C – SHARE-BASED PAYMENT

The Company applies the provisions of Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (123R) and Accounting Principles Board Opinion No. 14  “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (APB 14)  to account for such transactions.  SFAS 123R requires that such transactions be accounted for at fair value.  If the fair value of the goods and services or debt related transactions are not readily measurable, the fair value of the warrants is used to account for such transactions.

The Company utilizes share-based awards as a form of compensation for employees, officers, directors and consultants.  During the quarter ended March 31, 2006, the Company adopted the provisions of SFAS 123R for share-based payments to employees using the modified prospective application transition method.  Under this method, previously reported amounts should not be restated to reflect the provisions of SFAS 123R.  SFAS 123R requires measurement of all employee share-based payment awards using a fair-value method and recording of such expense in the consolidated financial statements over the requisite service period.  The fair value concepts have not changed significantly in SFAS 123R; however, in adopting this standard, companies must choose among alternative valuation models and amortization assumptions.  After assessing alternative valuation models and amortization assumptions, the Company will continue using both the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion of the grant.  The Company will reconsider use of this model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. Previously, the Company had applied the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related  interpretations and elected to utilize the disclosure option of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).  Penn Octane recorded share-based payment expense for employees and non-employees of $82,143 ($0.01 per common share) and $25,894 ($0.00 per common share) for the three months ended September 30, 2006 and 2007, respectively, $205,794 ($0.01 per common share) and $110,567 ($0.01 per common share) for the nine months ended September 30, 2006 and 2007, respectively, under the fair-value provisions of SFAS 123R.  Rio Vista recorded unit-based payment expense for employees and non-employees of $8,394 ($0.00 per common unit) and $76,203 ($0.04 per common unit) for the three months ended September 30, 2006 and 2007, respectively, and $8,394 ($0.00 per common unit) and $152,025 ($0.08 per common unit) for the nine months ended September 30, 2006 and 2007, respectively under the fair-value provisions of SFAS 123R. 

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