##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-24394
 Penn Octane Corporation
  Delaware
    
    52-1790357(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)77-530 Enfield Lane, Bldg. D, Palm Desert, California
    
    92211(Address of Principal Executive Offices)
    
    (Zip Code)
 (760) 772-9080
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company þ
 Yes
o No
þ




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##### 



PENN OCTANE CORPORATION
TABLE OF CONTENTS
 PAGE NO.PART I FINANCIAL INFORMATIONITEM1. Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    3Consolidated Balance Sheets as of December 31, 2007 and
June 30, 2008 (unaudited)
    
    
    4-5Unaudited Consolidated Statements of Operations for the three
months and six months ended June 30, 2007 and 2008
    
    
    6Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 2007 and 2008
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-342. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    35-473. Quantitative and Qualitative Disclosures About Market Risk
    
    
    474T. Controls and Procedures
    
    
    47PART II OTHER INFORMATION1. Legal Proceedings
    
    
    491A. Risk Factors
    
    
    492. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    493.
Defaults Upon Senior Securities
    
    
    494. Submission of Matters to a Vote of Security Holders
    
    
    495. Other Information
    
    
    496. Exhibits
    
    
    50Signatures
    
    
    51Exhibit 15Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1.
 
 Report of Independent Registered Public Accounting Firm
 
       
  3




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 June 30,December 31,
    
    
    20082007
    
    
    (Unaudited)Current AssetsCash
    
    $
    4,339,000
    
    
    $
    2,622,000Restricted cash
    
    
    2,500,000
    
    
    
    1,312,000Trade accounts receivable (less allowance
for doubtful accounts of $255,000 and $0
at December 31, 2007 and June 30, 2008,
respectively)
    
    
    4,261,000
    
    
    
    2,206,000Inventories
    
    
    2,563,000
    
    
    
    Deferred tax asset
    
    
    608,000
    
    
    
    651,000Prepaid expenses and other current assets
    
    
    744,000
    
    
    
    492,000Total current assets
    
    
    15,015,000
    
    
    
    7,283,000Oil and gas properties and related
equipment (successful efforts method) -
net
    
    
    26,197,000
    
    
    
    28,112,000Property, plant and equipment  net
    
    
    12,983,000
    
    
    
    12,962,000Other non-current assets
    
    
    11,000
    
    
    
    12,000Goodwill
    
    
    6,463,000
    
    
    
    6,463,000Total assets
    
    $
    60,669,000
    
    
    $
    54,832,000
   4




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 CONSOLIDATED BALANCE SHEETS  CONTINUED
 LIABILITIES AND STOCKHOLDERS EQUITY
 June 30,December 31,
    
    
    20082007
    
    
    (Unaudited)Current LiabilitiesCurrent maturities of long-term debt
    
    $
    3,498,000
    
    
    $
    24,295,000Short-term debt
    
    
    5,493,000
    
    
    
    5,844,000Fuel Products trade accounts payable
    
    
    4,526,000
    
    
    
    Other accounts payable
    
    
    2,879,000
    
    
    
    5,299,000Taxes payable
    
    
    618,000
    
    
    
    671,000Accrued liabilities
    
    
    2,266,000
    
    
    
    3,555,000Total current liabilities
    
    
    19,280,000
    
    
    
    39,664,000Commitments and contingencies
    
    
    
    
    
    
    Long-term debt, less current maturities
    
    
    21,250,000
    
    
    
    250,000Deferred income tax  non-current
    
    
    3,238,000
    
    
    
    3,028,000Minority interest
    
    
    11,467,000
    
    
    
    7,884,000Stockholders EquitySeries A  Preferred stock-$.01 par value, 5,000,000
shares authorized; No shares issued and outstanding at
December 31, 2007 and June 30, 2008
    
    
    
    
    
    
    Series B  Senior preferred stock-$.01 par value, $10
liquidation value, 5,000,000 shares authorized; No shares
issued and outstanding at December 31, 2007 and June 30,
2008
    
    
    
    
    
    
    Common stock  $.01 par value, 25,000,000 shares
authorized; 15,386,187 and 15,406,187 shares issued and
outstanding at December 31, 2007 and June 30, 2008
    
    
    154,000
    
    
    
    154,000Additional paid-in capital
    
    
    29,271,000
    
    
    
    37,640,000Accumulated deficit
    
    
    (23,991,000
    )
    
    
    (33,788,000
    )Total stockholders equity
    
    
    5,434,000
    
    
    
    4,006,000Total liabilities and stockholders equity
    
    $
    60,669,000
    
    
    $
    54,832,000
   5




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2008
    
    
    2007
    
    
    2008Revenues
    
    $
    32,981,000
    
    
    $
    17,019,000
    
    
    $
    72,363,000
    
    
    $
    50,422,000Cost of goods sold
    
    
    32,480,000
    
    
    
    16,244,000
    
    
    
    70,918,000
    
    
    
    48,765,000Gross profit
    
    
    501,000
    
    
    
    775,000
    
    
    
    1,445,000
    
    
    
    1,657,000Selling, general and administrative expenses and
otherLegal and professional fees
    
    
    483,000
    
    
    
    1,385,000
    
    
    
    959,000
    
    
    
    2,106,000Salaries and payroll related expenses
    
    
    738,000
    
    
    
    547,000
    
    
    
    1,145,000
    
    
    
    1,605,000Other
    
    
    487,000
    
    
    
    680,000
    
    
    
    1,008,000
    
    
    
    1,663,0001,708,000
    
    
    
    2,612,000
    
    
    
    3,112,000
    
    
    
    5,374,000Operating loss from operations
    
    
    (1,207,000
    )
    
    
    (1,837,000
    )
    
    
    (1,667,000
    )
    
    
    (3,717,000
    )Other income (expense)Interest and Fuel Products financing expense
    
    
    (147,000
    )
    
    
    (1,024,000
    )
    
    
    (299,000
    )
    
    
    (1,979,000
    )Interest income
    
    
    5,000
    
    
    
    4,000
    
    
    
    18,000
    
    
    
    14,000Minority interest in loss
    
    
    686,000
    
    
    
    1,662,000
    
    
    
    1,146,000
    
    
    
    3,713,000Loss from operations before taxes
    
    
    (663,000
    )
    
    
    (1,195,000
    )
    
    
    (802,000
    )
    
    
    (1,969,000
    )(Benefit) provision for income taxes
    
    
    (374,000
    )
    
    
    (102,000
    )
    
    
    (401,000
    )
    
    
    (97,000
    )Loss from continuing operations
    
    $
    (289,000
    )
    
    $
    (1,093,000
    )
    
    $
    (401,000
    )
    
    $
    (1,872,000
    )Loss on sale of discontinued operations
    
    
    
    
    
    
    (343,000
    )
    
    
    
    
    
    
    (343,000
    )Net loss
    
    $
    (289,000
    )
    
    $
    (1,436,000
    )
    
    $
    (401,000
    )
    
    $
    (2,215,000
    )Net loss from continuing operations per common
share
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )Loss from discontinued operations per common share
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net loss per common share
    
    $
    (0.02
    )
    
    $
    (0.09
    )
    
    $
    (0.03
    )
    
    $
    (0.14
    )Weighted average common shares outstanding
    
    
    15,386,187
    
    
    
    15,406,187
    
    
    
    15,386,187
    
    
    
    15,406,187
   6




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,2007
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (401,000
    )
    
    $
    (2,215,000
    )Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation, depletion and amortization
    
    
    290,000
    
    
    
    952,000Amortization of loan discount
    
    
    
    
    
    
    36,000Discount on Richter Note
    
    
    378,000
    
    
    
    Share-based payment expense
    
    
    160,000
    
    
    
    1,169,000Unit-based compensation
    
    
    
    
    
    
    142,000Minority interest
    
    
    (1,144,000
    )
    
    
    (3,720,000
    )Beneficial conversion amortization
    
    
    
    
    
    
    18,000Loss on sale of discontinued operations
    
    
    
    
    
    
    343,000Gain on sale of assets
    
    
    
    
    
    
    20,000Changes in current assets and liabilities:Trade accounts receivable
    
    
    (9,000
    )
    
    
    2,055,000Inventories
    
    
    (1,076,000
    )
    
    
    2,563,000Prepaid expenses and other current assets
    
    
    (535,000
    )
    
    
    147,000Deferred tax asset, net
    
    
    (416,000
    )
    
    
    (253,000
    )LPG and Fuel Products trade accounts payable
    
    
    (1,145,000
    )
    
    
    (4,526,000
    )Other accounts payable and accrued liabilities
    
    
    1,157,000
    
    
    
    3,749,000U.S. and Foreign taxes payable
    
    
    (47,000
    )
    
    
    39,000Net cash (used in) provided by operating activities
    
    
    (2,788,000
    )
    
    
    519,000Cash flows from investing activities:Capital expenditures
    
    
    (170,000
    )
    
    
    (3,049,000
    )Decrease in other non-current assets
    
    
    (105,000
    )
    
    
    Purchase price adjustments  Oklahoma assets
    
    
    
    
    
    
    83,000Net cash used in investing activities
    
    
    (275,000
    )
    
    
    (2,966,000
    )Cash flows from financing activities:Decrease (increase) in restricted cash
    
    
    710,000
    
    
    
    1,188,000Revolving credit facilities
    
    
    331,000
    
    
    
    Loan origination fees related to RZB
    
    
    (100,000
    )
    
    
    Distributions paid to minority interests
    
    
    (955,000
    )
    
    
    (1,261,000
    )Distributions paid to the minority owners of the general partner
    
    
    (10,000
    )
    
    
    Stockholders note
    
    
    110,000
    
    
    
    Reduction in debt
    
    
    
    
    
    
    (381,000
    )Increase in debt
    
    
    
    
    
    
    575,000Exercise of options of Rio Vista
    
    
    
    
    
    
    774,000Costs of registration
    
    
    
    
    
    
    (210,000
    )Other
    
    
    
    
    
    
    45,000Net cash provided by (used in) financing activities
    
    
    86,000
    
    
    
    730,000Net decrease in cash
    
    
    (2,977,000
    )
    
    
    (1,717,000
    )Cash at beginning of period
    
    
    8,766,000
    
    
    
    4,339,000Cash at end of period
    
    $
    5,789,000
    
    
    $
    2,622,000Supplemental disclosures of cash flow information:Cash paid for:Interest
    
    $
    298,000
    
    
    $
    2,039,000Taxes
    
    $
    
    
    
    $
    Supplemental disclosures of noncash transactions:Equity  common stock and warrants issued and other
    
    $
    160,000
    
    
    $
    Unit based compensation
    
    $
    
    
    
    $
    366,000Share based compensation
    
    $
    
    
    
    $
    803,000Exchange of assets for note reduction
    
    $
    
    
    
    $
    100,000
   7




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE A  ORGANIZATION
      8




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE A  ORGANIZATION  
    Basis of Presentation
      9




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE B  LOSS PER COMMON SHARE
  For the three months June 30, 2007Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (289,000
    )Basic EPSNet loss available to common stockholders
    
    
    (289,000
    )
    
    
    15,386,187
    
    
    $
    (0.02
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 For the three months June 30, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (   1,093,000
    )Basic EPSNet loss available to common stockholders
    
    
    (   1,093,000
    )
    
    
    15,406,187
    
    
    $
    ( 0.07
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 For the six months June 30, 2007Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (      401,000
    )Basic EPSNet loss available to common stockholders
    
    
    (      401,000
    )
    
    
    15,386,187
    
    
    $
    ( 0.03
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  10




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE B  LOSS PER COMMON SHARE
 For the six months June 30, 2008Loss
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet loss from continuing operations
    
    $
    (    1,872,000
    )Basic EPSNet loss available to common stockholders
    
    
    (   1,872,000
    )
    
    
    15,406,187
    
    
    $
    ( 0.12
    )Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    Diluted EPSNet loss available to common stockholders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
 NOTE C  SHARE-BASED PAYMENT
    11




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE D  A FORMER OFFICER OF THE COMPANY NOTES
 Note Receivable
  Note Payable
  NOTE E  PROPERTY, PLANT AND EQUIPMENT
  December 31,
    
    
    June 30,2007
    
    
    2008Oklahoma:Pipelines and equipment
    
    $
    6,756,000
    
    
    $
    7,230,000Regional:Land
    
    
    237,000
    
    
    
    237,000Terminal and improvements
    
    
    3,825,000
    
    
    
    4,029,000Automotive equipment
    
    
    2,438,000
    
    
    
    2,438,0006,500,000
    
    
    
    6,704,00013,256,000
    
    
    
    13,934,000Other
    
    
    338,000
    
    
    
    366,00013,594,000
    
    
    
    14,300,000Less: accumulated depreciation and amortization
    
    
    (611,000
    )
    
    
    (1,338,000
    )$
    12,983,000
    
    
    $
    12,962,000
  12




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE E  PROPERTY, PLANT AND EQUIPMENT  Continued
   NOTE F  OIL AND GAS PROPERTIES AND RELATED EQUIPMENT, NET
 Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
  Development
costs of leased properties:
    
    $
    2,054,000Capitalized pipeline infrastructure costs:
    
    $
    424,000
   NOTE G  INVENTORIES
 December 31, 2007
    
    
    June 30, 2008Gallons
    
    
    LCM
    
    
    Gallons
    
    
    LCMFuel Products
    
    
    1,043,000
    
    
    $
    2,563,000
    
    
    
    
    
    
    $
    
  13




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS
  December 31,
    
    
    June 30,2007
    
    
    2008RZB Note
    
    $
    5,000,000
    
    
    $
    5,000,000Moores Note
    
    
    493,000
    
    
    
    300,000Richter Note Payable (see note D)
    
    
    
    
    
    
    544,000$
    5,493,000
    
    
    $
    5,844,000Long-term debt obligations were as follows:TCW Credit Facility
    
    $
    23,689,000
    
    
    $
    23,700,000Sellers Note  Regional
    
    
    922,000
    
    
    
    708,000Other
    
    
    137,000
    
    
    
    137,00024,748,000
    
    
    
    24,545,000Less current portion
    
    
    3,498,000
    
    
    
    24,295,000$
    21,250,000
    
    
    $
    250,000
 RZB Amendment
   14




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS  Continued
 Moores Note
  TCW Credit Facility
    15




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE H  DEBT OBLIGATIONS  Continued
 TCW Credit Facility  Continued
   Sellers Note  Regional
  Other
  Beneficial Conversion Features
  NOTE I  STOCK WARRANTS
 2001 Warrant Plan
   16




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE I  STOCK WARRANTS  Continued
 2001 Warrant Plan
  NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA
 Common Units
  Private Placement of Common Units
   17




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Private Placement of Common Units  Continued
       18




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Private Placement of Common Units  Continued
   Distributions of Available Cash
    19




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE J  COMMON UNITS AND OPTIONS OF RIO VISTA  Continued
 Distributions of Available Cash
  Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000June 2008
    
    
    08/14/08
    
    
    $
    0.25
    
    
    $
    679,000
    
    
    $
    14,000
 Common Unit Options
   NOTE K  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
   20




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
  Lesly Camacho by Her Mother Dora Adame as Next Friend, et al. vs. Penn Octane
International LLC, et al th
 Faustino Izaguirre Gonzalez, et al. vs. Penn Octane Corporation, et
al. th
   21




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Legal Proceedings  Continued
     Credit Facility and Letters of Credit
   22




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Credit Facility and Letters of Credit  Continued
      Leases
 Norfolk Southern Leases
    23




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Leases  Continued
 Norfolk Southern Leases
  Consulting Agreement
  CEOcast
   24




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Strategic Growth International
  Concentrations of Credit Risk
  Partnership Tax Treatment and Regional and MV Income Taxes
      25




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE K  COMMITMENTS AND CONTINGENCIES  Continued
 Partnership Tax Treatment and Regional and MV Income Taxes  Continued
   NOTE L  OIL AND GAS SALES CONTRACTS
   Date
    
    Terms-
    
    April 2008  October 2008:
    
    1.0 MMcf/d @ $6.35/Mcf (MV Pipeline production)-
    
    April 2008  October 2008:
    
    0.5 MMcf/d @ $7.97/Mcf (Brooken Pipeline production)-
    
    November 2008  March 2009:
    
    1.0 MMcf/d @ $8.61/Mcf (MV Pipeline production)-
    
    November 2008  March 2009:
    
    0.5 MMcf/d @ $8.61/Mcf (Brooken Pipeline production)
   26




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE M  RELATED PARTY TRANSACTIONS
   Sale  Purchase of Rio Vista Common Units
  Loans To Rio Vista
   27




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE M  RELATED PARTY TRANSACTIONS  Continued
 Loans To Rio Vista  Continued
   Omnibus Agreement
     28




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE M  RELATED PARTY TRANSACTIONS  Continued
 Guarantees
 Debt Guarantee .
 Tax Guarantee.
 NOTE N  401K
  NOTE O  REALIZATION OF ASSETS
 The accompanying consolidated balance sheet has been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate
continuation of the Company as a going concern. The Company had a loss from continuing
operations for each of the two years ended December 31, 2007 and the three months and six
months ended June 30, 2008 and has a deficit in working capital. Currently, all revenues
generated from the Oklahoma assets are held as collateral against the TCW Credit Facility.
The current portion of the TCW Credit Facility, the Moores Note, the RZB Note, and the
Seller Note  Regional are all short-term in nature and amounts due in the current year are
approximately $29,458,000. In addition, Penn Octane owes excise and other taxes, including
computed interest and penalties, collected from customers in connection with the sale of
Fuel Products in the amount of $1,800,000.
  29




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE O  REALIZATION OF ASSETS  Continued
     NOTE P  SEGMENT INFORMATION
    30




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  Transporting andTerminaling
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    436,000
    
    
    $
    32,545,000
    
    
    $
    32,981,000Interest expense
    
    
    26,000
    
    
    
    117,000
    
    
    
    143,000Interest income
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    123,000
    
    
    
    
    
    
    
    123,000Segment gross profit
    
    
    34,000
    
    
    
    467,000
    
    
    
    501,000Segment assets
    
    
    16,355,000
    
    
    
    6,858,000
    
    
    
    23,213,000Segment liabilities
    
    
    2,711,000
    
    
    
    3,988,000
    
    
    
    6,699,000Expenditure for segment assets
    
    
    
    
    
    
    
    
    
    
    Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    $
    32,981,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    $
    32,981,000Profit (loss)Total gross
profit for reportable Segments
    
    
    
    
    
    
    
    
    
    $
    501,000Selling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,708,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    (147,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    5,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    686,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before
taxes
    
    
    
    
    
    
    
    
    
    $
    (663,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    $
    23,213,000Other assets
    
    
    
    
    
    
    
    
    
    
    2,841,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    26,054,000
  31




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  Transportation andTerminalling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    2,153,000
    
    
    $
    1,857,000
    
    
    $
    13,009,000
    
    
    $
    17,019,000Interest expense
    
    
    293,000
    
    
    
    659,000
    
    
    
    51,000
    
    
    
    1,003,000Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    258,000
    
    
    
    214,000
    
    
    
    3,000
    
    
    
    475,000Segment gross profit
    
    
    545,000
    
    
    
    194,000
    
    
    
    36,000
    
    
    
    775,000Segment assets
    
    
    12,297,000
    
    
    
    36,409,000
    
    
    
    2,757,000
    
    
    
    51,463,000Segment liabilities
    
    
    4,378,000
    
    
    
    27,292,000
    
    
    
    2,276,000
    
    
    
    33,946,000Expenditure for segment assets
    
    
    36,000
    
    
    
    2,134,000
    
    
    
    
    
    
    
    2,170,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,626,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (607,000
    )Other revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,019,000Profit (loss)Total gross
profit for reportable Segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    775,000Total other gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative expense
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,612,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,024,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Minority interest in loss of RVEP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,662,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations
before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,195,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    51,463,000Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,369,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,832,000
  32




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  Transportation andTerminaling
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    1,115,000
    
    
    $
    71,248,000
    
    
    $
    72,363,000Interest expense
    
    
    52,000
    
    
    
    240,000
    
    
    
    292,000Interest income
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    288,000
    
    
    
    
    
    
    
    288,000Segment gross profit
    
    
    319,000
    
    
    
    1,126,000
    
    
    
    1,445,000Segment assets
    
    
    16,355,000
    
    
    
    6,858,000
    
    
    
    23,213,000Segment liabilities
    
    
    2,711,000
    
    
    
    3,988,000
    
    
    
    6,699,000Expenditure for segment assets
    
    
    
    
    
    
    2,000
    
    
    
    2,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    $
    72,363,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    $
    72,363,000Profit (loss)Total gross profit for reportable Segments
    
    
    
    
    
    
    
    
    
    $
    1,445,000Selling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (3,112,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    (299,000
    )Interest income
    
    
    
    
    
    
    
    
    
    
    18,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    1,146,000Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    Unallocated amountsCorporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before taxes
    
    
    
    
    
    
    
    
    
    $
    (802,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    $
    23,213,000Other assets
    
    
    
    
    
    
    
    
    
    
    2,841,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    26,054,000
  33




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##### Table of Contents



Penn Octane Corporation and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE P  SEGMENT INFORMATION  Continued
  Transportation andTerminalling
    
    
    Oil and Gas
    
    
    Fuel Sales
    
    
    TotalsRevenues from external customers
    
    $
    4,260,000
    
    
    $
    2,844,000
    
    
    $
    43,318,000
    
    
    $
    50,422,000Interest expense
    
    
    514,000
    
    
    
    1,297,000
    
    
    
    129,000
    
    
    
    1,940,000Interest income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    7,000Depreciation and amortization
    
    
    540,000
    
    
    
    406,000
    
    
    
    3,000
    
    
    
    949,000Segment gross profit
    
    
    901,000
    
    
    
    519,000
    
    
    
    234,000
    
    
    
    1,657,000Segment assets
    
    
    12,297,000
    
    
    
    36,409,000
    
    
    
    2,757,000
    
    
    
    51,463,000Segment liabilities
    
    
    4,378,000
    
    
    
    27,292,000
    
    
    
    2,276,000
    
    
    
    33,946,000Expenditure for segment assets
    
    
    200,000
    
    
    
    2,820,000
    
    
    
    
    
    
    
    3,020,000Reconciliation to Consolidated Amounts:RevenuesTotal revenues for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    51,978,000Elimination of intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,556,000
    )Other revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,422,000Profit (loss)Total gross profit for reportable Segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,657,000Total other gross profit (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,374,000
    )Selling, general and administrative expense and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,979,000
    )Interest and Fuel Products financing expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,713,000Minority interest in loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination of intersegment profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate headquarters expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated loss from operations before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,969,000
    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    51,463,000Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,369,000Corporate headquarters
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other unallocated amounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,832,000
  34




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##### Table of Contents



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Penn Octane Corporation (Penn Octane) and its consolidated subsidiaries which includes Rio Vista
Energy Partners L.P. and its subsidiaries (Rio Vista) are collectively hereinafter referred to as
the Company.
 The following discussion of the Companys results of operations and liquidity and capital
resources should be read in conjunction with the unaudited consolidated financial statements of the
Company and related notes thereto appearing elsewhere herein. References to specific years
preceded by fiscal (e.g. fiscal 2008) refer to the Companys fiscal year ended December 31.
 Cautionary Statement Regarding Forward-Looking Statements
  
    
    the volatility of realized natural gas prices;
    
    the discovery, estimation, development and replacement of oil and natural gas reserves;
    
    our business and financial strategy;
    
    our drilling locations;
    
    technology;
    
    our cash flow, liquidity and financial position;
    
    our production volumes;
    
    our lease operating expenses, general and administrative costs and finding and
development costs;
    
    the availability of drilling and production equipment, labor and other services;
    
    our future operating results;
    
    our prospect development and property acquisitions;
    
    the marketing of oil and natural gas;
    
    competition in the oil and natural gas industry and the transportation and terminalling
business;
    
    the impact of weather and the occurrence of natural disasters such as fires, floods,
hurricanes, earthquakes and other catastrophic events and natural disasters;
    
    governmental regulation of the oil and natural gas industry and the transportation and
terminalling business;
    
    required capital expenditures;
    
    cash distributions and qualified income;
    
    developments in oil producing and natural gas producing countries; and
    
    our strategic plans, objectives, expectations and intentions for future operations.
    35




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##### Table of Contents



Overview
 Historical Assets and Operations
    Current Assets and Operations
    36




---



##### Table of Contents



Liquidity and Capital Resources
 General
     Credit Arrangements
  37




---



##### Table of Contents



Debt Obligations
 RZB Loan Agreement
  TCW Credit Facility
   38




---



##### Table of Contents



Moores Note
  Sellers Note  Regional
  A Former Officer of the Company Note
  Distributions of Available Cash.
   39




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##### Table of Contents



Amounts PaidQuarter
    
    Payment
    
    
    Distribution
    
    
    Common
    
    
    GeneralEnded
    
    Date
    
    
    Per Unit
    
    
    Units
    
    
    PartnerDecember 2007
    
    
    02/14/08
    
    
    $
    0.25
    
    
    $
    607,000
    
    
    $
    12,000March 2008
    
    
    05/16/08
    
    
    $
    0.25
    
    
    $
    629,000
    
    
    $
    13,000June 2008
    
    
    08/14/08
    
    
    $
    0.25
    
    
    $
    679,000
    
    
    $
    14,000
 Leases
 Norfolk Southern Leases.
   CEOcast Agreement
   40




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##### Table of Contents



Strategic Growth International
  Related Party Transactions
      41




---



##### Table of Contents



Realization of Assets
      Results of Operations
   42




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##### Table of Contents



Three months ended June 30, 2008 Compared with Three Months ended June 30, 2007
 THREE MONTHS ENDED JUNE 30, 2008Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    13,009,000
    
    
    
    1,857,000
    
    
    
    2,153,000
    
    
    
    
    
    
    
    
    
    
    
    17,019,000Cost Of Goods Sold
    
    
    12,973,000
    
    
    
    1,663,000
    
    
    
    1,608,000
    
    
    
    
    
    
    
    
    
    
    
    16,244,000Gross Profit
    
    
    36,000
    
    
    
    194,000
    
    
    
    545,000
    
    
    
    
    
    
    
    
    
    
    
    775,000Selling, General And
Administrative
Expenses
    
    
    388,000
    
    
    
    52,000
    
    
    
    197,000
    
    
    
    
    
    
    
    1,975,000
    
    
    
    2,612,000Operating Income (loss)
    
    
    (352,000
    )
    
    
    142,000
    
    
    
    348,000
    
    
    
    
    
    
    
    (1,975,000
    )
    
    
    (1,837,000
    )Other Income (Expense)Interest and Fuel
Products Financing
Expense
    
    
    (51,000
    )
    
    
    (659,000
    )
    
    
    (293,000
    )
    
    
    
    
    
    
    (21,000
    )
    
    
    (1,024,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    4,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,662,000
    
    
    
    1,662,000Loss From Operations
Before Taxes
    
    
    (403,000
    )
    
    
    (517,000
    )
    
    
    55,000
    
    
    
    
    
    
    
    (330,000
    )
    
    
    (1,195,000
    )Provision (Benefit)
For Income Taxes
    
    
    
    
    
    
    (66,000
    )
    
    
    (36,000
    )
    
    
    
    
    
    
    
    
    
    
    (102,000
    )Loss from continuing
operations
    
    
    (403,000
    )
    
    
    (451,000
    )
    
    
    91,000
    
    
    
    
    
    
    
    (330,000
    )
    
    
    (1,093,000
    )Loss on sale of
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,000
    
    
    
    
    
    
    
    343,000Net income (loss)
    
    
    (403,000
    )
    
    
    (451,000
    )
    
    
    91,000
    
    
    
    (343,000
    )
    
    
    (330,000
    )
    
    
    (1,436,000
    )
  43




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##### Table of Contents



THREE MONTHS ENDED JUNE 30, 2007Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    32,545,000
    
    
    
    
    
    
    
    
    
    
    
    436,000
    
    
    
    
    
    
    
    32,981,000Cost Of Goods Sold
    
    
    32,078,000
    
    
    
    
    
    
    
    
    
    
    
    402,000
    
    
    
    
    
    
    
    32,480,000Gross Profit
    
    
    467,000
    
    
    
    
    
    
    
    
    
    
    
    34,000
    
    
    
    
    
    
    
    501,000Selling, General and
Administrative
Expenses
    
    
    183,000
    
    
    
    
    
    
    
    
    
    
    
    54,000
    
    
    
    1,471,000
    
    
    
    1,708,000Operating Income (Loss)
    
    
    284,000
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )
    
    
    (1,471,000
    )
    
    
    (1,207,000
    )Other Income (Expense)Interest and Fuel
Products Financing
Expense
    
    
    (117,000
    )
    
    
    
    
    
    
    
    
    
    
    (26,000
    )
    
    
    (4,000
    )
    
    
    (147,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    5,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    686,000
    
    
    
    686,000Income (Loss) From
Operations Before
Taxes
    
    
    167,000
    
    
    
    
    
    
    
    
    
    
    
    (46,000
    )
    
    
    (784,000
    )
    
    
    (663,000
    )Provision For Income
Taxes (Benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (374,000
    )
    
    
    (374,000
    )Net Income (Loss)
    
    
    167,000
    
    
    
    
    
    
    
    
    
    
    
    (46,000
    )
    
    
    (410,000
    )
    
    
    (289,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007.(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008  44




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##### Table of Contents



Six months ended June 30, 2008 Compared with Six Months ended June 30, 2007
 SIX MONTHS ENDED JUNE 30, 2008Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    43,318,000
    
    
    
    2,844,000
    
    
    
    4,260,000
    
    
    
    
    
    
    
    
    
    
    
    50,422,000Cost Of Goods Sold
    
    
    43,080,000
    
    
    
    2,325,000
    
    
    
    3,370,000
    
    
    
    
    
    
    
    (10,000
    )
    
    
    48,765,000Gross Profit
    
    
    238,000
    
    
    
    519,000
    
    
    
    890,000
    
    
    
    
    
    
    
    10,000
    
    
    
    1,657,000Selling, General And
Administrative
Expenses
    
    
    579,000
    
    
    
    81,000
    
    
    
    442,000
    
    
    
    
    
    
    
    4,272,000
    
    
    
    5,374,000Operating Income (loss)
    
    
    (341,000
    )
    
    
    438,000
    
    
    
    448,000
    
    
    
    
    
    
    
    (4,262,000
    )
    
    
    (3,717,000
    )Other Income (Expense)Interest and Fuel
Products Financing
Expense
    
    
    (129,000
    )
    
    
    (1,297,000
    )
    
    
    (514,000
    )
    
    
    
    
    
    
    (39,000
    )
    
    
    (1,979,000
    )Interest Income
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    7,000
    
    
    
    14,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,713,000
    
    
    
    3,713,000Loss From Operations
Before Taxes
    
    
    (470,000
    )
    
    
    (852,000
    )
    
    
    (66,000
    )
    
    
    
    
    
    
    (581,000
    )
    
    
    (1,969,000
    )Provision (Benefit)
For Income Taxes
    
    
    
    
    
    
    (66,000
    )
    
    
    (31,000
    )
    
    
    
    
    
    
    
    
    
    
    (97,000
    )Loss from continuing
operations
    
    
    (470,000
    )
    
    
    (786,000
    )
    
    
    (35,000
    )
    
    
    
    
    
    
    (581,000
    )
    
    
    (1,872,000
    )Loss on sale of
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,000
    
    
    
    
    
    
    
    343,000Net Loss
    
    
    (470,000
    )
    
    
    (786,000
    )
    
    
    (35,000
    )
    
    
    (343,000
    )
    
    
    (581,000
    )
    
    
    (2,215,000
    )
  45




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##### Table of Contents



SIX MONTHS ENDED JUNE 30, 2007Fuel
    
    
    Oklahoma
    
    
    Regional
    
    
    LPG
    
    
    Corporate/Sales (d)
    
    
    Assets (a)
    
    
    Enterprises (b)
    
    
    Transportation (c)
    
    
    Other
    
    
    TotalRevenues
    
    
    71,248,000
    
    
    
    
    
    
    
    
    
    
    
    1,115,000
    
    
    
    
    
    
    
    72,363,000Cost Of Goods Sold
    
    
    70,122,000
    
    
    
    
    
    
    
    
    
    
    
    796,000
    
    
    
    
    
    
    
    70,918,000Gross Profit
    
    
    1,126,000
    
    
    
    
    
    
    
    
    
    
    
    319,000
    
    
    
    
    
    
    
    1,445,000Selling, General and
Administrative
Expenses
    
    
    405,000
    
    
    
    
    
    
    
    
    
    
    
    115,000
    
    
    
    2,592,000
    
    
    
    3,112,000Operating Income (Loss)
    
    
    721,000
    
    
    
    
    
    
    
    
    
    
    
    204,000
    
    
    
    (2,592,000
    )
    
    
    (1,667,000
    )Other Income (Expense)Interest and Fuel
Products Financing
Expense
    
    
    (240,000
    )
    
    
    
    
    
    
    
    
    
    
    (52,000
    )
    
    
    (7,000
    )
    
    
    (299,000
    )Interest Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000
    
    
    
    18,000Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,146,000
    
    
    
    1,146,000Income (Loss) From
Operations Before
Taxes
    
    
    481,000
    
    
    
    
    
    
    
    
    
    
    
    152,000
    
    
    
    (1,435,000
    )
    
    
    (802,000
    )Provision For Income
Taxes (Benefit)
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416,000
    )
    
    
    (401,000
    )Net Income (Loss)
    
    
    466,000
    
    
    
    
    
    
    
    
    
    
    
    152,000
    
    
    
    (1,019,000
    )
    
    
    (401,000
    )
 (a)
    
    Acquired during November 2007(b)
    
    Acquired during July 2007.(c)
    
    Business commenced in August 2006 and sold December 31, 2007(d)
    
    Business ceased in May 2008 Off-Balance Sheet Arrangements
   46




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##### Table of Contents



Statement by Management Concerning Review of Interim Information by An Independent Registered
Public Accounting Firm.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4T. Controls and Procedures.
     
    
    In May 2008, Penn Octane hired an assistant controller to provide additional assistance
with internal accounting responsibilities and financial reporting. The newly hired
assistant controller has previous oil and gas experience.
    
    In June 2008, Penn Octane verbally agreed to hire a vice president, who will primarily
oversee the operations of our oil and gas properties. We are currently negotiating the
final terms of his contract.
    
    In June 2008, Penn Octane began discussions with a potential Chief Executive Officer
candidate. This candidate has extensive oil and gas expertise. We are currently negotiating
with this candidate in an effort to have him accept the role as Chief Executive Officer.
    
    In March 2008 and in connection with the acquisition of the Oklahoma operations, Penn
Octane hired two employees who were previously engaged in accounting functions of those
businesses. We are currently training those employees.
  47




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##### Table of Contents




    
    In May 2008, Penn Octane engaged the services of a software consulting firm to
implement an Oracle ERP accounting software system. This system is intended to enhance
internal controls over the ability to
enter transactions into the financial system and financial reporting. This system will also
provide for multiple user access, timely access to accounting information and additional data
security.
    
    Management is currently reviewing employee compensation and incentives to ensure that
it continues to attract and retain qualified employees.
     48




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   49




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##### Table of Contents



Item 6 Exhibits
 The following Exhibits are filed as part of this report:
 Exhibit No.15
    
    Accountants Acknowledgment.31.1
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.31.2
    
    Certification Pursuant to Rule 13a  14(a) / 15d  14(a) of the Exchange Act.32
    
    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the
Sarbanes Oxley Act of 2002.
 www.sec.gov
  50




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##### Table of Contents



SIGNATURES
  PENN OCTANE CORPORATIONAugust 19, 2008
    By:

/s/ Ian T. BothwellIan T. BothwellActing Chief Executive Officer, Acting
President, Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Executive, Financial and
Accounting Officer)  51




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description15
    
    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.
  52