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 June 30, 2005

                                       OR

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

     For the transition period from ____________ to _____________

                        Commission file number: 000-24394

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

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


77-530 ENFIELD LANE, BLDG. D, PALM DESERT, CALIFORNIA              92211
     (Address of Principal Executive Offices)                    (Zip Code)

Registrant's Telephone Number, Including Area Code: (760) 772-9080

     Indicate  by  check  mark whether the registrant: (1) has filed all reports
required  to  be  filed by Section 13 or 15(d) of the Securities Exchange Act of
1934  during  the  preceding  12  months  (or  for  such shorter period that the
registrant  was required to file such reports), and (2) has been subject to such
filing  requirements  for  the  past  90  days.
Yes  X    No
    ---     ---

     Indicate  by  check mark whether the registrant is an accelerated filer (as
defined  in  Rule  12b-2  of  the  Exchange  Act).
Yes        No  X
    ---       ---

     The number of shares of Common Stock, par value $.01 per share, outstanding
on  August  12,  2005  was  15,522,745.


                                        1
<PAGE>
<TABLE>
<CAPTION>
                                  PENN OCTANE CORPORATION
                                     TABLE OF CONTENTS


         ITEM                                                                         PAGE NO.
         ----                                                                         --------
<S>      <C>   <C>                                                                    <C>

Part I     1.  Financial Statements

               Independent Certified Public Accountants' Review Report                    3

               Unaudited Consolidated Balance Sheets as of June 30, 2005
               and December 31, 2004                                                    4-5

               Unaudited Consolidated Statements of Operations for the three months
               and six months ended June 30, 2005 and 2004                                6

               Unaudited Consolidated Statements of Cash Flows for the six months
               ended June 30, 2005 and 2004                                               7

               Notes to Consolidated Financial Statements (Unaudited)                  8-23

           2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                              24-44

           3.  Quantitative and Qualitative Disclosures About Market Risk                45

           4.  Controls and Procedures                                                   45

Part II    1.  Legal Proceedings                                                         46

           2.  Unregistered Sales of Equity Securities and Use of Proceeds               46

           3.  Defaults Upon Senior Securities                                           46

           4.  Submission of Matters to a Vote of Security Holders                       46

           5.  Other Information                                                         46

           6.  Exhibits                                                                  46

           Signatures                                                                    47
</TABLE>


                                        2
<PAGE>
             Independent Certified Public Accountants' Review Report

Board of Directors and Stockholders
Penn Octane Corporation

We  have reviewed the consolidated balance sheets of Penn Octane Corporation and
subsidiaries  (Company)  as  of  June  30,  2005  and  December  31,  2004,  the
consolidated  statements of operations for the three months and six months ended
June  30,  2005  and the consolidated statement of cash flows for the six months
ended  June  30, 2005.  These 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  financial  statements  referred  to  above  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 six months ended June 30,
2004  and  the  accompanying consolidated statement of cash flows of Penn Octane
Corporation  and  subsidiaries  for  the six months ended June 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  K 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
August 3, 2005


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

                                PENN OCTANE CORPORATION AND SUBSIDIARIES

                                      CONSOLIDATED BALANCE SHEETS

                                                 ASSETS

                                              (UNAUDITED)

                                                                              June 30,    December 31,
                                                                                2005          2004
                                                                             -----------  -------------
<S>                                                                          <C>          <C>
Current Assets
    Cash                                                                     $   209,933  $     374,567
    Restricted cash                                                            2,685,065      5,367,516
    Trade accounts receivable (less allowance for doubtful accounts of  $0)    6,488,968      9,222,035
    Inventories                                                                2,041,672      3,541,390
    Prepaid expenses and other current assets                                    175,275        114,204
                                                                             -----------  -------------
      Total current assets                                                    11,600,913     18,619,712
Property, plant and equipment - net                                           15,433,881     15,979,182
Lease rights (net of accumulated amortization of $795,309 and $772,412 at
June 30, 2005 and December 31, 2004)                                             358,730        381,627
Other non-current assets                                                          23,819         28,932
                                                                             -----------  -------------
        Total assets                                                         $27,417,343  $  35,009,453
                                                                             ===========  =============
</TABLE>

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


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

                                    CONSOLIDATED BALANCE SHEETS - CONTINUED

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                  (UNAUDITED)

                                                                                  June 30,       December 31,
                                                                                    2005             2004
                                                                               ---------------  ---------------
<S>                                                                            <C>              <C>
Current Liabilities
    Current maturities of long-term debt                                       $    1,681,547   $    1,874,618
    Revolving line of credit                                                        3,914,990        1,397,249
    LPG and fuel products trade accounts payable                                    4,150,490       13,215,832
    Other accounts payable                                                          1,762,387        1,661,360
    U.S. and foreign taxes payable                                                     11,806           36,099
    Accrued liabilities                                                             1,968,950        1,007,145
                                                                               ---------------  ---------------
      Total current liabilities                                                    13,490,170       19,192,303
Long-term debt, less current maturities                                                40,715           55,581
Minority interest in Rio Vista Energy Partners L.P.                                13,528,435       14,614,370
Commitments and contingencies                                                               -                -
Stockholders' Equity
    Series A - Preferred stock-$.01 par value, 5,000,000 shares authorized;
    No shares issued and outstanding at June 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 June 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 June 30,
    2005 and December 31, 2004                                                        155,227          153,165

    Additional paid-in capital                                                     28,741,122       28,536,987

    Note receivable from a former officer of the Company for exercise of
    warrants, less reserve of $1,500,000 and $468,693 at June 30, 2005 and
    December 31, 2004                                                              (1,696,693)      (2,728,000)

    Accumulated deficit                                                           (26,841,633)     (24,814,953)
                                                                               ---------------  ---------------
    Total stockholders' equity                                                        358,023        1,147,199
                                                                               ---------------  ---------------
                                                                               $   27,417,343   $   35,009,453
                                                                               ===============  ===============
        Total liabilities and stockholders' equity
</TABLE>

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


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

                                   CONSOLIDATED STATEMENTS OF OPERATIONS

                                                (UNAUDITED)

                                                    Three Months Ended               Six Months Ended
                                               -----------------------------  ----------------------------
                                                  June 30,       June 30,        June 30,       June 30,
                                                    2005           2004            2005           2004
                                               --------------  -------------  --------------  ------------
<S>                                            <C>             <C>            <C>             <C>
Revenues                                       $  52,262,580   $ 39,879,990   $ 111,989,474   $90,667,304
Cost of goods sold                                52,174,553     38,066,202     109,512,498    85,757,066
                                               --------------  -------------  --------------  ------------

    Gross profit                                      88,027      1,813,788       2,476,976     4,910,238
Selling, general and administrative expenses
    Legal and professional fees                      565,022        334,250       1,012,448       609,183
    Salaries and payroll related expenses          1,574,149        682,842       2,222,599     1,440,757
    Other                                            452,161        548,027         972,588       749,891
                                               --------------  -------------  --------------  ------------
                                                   2,591,332      1,565,119       4,207,635     2,799,831
                                               --------------  -------------  --------------  ------------

    Operating income (loss)                       (2,503,305)       248,669      (1,730,659)    2,110,407
Other income (expense)
    Interest and LPG and Fuel Products
    financing expense                               (424,075)      (375,371)       (816,017)     (725,668)
    Interest income                                    5,290          8,575           9,654        50,910
    Minority interest in loss of Rio Vista
    Energy Partners L.P.                             713,232              -         544,186             -
                                               --------------  -------------  --------------  ------------
        Income (loss) before taxes                (2,208,858)      (118,127)     (1,992,836)    1,435,649
Provision (benefit) for income tax                    14,237        (49,010)         33,847       (14,420)
                                               --------------  -------------  --------------  ------------
        Net income (loss)                      $  (2,223,095)  $    (69,117)  $  (2,026,683)  $ 1,450,069
                                               ==============  =============  ==============  ============

Net income (loss) per common share             $       (0.14)  $       0.00   $       (0.13)  $      0.09
                                               ==============  =============  ==============  ============
Net income (loss) per common share
assuming dilution                              $       (0.14)  $       0.00   $       (0.13)  $      0.09
                                               ==============  =============  ==============  ============

Weighted average common shares outstanding        15,522,745     15,285,245      15,472,710    15,293,791
                                               ==============  =============  ==============  ============
</TABLE>

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


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

                             CONSOLIDATED STATEMENTS OF CASH FLOWS

                                          (UNAUDITED)

                                                                          Six Months Ended
                                                                     --------------------------
                                                                       June 30,      June 30,
                                                                         2005          2004
                                                                     ------------  ------------
<S>                                                                  <C>           <C>
Cash flows from operating activities:
Net income (loss)                                                    $(2,026,683)  $ 1,450,069
Adjustments to reconcile net income to net cash (used in) provided
  by operating activities:
    Depreciation and amortization                                        511,296       484,080
    Amortization of lease rights                                          22,898        22,898
    Non-employee stock based costs and other                                   -        60,552
    Amortization of loan discount related to detachable warrants         221,218        52,608
    Gain on sale of assets                                               (24,000)            -
    Interest income                                                            -       (32,336)
    Discount of note receivable from former officer                    1,031,307             -
    Minority interest in loss of Rio Vista Energy Partners L.P.         (544,186)            -
Changes in current assets and liabilities:
    Trade accounts receivable                                          2,733,067    (2,775,824)
    Inventories                                                        1,499,718      (101,956)
    Prepaid expenses and other current assets                            (61,070)      (43,538)
    LPG and Fuel Products trade accounts payable                      (9,065,342)   (2,404,220)
    Other accounts payable and accrued liabilities                     1,162,841      (756,752)
    U.S. and Foreign taxes payable                                       (24,293)      (13,734)
                                                                     ------------  ------------
      Net cash (used in) provided by operating activities             (4,563,229)   (4,058,153)
Cash flows from investing activities:
    Capital expenditures                                                 (61,533)      102,892
    Proceeds from sale of assets                                         175,000             -
    Property held for sale                                                     -       220,000
    (Increase) decrease in other non-current assets                        5,113       (12,259)
                                                                     ------------  ------------
      Net cash  provided by  (used in) investing activities              118,580       310,633
Cash flows from financing activities:
    (Increase) decrease in restricted cash                             2,682,451     1,703,060
    Revolving credit facilities                                        2,517,741     2,051,461
    Issuance of common stock                                              97,750             -
    Distributions paid by Rio Vista to limited partners                 (955,330)            -
    Reduction in debt                                                    (62,597)     (224,820)
                                                                     ------------  ------------
      Net cash provided by (used in)  financing activities             4,280,015     3,529,701
                                                                     ------------  ------------
          Net increase (decrease) in cash                               (164,634)     (217,819)
Cash at beginning of period                                              374,567       278,188
                                                                     ------------  ------------
Cash at end of period                                                $   209,933   $    60,369
                                                                     ============  ============

Supplemental disclosures of cash flow information:
    Cash paid during the period for:
    Interest and LPG and Fuel Products financing expense             $   416,370   $   753,280
                                                                     ============  ============
Supplemental disclosures of noncash transactions:
    Equity-common stock and warrants issued and other                $   108,450   $   167,170
                                                                     ============  ============
    Stock exchanged for note receivable                              $         -   $   201,854
                                                                     ============  ============
    Note issued for software                                         $    55,463   $         -
                                                                     ============  ============
</TABLE>

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


                                        7
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION

     Penn Octane Corporation, 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 41.7% of the
     Company's  total  revenues  and 83.1% of the Company's LPG revenues for the
     six  months  ended June 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 49.8% of
     total  revenues  for  the  six  months  ended  June  30,  2005.


                                        8
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  A  -  ORGANIZATION  -  CONTINUED

     On  September  30,  2004, Penn Octane Corporation (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 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  units.  The
     remaining 2% of such units, 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 June 30, 2005 and December
     31, 2004, the unaudited consolidated statements of operations for the three
     and  six months ended June 30, 2005 and 2004 and the consolidated statement
     of  cash  flows  for the six months ended June 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 June 30,
     2005  and  December  31,  2004,  the  unaudited  consolidated  results  of
     operations  for  the  three months and six ended June 30, 2005 and 2004 and
     the  consolidated statement of cash flows for the six months ended June 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.  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
<PAGE>
                    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:

<TABLE>
<CAPTION>
                                        For the three months ended June 30, 2005       For the three months ended June 30, 2004
                                      ---------------------------------------------  ---------------------------------------------
                                      Income (loss)      Shares        Per-Share     Income (loss)      Shares        Per-Share
                                       (Numerator)    (Denominator)      Amount       (Numerator)    (Denominator)      Amount
                                      --------------  -------------  --------------  --------------  -------------  --------------
<S>                                   <C>             <C>            <C>             <C>             <C>            <C>
     Net income (loss)                $  (2,223,095)                                 $     (69,117)

     BASIC EPS

     Net income (loss) available to
     common stockholders                 (2,223,095)     15,522,745  $       (0.14)        (69,117)     15,285,245  $        0.00
                                                                     ==============                                 ==============
     EFFECT OF DILUTIVE SECURITIES

     Warrants                                     -               -                              -               -

     DILUTED EPS

     Net income (loss) available to
     common stockholders                        N/A             N/A             N/A             N/A            N/A          N/A
</TABLE>

<TABLE>
<CAPTION>
                                          For the six months ended June 30, 2005        For the six months ended June 30, 2004
                                      ---------------------------------------------  ---------------------------------------------
                                      Income (loss)      Shares        Per-Share      Income (loss)      Shares        Per-Share
                                       (Numerator)    (Denominator)      Amount        (Numerator)    (Denominator)     Amount
                                      --------------  -------------  --------------  ---------------  -------------  -------------
<S>                                   <C>             <C>            <C>             <C>              <C>            <C>
     Net income (loss)                $  (2,026,683)                                 $     1,450,069

     BASIC EPS

     Net income (loss) available to
     common stockholders                 (2,026,683)     15,472,710  $       (0.13)        1,450,069     15,293,791  $        0.09
                                                                     ==============                                  =============
     EFFECT OF DILUTIVE SECURITIES

     Warrants                                     -               -                                -         82,953
                                                                                     ---------------  -------------
     DILUTED EPS

     Net income (loss) available to
     common stockholders                        N/A             N/A            N/A   $     1,450,069     15,376,744  $        0.09
                                                                                     ===============  =============  =============
</TABLE>


                                       10
<PAGE>
                    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:

<TABLE>
<CAPTION>
                                                     Three Months Ended          Six Months Ended
                                                 -------------------------  -------------------------
                                                   June 30,     June 30,      June 30,     June 30,
                                                     2005         2004          2005         2004
                                                 ------------  -----------  ------------  -----------
<S>                                              <C>           <C>          <C>           <C>
Net income (loss), as reported                   $(2,223,095)  $  (69,117)  $(2,026,683)  $1,450,069

Add:  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                                        (120,023)     (14,913)     (160,413)     (24,473)
                                                 ------------  -----------  ------------  -----------
Net income (loss), pro forma                     $(2,343,118)  $  (84,030)  $(2,187,096)  $1,425,596
                                                 ============  ===========  ============  ===========

Net income (loss) per common share, as reported  $     (0.14)  $     0.00   $     (0.13)  $     0.09
                                                 ============  ===========  ============  ===========
Net income (loss) per common share,
pro forma                                        $     (0.15)  $    (0.01)  $     (0.14)  $     0.09
                                                 ============  ===========  ============  ===========
Net income (loss) per common share assuming
dilution, as reported                            $     (0.14)  $     0.00   $     (0.13)  $     0.09
                                                 ============  ===========  ============  ===========
Net income (loss) per common share assuming
dilution, pro forma                              $     (0.15)  $    (0.01)  $     (0.14)  $     0.09
                                                 ============  ===========  ============  ===========
</TABLE>

     The  following assumptions were used for grants of warrants to employees in
     the  six  months  ended  June  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  six  months  ended  June  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
<PAGE>
                    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  -  PROPERTY,  PLANT  AND  EQUIPMENT

     Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                       June 30,      December 31,
                                                                         2005            2004
                                                                    --------------  --------------
<S>                                                                 <C>             <C>
LPG:
     Midline pump station (b)                                       $   2,326,985   $   2,326,985
     Brownsville Terminal Facility: (a)
       Building                                                           173,500         173,500
       Terminal facilities                                              3,631,207       3,631,207
       Tank Farm                                                          373,945         373,945
       Leasehold improvements                                             318,807         318,807
       Equipment                                                          226,285         226,285
       Truck                                                               25,968          25,968
                                                                    --------------  --------------
                                                                        7,076,697       7,076,697
                                                                    --------------  --------------
     US - Mexico Pipelines and Matamoros Terminal Facility: (a)(c)

     U.S. Pipelines and Rights of Way                                   6,835,242       6,775,242
     Mexico Pipelines and Rights of Way                                   993,300         993,300
     Matamoros Terminal Facility                                        5,874,781       5,874,781
     Land                                                                 705,358         856,358
                                                                    --------------  --------------
                                                                       14,408,681      14,499,681
                                                                    --------------  --------------
         Total LPG                                                     21,485,378      21,576,378
                                                                    --------------  --------------
Other:
     Office equipment (b)                                                 108,487         106,953
     Software (b)                                                          57,162           1,700
                                                                    --------------  --------------
                                                                          165,649         108,653
                                                                    --------------  --------------
                                                                       21,651,027      21,685,031
     Less:  accumulated depreciation and amortization                  (6,217,146)     (5,705,849)
                                                                    --------------  --------------

                                                                    $  15,433,881   $  15,979,182
                                                                    ==============  ==============
</TABLE>

     (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
     $5,542,206  and  $5,745,793 of costs located in Mexico at June 30, 2005 and
     December  31,  2004,  respectively.


                                       12
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  E  -  INVENTORIES

     Inventories  are  valued  at  the  lower  of  FIFO cost or market (LCM) and
     consist  of  the  following:

<TABLE>
<CAPTION>
                                              June 30, 2005        December 31, 2004
                                          ---------------------  ---------------------
                                           Gallons      LCM       Gallons      LCM
                                          ---------  ----------  ---------  ----------
<S>                                       <C>        <C>         <C>        <C>
     LPG:
       Leased Pipeline                    1,175,958  $  944,479  1,175,958  $  930,156
       Brownsville Terminal Facility and
         Matamoros Terminal Facility        274,455     220,431    369,508     292,272
       Markham Storage and other                  -           -          -           -
                                          ---------  ----------  ---------  ----------

                                          1,450,413   1,164,910  1,545,466   1,222,428
                                          =========              =========

       Fuel Products                        517,818     876,762  1,847,191   2,318,962
                                          =========  ----------  =========  ----------

                                                     $2,041,672             $3,541,390
                                                     ==========             ==========
</TABLE>


NOTE  F  -  DEBT  OBLIGATIONS

<TABLE>
<CAPTION>
                                                                               June 30,   December 31,
     Debt consists of the following:                                             2005         2004
                                                                              ----------  -------------
<S>                                                                           <C>         <C>
     Noninterest-bearing note payable, discounted at 7%, for legal services;
     due in February 2002.                                                    $  137,500  $     137,500

     Restructured Notes and $280,000 Notes                                     1,511,121      1,711,924

     Other debt.                                                                  73,641         80,775
                                                                              ----------  -------------
             Total debt                                                        1,722,262      1,930,199
     Less:  Current maturities                                                 1,681,547      1,874,618
                                                                              ----------  -------------
             Long-term debt                                                   $   40,715  $      55,581
                                                                              ==========  =============
</TABLE>

     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 due June 15, 2005 in the amounts of
     approximately  $103,000  have  not  been  made  on  these  notes.

     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 six months ended June 30,
     2005  amortization  expense  was  $115,091  and  $172,636,  respectively.


                                       13
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE F - 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.

     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  June  30,  2005.

     Jerome B. Richter, former Chief Executive Officer of Penn Octane, continues
     to  provide  collateral  to  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.


NOTE G - 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 owed 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.


                                       14
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE G - STOCKHOLDERS' EQUITY - CONTINUED

     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.

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

     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.

     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,  under certain circumstances. 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 (6.25% as of June 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.


NOTE H - 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.


                                       15
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE H - OPTIONS AND WARRANTS OF RIO VISTA - CONTINUED

     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.

     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 unit 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 is 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 I - COMMITMENTS AND CONTINGENCIES

     CREDIT FACILITY, LETTERS OF CREDIT AND OTHER

     As of June 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.


                                       16
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

     CREDIT FACILITY, LETTERS OF CREDIT AND OTHER - CONTINUED

     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 (6.25% at June 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  no  longer  required  Mr.  Richter's  personal  guarantee.

     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 June 30, 2005
     totaled  approximately  $5,300,000  of  which  approximately  $4,000,000
     represents June 2005 purchases and approximately $1,300,000 represents July
     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 $2,200,000 at June 30, 2005). At June 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 June 30, 2005,
     such taxes of approximately $687,000 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 June 30,
     2005.

     LPG  and  Fuel  Products  financing  expense associated with the RZB Credit
     Facility  totaled  $369,925  and $406,806 for the six months ended June 30,
     2005  and  2004.


                                       17
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

     DISTRIBUTIONS  OF  AVAILABLE  CASH

     All  Rio Vista unitholders have the right to receive distributions from Rio
     Vista of "available cash" as defined in the Rio Vista partnership agreement
     in  an  amount  equal  to  at  least  the minimum distribution of $0.25 per
     quarter  per  unit,  plus  any  arrearages  in  the  payment of the minimum
     quarterly  distribution  on  the  units  from  prior  quarters. 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.  Rio Vista has not declared a distribution for
     the  quarter  ended  June  30,  2005.

     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.


                                       18
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED

     PARTNERSHIP TAX TREATMENT - CONTINUED

     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

     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.

     CONCENTRATIONS  OF  CREDIT  RISK

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


NOTE J - 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.


                                       19
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE J - CONTRACTS - CONTINUED

     LPG SALES TO PMI - CONTINUED

     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.

<TABLE>
<CAPTION>
             Month        Minimum Volumes
          --------------  ----------------
                             (gallons)
<S>                       <C>

          June 2005              3,500,000

          July 2005              3,500,000

          August 2005            3,500,000

          September 2005         5,700,000

          October 2005           8,100,000

          November 2005         11,700,000

          December 2005         11,700,000

          January 2006          11,700,000

          February 2006         11,700,000

          March 2006             8,100,000
</TABLE>

     Actual  volumes  of  LPG  sold to PMI for June and July 2005 were 3,500,000
     gallons  and  3,500,000  gallons,  respectively.

     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.

     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.


                                       20
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  J  -  CONTRACTS - CONTINUED

     LPG  SUPPLY  AGREEMENTS

     The Company's agreement with Exxon which expires in 2009 (as amended, Exxon
     Supply Contract) 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 9,100,000 gallons per month for the six months ended June 30,
     2005.

     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  terminates  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 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 suppliers if there
     are increases in quantities of LPG purchased and/or to finance future price
     increases  of  LPG.


NOTE  K  -  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 losses from current operations, 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 and the RZB Credit Facility, 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. The Company has not made the required June
     15,  2005  quarterly  interest  payments  on  these  notes.  The RZB Credit
     Facility may be insufficient to finance the Company's LPG sales and/or Fuel
     Products  sales,  assuming  increases  in  product  costs  per  gallon,  or
     volumetric  growth  in  product  sales, and maybe terminated by RZB with 90
     days  notice.

     The  Company's  gross profits on sales are insufficient to pay its expenses
     if  (i) the Company cannot sell LPG to PMI or other customers at acceptable
     margins  at  volumes  in  excess  of  the  minimum volumes contained in the
     Agreement  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.


                                       21
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  K  -  REALIZATION  OF  ASSETS - CONTINUED

     The  Company's  cash  flow has been reduced as a result of materially lower
     volumes  of  sales to PMI and materially reduced margins. Additionally, the
     Company  has  begun  to  incur the additional public company compliance and
     income  tax  preparation costs for Rio Vista. As a result of these factors,
     the  Company  may not have sufficient cash flow to pay its obligations when
     due  and/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
     the quarterly 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 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.
     The  ability  for  the  Company  to  generate  sufficient  cash  flows  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 (i) expand its Fuel Sales
     Business,  (ii)  further  diversify  its operations to reduce dependency on
     sales  of  LPG,  (iii)  sell  its  LPG  assets, (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.


                                       22
<PAGE>
                    PENN OCTANE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  L  -  SUBSEQUENT  EVENTS

     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  LPG  and  refined products terminal facility and 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). The purchase price is $10,100,000 for assets to
     be  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  agreed  to  loan  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.  The loan is to be secured by the tank farm and certain LPG
     storage  tanks  located at the Brownsville Terminal Facility and is subject
     to  the  consent  from  RZB and the issuance of an estoppel letter from the
     Brownsville Navigation District. Rio Vista intends to use the proceeds from
     the loan 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,
     assignment  of  LPG  related contracts, and the modification of LPG related
     permits  and  the  related Mexican governmental approvals. The PSA's may be
     terminated  by any party if the closing does not occur by October 31, 2005.

     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 which will enhance stockholder value.
     Penn  Octane  intends  to  continue  to  operate  its  Fuel Sales Business.

     Penn  Octane intends to file a proxy statement with the Securities Exchange
     Commission  (SEC) in connection with the requirement to obtain approval for
     the  LPG  Asset  Sale  from  Penn  Octane's  stockholders.

     If  the  LPG Asset Sale is completed, Rio Vista intends to use its proceeds
     to fund working capital requirements, pursue acquisitions and to resume the
     minimum  quarterly  distributions  to  its  unitholders  and  to  pay  all
     arrearages.  Rio  Vista  intends  to  pursue  acquisitions  which  produce
     "qualifying  income".

     Rio Vista intends to file a proxy statement with the SEC in connection with
     the  requirement to obtain approval for the LPG Asset Sale from Rio Vista's
     unitholders.  Rio  Vista's  proxy statement will also contain a proposal to
     amend the provision in its partnership agreement which requires dissolution
     upon  a  sale  of  all  or  substantially  all  of  its  assets.


                                       23
<PAGE>
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"  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 Penn Octane 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  LPG  and  refined  products  terminal  facility  and  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").  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 loan is to be
secured  by  the  tank  farm  and  certain  LPG  storage  tanks  located  at the
Brownsville  Terminal  Facility  and  is subject to the consent from RZB and the
issuance  of  an  estoppel letter from the Brownsville Navigation District.  Rio
Vista  intends  to  use  the  proceeds  from  the  loan 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, assignment of LPG related
contracts,  and  the modification of LPG related permits and the related Mexican
governmental approvals.  The PSA's may be terminated by any party if the closing
does  not  occur  by  October  31,  2005.


                                       24
<PAGE>
     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  which will enhance stockholder value. Penn Octane intends to
continue  to  operate  its Fuel Sales Business.

     Penn  Octane intends to file a proxy statement with the Securities Exchange
Commission (the "SEC") in connection with the requirement to obtain approval for
the  LPG  Asset  Sale  from  Penn  Octane's  stockholders.

     If  the  LPG Asset Sale is completed, Rio Vista intends to use its proceeds
to  fund  working  capital  requirements,  pursue acquisitions and to resume the
minimum  quarterly  distributions  to its unitholders and to pay all arrearages.
Rio  Vista  intends  to  pursue  acquisitions which produce "qualifying income".

     Rio Vista intends to file a proxy statement with the SEC in connection with
the  requirement  to  obtain  approval  for  the LPG Asset Sale from Rio Vista's
unitholders.  Rio  Vista's proxy statement will also contain a proposal to amend
the  provision  in  its  partnership agreement which requires dissolution upon a
sale  of  all  or  substantially  all  of  its  assets.

     The  following discusses the Company's existing risk factors, its business,
its  results of operations and its liquidity and capital resources assuming that
the sale of the assets discussed above is not consummated as contemplated.

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  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.  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.

     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.


                                       25
<PAGE>
     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.

     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, 2005, 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 grows, 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 six months ended June 30, 2005, the Company derived 41.7% of its
total  revenues  and 83.1% 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.


                                       26
<PAGE>
     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 $55.8 million for the six
months  ended  June  30,  2005  which  represents  approximately  49.8% of total
revenues.

     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 units.  The remaining 2% of such units, 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 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.  Penn Octane will benefit from
the  Spin-Off indirectly based on the success of Rio Vista through Penn Octane's
ownership  of  the  General  Partner.


LPG  SALES

     The  following  table  shows  the  Company's  volume  sold and delivered in
gallons and average sales price for the six months ended June 30, 2005 and 2004;

<TABLE>
<CAPTION>
                                           2005    2004
                                           -----  ------
<S>                                        <C>    <C>
Volume Sold

        LPG (millions of gallons) - PMI     52.7    97.7
        LPG (millions of gallons) - Other   12.0    23.2
                                           -----  ------
                                            64.7   120.9
                                           =====  ======
Average sales price

        LPG (per gallon) - PMI             $0.89  $ 0.75
        LPG (per gallon) - Other            0.78    0.65
</TABLE>


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.


                                       27
<PAGE>
     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 Monterey, 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.

RESULTS  OF  OPERATIONS

THREE  MONTHS ENDED JUNE 30, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2004

     Revenues.  Revenues  for  the  three months ended June 30, 2005, were $52.3
million compared with $39.9 million for the three months ended June 30, 2004, an
increase  of  $12.4  million  or  31.0%.  Of  this  increase,  $25.1 million was
attributable  to  new  revenues generated from the Company's Fuel Sales Business
which  commenced  operations  in  June  2004,  $6.0  million was attributable to
increases  in  average  sales  prices of LPG sold to PMI during the three months
ended June 30, 2005 and $2.2 million was attributable to increased average sales
prices  of  LPG  sold  to customers other than PMI during the three months ended
June  30,  2005,  partially  offset  by  $17.9 million attributable to decreased
volumes  of LPG sold to PMI during the three months ended June 30, 2005 and $3.1
million  was  attributable  to  decreased volumes of LPG sold to customers other
than  PMI  during  the  three  months  ended  June  30,  2005.

     Cost of goods sold.  Cost of goods sold for the three months ended June 30,
2005  was  $52.2  million compared with $38.1 million for the three months ended
June  30,  2004, an increase of $14.1 million or 37.1%.  Of this increase, $24.8
million  was  attributable to new costs of goods sold arising from the Company's
Fuel  Sales  Business  which commenced operations in June 2004, $6.2 million was
attributable to increases in the cost of LPG sold to PMI during the three months
ended  June 30, 2005 and $3.0 million was attributable to increased costs of LPG
sold  to  customers  other than PMI during the three months ended June 30, 2005,
partially  offset  by $16.3 million attributable to decreased volume of LPG sold
to  PMI  during  the  three  months  ended  June  30,  2005 and $3.4 million was
attributable to decreased volumes of LPG sold to customers other than PMI during
the  three  months  ended  June  30,  2005.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $2.6 million for the three months ended June 30,
2005,  compared  with  $1.6 million for the three months ended June 30, 2004, an
increase  of $1.0 million or 65.6%.   The increase during the three months ended
June  30,  2005  was  principally  due  to an increase in the discount of a note
receivable  from  a former officer of $1.0 million and increases in professional
fees,  partially  offset  by  reduced  payroll related costs.  The above amounts
include  selling,  general and administrative expenses related to the Fuel Sales
Business  of  $106,746  for  the  three  months  ended  June  30,  2005.

     Other  income  (expense).  Other  income  was $294,447 for the three months
ended  June  30,  2005,  compared  with  other expense of $366,796 for the three
months  ended  June 30, 2004.  The increase in other income was due primarily to
minority interest in the losses of Rio Vista of $713,232 and $125,474 of reduced
interest  costs  related  to  the purchase of LPG, partially offset by increased
interest  costs  of $75,461 associated with the Fuel Sales Business and $100,533
of  interest  costs  associated  with  the  amortization  of  loan  discounts.


                                       28
<PAGE>
     Income  tax.   The  Company  calculated  income taxes of $14,237 during the
three  months  ended June 30, 2005.   Income taxes consisted of state income tax
benefit  of  $10,396  and Mexican income tax expense of $24,633 during the three
months  ended  June  30,  2005.

SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004

     Revenues.  Revenues  for  the  six  months ended June 30, 2005, were $112.0
million  compared  with $90.7 million for the six months ended June 30, 2004, an
increase  of  $21.3  million  or  23.5%.  Of  this  increase,  $53.8 million was
attributable  to  new  revenues generated from the Company's Fuel Sales Business
which  commenced  operations  in  June  2004,  $13.0 million was attributable to
increases in average sales prices of LPG sold to PMI during the six months ended
June  30,  2005  and  $3.3  million  was attributable to increased average sales
prices  of LPG sold to customers other than PMI during the six months ended June
30, 2005, partially offset by $39.9 million attributable to decreased volumes of
LPG  sold  to PMI during the six months ended June 30, 2005 and $8.9 million was
attributable to decreased volumes of LPG sold to customers other than PMI during
the  six  months  ended  June  30,  2005.

     Cost  of  goods sold.  Cost of goods sold for the six months ended June 30,
2005  was  $109.5  million  compared with $85.8 million for the six months ended
June  30,  2004, an increase of $23.8 million or 27.7%.  Of this increase, $52.6
million  was  attributable to new costs of goods sold arising from the Company's
Fuel  Sales  Business which commenced operations in June 2004, $12.8 million was
attributable  to  increases in the cost of LPG sold to PMI during the six months
ended  June 30, 2005 and $4.9 million was attributable to increased costs of LPG
sold  to  customers  other  than  PMI during the six months ended June 30, 2005,
partially  offset  by $36.0 million attributable to decreased volume of LPG sold
to  PMI  during  the  six  months  ended  June  30,  2005  and  $9.8 million was
attributable to decreased volumes of LPG sold to customers other than PMI during
the  six  months  ended  June  30,  2005.

     Selling,  general  and  administrative  expenses.  Selling,  general  and
administrative  expenses  were  $4.2  million  for the six months ended June 30,
2005,  compared  with  $2.8  million  for the six months ended June 30, 2004, an
increase  of  $1.4  million or 50.3%.   The increase during the six months ended
June  30,  2005  was  principally  due  to an increase in the discount of a note
receivable  from  a former officer of $1.0 million and increases in professional
fees,  partially  offset  by  reduced  payroll related costs.  The above amounts
include  selling,  general and administrative expenses related to the Fuel Sales
Business  of  $279,074  for  the  six  months  ended  June  30,  2005.

     Other  income  (expense).  Other  expense  was  $262,177 for the six months
ended  June  30,  2005, compared with $674,758 for the six months ended June 30,
2004.  The  decrease  in other expense was due primarily to minority interest in
the  losses  of  Rio  Vista  of  $544,186 and $188,368 of reduced interest costs
related  to  the  purchase  of LPG, partially offset by increased interest costs
associated  with the Fuel Sales Business of $156,277, $154,053 of interest costs
associated  with  the amortization of loan discounts and reduced interest income
of  $41,257  during  the  six  months  ended  June  30,  2005.

     Income tax.   The Company calculated income taxes of $33,847 during the six
months  ended June 30, 2005.   Income taxes consisted of alternative minimum tax
of  $1,461, state income tax expense of $6,360 and Mexican income tax expense of
$26,026  during  the  six  months  ended  June  30,  2005.


                                       29
<PAGE>
LIQUIDITY  AND  CAPITAL  RESOURCES

     General. The Company has losses from current operations, 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  and  the RZB Credit Facility, 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. The Company
has  not  made  the  required June 15, 2005 quarterly interest payments. 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.

     Under  the  terms of the PMI Agreement referred to below, the sale price of
LPG will be at the same margins in effect during April and May 2005. Because the
volume  commitments  and price margins under the PMI Agreement are significantly
lower than PMI's historical volume commitments and margins, the Company's income
will  be  less  than  its  expected cash operating and other expenses during the
period  from at least June through September 2005. The Company estimates monthly
cash  flow  shortfalls,  assuming  current  expense  levels  excluding scheduled
obligations,  during  these  months  on  a  consolidated  basis  ranging  from
approximately  $350,000  per  month  at  a  volume  of  3,500,000  gallons  to
approximately  $150,000  per  month  at  a  volume  of  5,700,000  gallons.

     The  cash  flow  operating  shortfalls  projected  above do not reflect the
further cash requirements associated with existing debt and other obligations of
the  Company.  Actual  shortfalls  could  be significantly higher than estimated
above.

     The Company is taking certain measures to further reduce cash operating and
other  expenses. There can be no assurance, however, that costs and expenses can
be  reduced  sufficiently to mitigate negative cash flows at the reduced volumes
and  margins  contained  in  the  PMI  Agreement.

     The  Company's  cash  flow has been reduced as a result of materially lower
volumes  of  sales  to  PMI  and  materially  reduced margins. Additionally, the
Company  has  begun to incur the additional public company compliance and income
tax  preparation  costs for Rio Vista. As a result of these factors, the Company
may  not  have  sufficient cash flow to pay its obligations when due and/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 the quarterly 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.


                                       30
<PAGE>
     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 Penn Octane is unable to restructure
its  obligations,  Penn  Octane and Rio Vista would each 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 six months
ended  June  30,  2005,  and  2004.  All  information  is  in  thousands.

<TABLE>
<CAPTION>
                                                        2005       2004
                                                      ---------  ---------
<S>                                                   <C>        <C>
Net cash  (used) in operating activities . . . . . .  $( 4,563)  $( 4,058)
Net cash (used in) provided by  investing activities       118        310
Net cash provided by financing activities. . . . . .     4,280      3,530
                                                      ---------  ---------
Net increase (decrease) in cash. . . . . . . . . . .  $   (165)  $ (  218)
                                                      =========  =========
</TABLE>

     Sales  to  PMI.  On  March 31, 2004, the Company's sales agreement with PMI
("Contract")  expired.  During  the  months of April 2004 through December 2004,
the  Company  and  PMI  entered into monthly agreements for the sale of LPG (the
"Monthly  2004  Contracts").   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.


                                       31
<PAGE>
     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.

<TABLE>
<CAPTION>
           Month               Minimum Volume
           -----          ------------------------
                          (in millions of gallons)
<S>                       <C>

          June 2005                  3.5

          July 2005                  3.5

          August 2005                3.5

          September 2005             5.7

          October 2005               8.1

          November 2005             11.7

          December 2005             11.7

          January 2006              11.7

          February 2006             11.7

          March 2006                 8.1
</TABLE>

     Actual  volumes  of LPG sold to PMI for June and July 2005 were 3.5 million
gallons  and  3.5  million  gallons,  respectively.

     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  $46.7 million and $73.6
million  for  the  six  months  ended  June  30,  2005  and  2004, respectively,
representing approximately 41.7% and 81.1% of total revenues for the periods and
83.1%  and  83.0%  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.


                                       32
<PAGE>
     LPG  Supply  Agreements.  Effective  October 1, 1999, the Company and Exxon
entered  into  a  ten  year  LPG  supply contract (as amended, the "Exxon Supply
Contract"),  whereby  Exxon  has  agreed to supply and the Company has agreed to
take, 100% of Exxon's owned or controlled volume of propane and butane available
at  Exxon's King Ranch Gas Plant up to 13.9 million gallons per month blended in
accordance  with  required  specifications.  For  the  six months ended June 30,
2005,  under  the  Exxon  Supply  Contract,  Exxon  has  supplied  an average of
approximately  9.1  million  gallons  of  LPG per month.   The purchase price is
indexed  to  variable  posted  prices.

     In  addition,  under the terms of the Exxon Supply Contract, Exxon made its
Corpus  Christi  Pipeline  (the  "ECCPL")  operational  in  September 2000.  The
ability  to utilize the ECCPL allows the Company to acquire an additional supply
of  propane from other propane suppliers located near Corpus Christi, Texas (the
"Additional  Propane  Supply"),  and  bring the Additional Propane Supply to the
Plant  (the "ECCPL Supply") for blending to the required specifications and then
delivered  into  the  Leased  Pipeline.  The Company agreed to flow a minimum of
122.0  million  gallons  per year of Additional Propane Supply through the ECCPL
until  December  2005.  The  Company is required to pay minimum utilization fees
associated  with  the  use  of  the  ECCPL  until December 2005.  Thereafter the
utilization  fees will be based on the actual utilization of the ECCPL.   During
April  2005  the Exxon Supply Contract was amended whereby the Company's ability
to  access  the ECCPL is at the discretion of Exxon and minimum utilization fees
were  reduced.

     During  April 2005, 9.2 million gallons of LPG was supplied under the Exxon
Supply  Contract  and 1.2 million gallons were purchased on a spot monthly basis
from  another  supplier.

     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 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  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.


                                       33
<PAGE>
     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  49.8% of total revenues for the six months ended June
30,  2005.

     Fuel  Sales  totaled  $55.8  million  and  cost  of  fuel  and other direct
operating  expenses  totaled  $54.9  during  the six months ended June 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 June 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 (6.25%
at  June 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  CEO 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  no  longer required Mr. Richter's personal
guarantee.


                                       34
<PAGE>
     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 June 30, 2005 totaled
approximately  $5.3  million of which approximately $4.0 million represents June
2005  purchases  and  approximately $1.3 million represents July 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  $2.2  million  at June 30, 2005). At June 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 June 30, 2005, such taxes of
approximately  $687,000  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  June  30,  2005.

     LPG  and  Fuel  Products  financing  expense associated with the RZB Credit
Facility  totaled  $369,925, and $406,806 for the six months ended June 30, 2005
and  2004.

     The  following  is a summary of the Company's estimated minimum contractual
obligations  and  commercial obligations as of June 30, 2005.  Where applicable,
LPG  prices  are  based on the June 30, 2005 monthly average as published by Oil
Price  Information  Services.

<TABLE>
<CAPTION>
                                                                          PAYMENTS DUE BY PERIOD
                                                                           (AMOUNTS IN MILLIONS)
                                        -------------------------------------------------------------------------------
                                                         Less than         1 - 3           4 - 5            After
    Contractual Obligations                 Total         1 Year           Years           Years           5 Years
--------------------------------------  -------------  -------------  ---------------  --------------  ----------------
<S>                                     <C>            <C>            <C>              <C>             <C>

Long-Term Debt Obligations              $         1.7  $         1.7  $             -  $            -  $              -
Operating Leases                                  8.5            1.1              2.0             2.0               3.4
LPG Purchase Obligations                        545.7          128.4            256.9           160.4                 -
Other Long-Term Obligations                         -              -                -               -                 -
                                        -------------  -------------  ---------------  --------------  ----------------
    Total Contractual Cash Obligations  $       555.9  $       131.2  $         258.9  $        162.4  $            3.4
                                        =============  =============  ===============  ==============  ================
</TABLE>

<TABLE>
<CAPTION>
                                                           AMOUNT OF COMMITMENT EXPIRATION
                                                                      PER PERIOD
                                                                (AMOUNTS IN MILLIONS)
                                  --------------------------------------------------------
                                  Total Amounts   Less than   1 - 3    4 - 5       Over
Commercial Commitments              Committed       1 Year    Years    Years     5 Years
--------------------------------  --------------  ----------  ------  --------  ----------
<S>                               <C>             <C>         <C>     <C>       <C>

Lines of Credit                   $          3.9  $      3.9  $    -  $      -  $        -
Standby Letters of Credit                    5.3         5.3       -         -           -
Guarantees                                   N/A         N/A     N/A       N/A         N/A
Standby Repurchase Obligations               N/A         N/A     N/A       N/A         N/A
Other Commercial Commitments                 N/A         N/A     N/A       N/A         N/A
                                  --------------  ----------  ------  --------  ----------
    Total Commercial Commitments  $          9.2  $      9.2  $    -  $      -  $        -
                                  ==============  ==========  ======  ========  ==========
</TABLE>


                                       35
<PAGE>
     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.  Rio  Vista has not declared a distribution for the
quarter  ended  June  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  and  June  30,  2005.

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                          ------------------------------------------------
                                                            December        March 31,
                                                            31, 2004          2005         June 30, 2005
                                                          -------------  --------------  -----------------
<S>                                                       <C>            <C>             <C>
Net income (loss)                                         $(    63,000)  $     173,000   $       (728,000)
  Plus interest and other expense, net                         101,000         119,000            179,000
  Plus depreciation and amortization                           178,000         205,000            205,000
  Plus other non-cash expenses                                 344,000               -             17,000
                                                          -------------  --------------  -----------------
EBITDA                                                         560,000         497,000           (327,000)
Less cash interest and other cash expense, net                (101,000)        (61,000)           (64,000)
                                                          -------------  --------------  -----------------
Distributable cash flow (deficit)                              459,000         436,000           (391,000)
Distributable cash flow (deficit) applicable to general
partner                                                         (9,000)         (9,000)             8,000
                                                          -------------  --------------  -----------------
Distributable cash flow (deficit) applicable to limited
partners                                                  $    450,000   $     427,000   $       (383,000)
                                                          =============  ==============  =================
</TABLE>

     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.


                                       36
<PAGE>
     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.  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.


                                       37
<PAGE>
     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  during  2005.

     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.

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


                                       38
<PAGE>
     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,  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  owed  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.

     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.

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


                                       39
<PAGE>
     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,  under  certain  circumstances.  Written  agreements between the
Company and Mr. Richter reflecting the foregoing have not yet been executed. 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 June 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.

     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 F 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 (the "2005 Plan").  The
2005  Plan  permits  the  grant of common unit options, common unit appreciation
rights,  restricted common unit 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 is 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, the Company's board of directors and
the  independent committee of its board of directors formally approved the terms
of the Spin-Off (see below) 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.


                                       40
<PAGE>
     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.

     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.


                                       41
<PAGE>
     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  Company's  unaudited consolidated financial
statements  included  elsewhere  herein,  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
losses  from  current operations, 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 and
the  RZB  Credit  Facility,  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.   The Company has not made the
required  June  15,  2005  quarterly  interest  payments on these notes. The RZB
Credit  Facility  may  be insufficient to finance the Company's LPG sales and/or
Fuel  Products  sales,  assuming  increases  in  product  costs  per  gallon, or
volumetric  growth  in  product  sales, and maybe terminated by RZB with 90 days
notice.

     The  Company's  gross profits on sales are insufficient to pay its expenses
if  (i)  the  Company  cannot  sell  LPG to PMI or other customers at acceptable
margins  at  volumes in excess of the minimum volumes contained in the agreement
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 as a result of materially lower
volumes  of  sales  to  PMI  and  materially reduced margins.  Additionally, the
Company  has  begun to incur the additional public company compliance and income
tax  preparation costs for Rio Vista.  As a result of these factors, the Company
may  not  have  sufficient cash flow to pay its obligations when due and/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 the quarterly 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  included  elsewhere  herein, is dependent upon 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.  The  ability  for  the  Company  to  generate  sufficient  cash  flows  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 included elsewhere herein do not include any
adjustments  related  to the recoverability and classification of recorded asset
amounts  or  amounts  and  classification of liabilities that might be necessary
should  the  Company  be  unable  to  continue  in  existence.

     To  provide  the Company with the ability it believes necessary to continue
in existence, management is  taking steps to (i) expand its Fuel Sales Business,
(ii)  further  diversify  its  operations  to reduce dependency on sales of LPG,
(iii)  sell  its  LPG  assets,  (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.


                                       42
<PAGE>
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.


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<PAGE>
     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.  Rio
Vista  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.

STATEMENT  BY MANAGEMENT CONCERNING REVIEW OF INTERIM INFORMATION BY INDEPENDENT
CERTIFIED  PUBLIC  ACCOUNTANTS.

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


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<PAGE>
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.


                                       45
<PAGE>
PART  II

ITEM 1.   LEGAL PROCEEDINGS

          See  note  I  to  the  Company's  unaudited  consolidated  financial
          statements  included  in its Quarterly Report on Form 10-Q for the six
          months  ended  June  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

          None.

ITEM 5.   OTHER INFORMATION

          None.

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 28th day
          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).

THE  FOLLOWING  EXHIBITS  ARE  FILED  AS  PART  OF  THIS  REPORT:

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.

10.5      Purchase  and  Sale Agreement dated as of August 15, 2005 between Penn
          Octane  Corporation  and  TransMontaigne  Product  Services  Inc.

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.


                                       46
<PAGE>
                                   SIGNATURES

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


                            PENN OCTANE CORPORATION



August 19, 2005             By:  /s/ Ian  T.  Bothwell
                                 -----------------------------------------------
                                 Ian  T.  Bothwell
                                 Vice President, Treasurer, Assistant Secretary,
                                     Chief  Financial  Officer


                                       47