Certain Relationships and Related Transactions

The note receivable from Mr. Richter in the amount of $3,196,693 (Richter Note) was due July 29, 2005.  On August 3, 2005 in connection with Mr. Richter’s retirement in May 2005 and in consideration of his past services, the Company approved an extension of the Richter Note to July 29, 2007 and a discount of the Richter note to $1,696,693 plus accrued interest not waived (see below) on its maturity date, subject to satisfaction of certain conditions.  The Company considers it to be probable that the conditions will be met and therefore, the Richter Note will be discounted at maturity and accordingly, has recorded a charge to compensation expense as of September 30, 2005 in the amount of $1,031,307 with a corresponding credit to the reserve.  The interest rate on the extended Richter Note is 6.75%.  The Company will waive interest provided that Mr. Richter guarantees debt of the Company to any person in an amount equal to at least $1,800,000 (see note I).   Beginning December 15, 2005, the Company reduced the amount of guaranteed debt below $1,800,000.  Accordingly, the Company began accruing interest and reserving the interest on the Richter Note.  On October 13, 2006, the Company and Mr. Richter amended the security and pledge agreement whereby Mr. Richter substituted as collateral for the Richter Note the 1,000,000 shares of common stock of Penn Octane for 125,000 common units of Rio Vista owned by him which were also collateral for the Richter Note.    

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

On February 6, 2007, Penn Octane entered into a purchase option agreement with Shore Trading that provides Penn Octane with the option (Purchase Option) to purchase the 25% interest in the General Partner held by Shore Trading. 

Penn Octane paid Shore Trading $100,000 in order to acquire the Purchase Option.  The exercise price for the Purchase Option is $1,300,000, for a total purchase price of $1,400,000, if Penn Octane exercises the Purchase Option between July 1 and July 31, 2007.  If Penn Octane exercises the Purchase Option before July 1, 2007, the exercise price is $1,700,000, for a total purchase price of $1,800,000.  The Purchase Option expires if it is not exercised on or before July 31, 2007.

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

In consideration of the Services rendered by Mr. Richter to the companies, Penn Octane and Rio Vista paid the following fees (Fees) to Mr. Richter:  an amount equal to two percent (2%) of (i) the net proceeds, as defined, to the companies resulting from a sale of assets to a third party, and (ii) the net proceeds, as defined, to the companies from sales of LPG to PMI for any calendar month in which such sales exceed the volumes pursuant to a previous agreement with PMI.  Amounts expensed pursuant to (i) above (see note D) were $331,565 and have been paid to Mr. Richter.  Amounts expensed pursuant to (ii) above for the year ended December 31, 2006 totaled approximately $5,000 and have been paid to Mr. Richter.

Related to Mr. Richter’s retirement in May of 2005, the board of directors approved full vesting for all unvested warrants over the remaining period of his consulting agreement.  Mr. Richter’s consulting agreement expired on November 14, 2006.

Penn Octane entered into a consulting agreement (Consulting Agreement) with JBR Capital Resources, Inc. (JBR Capital) regarding consulting services to be rendered by JBR Capital to Penn Octane and to Rio Vista.  JBR Capital is controlled by Mr. Richter.  The provisions of the Consulting Agreement are effective as of November 15, 2006 (Effective Date). 

Pursuant to the Consulting Agreement, JBR Capital has agreed to assist Penn Octane and Rio Vista with the potential acquisition and disposition of assets and with other transactions involving Penn Octane or Rio Vista.  In exchange for these services, Penn Octane has agreed to pay JBR Capital a fee based on approved services rendered by JBR Capital plus a fee based on the net proceeds to Penn Octane resulting from a sale of assets to a third party introduced to Penn Octane by JBR Capital.  Pursuant to a related letter agreement, JBR Capital has agreed that Penn Octane will apply 50% of the amount of any fees payable to JBR Capital under the Consulting Agreement against amounts owed by Richter to Penn Octane pursuant to the Richter Note.  During the period November 15, 2006 through December 31, 2006, the Company expensed approximately $46,000 in connection with the Consulting Agreement of which $9,000 was paid and $9,000 was applied against the Richter Note.  The term of the Consulting Agreement is six months following the Effective Date.  The Consulting Agreement renews for additional six-month terms unless terminated by either party at least 30 days before the end of each term.

The Company’s consolidated Mexican affiliate, Tergas owns the Matamoros Terminal Facility and has been granted the permit to operate the Matamoros Terminal Facility.  The Company relies on Tergas’ permit to continue its delivery of LPG at the Matamoros Terminal Facility.  Tergas is owned 95% by Mr. Vicente Soriano, and the remaining balance is owned by an unrelated party.  The Company has an option to purchase Tergas for a nominal price of approximately $5,000.

On April 10, 2007, the Board of Directors approved a form of Chairman Services Agreement and Director Services Agreement.  Pursuant to these agreements, the non-employee chairman of the board will receive annual cash compensation of $25,000, payable quarterly, and an annual grant of warrants valued at approximately $6,250.  Other non-employee directors will receive annual cash compensation of $20,000, payable quarterly, and an annual grant of warrants valued at approximately $5,000.

On April 10, 2007, the Board of Directors approved a form of Indemnification Agreement for the directors and officers of Penn Octane.  The agreement provides for indemnification against liabilities in the case of legal proceedings brought by a third party or by or in the right of Penn Octane.  The agreement also provides for advancement of expenses to an indemnified director or officer.