation**
 (Exact
        Name of Registrant as Specified in Its Charter)
 
 **Delaware**
              **52-1790357**(State
                  or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
                  Employer Identification No.)
 
 **77-530
                  Enfield Lane, Bldg. D, Palm Desert, California**
              **92211**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 
 Registrant's
        Telephone Number, Including Area Code: **(760)
        772-9080**
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days.
 Yes T No
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).
 Yes  NoT
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act)
 Yes  NoT
  The
        number of shares of Common Stock, par value $.01 per share, outstanding on
        October 31, 2005 was 15,522,745.
  
 
 1
  **PENN
        OCTANE CORPORATION**
 **TABLE
        OF CONTENTS**
 
 ITEM
              
              PAGE
                  NO.Part
                  I
              1.
              Financial
                  StatementsReport
                  of Independent Registered Public Accounting
                  Firm
              3Unaudited
                  Consolidated Balance Sheets as of
                  September 30, 2005 and December 31, 2004
              4-5Unaudited
                  Consolidated Statements of
                  Operations for the three months and nine months ended September
                  30, 2005
                  and 2004
              6Unaudited
                  Consolidated Statements of Cash Flows for the
                  nine months ended September 30, 2005 and 2004
              7Notes
                  to Consolidated Financial Statements (Unaudited)
              8-292.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              30-563.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              564.
              Controls
                  and Procedures
              56Part
                  II
              1.
              Legal
                  Proceedings
              572.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              573.
              Defaults
                  Upon Senior Securities
              574.
              Submission
                  of Matters to a Vote of Security
                  Holders
              575.
              Other
                  Information
              576.
              Exhibits
              58-59Signatures
              60
  2
  Report
        of Independent Registered Public Accounting
        Firm
 
 Board
        of
        Directors and Stockholders
 Penn
        Octane Corporation
 
 We
        have
        reviewed the consolidated balance sheets of Penn Octane Corporation and
        subsidiaries (Company) as of September 30, 2005 and December 31, 2004, the
        consolidated statements of operations for the three months and nine months
        ended
        September 30, 2005 and the consolidated statement of cash flows for the nine
        months ended September 30, 2005. These interim financial statements are the
        responsibility of the Company’s management.
 
 We
        conducted our review in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). A review of interim financial
        information consists principally of applying analytical procedures and making
        inquiries of persons responsible for financial and accounting matters. It
        is
        substantially less in scope than an audit conducted in accordance with the
        standards of the Public Company Accounting Oversight Board, the objective
        of
        which is the expression of an opinion regarding the financial statements
        taken
        as a whole. Accordingly, we do not express such an opinion.
 
 Based
        on
        our reviews, we are not aware of any material modifications that should be
        made
        to the accompanying interim financial statements for them to be in conformity
        with United States generally accepted accounting principles.
 
 The
        accompanying consolidated statements of operations of Penn Octane Corporation
        and subsidiaries for the three months and nine months ended September 30,
        2004
        and the accompanying consolidated statement of cash flows of Penn Octane
        Corporation and subsidiaries for the nine months ended September 30, 2004
        were
        not audited, reviewed, or compiled by us and, accordingly, we do not express
        an
        opinion or any other form of assurance on them.
 
 We
        have
        previously audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the consolidated balance sheet
        of
        Penn Octane Corporation and Subsidiaries as of July 31, 2004 (not presented
        herein), and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended (not presented herein); and
        in
        our report dated October 5, 2004, we expressed an unqualified opinion on
        those
        consolidated financial statements.
 
 Our
        auditors’ report on the Company’s financial statements as of July 31, 2004
        included an explanatory paragraph referring to the matters discussed in Note
        S
        of those financial statements which raised substantial doubt about the Company’s
        ability to continue as a going concern. As indicated in Note L to the
        accompanying unaudited interim consolidated financial statements, conditions
        continue to exist which raise substantial doubt about the Company’s ability to
        continue as a going concern.
 
 
 /s/
        BURTON MCCUMBER & CORTEZ, L.L.P.
 
 Brownsville,
        Texas
 November
        4, 2005
  3
  **Part
        I**
 **Item
        1.**
 
 **Penn
        Octane Corporation and Subsidiaries**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **ASSETS**
 
 **(UNAUDITED)**
  September
                  30,
                2005
              
              December
                  31,
                2004Current
                  AssetsCash
              
              $
              289,634
              
              $
              374,567Restricted
                  cash
              
              
              7,323,697
              
              
              5,367,516Trade
                  accounts receivable (less allowance for doubtful accounts of
                  $0)
              
              
              10,980,219
              
              
              9,222,035Inventories
              
              
              2,618,074
              
              
              3,541,390Prepaid
                  expenses and other current assets
              
              
              219,404
              
              
              114,204Total
                  current assets
              
              
              21,431,028
              
              
              18,619,712Property,
                  plant and equipment - net
              
              
              15,073,907
              
              
              15,979,182Lease
                  rights (net of accumulated amortization of $806,758 and $772,412
                  at
                  September 30, 2005 and December 31, 2004)
              
              
              347,281
              
              
              381,627Other
                  non-current assets
              
              
              23,908
              
              
              28,932Total
                  assets
              
              $
              36,876,124
              
              $
              35,009,453
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  4
  **Penn
        Octane Corporation and Subsidiaries**
 
 **CONSOLIDATED
        BALANCE SHEETS - CONTINUED**
 
 **LIABILITIES
        AND STOCKHOLDERS' EQUITY**
 
 **(UNAUDITED)**
 
 September
                  30,
                2005
              
              December
                  31,
                2004Current
                  LiabilitiesCurrent
                  maturities of long-term debt
              
              $
              1,857,166
              
              $
              1,874,618Note
                  payable
              
              
              1,300,000
              
              
              -Revolving
                  line of credit
              
              
              2,628,019
              
              
              1,397,249LPG
                  and fuel products trade accounts payable
              
              
              13,433,166
              
              
              13,215,832Other
                  accounts payable
              
              
              1,896,041
              
              
              1,661,360U.S.
                  and foreign taxes payable
              
              
              -
              
              
              36,099Accrued
                  liabilities
              
              
              2,738,779
              
              
              1,007,145Total
                  current liabilities
              
              
              23,853,171
              
              
              19,192,303Long-term
                  debt, less current maturities
              
              
              24,493
              
              
              55,581Minority
                  interest in Rio Vista Energy Partners L.P.
              
              
              12,475,703
              
              
              14,614,370Commitments
                  and contingencies
              
              
              -
              
              
              -Stockholders'
                  EquitySeries
                  A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
                  no shares
                  issued and outstanding at September 30, 2005 and December 31,
                  2004
              
              
              -
              
              
              -Series
                  B - Senior preferred stock-$.01 par value, $10 liquidation value,
                  5,000,000 shares authorized; no shares issued and outstanding at
                  September
                  30, 2005 and December 31, 2004
              
              
              -
              
              
              -Common
                  stock - $.01 par value, 25,000,000 shares authorized; 15,522,745
                  and
                  15,316,495 shares issued and outstanding at September 30, 2005
                  and
                  December 31, 2004
              
              
              155,227
              
              
              153,165Additional
                  paid-in capital
              
              
              28,741,122
              
              
              28,536,987Note
                  receivable from a former officer of the Company for exercise of
                  warrants,
                  less reserve of $1,500,000 and $468,693 at September 30, 2005 and
                  December
                  31, 2004
              
              
              (1,696,693
              )
              
              (2,728,000
              )Accumulated
                  deficit
              
              
              (26,676,899
              )
              
              (24,814,953
              )Total
                  stockholders' equity
              
              
              522,757
              
              
              1,147,199Total
                  liabilities and stockholders' equity
              
              $
              36,876,124
              
              $
              35,009,453
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  5
  **Penn
        Octane Corporation and Subsidiaries**
 
 **CONSOLIDATED
        STATEMENTS OF
        OPERATIONS**
 
 **(Unaudited)**
 
 Three
                  Months Ended
              
              Nine
                  months endedSeptember
                  30,
                2005
              
              September
                  30,
                2004
              
              September
                  30,
                2005
              
              September
                  30,
                2004Revenues
              
              $
              66,698,075
              
              $
              59,362,046
              
              $
              178,687,549
              
              $
              150,029,350Cost
                  of goods sold
              
              
              65,182,714
              
              
              57,293,498
              
              
              174,695,212
              
              
              143,050,564Gross
                  profit
              
              
              1,515,361
              
              
              2,068,548
              
              
              3,992,337
              
              
              6,978,786Selling,
                  general and administrative expensesLegal
                  and professional fees
              
              
              668,398
              
              
              474,145
              
              
              1,680,846
              
              
              1,083,328Salaries
                  and payroll related expenses
              
              
              544,450
              
              
              381,203
              
              
              2,767,049
              
              
              1,821,960Other
              
              
              546,042
              
              
              905,968
              
              
              1,518,630
              
              
              1,655,8591,758,890
              
              
              1,761,316
              
              
              5,966,525
              
              
              4,561,147Asset
                  impairment charge
              
              
              -
              
              
              (324,041
              )
              
              -
              
              
              (324,041
              )Operating
                  income (loss)
              
              
              (243,529
              )
              
              (16,809
              )
              
              (1,974,188
              )
              
              2,093,598Other
                  income (expense)Interest
                  and LPG and Fuel Products financing expense
              
              
              (622,603
              )
              
              (366,548
              )
              
              (1,438,620
              )
              
              (1,092,216
              )Interest
                  income
              
              
              9,234
              
              
              9,837
              
              
              18,887
              
              
              60,747Minority
                  interest in loss of Rio Vista Energy Partners L.P.
              
              
              1,052,731
              
              
              -
              
              
              1,596,918
              
              
              -Income
                  (loss) before taxes
              
              
              195,833
              
              
              (373,520
              )
              
              (1,797,003
              )
              
              1,062,129Provision
                  for income tax
              
              
              (31,099
              )
              
              (65,011
              )
              
              (64,946
              )
              
              (50,591
              )Net
                  income (loss)
              
              $
              164,734
              
              $
              (438,531
              )
              $
              (1,861,949
              )
              $
              1,011,538Net
                  income (loss) per common share
              
              $
              0.01
              
              $
              (0.03
              )
              $
              (0.12
              )
              $
              0.07Net
                  income (loss) per common share assuming dilution
              
              $
              0.01
              
              $
              (
                  0.03
              )
              $
              (0.12
              )
              $
              0.07Weighted
                  average common shares outstanding
              
              
              15,522,745
              
              
              15,285,245
              
              
              15,489,572
              
              
              15,290,921
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  6
  **Penn
        Octane Corporation and Subsidiaries**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **(Unaudited)**
  Nine
                    months endedSeptember
                    30,
                  2005
                
                September
                    30,
                  2004Cash
                    flows from operating activities:Net
                    income (loss)
                
                $
                (
                    1,861,949
                )
                $
                1,011,538Adjustments
                    to reconcile net income to net cash (used in) provided by operating
                    activities:Depreciation
                    and amortization
                
                
                775,833
                
                
                726,542Amortization
                    of lease rights
                
                
                34,346
                
                
                34,346Non-employee
                    stock based costs and other
                
                
                -
                
                
                74,723Amortization
                    of loan discount related to detachable warrants
                
                
                398,955
                
                
                76,888Gain
                    on sale of assets
                
                
                (
                    24,000
                )
                
                -Interest
                    income
                
                
                -
                
                
                (
                    32,334
                )Asset
                    impairment charge
                
                
                -
                
                
                324,041Other
                
                
                -
                
                
                62,239Discount
                    of note receivable from former officer
                
                
                1,031,307
                
                
                -Minority
                    interest in loss of Rio Vista Energy Partners L.P.
                
                
                (
                    1,596,918
                )
                
                -Changes
                    in current assets and liabilities:Trade
                    accounts receivable
                
                
                (
                    1,758,184
                )
                
                (
                    2,679,094
                )Inventories
                
                
                1,014,945
                
                
                (
                    3,235,363
                )Prepaid
                    expenses and other current assets
                
                
                (
                    105,199
                )
                
                (
                    35,729
                )LPG
                    and Fuel Products trade accounts payable
                
                
                217,334
                
                
                (
                    1,811,420
                )Other
                    accounts payable and accrued liabilities
                
                
                2,066,324
                
                
                1,204,790U.S.
                    and Foreign taxes payable
                
                
                (
                    36,099
                )
                
                16,667Net
                    cash (used in) provided by operating activities
                
                
                156,695
                
                
                (
                    4,262,166
                )Cash
                    flows from investing activities:Capital
                    expenditures
                
                
                (
                    57,724
                )
                
                102,892Proceeds
                    from sale of assets
                
                
                175,000
                
                
                -Property
                    held for sale
                
                
                -
                
                
                220,000(Increase)
                    decrease in other non-current assets
                
                
                5,022
                
                
                (
                    8,559
                )Net
                    cash provided by (used in) investing activities
                
                
                122,298
                
                
                314,333Cash
                    flows from financing activities:(Increase)
                    decrease in restricted cash
                
                
                (
                    1,956,181
                )
                
                1,868,687Revolving
                    credit facilities
                
                
                1,230,770
                
                
                2,259,110Issuance
                    of common stock
                
                
                97,750
                
                
                -Distributions
                    paid by Rio Vista Energy Partners L.P. to limited partners
                
                
                (
                    955,328
                )
                
                -Issuance
                    of debt
                
                
                1,300,000
                
                
                -Reduction
                    in debt
                
                
                (80,937
                )
                
                (
                    226,119
                )Net
                    cash provided by (used in) financing activities
                
                
                (
                    363,926
                )
                
                3,901,678Net
                    decrease in cash
                
                
                (
                    84,933
                )
                
                (
                    46,155
                )Cash
                    at beginning of period
                
                
                374,567
                
                
                278,188Cash
                    at end of period
                
                $
                289,634
                
                $
                232,033Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for:Interest
                    and LPG and Fuel Products financing expense
                
                $
                625,931
                
                $
                1,094,497Supplemental
                    disclosures of noncash transactions:Equity-common
                    stock and warrants issued and other
                
                $
                530,450
                
                $
                167,170Stock
                    exchanged for note receivable
                
                $
                -
                
                $
                201,854Note
                    issued for software
                
                $
                55,463
                
                $
                -Transfer
                    of line fill to inventory
                
                $
                91,941
                
                $
                -
 
 The
        accompanying notes and accountants’ report are an integral part of these
        statements.
  7
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        A - ORGANIZATION**
 
 Penn
        Octane Corporation, formerly known as International Energy Development
        Corporation (International Energy), was incorporated in Delaware in August
        1992.
        Penn Octane Corporation (Penn Octane) and its consolidated subsidiaries are
        collectively hereinafter referred to as the Company. The Company has been
        principally engaged in the purchase, transportation and sale of liquefied
        petroleum gas (LPG). The Company owns and operates a terminal facility in
        Brownsville, Texas (Brownsville Terminal Facility) and owns
        a
        LPG terminal facility in Matamoros, Tamaulipas, Mexico (Matamoros Terminal
        Facility) and approximately 23 miles of pipelines (US - Mexico Pipelines)
        which
        connect the Brownsville Terminal Facility to the Matamoros Terminal Facility.
        The Company has a long-term lease agreement for approximately 132 miles of
        pipeline (Leased Pipeline) which
        connects ExxonMobil Corporation’s (Exxon) King Ranch Gas Plant in Kleberg
        County, Texas and Duke Energy's La Gloria Gas Plant in Jim Wells County,
        Texas,
        to the Company's Brownsville Terminal Facility .
        In
        addition, at the discretion of Exxon, the Company has access to a twelve-inch
        pipeline (ECCPL), which connects from Exxon’s Viola valve station in Nueces
        County, Texas to the inlet of the King Ranch Gas Plant as well as existing
        and
        other potential propane pipeline suppliers which have the ability to access
        the
        ECCPL. In connection with the Company’s lease agreement for the Leased Pipeline,
        the Company has access to storage in Markham, Texas (Markham) which has a
        capacity of up to approximately 21,000,000 gallons of storage, as well as
        other
        potential propane pipeline suppliers, via approximately 155 miles of pipeline
        located between Markham and the Exxon King Ranch Gas Plant.
 
 The
        Company commenced commercial operations for the purchase, transport and sale
        of
        LPG in the fiscal year ended July 31, 1995, upon construction of the Brownsville
        Terminal Facility. The primary market for the Company's LPG is the northeastern
        region of Mexico, which includes the states of Coahuila, Nuevo Leon and
        Tamaulipas. Since operations commenced, the Company’s primary customer for LPG
        has been P.M.I. Trading Limited (PMI). PMI is a subsidiary of Petroleos
        Mexicanos, the state-owned Mexican oil company, which is commonly known by
        its
        trade name “PEMEX.” PMI is the exclusive importer of LPG into Mexico. PMI sells
        the LPG purchased from the Company to PEMEX which distributes the LPG into
        the
        northeastern region of Mexico. Sales
        of
        LPG to PMI accounted for approximately 39% of the Company’s total revenues and
        81% of the Company’s LPG revenues for the nine months ended September 30, 2005.
        The Company’s gross profit from LPG sales is dependent on sales volume of LPG to
        PMI, which fluctuates in part based on the seasons. The demand for LPG is
        strongest during the winter season. ****
 
 During
        June 2004, the Company began operations as a reseller of gasoline and diesel
        fuel (Fuel Products). The Company sells Fuel Products (Fuel Sales Business)
        through transactional, bulk and/or rack transactions. Typical transactional
        and
        bulk sales are made based on a predetermined net spread between the purchase
        and
        sales price over posted monthly variable prices and/or daily spot prices.
        Rack
        sales transactions are based on variable sale prices charged by the Company
        which are tied to posted daily spot prices and purchase costs which are based
        on
        a monthly average or 3 day average based on posted prices. The Company pays
        pipeline and terminal fees based on regulated rates.
 
 The
        Company has the ability to access certain pipeline and terminal systems located
        in California, Arizona, Nevada and Texas, where it is able to deliver its
        Fuel
        Products.
 
 For
        bulk
        and transactional sales, the Company enters into individual sales contracts
        for
        each sale. Rack sales are subject to credit limitations imposed on each
        individual buyer by the Company. The Company has several supply contracts
        for
        each of the Fuel Products it sells. The supply contracts are for annual periods
        with flexible volumes but they may be terminated sooner by the supplier if
        the
        Company consistently fails to purchase minimum volumes of Fuel Products.
        Fuel
        sales approximated 52% of total revenues for the nine months ended September
        30,
        2005.
  8
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        A - ORGANIZATION - Continued**
 
 On
        September 30, 2004, Penn Octane Corporation completed a series of transactions
        involving (i) the transfer of substantially all of its owned pipeline and
        terminal assets in Brownsville and Matamoros to its wholly owned subsidiary
        Rio
        Vista Operating Partnership L.P. and its subsidiaries (RVOP) (ii) transferred
        its 99.9% interest in RVOP to its wholly owned subsidiary, Rio Vista Energy
        Partners L.P. and its subsidiaries (Rio Vista) and (iii) distributed all
        of its
        limited partnership interest (Common Units) in Rio Vista to its common
        stockholders (Spin-Off), resulting in Rio Vista becoming a separate public
        company. The Common Units represented 98% of Rio Vista’s outstanding partnership
        interests. The remaining 2% interests, which is the general partner interest,
        is
        owned and controlled by Rio Vista GP LLC (General Partner), a wholly owned
        subsidiary of Penn Octane. The General Partner is responsible for the management
        of Rio Vista. Accordingly the Company has control of Rio Vista by virtue
        of its
        ownership and related voting control of the General Partner. Therefore, Rio
        Vista is consolidated with the Company and the interests of the limited partners
        are classified as minority interests in the Company’s unaudited consolidated
        financial statements. Subsequent
        to the Spin-Off, Rio Vista sells LPG directly to PMI and purchases LPG from
        Penn
        Octane under a long-term supply agreement. The purchase price of the LPG
        from
        Penn Octane is determined based on the cost of LPG under Penn Octane’s LPG
        supply agreements with its supplier, other direct costs related to PMI sales
        and
        a formula that takes into consideration operating costs of Penn Octane and
        Rio
        Vista.
 
 During
        December 2004, Penn Octane changed its fiscal year end from July 31 to December
        31.
 
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited consolidated financial statements include Penn Octane
        and
        its United States subsidiaries including Penn Octane International, L.L.C.,
        PennWilson CNG, Inc. (PennWilson) and Penn CNG Holdings, Inc. and Rio Vista
        and
        its U.S. and Mexican subsidiaries, Penn Octane de Mexico, S. de R.L. de C.V.
        (PennMex), Termatsal, S. de R.L. de C.V. (Termatsal) and Tergas, S. de R.L.
        de
        C.V. (Tergas), a consolidated affiliate, and its other inactive Mexican
        subsidiaries. All significant intercompany accounts and transactions are
        eliminated.
 
 The
        unaudited consolidated balance sheets as of September 30, 2005 and December
        31,
        2004, the unaudited consolidated statements of operations for the three and
        nine
        months ended September 30, 2005 and 2004 and the consolidated statement of
        cash
        flows for the nine months ended September 30, 2005 and 2004, have been prepared
        by the Company without audit. In the opinion of management, the unaudited
        consolidated financial statements include all adjustments (which include
        only
        normal recurring adjustments) necessary to present fairly the unaudited
        consolidated financial position of the Company as of September 30, 2005 and
        December 31, 2004, the unaudited consolidated results of operations for the
        three months and six ended September 30, 2005 and 2004 and the consolidated
        statement of cash flows for the nine months ended September 30, 2005 and
        2004.
 
 Certain
        information and footnote disclosures normally included in consolidated financial
        statements prepared in accordance with accounting principles generally accepted
        in the United States of America have been omitted pursuant to the rules and
        regulations of the Securities Exchange Commission, although the Company believes
        that the disclosures made are adequate to make the information not misleading.
        These unaudited consolidated financial statements should be read in conjunction
        with the consolidated financial statements and notes thereto included in
        the
        Company’s Annual Report on Form 10-K for the year ended July 31, 2004 and Rio
        Vista’s Annual Report on Form 10-K for the year ended December 31,
        2004.
 
 Certain
        reclassifications have been made to prior period balances to conform to the
        current presentation. All reclassifications have been consistently applied
        to
        the periods presented.
  9
 
 **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 
 **NOTE
        B -**  **INCOME
        (LOSS)**  **PER
        COMMON SHARE**
 
 Income
        (loss) per share of common stock is computed on the weighted average number
        of
        shares outstanding. During periods in which the Company incurs losses, giving
        effect to common stock equivalents is not presented as it would be
        antidilutive.
 
 The
        following tables present reconciliations from income (loss) per common share
        to
        income (loss) per common share assuming dilution (see note H for the
        warrants):
  For
                  the three months ended September 30, 2005
              
              For
                  the three months ended September 30,
                  2004Income
                  (loss)
                (Numerator)
              
              Shares
                (Denominator)
              
              Per-Share
                Amount
              
              Income
                  (loss)
                (Numerator)
              
              Shares
                (Denominator)
              
              Per-Share
                AmountNet
                  income (loss)
              
              $
              164,734
              
              
              
              
              
              
              
              $
              (
                  438,531
              )**Basic
                  EPS**Net
                  income (loss) available to common stockholders
              
              
              164,734
              
              
              15,522,745
              
              $
              0.01
              
              
              (
                  438,531
              )
              
              15,285,245
              
              $
              (
                  0.03
              )**Effect
                  of Dilutive Securities**Warrants
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -**Diluted
                  EPS**Net
                  income (loss) available to common stockholders
              
              $
              164,734
              
              
              15,522,745
              
              $
              0.01
              
              
              N/A
              
              
              N/A
              
              
              N/A
   For
                  the nine months ended September 30, 2005
              
              For
                  the nine months ended September 30, 2004Income
                  (loss)(Numerator)
              
              Shares
                (Denominator)
              
              Per-Share
                Amount
              
              Income
                  (loss)(Numerator)
              
              Shares
                (Denominator)
              
              Per-Share
                AmountNet
                  income (loss)
              
              $
              (
                  1,861,949
              )
              
              
              
              
              
              
              $
              1,011,538**Basic
                  EPS**Net
                  income (loss) available to common stockholders
              
              
              (
                  1,861,949
              )
              
              15,489,572
              
              $
              (
                  0.12
              )
              
              1,011,538
              
              
              15,290,921
              
              $
              0.07**Effect
                  of Dilutive Securities**Warrants
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              55,302**Diluted
                  EPS**Net
                  income (loss) available to common stockholders
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              $
              1,011,538
              
              
              15,346,223
              
              $
              0.07
  10
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        C - STOCK-BASED COMPENSATION**
 
 The
        Company accounts for stock option plans in accordance with the provisions
        of APB
        No. 25, “Accounting for Stock Issued to Employees”, and related interpretations
        which recognizes compensation expense on the grant date if the current market
        price of the stock exceeds the exercise price.
 
 Had
        compensation cost related to the warrants granted to employees been determined
        based on the fair value at the grant dates, consistent with the provisions
        of
        SFAS 123, the Company’s pro forma net income (loss), and net income (loss) per
        common share would have been as follows:
 
 Three
                  Months Ended
              
              Nine
                  months endedSeptember
                  30,
                2005
              
              September
                  30,
                2004
              
              September
                  30,
                2005
              
              September
                  30,
                2004Net
                  income (loss), as reported
              
              $
              164,734
              
              $
              (
                  438,531
              )
              $
              (
                  1,861,949
              )
              $
              1,011,538Add:
                  Stock-based employee compensation cost expense included in reported
                  net
                  income (loss), net of related tax effects
              
              
              -
              
              
              -
              
              
              -
              
              
              -Less:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (
                  117,772
              )
              
              (7,528
              )
              
              (272,237
              )
              
              (35,653
              )Net
                  income (loss), pro forma
              
              $
              46,962
              
              $
              (
                  446,059
              )
              $
              (
                  2,134,186
              )
              $
              975,885Net
                  income (loss) per common share, as reported
              
              $
              0.01
              
              $
              (
                  0.03
              )
              $
              (
                  0.12
              )
              $
              0.07Net
                  income (loss) per common share, pro forma
              
              $
              0.00
              
              $
              (
                  0.03
              )
              $
              (
                  0.14
              )
              $
              0.06Net
                  income (loss) per common share assuming dilution, as
                  reported
              
              $
              0.01
              
              $
              (
                  0.03
              )
              $
              (
                  0.12
              )
              $
              0.07Net
                  income (loss) per common share assuming dilution, pro
                  forma
              
              $
              0.00
              
              $
              (
                  0.03
              )
              $
              (
                  0.14
              )
              $
              0.06
 
 The
        following assumptions were used for grants of warrants to employees in the
        nine
        months ended September 30, 2005, to compute the fair value of the warrants
        using
        the Black-Scholes option-pricing model; dividend yield of 0%; expected
        volatility of 68% and 63%; risk free interest rate of 4.08%, 3.51% and 3.52%
        and
        expected lives of 5 years.
 
 The
        following assumptions were used for grants of warrants to employees in the
        nine
        months ended September 30, 2004, to compute the fair value of the warrants
        using
        the Black-Scholes option-pricing model; dividend yield of 0%; expected
        volatility of 72% and 81%; risk free interest rate of 3.22% and 3.27% and
        expected lives of 5 years.
  11
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        C - STOCK-BASED COMPENSATION - Continued**
 
 During
        December 2004, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standard No. 123 (revised 2004) “Share-Based Payment”
(SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based
        Compensation”, and supercedes APB Opinion 25, “Accounting for Stock Issued to
        Employees” (APB 25). SFAS 123R requires that the cost of share-based payment
        transactions (including those with employees and non-employees) be recognized
        in
        the financial statements as compensation cost. That cost will be measured
        based
        on the fair value of equity or liability instrument issued. SFAS 123R is
        effective for the Company beginning January 1, 2006. The Company will apply
        the
        modified prospective method as provided for in SFAS 123R, and therefore the
        financial statements of the Company for interim and annual periods prior
        to the
        adoption of SFAS 123R will not reflect any restatements.
 
 **NOTE
        D - PURCHASE AND SALE AGREEMENT**
 
 On
        August
        15, 2005, Penn Octane and Rio Vista each entered into separate purchase and
        sale
        agreements (PSA’s) with TransMontaigne Product Services Inc. (TransMontaigne)
        which provide for the sale and assignment of all of their respective LPG
        assets
        and refined products assets including the Brownsville Terminal
        Facility and refined products tank farm and associated leases, owned
        pipelines located in the United States, including land, leases, and rights
        of
        ways, LPG inventory, 100% of the outstanding stock of Mexican subsidiaries
        and
        affiliate, which in turn own pipelines and the Matamoros Terminal Facility,
        including land and rights of way, and assignment of the Pipeline Lease, PMI
        sales agreement and Exxon Supply Contract (LPG Asset Sale). Penn Octane’s
        agreement with TransMontaigne does not include any assets related to the
        Fuel
        Sales Business. The purchase price is $10,100,000 for assets sold by Penn
        Octane
        and $17,400,000 for assets to be sold by Rio Vista. The purchase price may
        be
        reduced as provided for in the PSA’s. In connection with the PSA’s,
        TransMontaigne loaned Rio Vista $1,300,000 which is to be repaid, including
        interest, as a reduction of the total purchase price at the time of closing
        or
        120 days following demand by TransMontaigne (TransMontaigne Note). The
        TransMontaigne Note is secured by the tank farm and certain LPG storage tanks
        located at the Brownsville Terminal Facility. The TransMontaigne Note begins
        to
        accrue interest on November 15, 2005 at the prime rate plus 2%. In connection
        with the TransMontaigne Note, RZB Finance, LLC (RZB) provided a consent and
        the
        Brownsville Navigation District issued an estoppel letter. Rio Vista used
        the
        proceeds from the TransMontaigne Note to fund certain expenses associated
        with
        the PSA’s and for working capital purposes.
 
 The
        closing of the LPG Asset Sale is subject to several conditions, including
        TransMontaigne’s satisfactory completion of its due diligence review, including
        financial, business, environmental and legal, the approval of Penn Octane’s
        stockholders and Rio Vista’s unit holders (see below), assignment of LPG related
        contracts, and the modification of LPG related permits and the related Mexican
        governmental approvals. Certain of the conditions to closing were not met
        by
        October 31, 2005. The PSA’s provide that any party may terminate the agreements
        if closing does not occur on or before October 31, 2005. None of the parties
        have elected to terminate the agreements and the parties continue to work
        towards the closing of the LPG Asset Sale.
 
 If
        the
        LPG Asset Sale is completed, Penn Octane intends to use a portion of its
        proceeds to pay off the Restructured Notes and $280,000 Notes plus accrued
        interest. In addition, Penn Octane estimates that it may have a federal tax
        liability in connection with the sale of its assets. The remaining proceeds
        will
        be available to Penn Octane to fund working capital requirements and to pursue
        activities intended to enhance stockholder value. Penn Octane intends to
        continue to operate its Fuel Sales Business.
 
 In
        connection with the LPG Asset Sale, Penn Octane filed a definitive proxy
        statement with the Securities Exchange Commission (SEC) on September 27,
        2005 in
        connection with the requirement to obtain approval for the LPG Asset Sale
        from
        Penn Octane’s stockholders. On October 26, 2005, Penn Octane held a special
        meeting of stockholders at which the stockholders approved the LPG Asset
        Sale.
  12
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        D - PURCHASE AND SALE AGREEMENT - Continued**
 
 If
        the
        LPG Asset Sale is completed, Rio Vista intends to use its proceeds to fund
        working capital requirements, pursue potential acquisitions and to resume
        the
        minimum quarterly distributions to its unitholders and to pay all arrearages.
        Rio Vista intends to pursue potential acquisitions which produce “qualifying
        income”.
 
 In
        connection with the LPG Asset Sale, Rio Vista filed a definitive proxy statement
        with the SEC on September 27, 2005 in connection with the requirement to
        obtain
        approval for the LPG Asset Sale from Rio Vista’s unitholders. In addition, in
        order to permit Rio Vista’s continued existence following the LPG Asset Sale,
        Rio Vista’s proxy statement contained a proposal to amend a provision in its
        partnership agreement which requires dissolution upon a sale of all or
        substantially all of its assets. On October 26, 2005, Rio Vista held a special
        meeting of unitholders at which the unitholders approved the LPG Asset Sale
        and
        the amendment to its partnership agreement.
  **NOTE
        E - PROPERTY, PLANT AND EQUIPMENT**
 
 Property,
        plant and equipment consists of the following:
 
 September
                    30,
                2005
              
              December
                    31,
                2004LPG:Midline
                  pump station (b)
              
              $
              2,326,985
              
              $
              2,326,985Brownsville
                  Terminal Facility: (a)Building
              
              
              173,500
              
              
              173,500Terminal
                  facilities
              
              
              3,631,207
              
              
              3,631,207Tank
                  Farm
              
              
              373,945
              
              
              373,945Leasehold
                  improvements
              
              
              318,807
              
              
              318,807Equipment
              
              
              226,285
              
              
              226,285Truck
              
              
              25,968
              
              
              25,9687,076,697
              
              
              7,076,697US
                  - Mexico Pipelines and Matamoros Terminal Facility: (a)(c)U.S.
                  Pipelines and Rights of Way
              
              
              6,729,833
              
              
              6,775,242Mexico
                  Pipelines and Rights of Way
              
              
              993,300
              
              
              993,300Matamoros
                  Terminal Facility
              
              
              5,874,781
              
              
              5,874,781Land
              
              
              705,358
              
              
              856,35814,303,272
              
              
              14,499,681Total
                  LPG
              
              
              21,379,969
              
              
              21,576,378Other:Office
                  equipment (b)
              
              
              108,487
              
              
              106,953Software
                  (b)
              
              
              57,162
              
              
              1,700165,649
              
              
              108,65321,545,618
              
              
              21,685,031Less:
                  accumulated depreciation and amortization
              
              
              (6,471,711
              )
              
              (5,705,849
              )$
              15,073,907
              
              $
              15,979,182
 
 (a)
              Rio
                  Vista assets
 (b)
              Penn
                  Octane and Subsidiaries other than Rio
                  Vista
 (c)
              Rio
                  Vista owns, leases, or is in the process of obtaining the land
                  or rights
                  of way used related to the US-Mexico
                  Pipelines
 
 Property,
        plant and equipment, net of accumulated depreciation, includes $5,435,149
        and
        $5,745,793 of costs located in Mexico at September 30, 2005 and December
        31,
        2004, respectively.
  13
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        F - INVENTORIES**
 
 Inventories
        are valued at the lower of FIFO cost or market (LCM) and consist of the
        following:
 
 September
                  30, 2005
              
              December
                  31, 2004Gallons
              
              LCM
              
              Gallons
              
              LCMLPG:Leased
                  Pipeline
              
              
              1,175,958
              
              $
              1,328,383
              
              
              1,175,958
              
              $
              930,156Brownsville
                  Terminal Facility and Matamoros Terminal Facility
              
              
              238,360
              
              
              269,256
              
              
              369,508
              
              
              292,272Markham
                  Storage and other
              
              
              -
              
              
              -
              
              
              -
              
              
              -1,414,318
              
              
              1,597,639
              
              
              1,545,466
              
              
              1,222,428Fuel
                  Products
              
              
              466,320
              
              
              1,020,435
              
              
              1,847,191
              
              
              2,318,962$
              2,618,074
              
              
              
              
              $
              3,541,390
 
 **NOTE
        G - DEBT OBLIGATIONS**
 
 Debt
                  consists of the following:September
                  30,
                2005
              
              December31,
                2004Noninterest-bearing
                  note payable, discounted at 7%, for legal services; due in February
                  2002.
              
              $
              137,500
              
              $
              137,500Restructured
                  Notes and $280,000 Notes.
              
              
              1,688,857
              
              
              1,711,924Other
                  debt.
              
              
              55,302
              
              
              80,775Total
                  debt
              
              
              1,881,659
              
              
              1,930,199Less:
                  Current maturities
              
              
              1,857,166
              
              
              1,874,618Long-term
                  debt
              
              $
              24,493
              
              $
              55,581
 
 **Restructured
        Notes and $280,000 Note**
 
 On
        January 16, 2004, the Restructured Notes totaling $1,525,000 which were due
        on
        December 15, 2003 were renewed and extended (Restructuring). In connection
        with
        the Restructuring, the due date of the Restructured Notes was extended to
        December 15, 2005. The Restructured Notes can be repaid at any time without
        penalty. Annual interest on the Restructured Notes is 16.5% and the Company
        also
        agreed to pay a fee of 1.5% on any principal balance of the Restructured
        Notes
        outstanding at the end of each quarterly period, beginning December 15, 2003.
        Interest and fees are payable quarterly beginning March 15, 2004. In addition,
        the Company issued an additional 37,500 warrants to purchase shares of common
        stock of Penn Octane to certain holders of the Restructured Notes. All payments
        were made through March 15, 2005. The payments on these notes due June 15,
        2005
        and September 15, 2005 each in the amount of approximately $103,000 have
        not
        been made (see below).
 
 In
        addition, the Company agreed to extend the expiration date on outstanding
        warrants to purchase common stock of Penn Octane held by holders of the
        Restructured Notes until December 15, 2008 and agreed to issue 110,250 warrants
        (which includes 20,000 warrants to purchase Rio Vista common units held by
        Philadelphia Brokerage Corporation (see below)) to purchase Rio Vista common
        units (Rio Vista Warrants). The Rio Vista Warrants will expire on December
        15,
        2006 and the exercise price is $5.00 per warrant. The amount of discount
        recorded by the Company totaled $422,000 which is reflected as interest expense
        ratably amortized from the grant date of January 14, 2005 to December 15,
        2005,
        the maturity date of the debt obligations. For the three months and nine
        months
        ended September 30, 2005 amortization expense was $153,455 and $326,091,
        respectively.
  14
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        G - DEBT OBLIGATIONS - Continued**
 
 Certain
        holders of promissory notes totaling approximately $280,000 of principal
        due
        December 15, 2003, who did not agree to the Restructuring (Declining
        Noteholders), were paid by the Company. In connection with amounts due to
        the
        Declining Noteholders, the Company issued $280,000 of promissory notes ($280,000
        Notes). The terms of the $280,000 Notes are substantially similar to the
        Restructured Notes, except that the holders of the $280,000 Notes were not
        entitled to receive any warrants to purchase shares of common stock of Penn
        Octane until the Restructuring.
 
 The
        holders of the Restructured Notes and $280,000 Notes consented to the Spin-Off
        of Rio Vista provided that (1) the assets of Penn Octane transferred to Rio
        Vista continued to be pledged as collateral for payment of those notes, (2)
        Rio
        Vista guaranteed Penn Octane’s obligations under the notes and (3) Rio Vista be
        prohibited from making any distributions in the event that Penn Octane is
        in
        default under the Restructured Notes and $280,000 Notes.
 
 In
        connection with the Restructured Notes and $280,000 Notes, Philadelphia
        Brokerage Corporation (PBC) acted as placement agent and received a fee equal
        to
        1.5% of the Restructured Notes and $280,000 Notes. PBC also received warrants
        to
        purchase 20,000 units in Rio Vista. The terms of the warrants are the same
        as
        the Rio Vista Warrants.
 
 In
        connection with the issuance of the new warrants of Penn Octane and the
        extension of the warrants of Penn Octane, the Company recorded a discount
        of
        $194,245 related to the fair value of the newly issued, modified warrants
        and
        including fees of $27,075 of which $149,542 has been amortized through September
        30, 2005.
 
 Jerome
        B.
        Richter, former Chief Executive Officer of Penn Octane, continues to provide
        collateral to secure the Restructured Notes and the $280,000 Notes noteholders
        with 2,000,000 shares of common stock of Penn Octane owned by him. As a result
        of the Spin-Off, he is also required to provide as collateral 250,000 Common
        Units of Rio Vista owned by him.
 
 On
        September 30, 2005, the Company and holders of $1.8 million of promissory
        notes
        due December 15, 2005 (the ”Notes”) agreed to an amendment whereby the
        interest payments required to paid on June 15, 2005 and September 15, 2005
        were
        extended to December 15, 2005 (the “Deferred Interest”). Under the terms of the
        amendment, the Company agreed to pay additional interest at an annual rate
        of
        16.5% on the Deferred Interest from the original due date through the date
        the
        Deferred Interest is paid. In addition, the Company agreed to pay to the
        holders
        of the Notes, an additional amount equal to 5% of the principal amount
        outstanding of the Notes upon maturity. Mr. Richter agreed that he would
        deliver
        the 250,000 Common Units of Rio Vista owned by him (referred to above) to
        the
        collateral agent. The Company also agreed that it would not enter into any
        additional severance payment obligation in connection with the resignation
        of
        Mr. Richter until the Notes are fully paid. In addition, the holders of the
        Notes agreed to allow Rio Vista to pledge and deliver certain assets in
        connection with the TransMontaigne Note (see note D). The 250,000 Common
        Units
        of Rio Vista owned by Mr. Richter have not yet been delivered.
  15
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        H - STOCKHOLDERS’ EQUITY**
 
 **Common
        Stock**
  During
        January 2005, the Company issued 100,000 shares of common stock of Penn Octane
        to a consultant in payment of amounts accrued by the Company at December
        31,
        2004.
 
 During
        March 2005, warrants to purchase a total of 106,250 shares of common stock
        of
        Penn Octane were exercised resulting in cash proceeds to the Company of $97,750.
 
 The
        Company routinely issues shares of its common stock for cash, the exercise
        of
        warrants, in payment of notes and other obligations and to settle lawsuits.
 
 **Stock
        Warrants**
 
 The
        Company applies APB 25 for warrants granted to the Company’s employees and to
        the Company’s board of directors serving in the capacity as directors and SFAS
        123 for warrants issued to acquire goods and services from non-employees.
 
 On
        September 30, 2004, pursuant to the terms of an employment agreement dated
        May
        13, 2003 with Richard Shore, Jr., former President of the Company, the Company
        issued warrants to purchase 763,737 shares of Penn Octane’s common stock at an
        exercise price of $1.14 per share. The warrants expire on July 10,
        2006.
 
 **Penn
        Octane 2001 Warrant Plan**
 
 On
        March
        9, 2005, the board of directors of Penn Octane approved the grant of warrants
        to
        purchase a total of 1,005,000 shares of Penn Octane common stock under Penn
        Octane’s 2001 Warrant Plan previously approved by the Penn Octane stockholders.
        Of the total number of warrants granted, 625,000 were granted to executive
        officers of Penn Octane, 255,000 were issued to outside directors of Penn
        Octane
        and 125,000 were issued to a consultant. The exercise price for the warrants
        is
        $1.50 per share, which was the closing price for Penn Octane’s common stock as
        reported by the Nasdaq Stock Market on March 9, 2005. Warrants granted to
        executive officers vest in equal monthly installments over a period of 36
        months
        from the date of grant. Warrants granted to outside directors vest in equal
        monthly installments over a period of 12 months from the date of grant. All
        warrants become fully exercisable upon a change in control event and expire
        five
        years from the date of grant.
  16
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        H - STOCKHOLDERS’ EQUITY - Continued**
 
 **Note
        Receivable from a Former Officer of the Company**
 
 The
        note
        receivable from Mr. Richter, in the amount of $3,196,693, was due July 29,
        2005.
        On August 3, 2005 in connection with Mr. Richter’s retirement in May 2005 and
        his past services, the Company approved an extension of the note to July
        29,
        2007 and a discount of the note to $1,696,693 plus accrued interest not waived
        (see below) on its maturity date, subject to satisfaction of certain conditions.
        The Company considers it to be probable that the note will be discounted
        at
        maturity and accordingly, has recorded a charge to compensation expense as
        of
        June 30, 2005 in the amount of $1,031,307 with a corresponding credit to
        the
        reserve. The interest rate on the extended note is the prime rate (6.75%
        as of
        September 30, 2005) plus 2%. The Company will continue to waive interest
        provided that Mr. Richter guarantees debt of the Company to any person in
        an
        amount equal to at least $1,800,000 (see Note G).
  **NOTE
        I - OPTIONS AND WARRANTS OF RIO VISTA**
 
 **General
        Partner Options**
  Penn
        Octane’s 100% interest in the General Partner may be decreased to 50% as a
        result of the exercise by Shore Capital LLC (Shore Capital), an affiliate
        of Mr.
        Shore, and by Mr. Richter of options to each acquire 25% of the General Partner
        (General Partner Options). The exercise price for each option is approximately
        $82,000. The options expire on July 10, 2006. Following the exercise of any
        of
        the General Partner Options, Penn Octane will retain voting control of the
        General Partner pursuant to a voting agreement.
  **Common
        Unit Warrants**
  In
        connection with Mr. Shore’s employment agreement with Penn Octane, Shore Capital
        received warrants to acquire 97,415 common units of Rio Vista at $8.47 per
        unit.
        The warrants expire on July 10, 2006.
  The
        Company issued 90,250 warrants to purchase Rio Vista units to the holders
        of the
        Restructured Notes and $280,000 Notes and 20,000 warrants to purchase Rio
        Vista
        units to PBC (see note G to the unaudited consolidated financial statements).
        The calculated exercise price per warrant to purchase a Rio Vista Unit for
        these
        Rio Vista Warrants is $5.00.
  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. Under
        the
        terms of the Agreement and applicable rules of the Nasdaq Stock Market, no
        approval by the common unitholders of Rio Vista was required.
  17
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        I - OPTIONS AND WARRANTS OF RIO VISTA - Continued**
  On
        March
        9, 2005, the board of managers of the General Partner of Rio Vista approved
        the grant of options to purchase a total of 108,750 common units under the
        2005
        Plan. Of the total number of options granted, 93,750 were granted to certain
        executive officers of the General Partner and Mr. Richter and 15,000 were
        issued
        to outside managers of the General Partner. The exercise price for the options
        is $12.51 per common unit, which was the average of the high and low sales
        prices for Rio Vista common units as reported by the Nasdaq Stock Market
        on
        March 9, 2005. The options granted to executive officers (including Mr. Richter)
        were fully vested on the date of grant. The options granted to outside managers
        vest in equal monthly installments over a period of 12 months from the date
        of
        grant. All options become fully exercisable upon a change in control event
        and
        expire three years from the date of grant.
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES**
 
 **Credit
        Facility, Letters of Credit and Other**
 
 As
        of
        September 30, 2005, Penn Octane had a $20,000,000 credit facility with RZB
        Finance, LLC (RZB) for demand loans and standby letters of credit (RZB Credit
        Facility) to finance Penn Octane’s purchases of LPG and Fuel Products. The RZB
        Credit facility is an uncommitted facility under which the letters of credit
        have an expiration date of no more than 90 days and the facility is reviewed
        annually at March 31. In connection with the RZB Credit Facility, the Company
        granted RZB a security interest and assignment in any and all of the Company’s
        accounts, inventory, real property, buildings, pipelines, fixtures and interests
        therein or relating thereto, including, without limitation, the lease with
        the
        Brownsville Navigation District of Cameron County for the land on which the
        Company’s Brownsville Terminal Facility is located, the Pipeline Lease, and in
        connection therewith entered into leasehold deeds of trust, security agreements,
        financing statements and assignments of rent. Under the RZB Credit Facility,
        the
        Company may not permit to exist any subsequent lien, security interest,
        mortgage, charge or other encumbrance of any nature on any of its properties
        or
        assets, except in favor of RZB, without the consent of RZB. After the Spin-Off
        and transfer of assets to Rio Vista, RZB continues to retain a security interest
        in the transferred assets.
 
 Under
        the
        RZB Credit Facility, the Company is required to pay a fee with respect to
        each
        letter of credit thereunder in an amount equal to the greater of (i) $500,
        (ii)
        2.5% of the maximum face amount of such letter of credit for LPG and Fuel
        Products (effective July 21, 2005 the Fuel Products rate was reduced to 2%),
        or
        (iii) such higher amount as may be agreed to between the Company and RZB.
        Any
        loan amounts outstanding under the RZB Credit Facility accrue interest at
        a rate
        equal to the rate announced by the JPMorgan Chase Bank as its prime rate
        (6.75%
        at September 30, 2005) plus 2.5%. Pursuant to the RZB Credit Facility, RZB
        has
        sole and absolute discretion to limit or terminate its participation in the
        RZB
        Credit Facility and to refrain from making any loans or issuing any letters
        of
        credit thereunder. RZB also has the right to demand payment of any and all
        amounts outstanding under the RZB Credit Facility at any time. In addition
        to
        the fees described above, the Company is required to pay RZB annual fees
        of
        $50,000.
 
 Based
        on
        current minimum purchase commitments under the Company’s LPG supply agreement
        and current LPG prices, the amount available to finance Fuel Products and
        LPG
        purchases in excess of current minimum purchase commitments is limited and
        therefore the ability of the Company to grow the Fuel Sales Business is
        dependent on future increases in its RZB Credit Facility or other sources
        of
        financing, the reduction of LPG supply commitments and/or the reduction in
        LPG
        or Fuel Products purchase prices.
 
 Under
        the
        terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required
        to
        maintain net worth of a minimum of $10,000,000.
 
 Mr.
        Richter had personally guaranteed all of Penn Octane’s payment obligations with
        respect to the RZB Credit Facility. On July 21, 2005 in connection with the
        annual March 31, 2005 renewal of the RZB Credit Facility, RZB agreed to no
        longer require Mr. Richter’s personal guarantee.
  18
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES - Continued**
 
 **Credit
        Facility, Letters of Credit and Other - Continued**
 
 In
        connection with the Company’s purchases of LPG and Fuel Products, letters of
        credit are issued based on anticipated purchases. Outstanding letters of
        credit
        for purchases of LPG and Fuel Products at September 30, 2005 totaled
        approximately $14,081,051 of which approximately $9,935,126 represents September
        2005 purchases and approximately $4,145,925 represents October 2005
        purchases.
 
 In
        connection with the Company’s purchase of LPG and Fuel Products, under the RZB
        Credit Facility, assets related to product sales (Assets) are required to
        be in
        excess of borrowings and commitments (including restricted cash of approximately
        $7,323,697 at September 30, 2005). At September 30, 2005, the Company’s
        borrowings and commitments were less than the amount of the Assets.
 
 In
        connection with the Company’s Fuel Sales Business, the Company has issued bonds
        totaling $662,000 to the states of California, Nevada, Arizona and Texas
        (Bonds)
        to secure payments of excise and other taxes collected from customers in
        connection with sales of Fuel Products. The Bonds are partially secured by
        letters of credit totaling $452,600. At September 30, 2005, such taxes in
        the
        amount of approximately $674,871 were due. The letters of credit issued have
        all
        been secured by cash in the amount of approximately $461,000 which is included
        in restricted cash in the Company’s balance sheet at September 30, 2005.
 
 LPG
        and
        Fuel Products financing expense associated with the RZB Credit Facility totaled
        $328,097 and $277,903 for the nine months ended September 30, 2005 and
        2004.
 
 **Distributions
        of Available Cash**
 
 All
        Rio
        Vista unitholders have the right to receive distributions from Rio Vista
        of
“available cash” as defined in the Rio Vista partnership agreement in an amount
        equal to at least the minimum distribution of $0.25 per quarter per unit,
        plus
        any arrearages in the payment of the minimum quarterly distribution on the
        units
        from prior quarters. The General Partner receives a distribution corresponding
        to its 2% general partnership interest. The distributions are to be paid
        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 is existing, under **** any
        obligation of Penn Octane which Rio Vista has guaranteed.
 
 Cash
        distributions from Rio Vista are shared by the holders of Rio Vista common
        units
        and the General Partner interest as described in the partnership agreement
        based
        on a formula whereby the General Partner receives disproportionately more
        distributions per percentage interest than the holders of the common units
        as
        annual cash distributions exceed certain milestones.
 
 On
        both
        February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of
        $487,000. Because of insufficient available cash, Rio Vista has not declared
        a
        distribution for the quarters ended June 30, 2005 and September 30,
        2005.
  19
 
 **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES - Continued**
 
 **Partnership
        Tax Treatment**
 
 Rio
        Vista
        is not a taxable entity for U.S. tax purposes (see below) and incurs no U.S.
        federal income tax liability. Rio Vista’s Mexican subsidiaries are taxed on
        their income directly by the Mexican government. The income/loss of Rio Vista’s
        Mexican subsidiaries are included in the U.S. partnership income tax return
        of
        Rio Vista. The holders of the common units and General Partner interest will
        be
        entitled to their proportionate share of any tax credits resulting from any
        income taxes paid to the Mexican government. Each unitholder of Rio Vista
        is
        required to take into account that unitholder’s share of items of income, gain,
        loss and deduction of Rio Vista in computing that unitholder’s federal income
        tax liability, even if no cash distributions are made to the unitholder by
        Rio
        Vista. Distributions by Rio Vista to a unitholder are generally not taxable
        unless the amount of cash distributed is in excess of the unitholder’s adjusted
        tax basis in Rio Vista.
 
 Section
        7704 of the Internal Revenue Code (Code) provides that publicly traded
        partnerships, as a general rule, are taxed as corporations despite the fact
        that
        they are not classified as corporations under Section 7701 of the Code. Section
        7704 of the Code provides an exception to this general rule for a publicly
        traded partnership if 90% or more of its gross income for every taxable year
        consists of “qualifying income” (Qualifying Income Exception). For purposes of
        this exception, “qualifying income” includes income and gains derived from the
        exploration, development, mining or production, processing, refining,
        transportation (including pipelines) or marketing of any mineral or natural
        resource. Other types of “qualifying income” include interest (other than from a
        financial business or interest based on profits of the borrower), dividends,
        real property rents, gains from the sale of real property, including real
        property held by one considered to be a “dealer” in such property, and gains
        from the sale or other disposition of capital assets held for the production
        of
        income that otherwise constitutes “qualifying income”.
 
 No
        ruling
        has been or will be sought from the IRS and the IRS has made no determination
        as
        to Rio Vista’s classification as a partnership for federal income tax purposes
        or whether Rio Vista’s operations generate a minimum of 90% of “qualifying
        income” under Section 7704 of the Code.
 
 If
        Rio
        Vista were classified as a corporation in any taxable year, either as a result
        of a failure to meet the Qualifying Income Exception or otherwise, Rio Vista’s
        items of income, gain, loss and deduction would be reflected only on Rio
        Vista’s
        tax return rather than being passed through to Rio Vista’s unitholders, and Rio
        Vista’s net income would be taxed at corporate rates.
 
 If
        Rio
        Vista were treated as a corporation for federal income tax purposes, Rio
        Vista
        would pay tax on income at corporate rates, which is currently a maximum
        of 35%.
        Distributions to unitholders would generally be taxed again as corporate
        distributions, and no income, gains, losses, or deductions would flow through
        to
        the unitholders. Because a tax would be imposed upon Rio Vista as a corporation,
        the cash available for distribution to unitholders would be substantially
        reduced and Rio Vista’s ability to make minimum quarterly distributions would be
        impaired. Consequently, treatment of Rio Vista as a corporation would result
        in
        a material reduction in the anticipated cash flow and after-tax return to
        unitholders and therefore would likely result in a substantial reduction
        in the
        value of Rio Vista’s common units.
 
 Current
        law may change so as to cause Rio Vista to be taxable as a corporation for
        federal income tax purposes or otherwise subject Rio Vista to entity-level
        taxation. The Agreement provides that, if a law is enacted or existing law
        is
        modified or interpreted in a manner that subject Rio Vista to taxation as
        a
        corporation or otherwise subjects Rio Vista to entity-level taxation for
        federal, state or local income tax purposes, then the minimum quarterly
        distribution amount and the target distribution amount will be adjusted downward
        to reflect the impact of that law on Rio Vista.
  20
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES - Continued**
 
 **Litigation**
  Penn
          Octane International, L.L.C. (Penn Octane International), a wholly-owned
          subsidiary of Rio Vista has been named as the defendant in lawsuit 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, Penn Octane International,
          Rio
          Vista nor any of Rio Vista’s subsidiaries in Mexico owned or operated the tanker
          truck or employed or controlled the driver of the tanker truck. Further,
          none of
          the Penn Octane or Rio Vista companies owned or had custody of the LPG
          on the
          tanker truck at the time and location of the accident.
 
 Even
          though the accident took place in Mexico, the lawsuit was filed in the
          District
          Court for Cameron County, Texas, on September 26, 2005 and was served on
          September 28, 2005. The case is captioned *Lesly
          Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
          International LLC* .
          The
          plaintiffs seek unspecified monetary damages and a temporary injunction
          in order
          to preserve evidence relevant to the case and assets to secure a potential
          judgment. An ex
          parte temporary restraining order was sought and obtained by the plaintiffs on
          September 27, 2005, in order to preserve evidence and prevent any sale
          of
          assets, including Penn Octane’s and Rio Vista’s LPG Asset Sales. This order was
          issued without prior notice to, or opportunity to contest by, Penn Octane
          or Rio
          Vista. The temporary restraining order expired on October 19, 2005. A hearing
          on
          the plaintiffs’ application for a temporary injunction is expected in late
          November 2005.
 
 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
          lawsuit, 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 operator of the tanker truck,
          or
          its insurance company, is reportedly taking claims in Mexico from victims
          of the
          accident.
  Management
          believes that the lawsuit against Penn Octane International is without
          merit
          and, based on the advice of counsel, does not anticipate either liability
          for
          damages or the issuance of a temporary injunction against a sale of Penn
          Octane’s or Rio Vista’s assets. Rio Vista’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. If a court enjoined the
          sale of
          all or any portion of Penn Octane’s or Rio Vista’s assets to a third party, such
          an injunction could delay or prevent Penn Octane’s or Rio Vista’s LPG Asset Sale
          before resolution of the claims underlying the lawsuit. A lengthy delay
          of, or
          inability to close, the LPG Asset Sale could have a material adverse effect
          on
          Penn Octane’s and Rio Vista’s business, financial condition and results of
          operations.
 In
        October 2005, the District Court of Cameron County, Texas awarded $100,000
        to a
        land owner in connection with the acquisition of a right of way by the Company.
        The Company is currently appealing the award.
  21
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        J - COMMITMENTS AND CONTINGENCIES - Continued**
  **Litigation** **- Continued**
 
 The
        Company and its subsidiaries are involved with other proceedings, lawsuits
        and
        claims. The Company believes that the liabilities, if any, ultimately resulting
        from such proceedings, lawsuits and claims should not materially affect its
        consolidated financial statements.
 
 **Consulting
        Agreement**
 
 During
        November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting
        agreement whereby Mr. Richter shall serve as a special advisor to the board
        of
        directors of Penn Octane and the board of managers of Rio Vista and will
        provide
        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, the
        companies agreed to pay the following fees (Fees) to Mr. Richter: an amount
        equal to two percent (2%) of (i) the net proceeds to the companies
        resulting from a sale of assets to a third party, and (ii) the net proceeds
        to
        the companies from sales of LPG to PMI for any calendar month in which such
        sales exceed the volumes pursuant to the PMI Agreement (see Note K).
 
 The
        companies may, in their discretion, offset the amount of any Fees due and
        payable to Mr. Richter against any amounts owed (whether or not then due
        or
        payable) by Mr. Richter to the Company, including without limitation, any
        amounts owed by Mr. Richter to Penn Octane pursuant to his promissory note
        payable to Penn Octane.
 
 The
        term
        of this consulting agreement shall continue until the earlier of one year
        from
        the date of the agreement or termination of the agreement upon 30 days written
        notice to the other party.
 
 **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.
  22
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        K - CONTRACTS**
 
 **LPG
        Sales to PMI**
 
 During
        December 2004, the Company and PMI entered into a three month agreement for
        the
        period January 1, 2005 to March 31, 2005 for the minimum sale of 11,700,000
        gallons of LPG for the months of January and February 2005 and 11,050,000
        gallons of LPG for the month of March 2005 (Quarterly Agreement) at reduced
        margins compared with those in effect during 2004. Actual volumes sold were
        12,700,000 gallons, 9,900,000 gallons and 9,600,000 gallons for January,
        February and March 2005, respectively. In April 2005, the Company entered
        into a
        one month contract with PMI for the sale of a minimum of 10,450,000 gallons
        at a
        further reduction in margin. On May 5, 2005, the Company entered into a contract
        with PMI for the sale of a minimum of 6,000,000 gallons of LPG for the period
        May 5, 2005 to May 31, 2005 at the reduced margin received in April 2005.
        For
        the period May 1, 2005 to May 4, 2005, PMI did not purchase any LPG from
        the
        Company. Actual volumes of LPG sold to PMI for April and May 2005 were
        10,800,000 and 6,100,000, respectively.
 
 The
        shortfall for the month of February 2005 was attributable to the Company
        not
        having a sufficient supply of LPG to meet the minimum contract volume. The
        shortfall for the month of March 2005 was attributable to PMI not purchasing
        the
        minimum contract volume. In accordance with the Quarterly Agreement, PMI
        paid
        approximately $104,000 representing the total amount due associated with
        the
        shortfall volumes for March 2005.
 
 Effective
        June 4, 2005, the Company entered into an agreement with PMI for the period
        June
        4, 2005 through March 31, 2006 for the purchase of LPG (PMI Agreement). PMI
        did
        not purchase LPG from the Company during the period June 1 - June 3, 2005.
        The
        following table sets forth the minimum monthly volume of LPG that PMI has
        committed to purchase from the Company pursuant to the PMI Agreement and
        the
        actual volumes purchased for the months June 2005 through October
        2005.
  Month
              Minimum
                  Volumes
                (gallons)
              Actual
                  Volumes
                (gallons)June
                  2005
              3,500,000
              3,507,973July
                  2005
              3,500,000
              3,514,516August
                  2005
              3,500,000
              7,381,533September
                  2005
              5,700,000
              10,134,546October
                  2005
              8,100,000
              12,316,061November
                  2005
              11,700,000
              *December
                  2005
              11,700,000
              *January
                  2006
              11,700,000
              *February
                  2006
              11,700,000
              *March
                  2006
              8,100,000
              *
  *
        Actual
        volumes not yet determined.
  23
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        K - CONTRACTS - Continued**
 
 **LPG
        Sales to PMI - Continued**
  Under
        the
        terms of the PMI Agreement, the sale price of LPG will be at the same reduced
        margins in effect during April and May 2005.
  PMI
        has
        primarily used the Matamoros Terminal Facility to load LPG purchased from
        the
        Company for distribution by truck in Mexico. The Company continues to use
        the
        Brownsville Terminal Facility in connection with LPG delivered by railcar
        to
        other customers, storage and as an alternative terminal in the event the
        Matamoros Terminal Facility cannot be used.
 
 **LPG
        Supply Agreements**
 
 The
        Company’s agreement with Exxon (as amended, Exxon Supply Contract) which expires
        in 2009 requires the Company to purchase minimum quantities of LPG totaling
        up
        to approximately 13,900,000 gallons per month although the actual amounts
        supplied under the Exxon Supply Contract averaged approximately 9,000,000
        gallons per month for the nine months ended September 30, 2005.
 
 During
        August 2005, the Exxon Supply Contract was amended whereby the Company agreed
        to
        give up future rights to access the EECPL in exchange for a reduction of
        the
        minimum pipeline delivery fees during the period April 1, 2005 through December
        31, 2005 by 50% (a reduction of $387,960 through September 30, 2005). In
        addition, the total pipeline delivery fees during the period April 1, 2005
        through December 31, 2005 are to be paid over a 48 month period beginning
        January 1, 2006.
 
 In
        order
        to meet sales volume in excess of LPG provided under the Exxon Supply Contract,
        the Company has entered into monthly arrangements with other LPG suppliers.
        The
        costs of such LPG supplies vary but are less than amounts received under
        the PMI
        Agreement.
 
 During
        January 2005, the Company amended the Koch supply contract whereby beginning
        February 2005 and continuing through September 30, 2005, the Company is not
        required to purchase any LPG from Koch under the existing Koch supply contract.
        In addition under the terms of the amendment, the Koch supply contract
        terminated on September 30, 2005.
 
 In
        addition to the LPG costs charged by its suppliers, the Company also incurs
        additional costs to deliver LPG to the Company’s facilities. Furthermore, the
        Company may incur significant additional costs associated with the storage,
        disposal and/or changes in LPG prices resulting from the excess of LPG purchased
        under the Exxon Supply Contract and/or other monthly contracts with other
        LPG
        suppliers over actual sales volumes to PMI. Under the terms of the Exxon
        Supply
        Contract, the Company must provide letters of credit in amounts equal to
        the
        cost of the product to be purchased. In addition, the cost of the product
        purchased is tied directly to overall market conditions. As a result, the
        Company’s existing letter of credit facility may not be adequate to meet the
        letter of credit requirements under the Exxon Supply Contract or other contracts
        with LPG suppliers if there are increases in quantities of LPG purchased
        and/or
        to finance future price increases of LPG.
  24
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        L** **- REALIZATION OF ASSETS**
  The
        accompanying unaudited consolidated financial statements have been prepared
        in
        conformity with accounting principles generally accepted in the United States
        of
        America, which contemplate continuation of the Company as a going concern.
        The
        Company has a loss from operations for the nine months ended September 30,
        2005,
        has an accumulated deficit since inception and has a deficit in working capital.
        In addition, substantially all of the Company’s assets are pledged or committed
        to be pledged as collateral on existing debt in connection with the Restructured
        Notes, the $280,000 Notes, the RZB Credit Facility and the TransMontaigne
        Note,
        and therefore, the Company may be unable to obtain additional financing
        collateralized by those assets. The Restructured Notes and the $280,000 Notes
        are due December 15, 2005. If the LPG Asset Sale does not close, the
        TransMontaigne Note may be due as early as March 15, 2006, including interest
        beginning November 15, 2005. The Company restructured the interest payments
        which were due June 15, 2005 and September 15, 2005 on the Restructured
        Notes and the $280,000 Notes. The RZB Credit Facility may be insufficient
        to
        finance the Company’s LPG purchases and/or Fuel Products purchases,
        assuming increases in product costs per gallon, or volumetric growth in product
        sales, and may be terminated by RZB with 90 days notice.
 
 The
        PMI
        Agreement expires on March 31, 2006 unless it is renewed or extended. If
        the LPG
        Asset Sale does not close, the Company’s gross profit from operations beginning
        October 1, 2005, based on the minimum volumes and the margins provided for
        in
        the PMI Agreement, may provide sufficient cash flow for the Company to pay
        its
        operating expenses through March 31, 2006, assuming breakeven results from
        the
        Fuel Sales Business. However, cash flow may not be sufficient to allow the
        Company to pay its other obligations, including, but not limited to, the
        Restructured Notes, the $280,000 Notes and the TransMontaigne Note as they
        become due, and costs of maintenance and repairs and professional fees related
        to the LPG Asset Sale. In addition, the Company may not have sufficient supply
        of LPG from the Exxon Supply Contract to meet the minimum monthly volumes
        under
        the PMI Agreement. If the LPG Asset Sale does not close, the Company’s gross
        profits on sales may be insufficient to pay its operating expenses, subsequent
        to March 31, 2006, if (i) the Company cannot sell LPG to PMI or other customers
        at acceptable margins and volumes and/or (ii) the Company cannot successfully
        reduce the minimum volumes and/or purchase costs required under the Exxon
        Supply
        Contract and/or (iii) the Company cannot sufficiently reduce its other expenses,
        and/or (iv) the Company’s Fuel Sales Business is not sufficiently successful.
 
 The
        Company’s cash flow has been reduced compared to historical levels as a result
        of materially lower volumes of sales to PMI and materially reduced margins.
        Additionally, the Company’s public company compliance and income tax preparation
        costs have increased as a result of the Spin-Off of Rio Vista. As a result
        of
        these factors, the Company may not have sufficient cash flow to pay its
        obligations when due and/or pay arrearages or make future distributions to
        Rio
        Vista’s unitholders. In the event Penn Octane does not pay its obligations when
        due, Rio Vista’s guarantees to Penn Octane and Penn Octane’s creditors may be
        triggered. Accordingly, Rio Vista may be required to pay such obligations
        of
        Penn Octane to avoid foreclosure against its assets by Penn Octane’s creditors.
        If the Company’s revenues and other sources of liquidity are not adequate to pay
        its obligations, Rio Vista may be required to reduce or eliminate distributions
        to unitholders and Penn Octane or Rio Vista may be required to raise additional
        funds to avoid such foreclosure. There can be no assurance that such additional
        funding will be available on terms attractive to either Penn Octane or Rio
        Vista
        or available at all. If additional amounts cannot be raised and the Company
        is
        unable to restructure its obligations, the Company would suffer material
        adverse
        consequences to its business, financial condition and results of operations
        and
        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.
  25
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        L** **- REALIZATION OF ASSETS - Continued**
 
 In
        view
        of the matters described in the preceding paragraphs, recoverability of the
        recorded asset amounts shown in the accompanying unaudited consolidated balance
        sheet is dependent upon either (1) closing of the LPG Asset Sale or (2) the
        ability of the Company to generate sufficient cash flow through operations
        or
        additional debt or equity financing to pay its liabilities and obligations
        when
        due. If the LPG Asset Sale does not close, the ability for the Company to
        generate sufficient cash flows from operations is significantly dependent
        on the
        sale of LPG to PMI at acceptable average monthly sales volumes and margins,
        the
        success of the Fuel Sales Business and the adequacy of the RZB Credit Facility
        to finance such sales. The unaudited consolidated financial statements do
        not
        include any adjustments related to the recoverability and classification
        of
        recorded asset amounts or amounts and classification of liabilities that
        might
        be necessary should the Company be unable to continue in existence.
 
 To
        provide the Company with the ability it believes necessary to continue in
        existence, management is taking steps to close the LPG Asset Sale. If the
        LPG
        Asset Sale does not close, management intends to (i) continue to negotiate
        with
        PMI for continued sales of LPG at acceptable volumes and margins (ii) continue
        to expand its Fuel Sales Business, (iii) further diversify its operations
        to
        reduce dependency on sales of LPG, (iv) increase the amount of financing
        for its
        products and operations, (v) raise additional debt and/or equity capital
        and
        (vi) reduce its supply costs and operating expenses. Management may also
        to
        continue to attempt to sell its LPG and refined products assets.
  
 **NOTE
        M - PRO FORMA FINANCIAL INFORMATION**
 
 The
        following unaudited pro forma consolidated financial information (Pro Forma
        Statements) for the Company gives effect to the LPG Asset Sale. The
        unaudited pro forma consolidated balance sheet assumes that the LPG Asset
        Sale
        was consummated on September 30, 2005. The unaudited pro forma consolidated
        statement of operations for the nine months ended September 30, 2005 assumes
        that the LPG Asset Sale was consummated as of January 1, 2005.
 
 The
        Pro
        Forma Statements are based on the available information and contain certain
        assumptions that the Company deems appropriate. The Pro Forma Statements
        do not
        purport to be indicative of the financial position of the Company had the
        transaction referred to above occurred on the dates indicated, nor are the
        Pro Forma Statements necessarily indicative of the future financial
        position of the Company. The Pro Forma Statements should be read in conjunction
        with unaudited consolidated financial statements and notes thereto included
        herein.
  26
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        M - PRO FORMA FINANCIAL INFORMATION - Continued**
 
 **Penn
        Octane Corporation and Subsidiaries**
 **PRO
        FORMA CONSOLIDATED BALANCE SHEET**
 **(Unaudited)**
 
 
 **As
                  Reported**
                **September
                  30, 2005**
              
              **Pro
                  Forma**
                **Adjustments**
              
              **Pro
                  Forma**
                **September 30,
                  2005****ASSETS**Current
                  AssetsCash
              
              $
              289,634
              
              $
              25,977,000
              (1)
              $
              18,614,8256,243,589
              (2)(11,776,398
              (2)(2,119,000
              )(3)Restricted
                  cash
              
              
              7,323,697
              
              
              (6,243,589
              )(2)
              
              1,080,108Trade
                  accounts receivable
              
              
              10,980,219
              
              
              
              
              
              10,980,219Inventories
              
              
              2,618,074
              
              
              (1,597,639
              )(1)
              
              1,020,435Prepaid
                  expenses and other current assets
              
              
              219,404
              
              
              
              
              
              219,404Total
                  current assets
              
              
              21,431,028
              
              
              10,483,963
              
              
              31,914,991Property,
                  plant and equipment — net
              
              
              15,073,907
              
              
              (15,007,200
              )(1)
              
              66,707Lease
                  rights — net
              
              
              347,281
              
              
              (347,281
              )(1)
              
              —Other
                  non-current assets
              
              
              23,908
              
              
              —
              
              
              23,908Total
                  assets
              
              $
              36,876,124
              
              $
              (4,870,518
              )
              $
              32,005,606**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  LiabilitiesCurrent
                  maturities of long-term debt
              
              $
              1,857,166
              
              $
              (1,688,857
              )(3)
              $
              168,309Note
                  payable
              
              
              1,300,000
              
              
              (1,300,000
              )(1)
              
              —Revolving
                  line of credit
              
              
              2,628,019
              
              
              
              
              
              2,628,019LPG
                  and fuel products trade accounts payable
              
              
              13,433,166
              
              
              (11,776,398
              )(2)
              
              1,656,768U.S.
                  and foreign taxes payable
              
              
              —
              
              
              2,000,000
              (5)
              
              2,000,000Other
                  accounts payable
              
              
              1,896,041
              
              
              —
              
              
              1,896,041Accrued
                  liabilities
              
              
              2,738,779
              
              
              (314,000
              )(3)
              
              2,951,779(223,000
              )(1)750,000
              (4)Total
                  current liabilities
              
              
              23,853,171
              
              
              (12,552,255
              )
              
              11,300,916Long
                  term debt, less current maturities net of discount
              
              
              24,493
              
              
              —
              
              
              24,493Minority
                  interest in Rio Vista Energy Partners L.P.
              
              
              12,475,703
              
              
              2,855,963
              (6)
              
              15,331,666Commitments
                  and Contingencies
              
              
              —
              
              
              —
              
              
              —Stockholders’
                  EquityCommon
                  stock
              
              
              155,227
              
              
              —
              
              
              155,227Additional
                  paid in capital
              
              
              28,741,122
              
              
              —
              
              
              28,741,122Notes
                  receivable from a former officer of the Company
              
              
              (1,696,693
              )
              
              555,540
              (7)
              
              (1,143,153
              )Accumulated
                  deficit
              
              
              (26,676,899
              )
              
              10,547,880
              (1)
              
              (22,404,665
              )(750,000
              )(4)(2,000,000
              )(5)(116,143
              )(3)(2,855,963
              )(6)(555,540
              )(7)Total
                  stockholders’ equity
              
              
              522,757
              
              
              4,825,774
              
              
              5,348,531Total
                  liabilities and stockholders’ equity
              
              $
              36,876,124
              
              $
              (4,870,518
              )
              $
              32,005,606
  27
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        M - PRO FORMA FINANCIAL INFORMATION - Continued**
 
 **Penn
        Octane Corporation and Subsidiaries**
 **PRO
        FORMA CONSOLIDATED STATEMENT OF OPERATIONS**
 **(Unaudited)**
 
 **As
                  Reported**
                **September
                  30, 2005**
              
              **Pro
                  Forma**
                **Adjustments**
              
              **Pro
                  Forma**
                **September
                  30, 2005**Revenues
              
              $
              178,687,549
              
              $
              (85,517,130
              )(8)
              $
              93,170,419Cost
                  of Goods Sold
              
              
              174,695,212
              
              
              (83,521,381
              )(8)
              
              91,173,831Gross
                  Profit
              
              
              3,992,337
              
              
              (1,995,749
              )
              
              1,996,588Selling,
                  general and administrative expensesLegal
                  and professional fees
              
              
              1,680,846
              
              
              (439,994
              )(8)
              
              1,240,852Salaries
                  and payroll related expenses
              
              
              2,767,049
              
              
              (141,000
              )(8)
              
              2,626,049Other
              
              
              1,518,630
              
              
              (15,335
              )(8)
              
              1,503,2955,966,525
              
              
              (596,329
              )
              
              5,370,196Operating
                  income (loss)
              
              
              (1,974,188
              )
              
              (1,399,420
              )
              
              (3,373,608
              )Other
                  income (expense)Interest
                  and LPG and Fuel Productsfinancing
                  expense
              
              
              (1,438,620
              )
              
              328,097
              )(8)
              
              (308,921
              )801,602
              (3)Interest
                  income
              
              
              18,887
              
              
              (3,546
              )(8)
              
              15,341Gain
                  on LPG Asset Sale
              
              
              -
              
              
              9,934,881
              (1)
              
              8,631,341(750,000
              )(4)(553,540
              )(7)Minority
                  interest in loss of Rio VistaEnergy
                  Partners L.P.
              
              
              1,596,918
              
              
              (1,092,700
              )(6)
              
              504,218Income
                  (loss) before taxes
              
              
              (1,797,003
              )
              
              7,265,374
              
              
              5,468,371Provision
                  for income taxes
              
              
              (64,946
              )
              
              (2,000,000
              )(5)
              
              (2,064,946
              )Net
                  income (loss)
              
              $
              (1,861,949
              )
              $
              5,265,374
              
              $
              3,403,425Net
                  income (loss) per common share
              
              $
              (0.12
              )
              
              
              
              $
              0.22Net
                  income (loss) per common share assuming dilution
              
              $
              (0.12
              )
              
              
              
              $
              0.22Weighted
                  average common shares outstanding
              
              
              15,489,572
              
              
              
              
              
              15,489,572
  28
  **Penn
        Octane Corporation and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  **NOTE
        M - PRO FORMA FINANCIAL INFORMATION - Continued**
 
 **Penn
        Octane Corporation and Subsidiaries**
 **Notes
        to Pro Forma Unaudited Consolidated Financial Information**
 **September 30,
        2005**
 **(Unaudited)**
 
 (1)
              To
                  reflect the LPG Asset Sale, including net proceeds received, the
                  payment
                  by Rio Vista of the Mexican subsidiaries net working capital deficit
                  estimated at $223,000, the payment of the TransMontaigne Note and
                  the
                  resulting gain. This amount does not assume any reductions to the
                  purchase
                  price other than in connection with the Mexican subsidiaries net
                  working
                  capital deficit as provided for in the PSA’s. (See adjustments 4, 5 and 7
                  below which are related to the
                  sale).
 
 (2)
              To
                  reflect the settlement of net obligations guaranteed by or owed
                  to RZB in
                  connection with LPG purchases collateralized by the LPG assets
                  and refined
                  product assets sold.
 
 (3)
              To
                  reflect the payment of outstanding promissory notes including accrued
                  interest which are collateralized by the LPG assets and refined
                  products
                  assets sold and the write-off of unamortized
                  discount.
 
 (4)
              To
                  accrue for estimated expenses associated with the LPG Asset
                  Sale.
 
 (5)
              To
                  accrue for federal and state taxes estimated to result from the
                  LPG Asset
                  Sale.
 
 (6)
              To
                  record minority interest in the equity in the losses of Rio Vista in
                  connection with the LPG Asset Sale.
 
 (7)
              To
                  accrue fee to Jerome B. Richter on the LPG Asset Sale and offset
                  against a
                  note receivable from
                  Mr. Richter.
 
 (8)
              To
                  eliminate revenues and expenses related to the LPG
                  operations.
  29
  **Item
        2** .  **Management's
        Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 ***Penn
        Octane Corporation (“Penn Octane”) and its consolidated subsidiaries which
        includes Rio Vista Energy Partners L.P. (“Rio Vista”) and its subsidiaries are
        collectively hereinafter referred to as the
“Company”.***
 
 *The
        following discussion of the Company's results of operations and liquidity
        and
        capital resources should be read in conjunction with the unaudited consolidated
        financial statements of the Company and related notes thereto appearing
        elsewhere herein. References to specific years preceded by “fiscal” (e.g. fiscal
        2005) refer to the Company's fiscal year ended December 31.*
 
 **Forward-Looking
        Statements**
 
 *The
        statements contained in this Quarterly Report that are not historical facts
        are
        forward-looking statements within the meaning of Section 27A of the Securities
        Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
        forward-looking statements may be identified by the use of forward-looking
        terms
        such as “believes,” “expects,” “may,” “will”, “should” or “anticipates” or by
        discussions of strategy that inherently involve risks and uncertainties.
        From
        time to time, the Company has made or may make forward-looking statements,
        orally or in writing. These forward-looking statements include statements
        regarding anticipated future revenues, sales, LPG supply, LPG pricing,
        operations, demand, competition, capital expenditures, future acquisitions,
        additional financing, the deregulation of the LPG market in Mexico, the
        operations of the US - Mexico Pipelines, the Matamoros Terminal Facility,
        the
        remaining Saltillo Terminal assets, other upgrades to facilities, foreign
        ownership of LPG operations, short-term obligations and credit arrangements,
        Fuel Sales Business, LPG Asset Sale, the Spin-Off, cash distributions,
“Qualifying Income”, risk factors and other statements regarding matters that
        are not historical facts, and involve predictions which are based upon a
        number
        of future conditions that ultimately may prove to be inaccurate. Actual results,
        performance or achievements could differ materially from the results expressed
        in, or implied by, these forward-looking statements. Factors that may cause
        or
        contribute to such differences include those discussed under “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations,” as well as those discussed elsewhere in this Report on Form 10-Q
        and the Company’s Form 10-K for the year ended July 31, 2004. We caution you,
        however, that the following list of factors may not include all material
        risks
        facing the Company.*
 
 **Purchase
        and Sale Agreements**
 
 On
        August
        15, 2005, Penn Octane and Rio Vista each entered into separate purchase and
        sale
        agreements (the “PSA’s”) with TransMontaigne Product Services Inc.
        (“TransMontaigne”) which provide for the sale and assignment of all of their
        respective LPG assets and refined products assets including the Brownsville
        Terminal Facility and refined products tank farm and associated leases, owned
        pipelines located in the United States, including land, leases, and rights
        of
        ways, LPG inventory, 100% of the outstanding stock of Mexican subsidiaries
        and
        affiliate, which in turn own pipelines and the Matamoros Terminal Facility,
        including land and rights of way, and assignment of the Pipeline Lease, PMI
        sales agreement and Exxon Supply Contract (the “LPG Asset Sale”). Penn Octane’s
        agreement with TransMontaigne does not include any assets related to the
        Fuel
        Sales Business. The purchase price is $10.1 million for assets to be sold
        by
        Penn Octane and $17.4 million for assets to be sold by Rio Vista. The purchase
        price may be reduced as provided for in the PSA’s. In connection with the PSA’s,
        TransMontaigne agreed to loan Rio Vista $1.3 million which is to be repaid,
        including interest, as a reduction of the total purchase price at the time
        of
        closing or 120 days following demand by TransMontaigne (the “TransMontaigne
        Note”). The TransMontaigne Note is secured by the tank farm and certain LPG
        storage tanks located at the Brownsville Terminal Facility. The TransMontaigne
        Note begins to accrue interest on November 15, 2005 at the prime rate plus
        2%.
        In connection with the TransMontaigne Note, RZB Finance, LLC (“RZB”) provided a
        consent and the Brownsville Navigation District issued an estoppel letter.
        Rio
        Vista used the proceeds from the TransMontaigne Note to fund certain expenses
        associated with the PSA’s and for working capital purposes.
  30
  The
        closing of the LPG Asset Sale is subject to several conditions, including
        TransMontaigne’s satisfactory completion of its due diligence review, including
        financial, business, environmental and legal, the approval of Penn Octane’s
        stockholders and Rio Vista’s unit holders (see below), assignment of LPG related
        contracts, and the modification of LPG related permits and the related Mexican
        governmental approvals. Certain of the conditions to closing were not met
        by
        October 31, 2005. The PSA’s provide that any party may terminate the agreements
        if closing does not occur on or before October 31, 2005. None of the parties
        have elected to terminate the agreements and the parties continue to work
        towards the closing of the LPG Asset Sale.
 
 If
        the
        LPG Asset Sale is completed, Penn Octane intends to use a portion of its
        proceeds to pay off the Restructured Notes and $280,000 Notes plus accrued
        interest. In addition, Penn Octane estimates that it may have a federal tax
        liability in connection with the sale of its assets. The remaining proceeds
        will
        be available to Penn Octane to fund working capital requirements and to pursue
        activities intended to enhance stockholders value. Penn Octane intends to
        continue to operate its Fuel Sales Business.
 
 In
        connection with the LPG Asset Sale, Penn Octane filed a definitive proxy
        statement with the Securities Exchange Commission (SEC) on September 27,
        2005 in
        connection with the requirement to obtain approval for the LPG Asset Sale
        from
        Penn Octane’s stockholders. On October 26, 2005, Penn Octane held a special
        meeting of stockholders at which the stockholders approved the LPG Asset
        Sale.
 
 If
        the
        LPG Asset Sale is completed, Rio Vista intends to use its proceeds to fund
        working capital requirements, pursue potential acquisitions and to resume
        the
        minimum quarterly distributions to its unitholders and to pay all arrearages.
        Rio Vista intends to pursue potential acquisitions which produce “qualifying
        income”.
 
 In
        connection with the LPG Asset Sale, Rio Vista filed a definitive proxy statement
        with the SEC on September 27, 2005 in connection with the requirement to
        obtain
        approval for the LPG Asset Sale from Rio Vista’s unitholders. In addition, in
        order to permit Rio Vista’s continued existence following the LPG Asset Sale,
        Rio Vista’s proxy statement contained a proposal to amend the provision in its
        partnership agreement which requires dissolution upon a sale of all or
        substantially all of its assets. On October 26, 2005, Rio Vista held a special
        meeting of unitholders at which the unitholders approved the LPG Asset Sale
        and
        the amendment to its partnership agreement.
 
 The
        following discusses the Company’s existing risk factors, its business, its
        results of operations and its liquidity and capital resources.
 
 **Risk
        Factors**
 
 *Business
        Factors.* Beginning
        with the expiration of the LPG sales contract with PMI effective March 31,
        2004
        and continuing through the contract recently entered into with PMI effective
        June 4, 2005 (the “PMI Agreement”), the Company has experienced materially lower
        LPG sales volumes and margins, which have adversely affected the Company’s
        results of operations. Penn Octane has one major customer for LPG, Rio Vista,
        and Rio Vista has only one customer for LPG in Mexico, PMI. The Company
        commenced its Fuel Sales Business in June 2004. There is no assurance that
        upon
        the expiration of the PMI Agreement that PMI will continue to purchase LPG
        from
        Rio Vista or in quantities or prices that are profitable. There are a limited
        number of suppliers of LPG that connect to Rio Vista’s pipelines and a limited
        supply of LPG. The Company may lose its competitive advantage when the Company’s
        Seadrift pipeline lease expires in 2013. The Company may be unable to
        successfully develop additional sources of revenue in order to reduce its
        dependence on PMI. The Company may not have sufficient cash to meet its
        obligations as they become due. All of the Company’s assets are pledged as
        collateral for existing debt, and the Company therefore may be unable to
        obtain
        additional financing collateralized by such assets. The Company is at risk
        of
        economic loss due to fixed margin contracts. If the Company cannot develop
        sufficient capital resources for acquisitions or opportunities for expansion,
        the Company’s growth will be limited. The Company’s ability to grow the Fuel
        Sales Business is largely dependent on available financing which may be limited.
        Future acquisitions and expansions may not be successful, may substantially
        increase the Company’s indebtedness and contingent liabilities, and may create
        integration difficulties. The Company’s business would be adversely affected if
        operations at Rio Vista’s transportation, terminal and distribution facilities
        were interrupted. The Company’s business would also be adversely affected if the
        operations of the Company’s customers and suppliers were
        interrupted.
  31
  *Competitive
        Factors.* The
        energy industry is highly competitive. There is competition within the
        industries and also with other industries in supplying the energy and fuel
        needs
        of the industry and individual consumers. The Company competes with other
        companies including Valero, L.P. (“Valero”) in the sale or purchase of LPG and
        Fuel Products as well as the transportation of these products in the US and
        Mexican markets and employs all methods of competition which are lawful and
        appropriate for such purposes. A key component of the Company’s competitive
        position, particularly given the commodity-based nature of many of its products,
        is its ability to manage its expenses successfully, which requires continuous
        management focus on reducing unit costs and improving efficiency and its
        ability
        to secure unique opportunities for the purchase, sale and/or delivery methods
        of
        its products.
 
 *International
        Factors.* Mexican
        economic, political and social conditions may change and adversely affect
        Rio
        Vista’s operations. Rio Vista may not be able to continue operations in Mexico
        if Mexico restricts the existing ownership structure of its Mexican operations,
        requiring Rio Vista to increase its reliance on Mexican nationals to conduct
        its
        business. The LPG market in Mexico has yet to be deregulated. If deregulation
        occurs, the results may hinder Rio Vista’s ability to negotiate acceptable
        contracts with distributors. Rio Vista’s contracts and Mexican business
        operations are subject to volatility in currency exchange rates which could
        negatively impact its earnings.
 
 *Political
        Factors.* The
        operations and earnings of the Company and its consolidated affiliate in
        the US
        and Mexico have been, and may in the future be, affected from time to time
        in
        varying degree by political instability and by other political developments
        and
        laws and regulations, such as forced divestiture of assets; restrictions
        on
        production, imports and exports; war or other international conflicts; civil
        unrest and local security concerns that threaten the safe operation of the
        Company’s facilities; price controls; tax increases and retroactive tax claims;
        expropriation of property; cancellation of contract rights; and environmental
        regulations. Both the likelihood of such occurrences and their overall effect
        upon the Company vary greatly and are not predictable.
 
 *Industry
        and Economic Factors.* The
        operations and earnings of the Company and its consolidated affiliate throughout
        the US and Mexico are affected by local, regional and global events or
        conditions that affect supply and demand for the Company’s products. These
        events or conditions are generally not predictable and include, among other
        things, general economic growth rates and the occurrence of economic recessions;
        the development of new supply sources for its products; supply disruptions;
        weather, including seasonal patterns that affect energy demand and severe
        weather events that can disrupt operations; technological advances, including
        advances in exploration, production, refining and advances in technology
        relating to energy usage; changes in demographics, including population growth
        rates and consumer preferences; and the competitiveness of alternative
        hydrocarbon or other energy sources or product substitutes.
 
 *Acquisition
        Factors.* In
        additional to the factors cited above, the advancement, cost and results
        of
        particular projects sought by the Company, including projects which do not
        specifically fall within the areas of the Company’s current lines of businesses
        will depend on: the outcome of negotiations for such acquisitions; the ability
        of the Company’s management to manage such businesses; the ability of the
        Company to obtain financing for such acquisitions; business integration issues;
        changes in operating conditions or costs; and the occurrence of unforeseen
        technical difficulties.
 
 *NASDAQ
        Listing* . On
        May
        25, 2005, Penn Octane received written notification from The Nasdaq Stock
        Market’s Listing Qualification Department stating that, for the last 30
        consecutive business days, the bid price of Penn Octane’s common stock had
        closed below the minimum $1.00 per share requirement for continued inclusion
        under Marketplace Rule 4310(c)(4) (the “Bid Price Rule”). In
        accordance with Marketplace Rule 4310(c)(8)(D), Penn Octane was granted 180
        calendar days, until November 21, 2005, to regain compliance. If at any
        time before November 21, 2005, the bid price of Penn Octane’s common stock
        closed at $1.00 per share or more for a minimum of 10 consecutive business
        days,
        Penn Octane would have regained compliance with the Bid Price Rule. The bid
        price of Penn Octane’s common stock has not closed at or above $1.00 from
        April 12, 2005 through November 18, 2005.
 
 Because
        Penn Octane will not be able to comply with the Bid Price Rule by November
        21,
        2005, NASDAQ staff will determine whether Penn Octane meets The NASDAQ SmallCap
        Market initial listing criteria set forth in Marketplace Rule 4310(c),
        except for the bid price requirement. If Penn Octane meets the initial listing
        criteria, Penn Octane will be granted an additional 180 calendar day compliance
        period lasting until May 20, 2006. If Penn Octane does not meet the Bid Price
        Rule by May 20, 2006, Penn Octane’s common stock will be delisted. To date, Penn
        Octane has not been notified by NASDAQ whether or not the Company will be
        delisted or granted an additional 180-day compliance period after the initial
        November 21, 2005 deadline. If Penn Octane does not receive an additional
        180-day compliance period, Penn Octane’s common stock is subject to current
        delisting by NASDAQ.
  32
  In
        addition, as a result of the LPG Asset Sale, NASDAQ may review whether or
        not
        Penn Octane has sufficient continuing operations immediately following the
        LPG
        Asset Sale to avoid being deemed a “shell company.” If NASDAQ determined that
        Penn Octane had insufficient operations, NASDAQ could take steps to delist
        Penn
        Octane based on NASDAQ’s discretionary authority over listed companies. The
        Company believes that Penn Octane would not be deemed a “shell company” because
        of its continued operations (including the fuel sales business) following
        the
        LPG Asset Sale, unless Penn Octane also sold all or a substantial part of
        those
        continued operations.
 
 If
        Penn
        Octane is delisted from the NASDAQ SmallCap Market, Penn Octane will continue
        to
        file all required reports with the Securities and Exchange Commission and
        intends to seek quotation in the OTC Bulletin Board through a market maker.
        The
        OTC Bulletin Board is a regulated quotation service that displays real-time
        quotes, last sale prices and volume information in over-the-counter securities.
        Delisting by NASDAQ may result in decreased market interest in Penn Octane
        common stock, investors and stockholders may experience more difficulty in
        buying and selling Penn Octane common stock, and Penn Octane’s unit price may
        decline. In addition, Penn Octane may experience greater difficulty in obtaining
        necessary debt and equity capital for potential acquisitions or the operation
        of
        its business.
 
 *Market
        Risk Factors.* See
“Notes to Consolidated Financial Statements (Unaudited),” “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations” and
“Quantitative and Qualitative Disclosures About Market Risk” in this report for
        discussion of the impact of market risks, inflation and other
        uncertainties.
 
 *Internal
        Control Factors.* Pursuant
        to Section 404 of the Sarbanes Oxley Act of 2002, beginning with the fiscal
        year
        ended December 31, 2007, the Company is required to complete an annual
        evaluation of its internal control systems. In addition, the Company’s
        independent auditors are required to provide an opinion regarding such
        evaluation and the adequacy of the Company’s internal accounting controls. The
        Company’s internal controls may be found to be inadequate, deficiencies or
        weaknesses may be discovered, and remediation may not be successful. As the
        Company continues, the Company will need to strengthen its internal control
        systems. If the Company acquires an existing business, the internal control
        systems of the acquired business may be inadequate and may require additional
        strengthening.
 
 *Projections* .
        Projections, estimates and descriptions of the Company’s plans and objectives
        included herein are forward-looking statements. Actual future results could
        differ materially due to, among other things, the factors discussed above
        and
        elsewhere in this report.
  **Overview**
 
 The
        Company has been principally engaged in the purchase, transportation and
        sale of
        LPG for distribution into northeast Mexico. To the extent that Penn Octane
        purchases quantities of LPG under its supply contract in excess of LPG sold
        to
        PMI, the Company sells the excess LPG to U.S. and other customers.
 
 During
        the nine months ended September 30, 2005, the Company derived 39% of its
        total
        revenues and 81% of LPG revenues from sales of LPG to PMI, its primary customer.
 
 The
        Company provides products and services through a combination of fixed-margin
        and
        fixed-price contracts. Costs included in cost of goods sold, other than the
        purchase price of LPG, may affect actual profits from sales, including costs
        relating to transportation, storage, leases and maintenance. Mismatches in
        volumes of LPG purchased from suppliers and volumes sold to PMI or others
        could
        result in gains during periods of rising LPG prices or losses during periods
        of
        declining LPG prices as a result of holding inventories or disposing of excess
        inventories.
 
 During
        June 2004, the Company began the Fuel Sales Business with the ability to
        access
        certain pipeline and terminal systems located in California, Arizona, Nevada
        and
        Texas. Fuel Sales approximated $93.2 million for the nine months ended September
        30, 2005 which represents approximately 52% of total revenues.
  33
  On
        September 30, 2004, Penn Octane completed a series of transactions involving
        (i)
        the transfer of substantially all of its owned pipeline and terminal assets
        in
        Brownsville and Matamoros to RVOP (ii) transferred its 99.9% interest in
        RVOP to
        Rio Vista and (iii) the Spin-Off, resulting in Rio Vista becoming a separate
        public company. The Common Units represented 98% of Rio Vista’s outstanding
        partnership interests. The remaining 2% interests, which is the general partner
        interest, is owned and controlled by the General Partner. The General Partner
        is
        responsible for the management of Rio Vista. Accordingly the Company has
        control
        of Rio Vista by virtue of its ownership and related voting control of the
        General Partner. Therefore, Rio Vista is consolidated with the Company and
        the
        interests of the limited partners are classified as minority interests in
        the
        Company’s unaudited consolidated financial statements. Subsequent
        to the Spin-Off, Rio Vista sells LPG directly to PMI and purchases LPG from
        Penn
        Octane under a long-term supply agreement. The purchase price of the LPG
        from
        Penn Octane is determined based on the cost of LPG under Penn Octane’s LPG
        supply agreements with its suppliers, other direct costs related to PMI sales
        and a formula that takes into consideration operating costs of Penn Octane
        and
        Rio Vista.
 
 Penn Octane
        continues to sell LPG to PMI through its supply contract with Rio Vista,
        and it
        shifted certain costs of operations related to the Brownsville and Matamoros
        terminals and pipelines, and certain administrative costs to Rio Vista. In
        addition, it continues to manage Rio Vista through the General Partner and
        to
        explore opportunities to acquire and grow other lines of business such as
        the
        Fuel Sales Business described below.
  **LPG
        Sales**
 
 The
        following table shows the Company's volume sold and delivered in gallons
        and
        average sales price for the nine months ended September 30, 2005 and
        2004;
 
 2005
              
              2004Volume
                  SoldLPG
                  (millions of gallons) - PMI
              
              
              73.7
              
              
              134.2LPG
                  (millions of gallons) - Other
              
              
              19.9
              
              
              35.093.6
              
              
              169.2Average
                  sales priceLPG
                  (per gallon) - PMI
              
              $
              0.94
              
              $
              0.79LPG
                  (per gallon) - Other
              
              
              0.81
              
              
              0.69
  34
 
 ***Recent
        Trends.*** Since
        April 2004, PMI has contracted with the Company for volumes which are
        significantly lower than amounts purchased by PMI in similar periods during
        previous years and beginning April 2005 margins have been significantly lower
        than historical levels. See Liquidity and Capital Resources - Sales to PMI
        below. The Company believes that the reduction of volume commitments or margins
        for April 2004 through March 2006 is based on additional LPG production by
        PEMEX
        being generated from the Burgos Basin field in Reynosa, Mexico, an area within
        the proximity of the Company’s Matamoros Terminal Facility and increased
        competition from U.S. suppliers (see below). Although the Company is not
        aware
        of the total amount of LPG actually being produced by PEMEX from the Burgos
        Basin, it is aware that PEMEX has constructed and is operating two new cryogenic
        facilities at the Burgos Basin which it believes may have a capacity of
        producing up to 12 million gallons of LPG per month. The Company also believes
        that PEMEX is intending to install two additional cryogenic facilities, with
        similar capacity, to be operational in 2006. The Company is also not aware
        of
        the capacity at which the current cryogenic facilities are being operated.
        Furthermore, the Company is not aware of the actual gas reserves of the Burgos
        Basin or the gas quality, each of which could significantly impact LPG
        production amounts.
 
 During
        June 2004, Valero began operation of a newly constructed LPG terminal facility
        in Nuevo Laredo, Mexico and a newly constructed pipeline connecting the terminal
        facility in Nuevo Laredo, Mexico to existing pipelines in Juarez, Texas which
        connect directly to Valero Energy Corporation’s Corpus Christi, Texas and Three
        Rivers, Texas refineries. Valero originally contracted with PMI under a five
        year agreement to deliver approximately 6.3 million gallons (of which 3.2
        million gallons were previously delivered by truck from Three Rivers, Texas)
        of
        LPG per month. During July 2005, Valero announced that it had entered into
        a new
        agreement with PMI which provides for double the amount of LPG previously
        contracted for with PMI.
 
 During
        2004, a pipeline operated by El Paso Energy between Corpus Christi, Texas
        and
        Hidalgo County, Texas was closed. Historically these facilities had supplied
        approximately 5.0 million gallons of LPG per month to the Company’s strategic
        zone. The Company is not aware of any future plans for these facilities.
 
 During
        2003, PMI constructed and began operations of a refined products cross border
        pipeline connecting a pipeline running from PEMEX’s Cadereyta Refinery in
        Monterrey, Mexico to terminal facilities operated by TransMontaigne, in
        Brownsville, Texas. The pipeline crosses the US-Mexico border near the proximity
        of the Company’s pipelines. In connection with the construction of the pipeline,
        PMI was required to obtain an easement from the Company for an approximate
        21.67
        acre portion of the pipeline. Under the terms of the easement, PMI has warranted
        that it will not transport LPG through October 15, 2017.
  **Fuel
        Sales Business**
 
 The
        following table shows the Company's volume sold and delivered in gallons
        and
        average sales price for the nine months ended September 30, 2005 and
        2004;
 
 Volume
                  Sold
              
              2005
              
              2004
                  *Fuel
                  Products (millions of gallons)
              
              53.5
              
              14.6Average
                  sales priceFuel
                  Products (per gallon)
              
              $
              1.74
              
              $
              1.35
 
 ***** Fuel
        Sales Business operations commenced in June 2004.
  35
 
 **Results
        of Operations**
 
 The
        following summarizes the gross profit before allocation of corporate overhead
        among the Company’s LPG and Fuel Sales Business for the three months and nine
        months ended September 30, 2005. All amounts are in thousands.
  For
                  the three months ended September 30, 2005
              
              For
                  the nine months ended September 30, 2005LPG
              
              Fuel
                  Sales
              
              Total
              
              LPG
              
              Fuel
                  Sales
              
              TotalRevenues
              
              $
              29,309
              
              $
              37,389
              
              $
              66,698
              
              $
              85,517
              
              $
              93,170
              
              $
              178,687Cost
                  of goods sold
              
              
              28,924
              
              
              36,259
              
              
              65,183
              
              
              83,521
              
              
              91,174
              
              
              174,695Gross
                  profit
              
              $
              385
              
              $
              1,130
              
              $
              1,515
              
              $
              1,996
              
              $
              1,996
              
              $
              3,992
  ***Three
        Months Ended September 30, 2005 Compared With Three Months Ended September
        30,
        2004***
 
 *Revenues.* Revenues
        for the three months ended September 30, 2005, were $66.7 million compared
        with
        $59.4 million for the three months ended September 30, 2004, an increase
        of $7.3
        million or 12.4%. Of this increase, $19.6 million was attributable to increases
        in revenues generated from the Company’s Fuel Sales Business during the three
        months ended September 30, 2005 compared to the three months ended September
        30,
        2004, primarily the result of increases in fuel sales prices and volumes
        (the
        Company commenced operations of the Fuel Sales Business in June 2004), $6.8
        million was attributable to increases in average sales prices of LPG sold
        to PMI
        during the three months ended September 30, 2005 and $846,067 was attributable
        to increased average sales prices of LPG sold to customers other than PMI
        during
        the three months ended September 30, 2005, partially offset by $16.7 million
        attributable to decreased volumes of LPG sold to PMI during the three months
        ended September 30, 2005 and $3.3 million was attributable to decreased volumes
        of LPG sold to customers other than PMI during the three months ended September
        30, 2005.
 
 *Cost
        of goods sold.* Cost of
        goods sold for the three months ended September 30, 2005 was $65.2 million
        compared with $57.3 million for the three months ended September 30, 2004,
        an
        increase of $7.9 million or 13.8%. Of this increase, $18.5 million was
        attributable to increases in costs of goods sold arising from the Company’s Fuel
        Sales Business during the three months ended September 30, 2005 compared
        to the
        three months ended September 30, 2004, primarily the result of increases
        in fuel
        costs and volumes purchased (the Company commenced operations in June 2004),
        $8.1 million was attributable to increases in the cost of LPG sold to PMI
        during
        the three months ended September 30, 2005 and $572,422 principally the result
        of
        other direct costs associated with the Fuel Sale Business during the three
        months ended September 30, 2005, partially offset by $474,600 attributable
        to
        decreased costs of LPG sold to customers other than PMI during the three
        months
        ended September 30, 2005, $15.7 million attributable to decreased volume
        of LPG
        sold to PMI during the three months ended September 30, 2005, $3.1 million
        attributable to decreased volumes of LPG sold to customers other than PMI
        during
        the three months ended September 30, 2005 and $69,954 attributable to reduced
        transportation costs associated with the LPG business as a result of reduced
        volumes sold.
  36
  *Selling,
        general and administrative expenses.* Selling,
        general and administrative expenses were $1.8 million for the three months
        ended
        September 30, 2005, compared with $1.8 million for the three months ended
        September 30, 2004. During the three months ended September 30, 2005, the
        Company incurred increases in professional fees primarily associated with
        the
        LPG Asset Sale, additional public company expenses and professional fees
        related
        to Rio Vista and increased payroll related costs associated with the Fuel
        Sales
        Business which were offset by reduced professional fees, expenses and taxes
        associated with the Spin-off.
 
 *Other
        income (expense).* Other
        income was $439,362 for the three months ended September 30, 2005, compared
        with
        other expense of $680,752 for the three months ended September 30, 2004.
        The
        increase in other income was due primarily to minority interest in the losses
        of
        Rio Vista of $1.1 million and $324,041 of reduced costs related to an asset
        impairment charge, partially offset by increased interest costs of $49,103
        associated with the Fuel Sales Business and $153,455 of interest costs
        associated with the amortization of loan discounts.
 
 *Income
        tax.* The
        Company calculated income taxes of $31,099 during the three months ended
        September 30, 2005. Income taxes consisted of alternative minimum tax of
        $6,337,
        state income tax expense of $6,936, and Mexican income tax expense of $17,826
        during the three months ended September 30, 2005.
 
 ***Nine
        months ended September 30, 2005 Compared With Nine months ended September
        30,
        2004***
 
 *Revenues.* Revenues
        for the nine months ended September 30, 2005, were $178.7 million compared
        with
        $150.0 million for the nine months ended September 30, 2004, an increase
        of
        $28.7 million or 19.1%. Of this increase, $73.5 million was attributable
        to
        increases in revenues generated from the Company’s Fuel Sales Business during
        the nine months ended September 30, 2005 compared to the nine months ended
        September 30, 2004, primarily the result of increases in fuel sales prices
        and
        volumes (the Company commenced operations of the Fuel Sales Business in June
        2004), $20.2 million was attributable to increases in average sales prices
        of
        LPG sold to PMI during the nine months ended September 30, 2005 and $4.3
        million
        was attributable to increased average sales prices of LPG sold to customers
        other than PMI during the nine months ended September 30, 2005, partially
        offset
        by $56.9 million attributable to decreased volumes of LPG sold to PMI during
        the
        nine months ended September 30, 2005 and $12.3 million was attributable to
        decreased volumes of LPG sold to customers other than PMI during the nine
        months
        ended September 30, 2005.
 
 *Cost
        of goods sold.* Cost of
        goods sold for the nine months ended September 30, 2005 was $174.7 million
        compared with $143.1 million for the nine months ended September 30, 2004,
        an
        increase of $31.6 million or 22.1%. Of this increase, $71.1 million was
        attributable to increases in costs of goods sold arising from the Company’s Fuel
        Sales Business during the nine months ended September 30, 2005 compared to
        the
        nine months ended September 30, 2004, primarily the result of increases in
        fuel
        costs and volumes purchased (the Company commenced operations of the Fuel
        Sales
        Business in June 2004), $21.3 million was attributable to increases in the
        cost
        of LPG sold to PMI during the nine months ended September 30, 2005, $4.2
        million
        was attributable to increased costs of LPG sold to customers other than PMI
        during the nine months ended September 30, 2005 and $353,985 principally
        the
        result of other direct costs associated with the Fuel Sale Business during
        the
        nine months ended September 30, 2005, partially offset by $52.1 million
        attributable to decreased volume of LPG sold to PMI during the nine months
        ended
        September 30, 2005 and $12.8 million was attributable to decreased volumes
        of
        LPG sold to customers other than PMI during the nine months ended September
        30,
        2005 and $468,768 attributable to reduced transportation costs associated
        with
        the LPG business as a result of reduced volumes sold.
 
 *Selling,
        general and administrative expenses.* Selling,
        general and administrative expenses were $6.0 million for the nine months
        ended
        September 30, 2005, compared with $4.6 million for the nine months ended
        September 30, 2004, an increase of $1.4 million or 30.9%. The increase during
        the nine months ended September 30, 2005 was principally due to an increase
        in
        the discount of a note receivable from a former officer of $1.0 million,
        increases in professional fees primarily associated with the LPG Asset Sale,
        additional public company expenses and professional fees related to Rio Vista
        and increased payroll related costs associated with the Fuel Sales Business,
        partially offset by reduced professional fees, expenses and taxes associated
        with the Spin-off.
 
 *Other
        income (expense).* Other
        income was $177,185 for the nine months ended September 30, 2005, compared
        with
        other expense of $1.4 million for the nine months ended September 30, 2004.
        The
        decrease in other expense was due primarily to minority interest in the losses
        of Rio Vista of $1.6 million and $324,041 of reduced costs related to an
        asset
        impairment charge and $228,952 of reduced interest costs related to the purchase
        of LPG, partially offset by increased interest costs associated with the
        Fuel
        Sales Business of $205,380, $326,091 of interest costs associated with the
        amortization of loan discounts and reduced interest income of $41,860 during
        the
        nine months ended September 30, 2005.
  37
  *Income
        tax.* The
        Company calculated income taxes of $64,946 during the nine months ended
        September 30, 2005. Income taxes consisted of alternative minimum tax of
        $7,798,
        state income tax expense of $13,296 and Mexican income tax expense of $43,852
        during the nine months ended September 30, 2005.
  **Liquidity
        and Capital Resources**
 
 *General.* The
        Company has a loss from operations for the nine months ended September 30,
        2005,
        has an accumulated deficit since its inception and has a deficit in working
        capital. In addition, substantially all of the Company’s assets are pledged or
        committed to be pledged as collateral on existing debt in connection with
        the
        Restructured Notes, the $280,000 Notes, the RZB Credit Facility and the
        TransMontaigne Note, and therefore, the Company may be unable to obtain
        additional financing collateralized by those assets. The Restructured Notes
        and
        the $280,000 Notes are due December 15, 2005. If the LPG Asset Sale does
        not
        close, the TransMontaigne Note may be due as early as March 15, 2006, including
        interest beginning November 15, 2005. The Company restructured the interest
        payments where were due June 15, 2005 and September 15, 2005 on the
        Restructured Notes and the $280,000 Notes. The RZB Credit Facility is an
        uncommitted facility which is authorized every ninety days and is reviewed
        annually at March 31. The Company may need to increase its credit facility
        for
        increases in quantities of LPG and Fuel Products purchased and/or to finance
        future price increases of LPG and Fuel Products. The Company depends heavily
        on
        sales to one major customer, PMI. The Company's sources of liquidity and
        capital
        resources historically have been provided by sales of LPG and Fuel Products,
        proceeds from the issuance of short-term and long-term debt, revolving credit
        facilities and credit arrangements, sale or issuance of preferred and common
        stock of the Company and proceeds from the exercise of warrants to purchase
        shares of the Company's common stock.
 
 The
        PMI
        Agreement expires on March 31, 2006 unless it is renewed or extended. If
        the LPG
        Asset Sale does not close, the Company’s gross profit from operations beginning
        October 1, 2005, based on the minimum volumes and the margins provided for
        in
        the PMI Agreement, may provide sufficient cash flow for the Company to pay
        its
        operating expenses through March 31, 2006 assuming breakeven results from
        the
        Fuel Sales Business. However, cash flow may not be sufficient to allow the
        Company to pay its other obligations, including, but not limited to, the
        Restructured Notes, the $280,000 Notes and the TransMontaigne Note as they
        become due, and costs of maintenance and repairs and professional fees related
        to the LPG Asset Sale. In addition, the Company may not have sufficient supply
        of LPG from the Exxon Supply Contract to meet the minimum monthly volumes
        under
        the PMI Agreement. If the LPG Asset Sale does not close, the Company’s gross
        profits on sales may be insufficient to pay its operating expenses, subsequent
        to March 31, 2006, if (i) the Company cannot sell LPG to PMI or other customers
        at acceptable margins and volumes and/or (ii) the Company cannot successfully
        reduce the minimum volumes and/or purchase costs required under the Exxon
        Supply
        Contract and/or (iii) the Company cannot sufficiently reduce its other expenses,
        and/or (iv) the Company’s Fuel Sales Business is not sufficiently
        successful.
 
 The
        Company’s cash flow has been reduced compared to historical levels, as a result
        of materially lower volumes of sales to PMI and materially reduced margins.
        Additionally, the Company’s public company compliance and income tax preparation
        costs have increased as a result of the Spin-Off of Rio Vista. As a result
        of
        these factors, the Company may not have sufficient cash flow to pay its
        obligations when due and/or pay arrearages or make future distributions to
        Rio
        Vista’s unitholders. In the event Penn Octane does not pay its obligations when
        due, Rio Vista’s guarantees to Penn Octane and Penn Octane’s creditors may be
        triggered. Accordingly, Rio Vista may be required to pay such obligations
        of
        Penn Octane to avoid foreclosure against its assets by Penn Octane’s creditors.
        If the Company’s revenues and other sources of liquidity are not adequate to pay
        its obligations, Rio Vista may be required to reduce or eliminate distributions
        to unitholders and Penn Octane or Rio Vista may be required to raise additional
        funds to avoid such foreclosure. 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.
 
 Although
        Rio Vista is not required to do so, if Penn Octane is unable to pay its
        obligations when they become due, Rio Vista may lend the necessary funds
        to Penn
        Octane. Conversely, if Rio Vista does not have the funds necessary to pay
        its
        obligations and to make its distributions, to the extent that Penn Octane
        has
        sufficient cash to do so, it may lend such amounts to Rio
        Vista.
  38
  If
        Penn
        Octane and/or Rio Vista are required to raise additional funds, management
        does
        not believe that either company would be able to obtain such financing from
        traditional commercial lenders. Rather, they may have to conduct sales of
        assets
        or sales of equity and/or debt securities through public or private financings,
        collaborative relationships or other arrangements. There
        can be no assurance that such additional funding will be available on terms
        attractive to either Penn Octane or Rio Vista or that such funding will be
        available in the required timeframe, if available at all. If additional
        financing is obtained through the sale of securities of Penn Octane, substantial
        and immediate dilution to existing Penn Octane common stockholders may occur. If
        additional amounts cannot be raised and the Company is unable to restructure
        its
        obligations, the Company would suffer material adverse consequences to its
        business, financial condition and results of operations. In such event, 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 U.S. bankruptcy laws .
 
 Further,
        if Penn Octane is determined to have a federal income tax liability as a
        result
        of the Spin-Off and if Penn Octane is unable to pay such liabilities, the
        Internal Revenue Service may assert that the Penn Octane stockholders who
        received common units in the Spin-Off are liable for unpaid federal income
        taxes
        of Penn Octane, including interest and any penalties, up to the value of
        the Rio
        Vista Common Units received by each stockholder.
 
 The
        following summary table reflects comparative cash flows for nine months ended
        September 30, 2005, and 2004. All information is in thousands.
 
 **2005**
              
              **2004**Net
                  cash (used) in operating activities
              
              $
              157
              
              $
              (
                  4,262
              )Net
                  cash (used in) provided by investing activities
              
              
              122
              
              
              314Net
                  cash provided by financing activities
              
              
              (
                  364
              )
              
              3,902Net
                  increase (decrease) in cash
              
              $
              (
                  85
              )
              $
              (
                  46
              )
  *Sales
        to PMI* .
        During
        December 2004, the Company and PMI entered into a three month agreement for
        the
        period January 1, 2005 to March 31, 2005 for the minimum sale of 11.7 million
        gallons of LPG for the months of January and February 2005 and 11.1 million
        gallons of LPG for the month of March 2005 (the “Quarterly Agreement”) at
        reduced margins compared with those in effect during 2004. Actual volumes
        sold
        were 12.7 million gallons, 9.9 million gallons and 9.6 million gallons for
        January, February and March 2005, respectively. In April 2005, the Company
        entered into a one month contract with PMI for the sale of a minimum of 10.5
        million gallons at a further reduced margin. On May 5, 2005, the Company
        entered
        into a contract with PMI for the sale of a minimum of 6.0 million gallons
        of LPG
        for the period May 5, 2005 to May 31, 2005 at the reduced margin received
        in
        April 2005. For the period May 1, 2005 to May 4, 2005, PMI did not purchase
        any
        LPG from the Company. Actual volumes of LPG sold to PMI for April and May
        2005
        were 10.8 million gallons and 6.1 million gallons, respectively.
 
 The
        shortfall for the month of February 2005 was attributable to the Company
        not
        having a sufficient supply of LPG to meet minimum contract volume. The shortfall
        for the month of March 2005 was attributable to PMI not purchasing the minimum
        contract volume. In accordance with the Quarterly Agreement, PMI paid
        approximately $104,000 representing the total amount due associated with
        the
        shortfall volumes for March 2005.
  39
  Effective
        June 4, 2005, the Company entered into an agreement with PMI for the period
        June
        4, 2005 through March 31, 2006 for the purchase of LPG (the “PMI Agreement”).
        PMI did not purchase LPG from the Company during the period June 1 - June
        3,
        2005. The following table sets forth the minimum monthly volume of LPG that
        PMI
        has committed to purchase from the Company pursuant to the PMI Agreement
        and the
        actual volumes purchased for the months June 2005 through October
        2005.
 
 Month
              Minimum
                  Volume
                (in
                  millions of gallons)
              Actual
                  Volumes
                (in
                  million of gallons)June
                  2005
              3.5
              3.5July
                  2005
              3.5
              3.5August
                  2005
              3.5
              7.4September
                  2005
              5.7
              10.1October
                  2005
              8.1
              12.3November
                  2005
              11.7
              *December
                  2005
              11.7
              *January
                  2006
              11.7
              *February
                  2006
              11.7
              *March
                  2006
              8.1
              *
 
 *
        Actual
        volumes not yet determined.
 
 Under
        the
        terms of the PMI Agreement, the sale price of LPG will be at the same margins
        in
        effect during April and May 2005.
 
 The
        Company’s management believes that PMI’s reduction of volume commitments for
        April 2004 through March 2006 is based on additional LPG production by PEMEX
        being generated from the Burgos Basin field in Reynosa, Mexico, an area within
        the proximity of the Company’s Matamoros Terminal Facility and increased
        competition from U.S. suppliers including Valero (see Recent Trends
        above).
 
 PMI
        has
        primarily used the Matamoros Terminal Facility to load LPG purchased from
        the
        Company for distribution by truck in Mexico. The Company continues to use
        the
        Brownsville Terminal Facility in connection with LPG delivered by railcar
        to
        other customers, storage and as an alternative terminal in the event the
        Matamoros Terminal Facility cannot be used.
 
 Revenues
        from PMI sales totaled approximately $69.3 million and $106.1 million for
        the
        nine months ended September 30, 2005 and 2004, respectively, representing
        approximately 39% and 71% of total revenues for the periods and 81% and 81%
        of
        the Company’s total LPG revenues for the periods.
 
 *Seasonality.* The
        Company’s gross profit is dependent on sales volume of LPG to PMI, which
        fluctuates in part based on the seasons. The demand for LPG is strongest
        during
        the winter season.
  40
 
 *LPG
        Supply Agreements* .
        The
        Company’s agreement with Exxon (as amended, “Exxon Supply Contract”), which
        expires in 2009, requires the Company to purchase minimum quantities of LPG
        totaling up to 13.9 million gallons per month although actual amounts supplied
        under the Exxon Supply Contract averaged approximately 9.0 million gallons
        per
        month for the nine months ended September 30, 2005. The purchase price is
        indexed to variable posted prices.
 
 During
        August 2005, the Exxon Supply Contract was amended whereby the Company agreed
        to
        give up future rights to access the EECPL in exchange for a reduction of
        the
        minimum pipeline delivery fees during the period April 1, 2005 through December
        31, 2005 by 50% (a reduction of $387,960 at September 30, 2005). In addition,
        the total pipeline delivery fees during the period April 1, 2005 through
        December 31, 2005 are to be paid over a 48 month period beginning January
        1,
        2006.
 
 In
        order
        to meet sales volume in excess of LPG provided under the Exxon Supply Contract,
        the Company has entered into monthly arrangements with other LPG suppliers.
        The
        costs of such LPG supplies vary but are less than amounts received under
        the PMI
        Agreement.
 
 During
        January 2005, the Company amended the Koch supply contract whereby beginning
        February 2005 and continuing through September 30, 2005, the Company is not
        required to purchase any LPG from Koch under the existing Koch supply contract.
        In addition under the terms of the amendment, the Koch supply contract
        terminated on September 30, 2005.
 
 The
        Company is currently purchasing LPG under the Exxon Supply Contract. The
        Company’s aggregate costs per gallon to purchase LPG (less any applicable
        adjustments) are below the aggregate sales prices per gallon of LPG sold
        to its
        customers.
 
 In
        addition to the LPG costs charged by its supplier, the Company also incurs
        additional costs to deliver the LPG to the Company’s facilities. Furthermore,
        the Company may incur significant additional costs associated with the storage,
        disposal and/or changes in LPG prices resulting from the excess LPG purchased
        under the Exxon Supply Contract and/or other monthly contracts with other
        LPG
        suppliers over actual sales volumes to PMI. Under the terms of the Exxon
        Supply
        Contract, the Company must provide letters of credit in amounts equal to
        the
        cost of the product to be purchased. In addition, the cost of the product
        purchased is tied directly to overall market conditions. As a result, the
        Company’s existing letter of credit facility may not be adequate to meet the
        letter of credit requirements under the Exxon Supply Contract or other contracts
        with LPG suppliers if there are increases in quantities of LPG purchased
        and/or
        to finance future price increases of LPG.
  *Fuel
        Sales Business.* The
        Company sells Fuel Products through transactional, bulk and/or rack
        transactions. Typical transactional and bulk sales are made based on a
        predetermined net spread between the purchase and sales price over posted
        monthly variable prices and/or daily spot prices. Rack sales transactions
        are
        based on variable sale prices charged by the Company which are tied to posted
        daily spot prices and purchase costs which are based on a monthly average
        or 3
        day average based on posted prices. The Company pays pipeline and terminal
        fees
        based on regulated rates.
 
 The
        Fuel
        Products market on the west coast of the United States is characterized by
        limited pipeline and terminal space to move sufficient Fuel Products to
        locations where demand for Fuel Products exists. The Company has the ability
        to
        access to certain pipeline and terminal systems located in California, Arizona,
        Nevada and Texas, where it is able to deliver its Fuel Products. The markets
        where the Company has targeted its products are generally in areas where
        the
        Fuel Products are difficult to deliver due to the infrastructure limitations
        and
        accordingly, the Company’s access provides an advantage over other potential
        competitors who may not have access to these pipelines or terminals. In
        addition, the Company’s supply contracts provide it with greater flexibility to
        manage changes in the prices of the Fuel Products. The Company believes it
        has
        an advantage over other competitors based on its favorable supply contracts
        and
        existing access to certain pipelines and terminals.
 
 For
        bulk
        and transactional sales, the Company enters into individual sales contracts
        for
        each sale. Rack sales are subject to credit limitations imposed on each
        individual buyer by the Company. The Company has several supply contracts
        for
        each of the Fuel Products it sells. The supply contracts are for annual periods
        with flexible volumes but they may be terminated sooner by the supplier if
        the
        Company consistently fails to purchase minimum volumes of Fuel Products.
        Fuel
        sales approximated 52% of total revenues for the nine months ended September
        30,
        2005.
  41
  Fuel
        Sales totaled $93.2 million and cost of fuel and other direct operating expenses
        totaled $91.2 during the nine months ended September 30, 2005. Future success
        of
        the Fuel Sales Business is dependent on the demand for Fuel Products in the
        Company’s markets and the Company’s ability to manage fluctuations in the price
        of such products.
 
 The
        ability of the Company to participate in the Fuel Sales Business is largely
        dependent on the Company’s ability to finance its supplies. Currently, the
        Company utilizes the RZB Credit Facility to finance the purchases of Fuel
        Products. Based on the Company’s commitments under the Exxon Supply Contract,
        increases in the costs of LPG and/or the increases in the costs of Fuel
        Products, the amount of financing available for the Fuel Sales Business may
        be
        reduced.
 
 Federal
        and State agencies require the Company to obtain the necessary regulatory
        and
        other approvals for its Fuel Sales Business.
 
 *Credit
        Arrangements* .
        As of
        September 30, 2005, Penn Octane had a $20.0 million credit facility with
        RZB
        Finance LLC (“RZB”) for demand loans and standby letters of credit (the “RZB
        Credit Facility”) to finance Penn Octane’s purchases of LPG and Fuel Products.
        The RZB Credit facility is an uncommitted facility under which the letters
        of
        credit have an expiration date of no more than 90 days and the facility reviewed
        annually at March 31. In connection with the RZB Credit Facility, the Company
        granted RZB a security interest and assignment in any and all of the Company's
        accounts, inventory, real property, buildings, pipelines, fixtures and interests
        therein or relating thereto, including, without limitation, the lease with
        the
        Brownsville Navigation District of Cameron County for the land on which the
        Company’s Brownsville Terminal Facility is located, the Pipeline Lease, and in
        connection therewith agreed to enter into leasehold deeds of trust, security
        agreements, financing statements and assignments of rent. Under the RZB Credit
        Facility, the Company may not permit to exist any subsequent lien, security
        interest, mortgage, charge or other encumbrance of any nature on any of its
        properties or assets, except in favor of RZB, without the consent of RZB.
        After
        the Spin-Off and transfer of assets to Rio Vista, RZB continues to retain
        a
        security interest in the transferred assets.
 
 Under
        the
        RZB Credit Facility, the Company pays a fee with respect to each letter of
        credit thereunder in an amount equal to the greater of (i) $500, (ii) 2.5%
        of
        the maximum face amount of such letter of credit for LPG and Fuel Products
        (effective July 21, 2005 the Fuel Products rate was reduced to 2%), or (iii)
        such higher amount as may be agreed to between the Company and RZB. Any loan
        amounts outstanding under the RZB Credit Facility accrue interest at a rate
        equal to the rate announced by the JPMorgan Chase Bank as its prime rate
        (6.75%
        at September 30, 2005) plus 2.5%. Pursuant to the RZB Credit Facility, RZB
        has
        sole and absolute discretion to limit or terminate its participation in the
        RZB
        Credit Facility and to refrain from making any loans or issuing any letters
        of
        credit thereunder. RZB also has the right to demand payment of any and all
        amounts outstanding under the RZB Credit Facility at any time. In addition
        to
        the fees described above, the Company is required to pay RZB annual fees
        of
        $50,000.
 
 Based
        on
        current minimum purchase commitments under the Company’s LPG supply agreement
        and current LPG prices, the amount available to finance Fuel Products and
        LPG
        purchases in excess of current minimum purchase commitments is limited and
        therefore the ability of the Company to grow the Fuel Sales Business is
        dependent on future increases in its RZB Credit Facility or other sources
        of
        financing, the reduction of LPG supply commitments and/or the reduction in
        LPG
        or Fuel Products prices.
 
 Under
        the
        terms of the RZB Credit Facility, either Penn Octane or Rio Vista is required
        to
        maintain net worth of a minimum of $10.0 million.
 
 Jerome
        B.
        Richter, former Chief Executive Officer of the Company, had personally
        guaranteed all of Penn Octane’s payment obligations with respect to the RZB
        Credit Facility. On July 21, 2005 in connection with the annual March 31,
        2005
        renewal of the RZB Credit Facility, RZB agreed to no longer require Mr.
        Richter’s personal guarantee.
  42
 
 In
        connection with the Company’s purchases of LPG and Fuel Products, letters of
        credit are issued based on anticipated purchases. Outstanding letters of
        credit
        for purchases of LPG and Fuel Products at September 30, 2005 totaled
        approximately $14.1 million of which approximately $9.9 million represents
        September 2005 purchases and approximately $4.1 million represents October
        2005
        purchases.
 
 In
        connection with the Company’s purchase of LPG and Fuel Products, under the RZB
        Credit Facility, assets related to product sales (the “Assets”) are required to
        be in excess of borrowings and commitments (including restricted cash of
        approximately $7.3 million at September 30, 2005). At September 30, 2005,
        the
        Company’s borrowings and commitments were less than the amount of the
        Assets.
 
 In
        connection with the Company’s Fuel Sales Business, the Company has issued bonds
        totaling $662,000 to the states of California, Nevada, Arizona and Texas
        (the
“Bonds”) to secure payments of excise and other taxes collected from customers
        in connection with sales of Fuel Products. The Bonds are partially secured
        by
        letters of credit totaling $452,600. At September 30, 2005, such taxes in
        the
        amount of approximately $674,871 were due. The letters of credit issued have
        all
        been secured by cash in the amount of approximately $461,000 which is included
        in restricted cash in the Company’s balance sheet at September 30, 2005.
 
 LPG
        and
        Fuel Products financing expense associated with the RZB Credit Facility totaled
        $328,097 and $277,903 for the nine months ended September 30, 2005 and
        2004.
 
 The
        following is a summary of the Company’s estimated minimum contractual
        obligations and commercial obligations as of September 30, 2005. Where
        applicable, LPG prices are based on the September 30, 2005 monthly average
        as
        published by Oil Price Information Service.
 
 **Payments
                  due by Period**
                **(Amounts
                  in Millions)**Contractual
                  Obligations
              
              Total
              
              Less
                  than
                1
                  Year
              
              1
                  -
                  3
                Years
              
              4
                  -
                  5
                Years
              
              After
                5
                  YearsLong-Term
                  Debt Obligations and Note Payble
              
              $
              3.3
              
              $
              3.3
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  Leases
              
              
              8.2
              
              
              1.1
              
              
              2.0
              
              
              1.9
              
              
              3.2LPG
                  Purchase Obligations
              
              
              697.4
              
              
              174.5
              
              
              348.9
              
              
              174.0
              
              
              -Other
                  Long-Term Obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  Contractual Cash Obligations
              
              $
              708.9
              
              $
              178.9
              
              $
              350.9
              
              $
              175.9
              
              $
              3.2
 
 **Amount
                  of Commitment Expiration****Per
                  Period**
                **(Amounts
                  in Millions)**Commercial
                  Commitments
              
              Total
                  Amounts
                Committed
              
              Less
                  than
                1
                  Year
              
              1
                  -
                  3
                Years
              
              4
                  -
                  5
                Years
              
              Over
                5
                  YearsLines
                  of Credit
              
              $
              2.6
              
              $
              2.6
              
              $
              -
              
              $
              -
              
              $
              -Standby
                  Letters of Credit
              
              
              14.1
              
              
              14.1
              
              
              -
              
              
              -
              
              
              -Guarantees
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/AStandby
                  Repurchase Obligations
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/AOther
                  Commercial Commitments
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/ATotal
                  Commercial Commitments
              
              $
              16.7
              
              $
              16.7
              
              $
              -
              
              $
              -
              
              $
              -
  43
  *Distributions
        of Available Cash.* All
        Rio
        Vista unitholders have the right to receive distributions from Rio Vista
        of
“available cash” as defined in the Rio Vista partnership agreement in an amount
        equal to 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. The General Partner receives a distribution corresponding
        to its 2% general partnership interest. The distributions are to be paid
        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 is existing, under **** any
        obligation of Penn Octane which Rio Vista has guaranteed.
 
 Cash
        distributions from Rio Vista are shared by the holders of Rio Vista common
        units
        and the General Partner interest as described in the partnership agreement
        based
        on a formula whereby the General Partner receives disproportionately more
        distributions per percentage interest than the holders of the common units
        as
        annual cash distributions exceed certain milestones.
 
 On
        both
        February 14, 2005 and May 13, 2005, Rio Vista made cash distributions of
        $487,000. Because of insufficient available cash, Rio Vista has not declared
        a
        distribution for the quarters ended June 30, 2005 and September 30, 2005.
 
 Rio
        Vista’s ability to make distributions may be impacted by sales to PMI at
        acceptable volumes and margins, payments on its guarantees, costs and expenses
        and the inability to obtain additional financing on its pledged assets. Although
        Penn Octane is not required to do so, to the extent that Penn Octane has
        sufficient cash to do so, it may lend amounts to Rio Vista to meet the minimum
        distributions. If Rio Vista’s revenues and other sources of liquidity after its
        quarterly distributions are not adequate to satisfy such payment obligations
        of
        Penn Octane and/or Penn Octane does not have the necessary cash to loan to
        Rio
        Vista, Rio Vista may be required to reduce or eliminate the quarterly
        distributions to unitholders and/or Penn Octane and/or Rio Vista may be required
        to raise additional funds to avoid foreclosure against their assets. However,
        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.
 
 The
        following is a reconciliation of Rio Vista’s consolidated net income to
        distributable cash flow for the three months ended December 31, 2004, March
        31,
        2005, June 30, 2005 and September 30, 2005.
 
 Three
                  Months EndedDecember31,
                2004
              
              March
                  31,
                2005
              
              June
                  30,
                2005
              
              September
                  30,
                2005Net
                  income (loss)
              
              $
              (
                  63,000
              )
              $
              173,000
              
              $
              (
                  728,000
              )
              $
              (
                  1,074,000
              )Plus
                  interest , LPG financing expense and taxes, net
              
              
              101,000
              
              
              119,000
              
              
              179,000
              
              
              234,000Plus
                  depreciation and amortization
              
              
              178,000
              
              
              205,000
              
              
              205,000
              
              
              216,000Earnings
                  before interest, taxes, depreciation and amortization
                  (“EBITDA”)
              
              
              216,000
              
              
              497,000
              
              
              (
                  344,000
              )
              
              (
                  624,000
              )Plus
                  other non-cash expenses
              
              
              344,000
              
              
              -
              
              
              (
                  24,000
              )
              
              -Less
                  cash interest, LPG financing expense and taxes, net
              
              
              (
                  101,000
              )
              
              (
                  61,000
              )
              
              (
                  64,000
              )
              
              (
                  81,000
              )Distributable
                  cash flow (deficit)
              
              
              459,000
              
              
              436,000
              
              
              (
                  432,000
              )
              
              (
                  705,000
              )Distributable
                  cash flow (deficit) applicable to general partner
              
              
              (
                  9,000
              )
              
              (
                  9,000
              )
              
              8,000
              
              
              14,000Distributable
                  cash flow (deficit) applicable to limited partners
              
              $
              450,000
              
              $
              427,000
              
              $
              (
                  424,000
              )
              $
              (
                  691,000
              )
 
 Rio
        Vista
        utilizes two financial measures, EBITDA and distributable cash flow, which
        are
        not defined in GAAP. Management uses these financial measures because they
        are
        widely accepted financial indicators used by investors to compare partnership
        performance. In addition, management believes that these measures provide
        investors an enhanced perspective of the operating performance of Rio Vista’s
        assets and the cash flow the business is generating. Neither EBITDA nor
        distributable cash flow are intended to represent cash flows for the period,
        nor
        are they presented as an alternative to net income. They should not be
        considered in isolation or as substitutes for a measure of performance prepared
        in accordance with GAAP.
  44
  *Partnership
        Tax Treatment.* Rio
        Vista is not a taxable entity for U.S. tax purposes (see below) and incurs
        no
        U.S. federal income tax liability. Rio Vista’s Mexican subsidiaries are taxed on
        their income directly by the Mexican government. The income/loss of Rio Vista’s
        Mexican subsidiaries are included in the U.S. partnership income tax return
        of
        Rio Vista. The holders of the common units and General Partner interest will
        be
        entitled to their proportionate share of any tax credits resulting from any
        income taxes paid to the Mexican government. Each unitholder of Rio Vista
        is
        required to take into account that unitholder’s share of items of income, gain,
        loss and deduction of Rio Vista in computing that unitholder’s federal income
        tax liability, even if no cash distributions are made to the unitholder by
        Rio
        Vista. Distributions by Rio Vista to a unitholder are generally not taxable
        unless the amount of cash distributed is in excess of the unitholder’s adjusted
        tax basis in Rio Vista.
 
 Section
        7704 of the Internal Revenue Code (the “Code”) provides that publicly traded
        partnerships, as a general rule, are taxed as corporations despite the fact
        that
        they are not classified as corporations under Section 7701 of the Code. Section
        7704 of the Code provides an exception to this general rule for a publicly
        traded partnership if 90% or more of its gross income for every taxable year
        consists of “qualifying income” (the “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”.
 
 No
        ruling
        has been or will be sought from the IRS and the IRS has made no determination
        as
        to Rio Vista’s classification as a partnership for federal income tax purposes
        or whether Rio Vista’s operations generate a minimum of 90% of “qualifying
        income” under Section 7704 of the Code.
 
 If
        Rio
        Vista were classified as a corporation in any taxable year, either as a result
        of a failure to meet the Qualifying Income Exception or otherwise, Rio Vista’s
        items of income, gain, loss and deduction would be reflected only on Rio
        Vista’s
        tax return rather than being passed through to Rio Vista’s unitholders, and Rio
        Vista’s net income would be taxed at corporate rates.
 
 If
        Rio
        Vista were treated as a corporation for federal income tax purposes, Rio
        Vista
        would pay tax on income at corporate rates, which is currently a maximum
        of 35%.
        Distributions to unitholders would generally be taxed again as corporate
        distributions, and no income, gains, losses, or deductions would flow through
        to
        the unitholders. Because a tax would be imposed upon Rio Vista as a corporation,
        the cash available for distribution to unitholders would be substantially
        reduced and Rio Vista’s ability to make minimum quarterly distributions would be
        impaired. Consequently, treatment of Rio Vista as a corporation would result
        in
        a material reduction in the anticipated cash flow and after-tax return to
        unitholders and therefore would likely result in a substantial reduction
        in the
        value of Rio Vista’s common units.
 
 Current
        law may change so as to cause Rio Vista to be taxable as a corporation for
        federal income tax purposes or otherwise subject Rio Vista to entity-level
        taxation. The Agreement provides that, if a law is enacted or existing law
        is
        modified or interpreted in a manner that subject Rio Vista to taxation as
        a
        corporation or otherwise subjects Rio Vista to entity-level taxation for
        federal, state or local income tax purposes, then the minimum quarterly
        distribution amount and the target distribution amount will be adjusted downward
        to reflect the impact of that law on Rio Vista.
 
 *Litigation.* Penn
        Octane International, L.L.C. “Penn Octane International”, a wholly-owned
        subsidiary of Rio Vista has been named as the defendant in lawsuit 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, Penn Octane International,
        Rio
        Vista nor any of Rio Vista’s subsidiaries in Mexico owned or operated the tanker
        truck or employed or controlled the driver of the tanker truck. Further,
        none of
        the Penn Octane or Rio Vista companies owned or had custody of the LPG on
        the
        tanker truck at the time and location of the accident.
  45
 Even
          though the accident took place in Mexico, the lawsuit was filed in the
          District
          Court for Cameron County, Texas, on September 26, 2005 and was served on
          September 28, 2005. The case is captioned *Lesly
          Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
          International LLC* .
          The
          plaintiffs seek unspecified monetary damages and a temporary injunction
          in order
          to preserve evidence relevant to the case and assets to secure a potential
          judgment. An ex
          parte temporary restraining order was sought and obtained by the plaintiffs on
          September 27, 2005, in order to preserve evidence and prevent any sale
          of
          assets, including Penn Octane’s and Rio Vista’s LPG Asset Sales. This order was
          issued without prior notice to, or opportunity to contest by, Penn Octane
          or Rio
          Vista. The temporary restraining order expired on October 19, 2005. A hearing
          on
          the plaintiffs’ application for a temporary injunction is expected in late
          November 2005.
 
 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
          lawsuit, 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 operator of the tanker truck,
          or
          its insurance company, is reportedly taking claims in Mexico from victims
          of the
          accident.
  Management
          believes that the lawsuit against Penn Octane International is without
          merit
          and, based on the advice of counsel, does not anticipate either liability
          for
          damages or the issuance of a temporary injunction against a sale of Penn
          Octane’s or Rio Vista’s assets. Rio Vista’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. If a court enjoined the
          sale of
          all or any portion of Penn Octane’s or Rio Vista’s assets to a third party, such
          an injunction could delay or prevent Penn Octane’s or Rio Vista’s LPG Asset Sale
          before resolution of the claims underlying the lawsuit. A lengthy delay
          of, or
          inability to close, the LPG Asset Sale could have a material adverse effect
          on
          Penn Octane’s and Rio Vista’s business, financial condition and results of
          operations.
  In
        October 2005, the District Court of Cameron County, Texas awarded $100,000
        to a
        land owner in connection with the acquisition of a right of way by the Company.
        The Company is currently appealing the award.
 
 The
        Company and its subsidiaries are involved with other proceedings, lawsuits
        and
        claims. The Company believes that the liabilities, if any, ultimately resulting
        from such proceedings, lawsuits and claims should not materially affect its
        consolidated financial statements.
 
 *Consulting
        Agreement.* During
        November 2005, Penn Octane, Rio Vista and Mr. Richter entered into a consulting
        agreement whereby Mr. Richter shall serve as a special advisor to the board
        of
        directors of Penn Octane and the board of managers of Rio Vista and will
        provide
        the following services (the “Services”) to both Penn Octane and Rio Vista:
        assistance with the sale of all or part of their LPG assets and 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, the
        companies agreed to pay the following fees (“Fees”) to Mr. Richter: an amount
        equal to two percent (2%) of (i) the net proceeds to the companies
        resulting from a sale of assets to a third party, and (ii) the net proceeds
        to
        the companies from sales of LPG to PMI for any calendar month in which such
        sales exceed the volumes pursuant to the PMI Agreement (see Note K to the
        unaudited consolidated financial statements).
  46
  T he
        companies may, in their discretion, offset the amount of any Fees due and
        payable to Mr. Richter against any amounts owed (whether or not then due
        or
        payable) by Mr. Richter to the Company, including without limitation, any
        amounts owed by Mr. Richter to Penn Octane pursuant to his promissory note
        payable to Penn Octane.
 
 The
        term
        of this consulting agreement shall continue until the earlier of one year
        from
        the date of the agreement or termination of the agreement upon 30 days written
        notice to the other party.
 
 *Pipeline
        Lease* .
        The
        Pipeline Lease currently expires on December 31, 2013, pursuant to an amendment
        (the “Pipeline Lease Amendment”) entered into between the Company and Seadrift
        on May 21, 1997, which became effective on January 1, 1999 (the “Effective
        Date”). The Pipeline Lease Amendment provides, among other things, for
        additional storage access and inter-connection with another pipeline controlled
        by Seadrift, thereby providing greater access to and from the Leased Pipeline.
        Pursuant to the Pipeline Lease Amendment, the Company’s fixed annual rent for
        the use of the Leased Pipeline is $1.0 million including monthly service
        payments. The service payments are subject to an annual adjustment based
        on a
        labor cost index and an electric power cost index. In connection with the
        Pipeline Lease, the Company has access to storage in Markham, Texas which
        has a
        capacity of up to 21.0 million gallons of storage.
 
 The
        Pipeline Lease Amendment provides for variable rental increases based on
        monthly
        volumes purchased and flowing into the Leased Pipeline and storage utilized.
        The
        Company believes that the Pipeline Lease Amendment provides the Company
        increased flexibility in negotiating sales and supply agreements with its
        customers and suppliers.
  The
        Company at its own expense, installed a mid-line pump station which included
        the
        installation of additional piping, meters, valves, analyzers and pumps along
        the
        Leased Pipeline to increase the capacity of the Leased Pipeline. The Leased
        Pipeline’s capacity
        is estimated to be between 300 million and 360 million gallons per
        year.
 
 *Other.* The
        Company intends to upgrade its computer and information systems at a total
        estimated cost of approximately $350,000 expected to be completed during
        2006.
 
 *Mexican
        Operations.* ****** Under
        current Mexican law, foreign ownership of Mexican entities involved in the
        distribution of LPG or the operation of receiving, conveying, storing and
        delivering LPG to final users is prohibited. Foreign ownership is permitted
        in
        the transportation and storage of LPG. Mexican law also provides that an
        entity
        with a permit to transport LPG is not permitted to obtain permits for the
        other
        defined LPG activities (storage or distribution). PennMex has a transportation
        permit and Termatsal owns, leases, or is in the process of obtaining the
        land or
        rights of way used in the construction of the Mexican portion of the US-Mexico
        Pipelines, and owns the Mexican portion of the assets comprising the US-Mexico
        Pipelines and the Matamoros Terminal Facility. The Company’s consolidated
        Mexican affiliate, Tergas, S. de R.L. de C.V. (“Tergas”), has been granted the
        permit to operate the Matamoros Terminal Facility and the Company relies
        on
        Tergas’ permit to continue its delivery of LPG at the Matamoros Terminal
        Facility. The Company pays Tergas its actual cost for distribution services
        at
        the Matamoros Terminal Facility plus a small profit.
 
 Through
        its operations in Mexico and the operations of the Mexican Subsidiaries and
        Tergas, a consolidated affiliate, the Company is subject to the tax laws
        of
        Mexico which, among other things, require that the Company comply with transfer
        pricing rules, the payment of income, asset and ad valorem taxes, and possibly
        taxes on distributions in excess of earnings. In addition, distributions
        to
        foreign corporations, including dividends and interest payments may be subject
        to Mexican withholding taxes.
 
 During
        July 2003, the Company acquired an option to purchase Tergas, an affiliate
        95%
        owned by Mr. Vicente Soriano and the remaining balance owned by Mr. Abelardo
        Mier, a consultant of the Company, for a nominal price of approximately $5,000.
        Since inception the operations of Tergas have been funded by the Company
        and the
        assets, liabilities and results of operations of Tergas are included in the
        Company’s consolidated financial statements.
  47
  *Deregulation
        of the LPG Industry in Mexico.* ****** The
        Mexican petroleum industry is governed by the *Ley
        Reglarmentaria del Artículo 27 Constitutional en el Ramo del
        Petróleo* (the
        Regulatory Law to Article 27 of the Constitution of Mexico concerning Petroleum
        Affairs (the “Regulatory Law”)), Reglamento de Gas Licuado de Petroleo
        (Regulation of LPG) and *Ley
        Orgánica del Petróleos Mexicanos y Organismos Subsidiarios* (the
        Organic Law of Petróleos Mexicanos and Subsidiary Entities (the “Organic Law”)).
        Under Mexican law and related regulations, PEMEX is entrusted with the central
        planning and the strategic management of Mexico's petroleum industry, including
        importation, sales and transportation of LPG. In carrying out this role,
        PEMEX
        controls pricing and distribution of various petrochemical products, including
        LPG.
 
 Beginning
        in 1995, as part of a national privatization program, the Regulatory Law
        was
        amended to permit private entities to transport, store and distribute natural
        gas with the approval of the Ministry of Energy. As part of this national
        privatization program, the Mexican Government is expected to deregulate the
        LPG
        market (“Deregulation”). In June 1999, the Regulation of LPG was enacted to
        permit foreign entities to participate without limitation in the defined
        LPG
        activities related to transportation and storage. However, foreign entities
        are
        prohibited from participating in the distribution of LPG in Mexico. Upon
        Deregulation, Mexican entities will be able to import LPG into Mexico. Under
        Mexican law, an entity with a permit to transport LPG is not permitted to
        obtain
        permits for the other defined LPG activities (storage and distribution).
        The
        Company or its consolidated affiliate expect to sell LPG directly to independent
        Mexican distributors as well as PMI upon Deregulation. The Company anticipates
        that the independent Mexican distributors will be required to obtain
        authorization from the Mexican government for the importation of LPG upon
        Deregulation prior to entering into contracts with the Company.
 
 During
        July 2001, the Mexican government announced that it would begin to accept
        applications from Mexican companies for permits to allow for the importation
        of
        LPG pursuant to provisions already provided for under existing Mexican law.
 
 In
        connection with the above, in August 2001, Tergas received a one year permit
        from the Mexican government to import LPG. During September 2001, the Mexican
        government decided to delay the implementation of Deregulation and asked
        Tergas
        to defer use of the permit and as a result, the Company did not sell LPG
        to
        distributors other than PMI. In March 2002, the Mexican government again
        announced its intention to issue permits for free importation of LPG into
        Mexico
        by distributors and others beginning August 2002, which was again delayed.
        To
        date the Mexican government has continued to delay implementation of
        Deregulation. Tergas’ permit to import LPG expired during August 2002. Tergas
        intends to obtain a new permit when the Mexican government again begins to
        accept applications. As a result of the foregoing, it is uncertain as to
        when,
        if ever, Deregulation will actually occur and the effect, if any, it will
        have
        on the Company. However, should Deregulation occur and should the LPG Asset
        Sale
        not close, it is the Company’s intention to sell LPG directly to distributors in
        Mexico as well as to PMI.
 
 The
        point
        of sale for LPG which flows through the US-Mexico Pipelines for delivery
        to the
        Matamoros Terminal Facility is the United States-Mexico border. For LPG
        delivered into Mexico, PMI is the importer of record.
 
 *Private
        Placements and Other Transactions* .
        During
        January 2005, the Company issued 100,000 shares of common stock of Penn Octane
        to a consultant in payment of amounts accrued by the Company at December
        31,
        2004.
 
 During
        March 2005, warrants to purchase a total of 106,250 shares of common stock
        of
        Penn Octane were exercised resulting in cash proceeds to the Company of $97,750.
 
 On
        September 30, 2004, pursuant to the terms of an employment agreement dated
        May
        13, 2003 with Richard Shore, Jr., former President of the Company, the Company
        issued warrants to purchase 763,737 shares of Penn Octane’s common stock at an
        exercise price of $1.14 per share. The warrants expire on July 10,
        2006.
  48
  **Penn
        Octane 2001 Warrant Plan**
 
 On
        March
        9, 2005, the board of directors of Penn Octane approved the grant of warrants
        to
        purchase a total of 1.0 million shares of Penn Octane common stock under
        Penn
        Octane’s 2001 Warrant Plan previously approved by the Penn Octane stockholders.
        Of the total number of warrants granted, 625,000 were granted to executive
        officers of Penn Octane, 255,000 were issued to outside directors of Penn
        Octane
        and 125,000 were issued to a consultant. The exercise price for the warrants
        is
        $1.50 per share, which was the closing price for Penn Octane’s common stock as
        reported by the Nasdaq Stock Market on March 9, 2005. Warrants granted to
        executive officers vest in equal monthly installments over a period of 36
        months
        from the date of grant. Warrants granted to outside directors vest in equal
        monthly installments over a period of 12 months from the date of grant. All
        warrants become fully exercisable upon a change in control event and expire
        five
        years from the date of grant.
 
 **Note
        Receivable from a Former Officer of the Company**
 
 The
        note
        receivable from a former officer of the Company, Mr. Richter, in the amount
        of
        $3.2 million, was due July 29, 2005. On August 3, 2005 in connection with
        Mr.
        Richter’s retirement in May 2005 and his past services, the Company approved an
        extension of the note to July 29, 2007 and a discount of the note to $1.7
        million plus accrued interest not waived (see below) on its maturity date,
        subject to satisfaction of certain conditions. The Company considers it to
        be
        probable that the note will be discounted at maturity and accordingly, has
        recorded a charge to compensation expense as of June 30, 2005 in the amount
        of
        $1.0 million with a corresponding credit to the reserve. The interest rate
        on
        the extended note is the prime rate (6.25% as of September 30, 2005) plus
        2%.
        The Company will continue to waive interest provided that Mr. Richter guarantees
        debt of the Company to any person in an amount equal to at least $1.8
        million.
 
 **Restructured
        Notes and $280,000 Note** *.* ****
 
 On
        January 16, 2004, the Restructured Notes totaling $1,525,000 which were due
        on
        December 15, 2003 were renewed and extended (“Restructuring”). In connection
        with the Restructuring, the due date of the Restructured Notes was extended
        to
        December 15, 2005. The Restructured Notes can be repaid at any time without
        penalty. Annual interest on the Restructured Notes is 16.5% and the Company
        also
        agreed to pay a fee of 1.5% on any principal balance of the Restructured
        Notes
        outstanding at the end of each quarterly period, beginning December 15, 2003.
        Interest and fees are payable quarterly beginning March 15, 2004. In addition,
        the Company issued an additional 37,500 warrants to purchase shares of common
        stock of Penn Octane to certain holders of the Restructured Notes. All payments
        were made through March 15, 2005. The payments on these notes due June 15,
        2005
        and September 15, 2005 each in the amount of approximately $103,000 have
        not
        been made (see below).
 
 In
        addition, the Company agreed to extend the expiration date on outstanding
        warrants to purchase common stock of Penn Octane held by holders of the
        Restructured Notes until December 15, 2008 and agreed to issue 110,250 warrants
        (which includes 20,000 warrants to purchase Rio Vista common units held by
        Philadelphia Brokerage Corporation (see below)) to purchase Rio Vista common
        units (the “Rio Vista Warrants”). The Rio Vista Warrants will expire on December
        15, 2006 and the exercise price is $5.00 per warrant. The amount of discount
        recorded by the Company totaled $422,000 which is reflected as interest expense
        ratably amortized from the grant date of January 14, 2005 to December 15,
        2005,
        the maturity date of the debt obligations. For the three months and nine
        months
        ended September 30, 2005 amortization expense was $153,455 and $326,091,
        respectively.
 
 Certain
        holders of promissory notes totaling approximately $280,000 of principal
        due
        December 15, 2003, who did not agree to the Restructuring (the “Declining
        Noteholders”), were paid by the Company. In connection with amounts due to the
        Declining Noteholders, the Company issued $280,000 of promissory notes (the
        “$280,000 Notes”). The terms of the $280,000 Notes are substantially similar to
        the Restructured Notes, except that the holders of the $280,000 Notes were
        not
        entitled to receive any warrants to purchase shares of common stock of Penn
        Octane until the Restructuring.
  49
  The
        holders of the Restructured Notes and $280,000 Notes consented to the Spin-Off
        of Rio Vista provided that (1) the assets of Penn Octane transferred to Rio
        Vista continued to be pledged as collateral for payment of those notes, (2)
        Rio
        Vista guaranteed Penn Octane’s obligations under the notes and (3) Rio Vista be
        prohibited from making any distributions in the event that Penn Octane is
        in
        default under the Restructured Notes and $280,000 Notes.
 
 In
        connection with the Restructured Notes and $280,000 Notes, Philadelphia
        Brokerage Corporation (the “PBC”) acted as placement agent and received a fee
        equal to 1.5% of the Restructured Notes and $280,000 Notes. PBC also received
        warrants to purchase 20,000 units in Rio Vista. The terms of the warrants
        are
        the same as the Rio Vista Warrants.
 
 In
        connection with the issuance of the new warrants of Penn Octane and the
        extension of the warrants of Penn Octane, the Company recorded a discount
        of
        $194,245 related to the fair value of the newly issued, modified warrants
        and
        including fees of $27,075 of which $149,542 has been amortized through September
        30, 2005.
  Mr.
        Richter continues to provide collateral to secure the Restructured Notes
        and the
        $280,000 Notes noteholders with 2.0 million shares of common stock of Penn
        Octane owned by him. As a result of the Spin-Off, he is also required to
        provide
        as collateral 250,000 Common Units of Rio Vista owned by him.
 
 On
        September 30, 2005, the Company and holders of $1.8 million of promissory
        notes
        due December 15, 2005 (the ”Notes”) agreed to an amendment whereby the interest
        payments required to paid on June 15, 2005 and September 15, 2005 were extended
        to December 15, 2005 (the “Deferred Interest”). Under the terms of the
        amendment, the Company agreed to pay additional interest at an annual rate
        of
        16.5% on the Deferred Interest from the original due date through the date
        the
        Deferred Interest is paid. In addition, the Company agreed to pay to the
        holders
        of the Notes, an additional amount equal to 5% of the principal amount
        outstanding of the Notes upon maturity. Mr. Richter agreed that he would
        deliver
        the 250,000 Common Units of Rio Vista owned by him (referred to above) to
        the
        collateral agent. The Company also agreed that it would not enter into any
        additional severance payment obligation in connection with the resignation
        of
        Mr. Richter until the Notes are fully paid. In addition, the holders of the
        Notes agreed to allow Rio Vista to pledge and deliver certain assets in
        connection with the TransMontaigne Note (see above). The 250,000 Common Units
        of
        Rio Vista have not yet been delivered.
   **Options
        and Warrants of Rio Vista**
  ***General
        Partner Options.*** Penn
        Octane’s 100% interest in the General Partner may be decreased to 50% as a
        result of the exercise by Shore Capital LLC (“Shore Capital”), an affiliate of
        Mr. Shore, and by Mr. Richter of options to each acquire 25% of the General
        Partner (the “General Partner Options”). The exercise price for each option is
        approximately $82,000. The options expire on July 10, 2006. Following the
        exercise of any of the General Partner Options, Penn Octane will retain voting
        control of the General Partner pursuant to a voting agreement.
  ***Common
        Unit Warrants.*** In
        connection with Mr. Shore’s employment agreement with Penn Octane, Shore Capital
        received warrants to acquire 97,415 common units of Rio Vista at $8.47 per
        unit.
        The warrants expire on July 10, 2006.
  The
        Company issued 90,250 warrants to purchase Rio Vista units to the holders
        of the
        Restructured Notes and $280,000 Notes and 20,000 warrants to purchase Rio
        Vista
        units to PBC (see note G to the unaudited consolidated financial statements).
        The calculated exercise price per warrant to purchase a Rio Vista Unit for
        these
        Rio Vista Warrants is $5.00.
  50
  On
        March
        9, 2005, the board of managers of the General Partner of Rio Vista,
        approved the Rio Vista 2005 Equity Incentive Plan (the “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. Under the terms of the Agreement and applicable rules of the Nasdaq
        Stock Market, no approval by the common unitholders of Rio Vista was
        required.
  On
        March
        9, 2005, the board of managers of the General Partner of Rio Vista approved
        the grant of options to purchase a total of 108,750 common units under the
        2005
        Plan. Of the total number of options granted, 93,750 were granted to certain
        executive officers of the General Partner and Mr. Richter and 15,000 were
        issued
        to outside managers of the General Partner. The exercise price for the options
        is $12.51 per common unit, which was the average of the high and low sales
        prices for Rio Vista common units as reported by the Nasdaq Stock Market
        on
        March 9, 2005. The options granted to executive officers (including Mr. Richter)
        were fully vested on the date of grant. The options granted to outside managers
        vest in equal monthly installments over a period of 12 months from the date
        of
        grant. All options become fully exercisable upon a change in control event
        and
        expire three years from the date of grant.
  *The
        Spin-Off.* During
        September 2003, Penn Octane’s board of directors and the independent committee
        of its board of directors formally approved the terms of the Spin-Off (see
        Overview) and Rio Vista filed a Form 10 registration statement with the
        Securities and Exchange Commission (“SEC”). On September 30, 2004, all of Penn
        Octane’s limited partnership interest in Rio Vista was distributed to Penn
        Octane’s stockholders. Each stockholder of Penn Octane on September 30, 2004,
        received on common unit of the limited partnership interest of Rio Vista
        for
        every eight shares of Penn Octane’s common stock owned.
 
 As
        a
        result of the Spin-Off, Rio Vista owns and operates the LPG, distribution,
        transportation and marketing business previously conducted by Penn Octane.
        All
        of the assets transferred to Rio Vista in connection with the Spin-Off have
        been
        transferred at historical costs and related accumulated depreciation of Penn
        Octane at the date of the Spin-Off. Rio Vista began selling LPG to PMI upon
        the
        completion of the Spin-Off and at that time also began purchasing LPG from
        Penn
        Octane under the LPG Supply Agreement.
 
 The
        General Partner is responsible for managing the operations and activities
        of Rio
        Vista. Common unitholders do not participate in the management of Rio Vista.
        Penn Octane controls Rio Vista by virtue of its current ownership, management
        and voting control of the General Partner. Therefore, Rio Vista is accounted
        for
        as a consolidated subsidiary of Penn Octane for financial accounting
        purposes.
  **Intercompany
        Purchase Agreement for LPG**
  Penn
        Octane entered into a long-term supply agreement with Rio Vista pursuant
        to
        which Rio Vista agrees to purchase all of its LPG requirements for sales
        which
        utilize the assets transferred to Rio Vista by Penn Octane to the extent
        Penn
        Octane is able to supply such LPG requirements. This agreement further provides
        that Rio Vista has no obligation to purchase LPG from Penn Octane to the
        extent
        the distribution of such LPG to Rio Vista’s customers would not require the use
        of any of the assets Penn Octane contributed to Rio Vista or Penn Octane
        ceases
        to have the right to access the Seadrift pipeline.
  51
  Under
        the
        LPG Supply Agreement, Penn Octane supplies all of Rio Vista’s LPG requirements
        in connection with its LPG sales obligations to PMI. The purchases of the
        LPG
        are at fluctuating prices and are determined based on the cost of LPG under
        Penn
        Octane’s agreements with its LPG suppliers for volumes sold to Rio Vista for
        sale to PMI or to other Rio Vista customers, other direct costs related to
        PMI
        and other LPG sales of Rio Vista and a formula that takes into consideration
        operating costs of Penn Octane and Rio Vista. Rio Vista expects the aggregate
        costs per gallon to purchase LPG (less any applicable adjustments) to be
        below
        the aggregate sales prices per gallon of LPG sold to PMI. Rio Vista believes
        that its LPG Supply Agreement with Penn Octane provides it with an advantage
        over competitors in the supply of LPG to PMI based on Penn Octane’s adequate
        volumes and price provided for in its agreements with its LPG suppliers,
        and
        Penn Octane’s Leased Pipeline which takes the LPG directly to Rio Vista’s
        Brownsville Terminal Facility from those suppliers. The Leased Pipeline’s
        capacity is estimated to be between 25.0 million and 30.0 million gallons
        per
        month.
 
 Under
        the
        terms of the Exxon Supply Contract, Penn Octane must provide letters of credit
        in amounts equal to the cost of the product to be purchased. In addition,
        the
        cost of the product purchased is tied directly to overall market conditions.
        As
        a result, Penn Octane’s existing letter of credit facility may not be adequate
        to meet the letter of credit requirements under the Exxon Supply Contract
        or
        other suppliers if there are increases in quantities of LPG purchased and/or
        to
        finance future price increases of LPG.
 
 The
        LPG
        Supply Agreement terminates on the earlier to occur of:
 
 ·
              Penn
                  Octane ceases to have the right to access the Leased Pipeline that
                  connects to Rio Vista’s Brownsville Terminal Facility;
                  and
 ·
              Rio
                  Vista ceases to sell LPG using any of the assets contributed by
                  Penn
                  Octane to Rio Vista pursuant to the
                  Spin-Off.
  **Omnibus
        Agreement**
  In
        connection with the Spin-Off, Penn Octane entered into an Omnibus Agreement
        with
        Rio Vista and its subsidiaries that governs, among other things, indemnification
        obligations among the parties to the agreement, related party transactions,
        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,
        the term material agreements means 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 such 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.
  *Realization
        of Assets.* The
        accompanying unaudited consolidated financial statements have been prepared
        in
        conformity with accounting principles generally accepted in the United States
        of
        America, which contemplate continuation of the Company as a going concern.
        The
        Company has a loss from operations for the nine months ended September 30,
        2005,
        has an accumulated deficit since inception and has a deficit in working capital.
        In addition, substantially all of the Company’s assets are pledged or committed
        to be pledged as collateral on existing debt in connection with the Restructured
        Notes, the $280,000 Notes, the RZB Credit Facility and the TransMontaigne
        Note,
        and therefore, the Company may be unable to obtain additional financing
        collateralized by those assets. The Restructured Notes and the $280,000 Notes
        are due December 15, 2005. If the LPG Asset Sale does not close, the
        TransMontaigne Note may be due as early as March 15, 2006, including interest
        beginning November 15, 2005. The Company restructured the interest payments
        which were due June 15, 2005 and September 15, 2005 on the Restructured
        Notes and the $280,000 Notes. The RZB Credit Facility may be insufficient
        to
        finance the Company’s LPG purchases and/or Fuel Products purchases,
        assuming increases in product costs per gallon, or volumetric growth in product
        sales, and may be terminated by RZB with 90 days notice.
  52
  The
        PMI
        Agreement expires on March 31, 2006 unless it is renewed or extended. If
        the LPG
        Asset Sale does not close, the Company’s gross profit from operations beginning
        October 1, 2005, based on the minimum volumes and the margins provided for
        in
        the PMI Agreement, may provide sufficient cash flow for the Company to pay
        its
        operating expenses through March 31, 2006, assuming breakeven results from
        the
        Fuel Sales Business. However, cash flow may not be sufficient to allow the
        Company to pay its other obligations, including, but not limited to, the
        Restructured Notes, the $280,000 Notes and the TransMontaigne Note as they
        become due, and costs of maintenance and repairs and professional fees related
        to the LPG Asset Sale. In addition, the Company may not have sufficient supply
        of LPG from the Exxon Supply Contract to meet the minimum monthly volumes
        under
        the PMI Agreement. If the LPG Asset Sale does not close, the Company’s gross
        profits on sales may be insufficient to pay its operating expenses, subsequent
        to March 31, 2006, if (i) the Company cannot sell LPG to PMI or other customers
        at acceptable margins and volumes and/or (ii) the Company cannot successfully
        reduce the minimum volumes and/or purchase costs required under the Exxon
        Supply
        Contract and/or (iii) the Company cannot sufficiently reduce its other expenses,
        and/or (iv) the Company’s Fuel Sales Business is not sufficiently successful.
  The
        Company’s cash flow has been reduced compared to historical levels as a result
        of materially lower volumes of sales to PMI and materially reduced margins.
        Additionally, the Company’s public company compliance and income tax preparation
        costs have increased as a result of the Spin-Off of Rio Vista. As a result
        of
        these factors, the Company may not have sufficient cash flow to pay its
        obligations when due and/or pay arrearages or make future distributions to
        Rio
        Vista’s unitholders. In the event Penn Octane does not pay its obligations when
        due, Rio Vista’s guarantees to Penn Octane and Penn Octane’s creditors may be
        triggered. Accordingly, Rio Vista may be required to pay such obligations
        of
        Penn Octane to avoid foreclosure against its assets by Penn Octane’s creditors.
        If the Company’s revenues and other sources of liquidity are not adequate to pay
        its obligations, Rio Vista may be required to reduce or eliminate distributions
        to unitholders and Penn Octane or Rio Vista may be required to raise additional
        funds to avoid such foreclosure. There can be no assurance that such additional
        funding will be available on terms attractive to either Penn Octane or Rio
        Vista
        or available at all. If additional amounts cannot be raised and the Company
        is
        unable to restructure its obligations, the Company would suffer material
        adverse
        consequences to its business, financial condition and results of operations
        and
        Penn Octane and/or Rio Vista would likely be required to seek other
        alternatives, which could include the sale of assets, closure of operations
        and/or protection under the U.S. bankruptcy laws.
  In
        view
        of the matters described in the preceding paragraphs, recoverability of the
        recorded asset amounts shown in the accompanying unaudited consolidated balance
        sheet is dependent upon either (1) closing of the LPG Asset Sale or (2) the
        ability of the Company to generate sufficient cash flow through operations
        or
        additional debt or equity financing to pay its liabilities and obligations
        when
        due. If the LPG Asset Sale does not close, the ability for the Company to
        generate sufficient cash flows from operations is significantly dependent
        on the
        sale of LPG to PMI at acceptable average monthly sales volumes and margins,
        the
        success of the Fuel Sales Business and the adequacy of the RZB Credit Facility
        to finance such sales. The unaudited consolidated financial statements do
        not
        include any adjustments related to the recoverability and classification
        of
        recorded asset amounts or amounts and classification of liabilities that
        might
        be necessary should the Company be unable to continue in existence.
  To
        provide the Company with the ability it believes necessary to continue in
        existence, management is taking steps to close the LPG Asset Sale. If the
        LPG
        Asset Sale does not close, management intends to (i) continue to negotiate
        with
        PMI for continued sales of LPG at acceptable volumes and margins (ii) continue
        to expand its Fuel Sales Business, (iii) further diversify its operations
        to
        reduce dependency on sales of LPG, (iv) increase the amount of financing
        for its
        products and operations, (v) raise additional debt and/or equity capital
        and
        (vi) reduce its supply costs and operating expenses. Management may also
        to
        continue to attempt to sell its LPG and refined products assets.
  53
 
 **Impact
        of Inflation**
  Inflation
        in the United States has been relatively low in recent years and did not
        have a
        material impact on the unaudited consolidated financial statements of the
        Company. However, inflation remains a factor in the United States economy
        and
        could increase the Company’s cost to acquire or replace property, plant and
        equipment as well as our labor and supply costs.
  The
        Company may be adversely impacted as a result of increases in LPG prices,
        which
        are related to oil and natural gas prices, because of limits on the RZB Credit
        Facility.
  **Environmental
        Matters**
  The
        Company’s operations are subject to environmental laws and regulations adopted
        by various governmental authorities in the jurisdictions in which these
        operations are conducted. Under the Omnibus Agreement, Penn Octane will
        indemnify Rio Vista for five years after the completion of the Spin-Off against
        certain potential environmental liabilities associated with the assets it
        contributed to Rio Vista relating to events or conditions that existed before
        the completion of the Spin-Off.
  **Recently
        Issued Financial Accounting Standards**
 
 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, an affiliate of the Company, is
        a VIE
        and therefore, its assets, liabilities and results of operations have been
        included in the accompanying unaudited consolidated financial statements
        of the
        Company.
 
 In
        November 2004, the FASB issued Statement of Financial Accounting Standard
        No.
        151, “Inventory Costs - An Amendment of ARB No. 43 Chapter 4” (“SFAS 151”) which
        clarifies that abnormal amounts of idle facility expense, freight, handling
        costs and spoilage should be expensed as incurred and not included in overhead.
        Further, SFAS 151 requires that allocation of fixed production overheads
        to
        conversion costs should be based on normal capacity of the production
        facilities. The provisions in SFAS 151 are effective for inventory costs
        incurred during fiscal years beginning after June 15, 2005. The Company has
        determined that SFAS 151 will not have a material impact on their consolidated
        results of operations, financial position or cash flows.
 
 During
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standard No. 123 (revised 2004) “Share-Based
        Payment” (“SFAS 123R”). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based
        Compensation”, and supercedes APB Opinion 25, “Accounting for Stock Issued to
        Employees” (“APB 25”). SFAS 123R requires that the cost of share-based payment
        transactions (including those with employees and non-employees) be recognized
        in
        the financial statements as compensation cost. That cost will be measured
        based
        on the fair value of equity or liability instrument issued. SFAS 123R is
        effective for the Company beginning January 1, 2006. The Company currently
        accounts for stock options issued to employees under APB 25.
 
 In
        December 2004, the FASB issued Statement of Financial Accounting Standard
        No.
        153, “Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29” (“SFAS
        153”). The amendments made by SFAS 153 are based on the principle that exchanges
        on nonmonetary assets should be measured based on the fair value of the assets
        exchanged. The provisions in SFAS 153 are effective for nonmonetary asset
        exchanges occurring in fiscal periods beginning after June 15, 2005. Early
        application is permitted and companies must apply the standard prospectively.
        The Company has determined that SFAS 153 will not have a material impact
        on
        their consolidated results of operations, financial position or cash
        flows.
  54
 
 In
        May
        2005, the FASB issued Statement of Financial Accounting Standard No. 154,
        “Accounting Changes and Error Corrections” (SFAS154). This new standard replaces
        APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting
        Accounting Changes in Interim Financial Statements”. Among other changes, SFAS
        154 requires that a voluntary change in accounting principle be applied
        retrospectively with all prior period financial statements presented on the
        new
        accounting principle, unless it is impracticable to do so. SFAS 154 also
        provides that (1) a change in method of depreciating or amortizing a long-lived
        nonfinancial asset be accounted for as a change in estimate (prospectively)
        that
        was effected by a change in accounting principle, and (2) correction of errors
        in previously issued financial statements should be termed a “restatement.” The
        new standard is effective for accounting changes and correction of errors
        made
        in fiscal years beginning after December 15, 2005. Early adoption of this
        standard is permitted for accounting changes and correction of errors made
        in
        fiscal years beginning after June 1, 2005. The Company has determined that
        SFAS
        154 will not have a material impact on their consolidated results of operations,
        financial position or cash flows.
 
 
 **Critical
        Accounting Policies**
 
 The
        unaudited 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 Company’s consolidated
        financial statements included in its Annual Report on Form 10-K for the fiscal
        year ended July 31, 2004, “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.
 
 Revenue
        recognition - the Company expects in the future to enter into sales agreements
        to sell LPG for future delivery. The Company will not record sales until
        the LPG
        is delivered to the customer.
 
 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.
 
 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.
 
 Stock-based
        compensation - The Company accounts for stock-based compensation using the
        provisions of APB 25 (intrinsic value method), which is permitted by SFAS
        123.
        The difference in net income, if any, between the intrinsic value method
        and the
        method provided for by SFAS 123 (fair value method) is required to be disclosed
        in the financial statements on an annual and interim basis as a result of
        the
        issuance of SFAS 148.
 
 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.
  55
 
 **Statement
        by Management Concerning Review of Interim Information by An Independent
        Registered Public Accounting Firm.**
 
 The
        unaudited consolidated financial statements included in this filing on Form
        10-Q
        have been reviewed by Burton McCumber & Cortez, L.L.P., an independent
        registered public accounting firm, in accordance with established professional
        standards and procedures for such review. The report of Burton McCumber &
Cortez, L.L.P. commenting on their review, accompanies the unaudited
        consolidated financial statements included in Item 1 of Part I.
   **Item
                  3.**
              **Quantitative
                  and Qualitative Disclosures About Market
                  Risk.**
 
 To
        the
        extent that the Company maintains quantities of LPG inventory in excess of
        commitments for quantities of undelivered LPG and/or has commitments for
        undelivered LPG in excess of inventory balances, the Company is exposed to
        market risk related to the volatility of LPG prices. In the event that inventory
        balances exceed commitments for undelivered LPG, during periods of falling
        LPG
        prices, the Company may sell excess inventory to customers to reduce the
        risk of
        these price fluctuations. In the event that commitments for undelivered LPG
        exceed inventory balances, the Company may purchase contracts which protect
        the
        Company against future price increases of LPG.
 
 The
        Company does not maintain quantities of LPG inventory in excess of quantities
        actually ordered by PMI. Therefore, the Company has not currently entered
        into
        and does not currently expect to enter into any arrangements in the future
        to
        mitigate the impact of commodity price risk.
 
 To
        the
        extent the Company maintains quantities of Fuel Products inventory in excess
        of
        commitments for quantities of undelivered Fuel Products, the Company is exposed
        to market risk related to the volatility of Fuel Product prices. In the event
        that inventory balances exceed commitments for undelivered Fuel Products,
        during
        periods of falling Fuel Products prices, the Company may sell excess inventory
        to customers to reduce the risk of these price fluctuations.
 
 The
        Company has historically borrowed only at fixed interest rates. All current
        interest bearing debt is at a fixed rate. Trade accounts receivable from
        the
        Company’s limited number of customers and the Company’s trade and other accounts
        payable generally do not bear interest. The Company’s credit facility with RZB
        provides for cash advances at a current variable interest rate. Fees paid
        to RZB
        for letters of credit are based on a fixed schedule as provided in the Company’s
        agreement with RZB. Therefore, the Company currently has limited, if any,
        interest rate risk.
 
 The
        Company routinely converts U.S. dollars into Mexican pesos to pay terminal
        operating costs and income taxes. Such costs have historically been less
        than $1
        million per year and the Company expects such costs will remain at less than
        $1
        million in any year. The Company does not maintain Mexican peso bank accounts
        with other than nominal balances. Therefore, the Company has limited, if
        any,
        risk related to foreign currency exchange rates.
 
 **Item
                  4.**
              **Controls
                  and Procedures.**
 
 The
        Company’s management, including the principal executive officer and principal
        financial officer, conducted an evaluation of the Company’s disclosure controls
        and procedures, as such term is defined under Rule 13a-15 promulgated under
        the
        Securities Exchange Act of 1934, as of the end of the period. Based on their
        evaluation, the Company’s principal executive officer and principal accounting
        officer concluded that the Company’s disclosure controls and procedures are
        effective.
 
 There
        have been no significant changes (including corrective actions with regard
        to
        significant deficiencies or material weaknesses) in the Company’s internal
        controls or in other factors that could significantly affect these controls
        subsequent to the date of the evaluation referenced in paragraph
        above.
  56
  **PART
        II**
 
 **Item
                  1.**
              **Legal
                  Proceedings**
 
 See
        note
        J to the Company’s unaudited consolidated financial statements included in its
        Quarterly Report on Form 10-Q for the nine months ended September 30,
        2005.
 
 **Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
 
 None.
 
 **Item
                  3.**
              **Defaults
                  Upon Senior Securities**
  None.
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
 
 A
        special
        meeting of the stockholders of Penn Octane Corporation was held on
        October 26, 2005, at the Hilton Waterfront Beach Resort, 21100 Pacific
        Coast Highway, Huntington Beach, California 92648. The record date for purposes
        of determining stockholders and entitled to notice of and to at the special
        meeting was September 26, 2005. As of the record date, a total of 15,522,745
        shares of common stock were outstanding. Proxies
        for the meeting were solicited pursuant to Regulation 14A under the Exchange
        Act. There was no solicitation in opposition to management’s proposals. All
        proposals were approved by holders of at least a majority of the outstanding
        common shares. The results of the voting by the stockholders for each proposals
        are presented below :
 
 **Proposal
        #1**  To
        approve the purchase and sale agreement, dated as of August 15, 2005,
        between the Company and TransMontaigne Product Services, Inc. and the sale
        to
        TransMontaigne of the Company’s liquefied petroleum gas (“LPG”) assets and
        substantially all of the assets of Rio Vista Energy Partners L.P., an affiliate
        of the company.
 
 For
              Against
              Abstain8,611,054
              43,940
              6,100
  **Proposal
        #2**  To
        approve a proposal to adjourn the special meeting, if necessary, to solicit
        additional proxies in favor of approval of the Company’s purchase and sale
        agreement with TransMontaigne, the sale of the Company’s LPG assets and the sale
        of substantially all of the assets of Rio Vista Energy Partners
        L.P.
 
 For
              Against
              Abstain8,578,725
              75,869
              6,500
 
 **Proposal
        #3**  To
        transact such other business as may properly come before the special meeting
        or
        any adjournment thereof, including to consider any procedural matters incident
        to the conduct of the special meeting.
 
 For
              Against
              Abstain8,490,025
              162,869
              8,200
 
 **Item
                  5.**
              **Other
                  Information**
 
 None.
  57
  **Item
                  6**.
              **Exhibits**
 
 **The
        following exhibits are incorporated by reference to previously filed reports,
        as
        noted.**
 
 Exhibit
        No.
 
 10.1
              Amendment
                  to Product Sales Agreement made effective as of the 28thday of January 2005 by and between Penn Octane Corporation and
                  Koch
                  Hydrocarbon, L.P. (Incorporated by reference to the Company’s Transition
                  Report on Form 10-Q for the transition period ended December 31,
                  2004
                  filed on February 22, 2005, SEC File No.
                  000-24394).
 
 10.2*
              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, 2005, SEC File No.
                  000-24394).
 
 10.3*
              Rio
                  Vista Energy Partners L.P. 2005 Equity Incentive 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, 2005, SEC File No.
                  000-24394).
 
 10.4
              Matamoros
                  LPG Mix Purchase and Sales Agreement made and entered into as of
                  June 4,
                  2005, by and between Rio Vista Energy Partners L.P. and P.M.I.
                  Trading
                  Limited (Incorporated by reference to the Company’s Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 2005 filed on August 19,
                  2005,
                  SEC File No. 000-24394).
 
 10.5
              Purchase
                  and Sale Agreement dated as of August 15, 2005 between Penn Octane
                  Corporation and TransMontaigne Product Services Inc. (Incorporated
                  by
                  reference to the Company’s Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 2005 filed on August 19, 2005, SEC File No.
                  000-24394).
 
 **The
        following Exhibits are filed as part of this report:**
 
 10.6
              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.
 
 10.7
              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.
 
 10.8
              Amended
                  and Restated Consulting Agreement dated November 15, 2005 between
                  Penn
                  Octane Corporation, Rio Vista Energy Partners L.P. and Jerome B.
                  Richter.
 
 10.9
              Amended
                  and Restated Promissory Note by Jerome B. Richter to the Company
                  dated
                  November 15, 2005.
 
 10.10
              Agreement
                  dated as of November 15, 2005 by and between Penn Octane Corporation
                  and
                  Jerome B. Richter.
 
 10.11
              Form
                  of Amendment of Promissory Note(s) of Penn Octane Corporation due
                  December
                  15, 2005 and Related Agreements dated September 30,
                  2005.
 
 10.12
              Form
                  of Escrow Agreement dated as of September 30, 2005 by and between
                  Jerome
                  B. Richter, Penn Octane Corporation and the Noteholders of Promissory
                  Notes of Penn Octane due on December 15,
                  2005.
  58
 
 15
              Accountant’s
                  Acknowledgment.
  31.1
              Certification
                Pursuant to Rule 13a - 14(a) / 15d - 14(a) of the Exchange
                Act.
  31.2
              Certification
                Pursuant to Rule 13a - 14(a) / 15d - 14(a) of the Exchange
                Act.
  32
              Certification
                  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
                  906 of
                  the Sarbanes -Oxley Act of 2002.
 
 *
        indicates management contract or compensatory plan or
        arrangement.
  59
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed by the following persons on behalf of the registrant and in the
        capacities and on the dates indicated.
  **PENN
                  OCTANE CORPORATION**November
                  21, 2005
              By:
              /s/
                  Ian T. BothwellIan
                  T. BothwellVice
                  President, Treasurer, Assistant Secretary,Chief
                  Financial Officer
  60