Compensation Discussion and Analysis

The Company’s compensation to executive management was administered by the Compensation Committee of the Board of Directors.  As of December 31, 2006, the Compensation Committee was comprised of two directors, both of whom are outside directors, who report to the Board of Directors on all compensation matters concerning the Company’s executive officers (Executive Officers), including the Company’s Chief Executive Officer, Chief Financial Officer and the Company’s other Executive Officers (collectively, with the Chief Executive Officer and Chief Financial Officer, the Named Executive Officers) (see below).  In determining annual compensation, including bonus, and other incentive compensation to be paid to the Named Executive Officers, the Compensation Committee considers several factors including overall performance of the Named Executive Officer (measured in terms of financial performance of the Company, opportunities provided to the Company, responsibilities, quality of work and/or tenure with the Company), and considers other factors including retention and motivation of the Named Executive Officers and the overall financial condition of the Company.  The Compensation Committee provides compensation to the Named Executive Officers in the form of cash and equity instruments.

The overall compensation provided to the Named Executive Officers consisting of base salary and the issuance of equity instruments is intended to be competitive with the compensation provided to executives at other companies after adjusting for factors described above, including the Company’s financial condition during the term of employment of the Executive Officers.

The base salary, cash bonuses and share based compensation is approved based on the Named Executive Officer’s position, level of responsibility, performance and tenure with the Company.

In November 2006, Mr. Bothwell was appointed Acting Chief Executive Officer of the Company. During the period January 1, 2006 until October 2006, Mr. Charles C. Handly served as Chief Executive Officer of the Company.  Mr. Handly retired in October 2006. The Compensation Committee determined that Mr. Bothwell’s and Mr. Handly’s compensation was fair to the Company.  

At December 31, 2006, the Company had only one executive officer.  During fiscal 2006, the officer did not receive any increase in his base salary over base salary paid during fiscal 2005.  During fiscal 2006, the officer received a cash bonus of $70,000 associated with the Restated LPG Asset Sale.  The executive did not receive any other bonus compensation in the form of cash, stock options or stock grants. 

On September 30, 2004, pursuant to the terms of an employment agreement dated May 13, 2003 with Richard Shore, Jr., the Company issued warrants to purchase 763,737 shares of the Company’s common stock at an exercise price of $1.14 per share to Shore Capital, LLC, an affiliate of Mr. Shore.  The warrants expired on July 10, 2006.

On March 9, 2005, the board of directors of the Company approved the grant to executive officers of the Company excluding Mr. Shore, of warrants to purchase a total of 625,000 shares of the Company’s common stock under the Company’s 2001 Warrant Plan previously approved by the Company’s stockholders.  The exercise price for the warrants is $1.50 per share, which was the closing price for the Company’s common stock as reported by the NASDAQ Capital Market on March 9, 2005.  Warrants vest in equal monthly installments over a period of 36 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.

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

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

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

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

The Company is aware of its limited executive management and its dependence on such management in performing the day to day operations.  The Company expects that it will need to hire additional executive management in connection with its future growth.  The Company’s compensation committee is currently drafting guidelines related to executive compensation, including annual evaluations of the level of base salary, bonus payments, share based compensation and perquisites in an effort to be in a position to attract and/or retain its executives in the future.