**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**


(Mark
      One)


x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


For
      the
      fiscal year 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: **0-21825**





**SMF
      ENERGY CORPORATION**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **65-0707824**(State
                or other jurisdiction
              of
                incorporation or organization)
            (I.R.S.
                Employer
              Identification
                No.)





**200
      West Cypress Creek Road, Suite 400, Fort Lauderdale, Florida
      33309**


(Address
      of principal executive offices) (Zip Code)


**(954)
      308-4200**


(Registrant’s
      telephone number, including area code)


Securities
      registered pursuant to Section 12(b) of the Act:





**Title
                of
                Class**
            ****
            **Name
                of exchange on which registered****Common
                Stock, $.01 Par Value**
            ****
            **Nasdaq
                Capital Market**





Securities
      registered pursuant to Section 12(g) of the Act: **None**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No
x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes oNo
x




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 o





Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (Section 229.405 of this Chapter) is not contained herein,
        and
        will not be contained, to the best of registrant’s knowledge, in definitive
        proxy or information statements incorporated by reference in Part III of
        this
        Form 10-K or any amendment to this Form 10-K. o





Indicate
      by check mark whether the registrant is a large accelerated filer, accelerated
      filer or a non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act).


oLarge
      accelerated
      filer        o Accelerated
      filer        o Non-accelerated
      filer Smaller
      reporting company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  Yes oNo
x





The
      aggregate market value of the voting stock held by non-affiliates was $884,925.
      The aggregate market value was computed by reference to the last sale price
      of
      the registrant’s Common Stock on the Nasdaq Capital Market on December 31, 2007.





As
      of
      September 5, 2008 there were 14,556,295 shares of the Registrant’s Common Stock
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE:**




Certain
      Portions of Registrant’s Proxy Statement relating to the 2008 Annual Meeting of
      Shareholders are incorporated by reference into Part III.









**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




From
      time
      to time, we make statements concerning our expectations, beliefs, plans,
      objectives, goals, strategies, future events or performance and underlying
      assumptions and other statements that are not historical facts. These statements
      are "forward-looking statements" within the meaning of the Private Securities
      Litigation Reform Act of 1995. Forward-looking statements include statements
      concerning our expectations, plans, objectives, goals, strategies, future
      events, future revenue or performance, capital expenditures, financing needs,
      plans or intentions relating to acquisitions, business trends and other
      information that is not historical information and, in particular, appear under
      the headings "Management's Discussion and Analysis of Financial Condition and
      Results of Operations." The words "could," "estimate," "expect," "anticipate,"
      "project," "plan," "intend," "believe," "goal," "forecast" and variations of
      such words or similar expressions are intended to identify forward-looking
      statements. All forward-looking statements, including, without limitation,
      management's examination of historical operating trends, are based upon our
      current expectations and various assumptions. Our expectations, beliefs and
      projections are expressed in good faith and we believe there is a reasonable
      basis for them. However, there can be no assurance that our expectations,
      beliefs and projections will result or be achieved.




There
      may
      also be factors that are not presently known to us or that we currently consider
      to be immaterial that may cause our actual results to differ materially from
      the
      forward-looking statements. Some of the risks and uncertainties that could
      cause
      our actual results to differ materially from the forward-looking statements
      are
      described in the section entitled “Risk Factors” in Item 1A, and elsewhere in
      this Annual Report on Form 10-K. All forward-looking statements and projections
      attributable to us or persons acting on our behalf apply only as of the date
      of
      the particular statement, and are expressly qualified in their entirety by
      the
      cautionary statements included in this report and our other filings with the
      SEC. We undertake no obligation to publicly update or revise forward-looking
      statements, including any of the projections presented herein, to reflect events
      or circumstances after the date made or to reflect the occurrence of
      unanticipated events.









**TABLE
      OF CONTENTS**


**PAGE****PART
                      I.**Item
                      1.
                  Business
                  1Item
                      1A.
                  Risk
                      Factors
                  7Item
                      1B.
                  Unresolved
                      Staff Comments
                  12Item
                      2.
                  Properties
                  13Item
                      3.
                  Legal
                      Proceedings
                  13Item
                      4.
                  Submission
                      of Matters to a Vote of Security Holders
                  14**PART
                      II.**Item
                      5.
                  Market
                      for Common Equity, Related Shareholder Matters and Issuer Purchases
                      of
                      Equity Securities
                  15Item
                      6.
                  Selected
                      Financial Data
                  16Item
                      7.
                  Management’s
                      Discussion and Analysis of Financial Condition and Results
                      of Operations
                  18Item
                      8.
                  Financial
                      Statements and Supplementary Data
                  37Item
                      9.
                  Changes
                      in and Disagreements with Accountants on Accounting and Financial
                      Disclosure
                  37Item
                      9A.
                  Controls
                      and Procedures
                  37Item
                      9B.
                  Other
                      Information
                  38**PART
                      III.**Item
                      10.
                  Directors,
                      Executive Officers and Corporate Governance
                  39Item
                      11.
                  Executive
                      Compensation
                  39Item
                      12.
                  Security
                      Ownership of Certain Beneficial Owners and Management and Related
                      Stockholder Matters
                  39Item
                      13.
                  Certain
                      Relationships, Related Transactions, and Director Independence
                  39Item
                      14.
                  Principal
                      Accounting Fees and Services
                  39**PART
                      IV.**Item
                      15.
                  Exhibits,
                      Financial Statement Schedules
                  40Signatures
                  
                  48








**PART
      I**




**Item
      1.  Business**




***Overview***




We
      were originally incorporated in Florida in 1996, under the name Streicher Mobile
      Fueling, Inc. (“Streicher”). SMF Energy Corporation (the “Company”), a Delaware
      corporation, was formed in 2006 as a wholly-owned subsidiary of Streicher.
      In
      December 2006, the shareholders of Streicher approved changing the name of
      Streicher to SMF Energy Corporation and the reincorporation of Streicher in
      Delaware by merger into the Company. These actions were effectuated on February
      14, 2007 by the merger of Streicher into the Company. Unless indicated
      otherwise, "the Company", "SMF," "we", "us" and "our" refer to SMF Energy
      Corporation and its subsidiaries.




We
      are a
      leading provider of petroleum product distribution services, transportation
      logistics and emergency response services to the trucking,
      manufacturing, construction, shipping, utility, energy, chemical,
      telecommunication and government services industries. We
      provide our services and products through 26 service locations
      in the ten states of Alabama, California, Florida, Georgia, Louisiana,
      Mississippi, North Carolina, South Carolina, Tennessee and Texas.




The broad
      range of services we offer our customers includes commercial mobile and bulk
      fueling; the packaging, distribution and sale of lubricants; integrated
      out-sourced fuel management; transportation logistics and emergency response
      services. Our fleet of custom specialized tank
      wagons, tractor-trailer transports, box trucks, and customized flatbed vehicles
      delivers diesel
      fuel and gasoline to customers’ locations on a regularly scheduled or as needed
      basis, refueling vehicles and equipment, re-supplying fixed-site and
      temporary bulk storage tanks, and emergency power generation systems ;
      and
      distributes a wide variety of specialized petroleum products, lubricants and
      chemicals to our customers. In addition, our fleet of  special
      duty tractor-trailer units provides heavy haul transportation services over
      short and long distances to customers requiring the movement of over-sized
      or over-weight equipment
      and manufactured products.




***Acquisitions***




As
      part
      of our overall business strategy, we are pursuing growth through the acquisition
      of other companies and operations that offer services similar or complementary
      to ours. Through such acquisitions, we have expanded our services and products,
      enabling us to grow our margins and to position ourselves for profitable
      financial performance by consolidating operations and improving
      efficiencies.




We
      completed two acquisitions during 2005. In February
      2005, we purchased substantially all of the assets and business operations
      of
      Shank C&E Investment s ,
      L.L.C.
      (“Shank Services”), a Houston, Texas based provider of commercial mobile
      and bulk fueling services ,
      petroleum lubricants packaging
      and distribution,  and
      heavy
      haul transportation services. In October
      2005, we acquired H & W Petroleum Company, Inc. (“H & W”), a
      Houston based marketer and distributor of lubricants, commercial fuels and
      petroleum products. Immediately prior to our acquisition of H & W, H & W
      acquired the operating assets of Harkrider Distributing Company, Incorporated
      (“Harkrider”), a Houston based marketer and distributor of dry cleaning
      solvents, chemicals and petroleum products.





The
      prior
      operations of Shank Services, together with the historical operations of
      Streicher in the Texas markets, have now been integrated into the operations
      of
      H & W Petroleum Company.





These
      acquisitions significantly extended our presence in major Texas markets,
      provided a platform of growth in the southwest, and made us a leading
      distributor of both packaged and bulk branded lubricants and of other unbranded
      petroleum products and chemicals. They also expanded our commercial mobile
      and
      bulk fueling operations and strengthened our ability to provide emergency
      service and fuel delivery services in response to natural disasters, such as
      hurricanes, tropical storms, ice and snow storms, forest fires and earthquakes
      and other emergency situations.




1




***Strategy***




An
      objective of our business model is to become the leading “single source”
provider of petroleum products and services to our target customers in the
      ten
      states in which we presently have operating locations, as well as expanding
      into
      additional markets in the Southeast, Mid-Atlantic, Mid-Continent and West Coast
      regions of the U.S. We seek to offer our customers a diversified package of
      quality and reliable petroleum products and service with 24 hour around the
      clock availability at competitive prices. To achieve this objective we plan
      to
      grow organically and through selective acquisitions.




Our
      organic growth strategy is focused on increasing market share in our existing
      operating locations and contiguous geographic areas. We seek market share
      expansion through a concentrated market penetration and sales program offering
      a
      broader line of products and services to both existing and prospective
      customers. We believe that the implementation of our enhanced corporate
      infrastructure, including the newly installed Enterprise Resource Planning
      (“ERP”) operating system, has enabled us to operate more efficiently and to
      reduce operating costs and administrative expenses. This new system has
      facilitated the consolidation of financial management reporting and analysis
      functions, improved management controls, and helped us comply with some of
      the
      requirements of the Sarbanes-Oxley Act of 2002.




With
      the
      completion of the ERP system we are now able to more effectively pursue
      acquisitions. Our acquisition strategy is focused on acquiring companies, assets
      and business operations that will complement or offer diversified opportunities
      for growth in the markets where we already have an established presence or
      that
      permit us to expand into new markets. We believe that carefully selected future
      acquisitions can provide us with increased market share, volume and margins.
      In
      addition, such acquisitions can enhance our operational and administrative
      efficiencies by helping us achieve greater economies of scale.




We
      evaluate our potential acquisitions based on factors such as:




·
            market
                presence;




·
            growth
                potential of product and service lines;




·
            margin
                contribution;




·
            impact
                on our competition;




·
            customer
                loyalty and retention;




·
            commitment
                of management and other personnel;




·
            integration
                efficiencies and controls; and




·
            transaction
                financing alternatives, among others.




We
      expect
      to fund future acquisitions primarily by raising additional capital. This
      capital may be in the form of equity, debt or a combination of both. While
      we
      expect to be able to satisfy these capital requirements, there is no assurance
      that we will be able to do so, and any failure to raise needed capital will
      impede the implementation of our growth strategy.




***Products,
      Services and Operations***




**Commercial
      Mobile** **and
      Bulk** **Fueling** **and Fuel Management Services**




We
      provide commercial mobile
      and bulk fueling deliveries on a regularly scheduled or as needed basis,
      refueling vehicles and equipment, and re-supplying bulk
      storage tanks and emergency power generation systems.




2




Traditionally,
      businesses and other entities that operate fleets of vehicles and equipment
      have
      met their fueling requirements by fueling vehicles at retail stations or at
      other third party facilities or by maintaining their own supply of fuel in
      on-site storage tanks. We
      believe that the commercial mobile
      fueling and out-sourced fuel management services we offer provide numerous
      benefits to our customers, including lower labor and administrative costs
      associated with fueling vehicles, centralized control and management over fuel
      inventories, data useful for management and tax reporting, elimination of
      environmental risks and related costs associated with on-site fuel storage
      and
      dispensing facilities, and elimination of security risks associated with
      off-site fueling by employees. Our
      commercial mobile fueling solutions include the use of our patented proprietary
      electronic fuel tracking control system to
      measure, record and track fuel dispensed to each vehicle and tank fueled at
      a
      customer location. This system allows verification of the amount and type of
      fuel delivered and provides customers with customized fleet fuel data. Depending
      on the customer application, the benefits of our commercial mobile fueling
      and
      out-sourced fuel management services over traditional fueling methods may
      include:




·
            *Reduced
                Operating Costs and Increased Labor Productivity*.
                Fleet operators are able to reduce operating costs and lower payroll
                hours
                by eliminating the need for their employees to fuel vehicles either
                on-site or at local retail stations and other third party facilities.
                Overnight fueling prepares fleet vehicles for operation at the beginning
                of each workday and increases labor productivity by allowing employees
                to
                use their vehicles during time that would otherwise be spent fueling.
                Vehicle use is maximized since fueling is conducted during non-operating
                hours. The fuel necessary to operate vehicles is reduced since fueling
                takes place at customer locations. The administrative burden required
                to
                manage fuel programs and monitor vehicle utilization is also reduced.




·
            *Centralized
                Inventory Control and Management*.
                Our fuel management system provides fleet operators with a central
                management data source. Web-based comprehensive reports detail, among
                other things, the location, description, fuel type and daily and
                weekly
                fuel consumption of each vehicle or piece of equipment that we fuel.
                This
                eliminates customers’ need to invest working capital to carry fuel
                supplies and allows customers to centralize fuel inventory controls
                as
                well as track and analyze vehicle movements and fuel consumption
                for
                management and fuel tax reporting purposes. We are also able to service
                and manage fuel delivery to a customer’s on-site storage tank, and using
                our technology we can provide reports detailing fuel dispensed from
                the
                tank into each of the customer’s vehicles. Our system is specifically
                designed for use in commercial fueling and is certified for accuracy
                by
                The National Conference on Weights and
                Measures.




·
            *Tax
                Reporting Benefits*.
                Our fuel management system can track fuel consumption to specific
                vehicles
                and fuel tanks, providing tax reporting benefits to customers consuming
                fuel in uses that are tax-exempt, such as for off-road vehicles,
                government-owned vehicles and fuel used to operate refrigerator units
                on
                vehicles. For these uses, the customers receive reports that provide
                them
                with the information required to substantiate tax
                exemptions.




·
            *Elimination
                of Expenses and Liabilities of On-site Storage*.
                Fleet operators who previously satisfied their fuel requirements
                using
                on-site storage tanks can eliminate the capital and costs relating
                to
                installing, equipping and maintaining fuel storage and dispensing
                facilities, including the cost and price volatility associated with
                fuel
                inventories; complying with escalating environmental government
                regulations; and carrying increasingly expensive insurance. By removing
                on-site storage tanks and relying on commercial mobile fueling, customers
                are able to avoid potential liabilities related to both employees
                and
                equipment in connection with fuel storage and handling. Customers’
                expensive and inefficient use of business space and the diminution
                of
                property values associated with environmental concerns are also
                eliminated.




·
            *Lower
                Risk of Fuel Theft*.
                Fleet operators relying on employees to fuel vehicles, whether at
                on-site
                facilities or at retail stations, often experience shrinkage of fuel
                inventories or excess fuel purchases due to employee fraud. Our fuel
                management system prevents the risk of employee theft by dispensing
                fuel
                only to authorized vehicles. Utilizing our fueling services, rather
                than
                allowing employees to purchase fuel at local retail stations, also
                eliminates employee fraud due to credit card
                abuse.




3




·
            *Access
                to Emergency Fuel Supplies and Security*.
                Emergency preparedness, including fuel availability, is critical
                to the
                operation of governmental agencies, utilities, communication companies,
                delivery services and numerous other fleet operators. We provide
                access to
                emergency fuel supplies at times and locations chosen by our customers,
                allowing them to react more quickly and effectively to emergency
                situations, such as severe weather conditions and related disasters.
                Fueling by fleet operators at their own on-site storage facilities,
                and/or
                at retail and other third party locations may be limited due to power
                interruptions, supply outages or access and other natural limitations.
                In
                addition, since security concerns of fleet operators to terrorism,
                hijacking and sabotage are increasing, fueling vehicles at customers’
                facilities eliminates security risks to the fleet operators’ employees and
                equipment rather than fueling at retail service stations and other
                third
                party facilities.




**Packaging,
      Distribution and Sale of Lubricants, Other Petroleum Products and
      Chemicals**




We
      distribute and sell a wide array of petroleum-based lubricants, including
      products such as gear oil, engine oil, heavy-duty motor oil, hydraulic oil,
      transmission oil, specialty high temperature grease and synthetic lubricants,
      from our Texas facilities. Our operations include the repackaging of lubricants
      purchased in bulk quantities and the blending of lubricant products to meet
      specific customer requirements. We also distribute dry cleaning solvents and
      other chemicals.




**Transportation
      Logistics Services**




Some
      of
      our customers, particularly those engaged in the construction industry within
      Texas, require the movement of heavy equipment, such as bulldozers, cranes
      and
      road grading equipment. To meet this demand, we provide specialized
      transportation and logistics services utilizing a fleet of re-configurable
      tractor-trailer units to provide the delivery of specialized commodities,
      including heavy haul, over-size and/or over-weight machinery and equipment.
      These services are primarily supplied in Texas as well as in the Southeast
      and
      Southwest regions of the U.S.




**Emergency
      Response Services**




We
      provide fuel supply services to governmental agencies, utilities, communication
      companies, delivery services and other fleet and equipment operators when
      emergency situations, such as severe weather conditions and related disasters,
      create power interruptions, supply outages or access restrictions on our
      customers. We provide access to emergency fuel supplies at times and locations
      chosen by our customers, allowing them to react more quickly and effectively
      to
      emergency situations. In addition, our emergency generator services program
      provides customers with ongoing fuel testing, treatment, filtration and top-off
      services to ensure that generators and other emergency power supply systems
      are
      fully fueled and that the fuel is in optimal condition for use at the onset
      of
      power outages. We then provide emergency fuel supplies in a series of scheduled
      deliveries for the duration of power outages based on the consumption and
      utilization requirements of these generator systems.




***Operating
      Equipment***




We
      operate a fleet of over 200  specialized
      commercial vehicles, including fueling and lubricant tank wagons, tractor
      trailer fuel and lubricant transports, lubricant delivery box trucks, flatbed
      vehicles and special
      heavy haul tractor-trailer units. Our
      custom commercial mobile fueling trucks have fuel carrying capacities ranging
      from 2,800 to 4,500 gallons and are equipped with multi-compartmented tanks.
      The
      fuel we deliver is acquired daily at local third-party petroleum terminal
      storage facilities. Each truck typically services between five and fifteen
      customer locations per night or day, on specified delivery routes. The driver
      of
      each truck also fuels the customer vehicles.




4




We
      also own over 800 fuel and lubricant storage tanks with total capacity in excess
      of 1.7 million gallons. These tanks include bulk storage tanks located at our
      facilities and portable tanks used for the temporary storage and dispensing
      of
      fuels and lubricants at customer job sites. We
      also
      deliver portable storage tanks to the customer’s job-site or other locations;
      and reposition, re-supply and maintain them as required, on a scheduled or
      on an
      as needed basis .




***Marketing
      and Customers***




We
      identify and market to potential customers requiring petroleum related services
      and products within our established service areas. We also pursue the
      development of new markets by first evaluating the profitability of volume
      and
      margin commitments of any potential customers in those new areas. Our primary
      methods for developing new business are through direct marketing and referrals
      from existing customers as well as from our own personnel. We evaluate new
      customers on factors such as type and size of service required, proximity to
      existing markets, volume commitments, profitability margins and credit
      worthiness.




Our
      commercial mobile and bulk fueling and lubricant distribution customers are
      principally companies operating fleets of vehicles and equipment in a variety
      of
      industries including the trucking, manufacturing, construction, shipping, utility, energy, chemical,
      telecommunication and government services industries .
      We are
      usually the exclusive service provider for the fueling of a customer’s entire
      fleet or a particular location of vehicles and equipment. Our lubricant
      customers are primarily companies
      requiring large volumes of specialty industrial oils, motor and gear lubricants
      and greases that must adhere to rigid technical and performance specifications.
      In addition, we market and distribute solvents and specialty petroleum products
      to dry cleaners and industrial customers in Texas and certain other products,
      such as fire training chemicals, throughout the U.S.




During
      the years ended June 30, 2008 and 2007, approximately 8.1% and 6.7% of our
      revenues, excluding petroleum product taxes, were derived from fleet fueling
      services provided to the United States Postal Service, our largest customer.
      We
      (including predecessor companies affiliated with our founders) have provided
      fueling services to the United States Postal service for over 14 years pursuant
      to a series of contracts, including our recently renewed and expanded agreement
      expiring in 2010. Although we do have some length of service written contracts
      with a few of our larger customers, these types of agreements are not customary
      in the fuel and lubricant distribution industry, and therefore, we do not have
      written contracts with the majority of our customers. Most of our customers
      can
      terminate our services at any time and for any reason and, correspondingly,
      we
      can discontinue service to those customers at any time. We may also discontinue
      service to a customer if changes in service conditions or other factors cause
      us
      not to reach our minimum targeted levels of volumes and margins, and we are
      unable to negotiate a satisfactory arrangement with the customer to reach our
      minimum financial requirements.




The
      Company bills for its petroleum and other products and services once they are
      delivered.  All sales are final upon delivery.  Once billed, we
      collect from our customers generally in 30 to 45 days.





***Fuel
      and Lubricant Supply***




We
      purchase the fuel delivered to our customers from multiple suppliers at daily
      market prices and in certain cases we qualify for discounts. We monitor fuel
      prices and trends in each of our service markets daily seeking to purchase
      our
      supply at the lowest prices and under the most favorable terms. More recently,
      however, the unprecedented increases in petroleum and fuel prices have dampened
      the demand for the services and goods provided by most of the transportation,
      manufacturing, services and other industries that comprise the majority of
      our customer base and have raised the fuel running costs of our own
      delivery fleet. These higher fuel prices have substantially increased the amount
      of short term credit that we need to obtain to cover the time between our
      payment for fuel to the suppliers and our receipt of payment from our customers.
      Our higher demand for credit has led to limitations on the availability of
      supplier credit and has increased our borrowing costs. We mitigate commodity
      price risk by purchasing and delivering fuel supplies daily and by generally
      utilizing cost-plus pricing when billing customers.




5




We
      purchase the majority of our lubricants primarily pursuant to a long-term supply
      agreement with Chevron who also offers marketing and financing assistance to
      our
      customers. Lubricants are distributed and sold in bulk, prepackaged or
      repackaged by us to meet customer needs. We price lubricant products on a cost
      plus basis. Traditionally, lubricants inventory was not subject to as
      significant of a market price volatility as fuel products, however, due to
      escalating petroleum prices, the prices of lubricants have been
      impacted.




We
      purchase chemicals from several key suppliers. Products are delivered to our
      location to be redistributed to our customers via company owned equipment.
      Chemical sales are done in truckload quantities, or in containers ranging from
      5
      gallons to 55 gallons.




***Competition***




We
      compete with other distributors of fuels, lubricants and other petroleum
      products, including several large regional distributors and numerous small
      independent operators. Our mobile fueling operations also compete with retail
      marketing outlets such as retail stations and other third-party service
      locations. We believe that the primary competitive factors affecting our market
      include price, ability to meet complex and technical services needs,
      dependability, extended credit terms, service locations, and the ability to
      provide fuel-management tools.




We
      believe our principal competitive advantages include:




·
            ourpatented
                proprietary electronic fuel tracking control system;




·
            our
                reputation for timely, efficient and reliable delivery of products
                and
                services;




·
            our
                well trained drivers and support
                staff;




·
            our
                technical knowledge of our products and our customers’ needs;
                and




·
            our
                competitive pricing for products and services as a result of strong
                business relationships with our principal
                suppliers.




***Intellectual
      Property***




Our patented
      proprietary fuel tracking and management reporting system is widely used in
      our
      commercial mobile fueling operations. We own all patents covering the system,
      the rights to which are registered with the United States Patent and Trademark
      Office and expire in the year 2015, unless otherwise extended.




We
      currently have trademarks applications pending before the United States Patent
      and Trademark Office covering our trade name and logo. We rely upon a
      combination of trademark laws and non-disclosure and other contractual
      arrangements to protect our proprietary rights.




***Employees***




At
      June
      30, 2008 and 2007, we employed 280, and 284 employees, of which 267 and 269
      were
      full-time employees, respectively.




***Governmental
      Regulation***




Our
      operations are affected by numerous federal, state and local laws, regulations
      and ordinances, including those relating to protection of the environment and
      worker safety. Various federal, state and local agencies have broad powers
      under
      these laws, regulations and ordinances. In particular, the operation of our
      commercial fleet of vehicles is subject to extensive regulation by the U.S.
      Department of Transportation (“DOT”) under the Federal Motor Carrier Safety Act
      (“FMCSA”), and our transportation of diesel fuel and gasoline is further subject
      to the Hazardous Materials Transportation Act (“HMTA”). We are subject to
      regulatory and legislative changes that can affect the economics of the industry
      by requiring changes in operating practices or influencing the demand for,
      and
      the cost of providing, mobile fueling services. In addition, we depend on the
      supply of diesel fuel and gasoline from the oil and gas industry and are thereby
      affected by changing taxes, price controls and other laws and regulations
      generally relating to the oil and gas industry. Our future operations and
      earnings may be affected by new legislation, new regulations or changes in
      existing regulations.




6




The
      technical requirements of laws and regulations are becoming increasingly
      expensive, complex and stringent. These laws may impose penalties or sanctions
      for damages to natural resources or threats to public health and safety.
      Changing laws and regulations may also expose us to liability for the conduct
      of
      or conditions caused by others, or for acts of which we were in compliance
      with
      all applicable laws at the time such acts were performed. Sanctions for
      noncompliance may include revocation of permits, corrective action orders,
      administrative or civil penalties and criminal prosecution. Certain
      environmental laws provide for joint and several liabilities for remediation
      of
      spills and releases of hazardous substances. In addition, we may be subject
      to
      claims alleging personal injury or property damage as a result of alleged
      exposure to hazardous substances, as well as damage to natural
      resources.




There
      can
      be no assurance that we will be able to comply with existing and future
      regulatory requirements without incurring substantial costs or otherwise
      adversely affecting our operations.




***Available
      Information***




More
      information about the Company can be found at our website,
www.mobilefueling.com. Our annual report on Form 10-K, quarterly reports
      on Form 10-Q, current reports on Form 8-K and any amendments to those reports
      filed with the Securities Exchange Commission (“SEC”) pursuant to Section 13(a)
      of the Securities Exchange Act of 1934 are available on the “Investor Relations”
section of our website promptly after we file the reports with the SEC. Also
      available on our website is our Code of Business Conduct. Upon request, all
      of
      these documents are available in print without charge to our shareholders.
      Information on our website is not incorporated by reference in, and is not
      a
      part of, this report on Form 10-K.




All
      of
      our filings with the SEC may be reviewed at the SEC’s website, www.sec.gov .
      They
      may also be read and copied at the SEC’s Public Reference Room at 100 F Street,
      N.E., Room 1580, Washington, DC 20549.




**Item
      1A. Risk Factors**




We
      are
      affected by a wide range of risk factors that could materially affect our
      business, results of operations and financial condition, and could therefore
      cause operating results to differ materially from those expressed in any
      forward-looking statements made by or on behalf of us elsewhere in this report.
      In addition, investors in our common stock and other securities also bear
      certain risks relating to those securities and the trading market for our common
      stock. Below are some of the material factors and risks that could affect our
      results of operations or the value of our securities:





***No
      Assurance of Future Profitability; Losses from Operations; Need for Capital.*** We
      incurred net losses in each of the fiscal years ended June 30, 2008 and 2007.
      In
      order to generate profits in the future, we need to reduce interest expense,
      increase the volume of products and services sold at profitable margins, control
      costs and generate sufficient cash flow to support our working capital and
      debt
      service requirements. There is no assurance that we will be able to avoid net
      losses in the future or that we will be able to raise additional capital on
      acceptable terms if our capital needs cannot be satisfied by cash flow from
      operations. During fiscal 2008, we faced a number of challenges that required
      us
      to raise additional capital, including increased need for supplier credit in
      the
      face of historic increases in fuel prices, a general tightening of the credit
      markets and the need to meet Nasdaq requirements. In the future, we may need
      to
      raise additional capital to fund new acquisitions, the expansion or
      diversification of existing operations or additional debt repayment. While
      we
      believe that we will be able to obtain needed capital, there can be no assurance
      that we will do so or that it can be obtained on terms acceptable to us.




7





***Growth
      Dependent Upon Future Expansion; Risks Associated With Expansion into New
      Markets.*** While
      we
      intend to continue to expand through acquisitions, our growth will also depend
      upon the ability to achieve greater penetration in existing markets and to
      successfully enter new markets in both additional major and secondary
      metropolitan areas. Such organic expansion will largely be dependent on our
      ability to demonstrate the benefits of our services and products to potential
      new customers, successfully establish and operate new locations, hire, train
      and
      retain qualified management, operating, marketing and sales personnel, finance
      acquisitions, capital expenditures and working capital requirements, secure
      reliable sources of product supply on a timely basis and on commercially
      acceptable credit terms, and successfully manage growth by effectively
      supervising operations, controlling costs and maintaining appropriate quality
      controls. There can be no assurance that we will be able to successfully expand
      our operations into new markets.





***Interest
      Expense.*** A
      substantial portion of our net losses for the years ended June 30, 2008
      and 2007 are attributable to the substantial interest burden borne by the
      Company, including $3.06 million of interest in fiscal 2008 and $3.73 million
      in
      2007, compared to net losses of $6.77 million and $6.59 million, respectively,
      for those years. The majority of this interest is attributable to interest
      on
      our revolving bank debt and our August 2007 senior subordinated secured debt.
      If
      and to the extent that interest rates generally increase or we are otherwise
      required to bear higher interest rates for our future borrowings, our interest
      expense could increase, adversely affecting our results of operations and
      financial condition. Similarly, if we make one or more acquisitions or if we
      incur additional net losses in the future and are required to borrow funds
      to
      fund those acquisitions or offset those losses, the interest on the higher
      level
      of debt could have a detrimental effect on our results of operations and
      financial condition. Additionally, we are exposed to fluctuating interest rates
      associated with our line of credit.





***Effect
      of Preferred Stock Issuance.*** On
      February 29, 2008, we issued 4,587 shares of our Series A Convertible Preferred
      Stock for approximately $2.5 million in cash and debt and on March 12, 2008,
      we
      issued 1,985 shares of our Series B Convertible Preferred Stock for
      approximately $1.8 million in debt. On August 15, 2008, we issued, 229 shares
      of
      Series C Convertible Preferred Stock for $149,000. Each share of Preferred
      Stock
      is convertible into 1,000 shares of our common stock. Because the quarterly
      dividends on the Preferred Stock were originally payable at eighteen percent
      (18%) per annum of the aggregate issue price of $4.4 million,
      initially dividends at 18% per annum would be $795,000 per year in
      dividends on the Preferred Stock, some of which would be reduced
      interest obligations on outstanding debt securities that were converted to
      Preferred Stock. While the dividend rate will be reduced to 12% per annum two
      weeks after notification to the Series A and Series B Preferred stockholders,
      and the aggregate annual dividend obligation to $530,000, because of our
      achievement of positive Earnings Before Interest, Taxes, Depreciation and
      Amortization  for
      the
      past two consecutive fiscal quarters, the burden of paying even these lower
      dividends may, together with the interest and other debt service expenses on
      our
      revolving bank debt and our August 2007 senior subordinated secured debt, limit
      the amount of capital available to the Company and our ability to finance
      acquisitions and otherwise expand our operations. While we can require
      conversion of the preferred stock into common stock under certain limited
      circumstances, we can not predict when those circumstances will
      arise.





***Acquisition
      Availability; Integrating Acquisitions.***  Our
      future growth strategy involves the acquisition of complementary businesses,
      such as wholesale fuel or petroleum lubricants marketers and distributors,
      wholesale fuel and other commercial mobile fueling companies, and transportation
      logistics services businesses. It is not certain that we will be able to
      identify or make suitable acquisitions on acceptable terms or that any future
      acquisitions will be effectively and profitably integrated into our operations.
      Acquisitions involve numerous risks that could adversely affect our operating
      results, including timely and cost effective integration of the operations
      and
      personnel of the acquired business, potential write downs of acquired assets,
      retention of key personnel of the acquired business, potential disruption of
      existing business, maintenance of uniform standards, controls, procedures and
      policies, additional capital needs, the effect of changes in management on
      existing business relationships, and profitability and cash flows
      generally.




8





***Nasdaq
      Listing of Our Common Stock.*** Our
      common stock currently trades on the Nasdaq Capital Market under the symbol
      FUEL. While we consider the listing on Nasdaq to be a valuable attribute of
      our
      common stock and other securities, there can be no assurance that such listing
      will continue. During Fiscal 2008, our listing on Nasdaq came into question
      on
      two different grounds. On February 19, 2008, we received a letter from Nasdaq
      stating that we did not comply with the requirement of Nasdaq Marketplace Rule
      4310(c)(3) requiring listed companies to have $2,500,000 in stockholders'
      equity. In response, on February 29, 2008, we issued 4,587 shares of Series
      A
      Convertible Preferred Stock for approximately $2.52 million in cash and debt
      and
      on March 12, 2008, we issued 1,985 shares of our Series B Convertible Preferred
      Stock for approximately $1.8 million in debt. These transactions increased
      our
      stockholders’ equity by approximately $4.2 million, permitting us to regain
      compliance with Rule 4310(c)(3). There is no assurance, however, that such
      compliance will continue indefinitely since any future net operating losses
      will
      reduce our stockholders’ equity and could cause us to again be in violation of
      Rule 4310(c)(3).




In
      addition, on December 28, 2007, we received notice from Nasdaq that, because
      the
      bid price of our common stock had closed below the minimum $1.00 per share
      requirement of Marketplace Rule 4310(c) for 30 consecutive business days,
      compliance with the $1.00 bid price requirement was required by June 25, 2008.
      When the bid price stayed below the minimum after that date, we filed an appeal
      to a Nasdaq Listing Qualifications Panel to prevent a delisting of our common
      stock. The hearing on the Company’s appeal was held on August 14, 2008. At
      the hearing, we asked the Panel for a temporary exception to the minimum bid
      price requirement to us time to complete a reverse stock split that would reduce
      the number of shares outstanding and, correspondingly, increase the stock price.
      On September 11, 2008, the Panel granted the extension of time until December
      23, 2008. Under the terms of the extension, the Company must have a closing
      bid
      price of $1.00 or more for a minimum of ten prior consecutive trading days
      on or
      before December 23, 2008, and must otherwise maintain compliance with all other
      applicable Nasdaq listing standards. Moreover, while we expect that the reverse
      stock split, once in effect, would increase the trading price of the common
      stock above the $1.00 minimum bid price, there can be no assurance that the
      market price per post-split share will either exceed or remain in excess of
      the
      minimum for the sustained period of time necessary to ensure long term
      compliance with Nasdaq rules.




***Effects
      of Nasdaq Delisting.*** If
      our
      common stock is delisted from Nasdaq, we believe that it would trade in the
      over-the-counter market on the OTC Bulletin Board (the “OTCBB”), which was
      established for trading the securities of reporting companies that do not meet
      the Nasdaq listing requirements. Because the OTCBB is generally considered
      less
      efficient than Nasdaq, it could be more difficult for an existing shareholder
      to
      sell shares of our common stock after a delisting from Nasdaq. On the OTCBB,
      trading volumes are typically lower, reporting of transactions can be delayed,
      and coverage of the Company by securities analysts and news media, which is
      already limited, may be reduced. In turn, these factors could result in lower
      prices for our common stock or larger “spreads” between the “bid” and “ask”
prices quoted by market makers for shares of the Common Stock, either of which
      could reduce the prices available for sales of our common stock by existing
      shareholders.




Delisting
      from Nasdaq could also impair the Company’s ability to raise additional capital
      through equity or debt financing since Nasdaq listed securities are typically
      viewed as more liquid than securities that are not traded on a national
      securities exchange. In addition, if delisting does cause lower prices for
      our
      common stock, it could then cause an increase in the ownership dilution to
      shareholders when the Company issues equity securities in financing or other
      transactions. The price at which we issue shares in such transactions is
      generally based on or related to the market price of our common stock, so a
      decline in the market price could result in the need for us to issue a greater
      number of shares to raise a given amount of funding or to acquire a given dollar
      value of goods or services.




In
      addition, if our common stock is not listed on Nasdaq, we may become subject
      to
      Rule 15g-9 under the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”) because our common stock may be classified as a “penny stock”
under Exchange Act Rule 3a51-1. That rule imposes additional sales practice
      requirements on broker-dealers who sell low-priced securities to persons other
      than established customers and institutional accredited investors. For
      transactions covered by this rule, a broker-dealer must make a special
      suitability determination for the purchaser and have received the purchaser’s
      written consent to the transaction prior to sale. Consequently, the rule may
      affect the ability of broker-dealers to sell our common stock and may impair
      the
      ability of our shareholders to sell their common stock in the secondary market.
      Moreover, investors may be less interested in purchasing low-priced securities
      because the brokerage commissions, as a percentage of the total transaction
      value, tend to be higher for such securities. Also, institutional investors
      will
      usually not invest in low-priced securities (other than those which focus on
      small-capitalization companies or low-priced securities). For these reasons,
      a
      classification of our common stock as a “penny stock” under Rule 3a51-1 would
      probably adversely affect the liquidity and the value of that stock.




9




Finally,
      if our common stock was no longer listed on Nasdaq or any other national
      securities exchange, we could no longer use the SEC’s short form registration
      forms, such as Form S-3, to register shares of our common stock under the
      Securities Act of 1933 but would have to instead use the longer registration
      forms, such as Form S-1. While the negative impact of long form registration
      has
      been reduced by recent SEC rule changes permitting most purchasers of stock
      in
      unregistered offering to freely resell their securities six months after the
      purchase under Rule 144, long form registration would probably require more
      time, effort and expense, and may in turn limit the value of our common stock




***Price
      Depreciation After Reverse Stock Split.*** The long
      term efficacy of a reverse stock split in maintaining compliance with Nasdaq’s
      minimum bid price requirement is uncertain. While the short-term result of
      a
      reverse stock split can be reasonably predicted, the long-term consequences
      are
      more difficult to confirm. The price of our common stock is likely to be
      affected by our performance and by general market and economic conditions that
      cannot be predicted or evaluated by the Board of Directors at this time.
      Accordingly, even if the reverse stock split is successful in reestablishing
      compliance with Nasdaq’s minimum bid price requirement and we meet the
      stockholders’ equity and other requirements needed to maintain our Nasdaq
      listing, there is no assurance that the aggregate market value of our common
      stock will be greater after a reverse stock split than it would have been
      without ever effecting a reverse stock split.





***Volatility
      of Trading Market for Our Stock.*** During
      the past few years, our stock has sometimes traded in large daily volumes and
      other times at much lower volumes, in many cases at wide price variances. This
      volatility, which could make it difficult for shareholders to sell shares at
      a
      predictable price or at specific times, is generally due to factors beyond
      our
      control. Quarterly and annual operating results, changes in general conditions
      in the economy, the financial markets or other developments affecting us could
      also cause the market price of our common stock to fluctuate. The market price
      of our common stock may be affected by various other factors unrelated to the
      number of shares outstanding after the reverse stock split, including our future
      performance and general market conditions.





***Need
      to Maintain Effective Internal Controls.*** In
      fiscal
      2006, our management identified significant deficiencies related to policies
      and
      procedures to ensure accurate and reliable interim and annual consolidated
      financial statements that, considered together, constituted a material weakness
      in our internal controls. Even though we have taken the necessary steps to
      correct the identified material weakness and have not identified any material
      weakness for fiscal 2008, it is possible that, considering our size, our limited
      capital resources and our need to continue to expand our business by
      acquisitions and diversification, we may identify another material weakness
      in
      our internal controls in the future. Moreover, even if we do not identify any
      material weakness or significant deficiencies, our internal controls may not
      prevent all potential errors or fraud because any control system, no matter
      how
      well designed, cannot provide absolute assurance that the objectives of the
      control system will be achieved.





***Dependence
      on Key Personnel*** *.* Our
      future success will be largely dependent on the continued services and
      efforts of Richard E. Gathright, our Chief Executive Officer and President,
      and
      on those of other key executive personnel. The loss of the services of Mr.
      Gathright or other executive personnel could have a material adverse effect
      on
      our business and prospects. Our success and plans for future growth will also
      depend on our ability to attract and retain additional qualified management,
      operating, marketing, sales and financial personnel. There can be no assurance
      that we will be able to hire or retain such personnel on terms satisfactory
      to
      us. We have entered into written employment agreements with Mr. Gathright and
      certain other key executive personnel. While Mr. Gathright’s employment
      agreement provides for automatic one-year extensions unless either party gives
      notice of intent not to renew prior to such extension, there is no assurance
      that Mr. Gathright’s services or those of our other executive personnel will
      continue to be available to us.





***Fuel
      Pricing and Supply Availability; Effect on
      Profitability*** *.* Diesel
      fuel and gasoline are commodities that are refined and distributed by numerous
      sources. We purchase the fuel delivered to our customers from multiple suppliers
      at daily market prices and in some cases qualify for certain discounts. We
      monitor fuel prices and trends in each of our service markets on a daily basis
      and seek to purchase our supply at the lowest prices and under the most
      favorable terms. Commodity price risk is generally mitigated since we purchase
      and deliver our fuel supply daily and generally utilize cost-plus pricing when
      billing our customers. If we cannot continue to utilize cost-plus pricing when
      billing our customers, margins would likely decrease and losses could increase.
      We have not engaged in derivatives or futures trading to hedge fuel price
      movements. In addition, diesel fuel and gasoline may be subject to supply
      interruption due to a number of factors, including natural disasters, refinery
      and/or pipeline outages and labor disruptions. Limitations on the amount of
      credit available from suppliers has become a more significant issue for us
      in
      light of the dramatic increases in the price of fuel and other petroleum
      products over the past year. As a result, increasing the availability of short
      term credit for fuel purchases has been one of the principal motivations for
      raising new capital since the historic price escalation began in late 2007.
      Irrespective of the reason, any reduction of the availability of fuel supplies
      could impact our ability to provide mobile fueling, commercial bulk fueling,
      and
      emergency response services and impact profitability.




10





***Risks
      Associated with Customer Concentration; Absence of Written Agreements.*** Although
      we provide services to many customers, a significant portion of our revenue
      is
      generated from a few of our larger customers. Sales to our largest customer,
      the
      United States Postal Service, represents 8.1% of our total revenue in fiscal
      2008. While we have formal, length of service written contracts with some of
      these larger customers, such agreements are not customary and we do not have
      them with the majority of our customers. As a result, most of our customers
      can
      terminate our services at any time and for any reason, and we can similarly
      discontinue service to those customers. We may also discontinue service to
      a
      customer if changes in the service conditions or other factors cause us not
      to
      meet our minimum level of margins and rates, and the pricing or delivery
      arrangements cannot be re-negotiated. As a result of this customer concentration
      and the absence of written agreements, our business, results of operations
      and
      financial condition could be materially adversely affected if one or more of
      our
      larger customers were lost or if we were to experience a high rate of service
      terminations of our other customers.





***Effect
      of Reduced Fuel Usage.*** **** The
      dramatic increases in fuel prices over the past year have caused businesses,
      including many of our customers, to take steps to reduce the amount of fuel
      that
      they consume in their operations by driving fewer miles or, in some case, using
      higher mileage or alternative fuel vehicles. In turn, these reductions have
      reduced the volumes delivered by us to those customers. If higher prices
      persist, it is likely that these and other customers’ fuel usage will continue
      to decline, requiring us to obtain additional customers to replace the lost
      volume. If we cannot replace the lost volume with new customers, our revenues
      and results of operation will be negatively affected.





***Management
      of Growth; Accounting and Information Technology Systems Implementation.*** Our
      future growth strategy requires effective operational, financial and other
      internal systems, and the ability to attract, train, motivate, manage and retain
      our employees. If we are unable to manage growth effectively, results of
      operations will be adversely affected. In particular, our results of operations
      will be influenced by the redesign and implementation of our accounting and
      information technology systems. While in the short run, the costs of that
      redesign and implementation have increased our expenses and adversely affected
      our results of operations, we expect that, with the implementation completed,
      it
      will help reduce operating costs and improve our ability to effectively manage
      our business and integrate acquisitions. There can be no assurance, however,
      that such redesign and implementation will be completed as planned, or that
      it
      will have the intended results.





***Competition.*** We
      compete with other service providers, including several large regional providers
      and numerous small, local independent operators, who provide some or all of
      the
      same services that we offer to our customers. In the mobile fueling area, we
      also compete with retail fuel marketing, since fleet operators have the option
      of fueling their own equipment at retail stations and at other third-party
      service locations such as card lock facilities. Our ability to compete is
      affected by numerous factors, including price, the complexity and technical
      nature of the services required, delivery dependability, credit terms, the
      costs
      incurred for non-mobile fueling alternatives, service locations as well as
      the
      type of reporting and invoicing services provided. There can be no assurance
      that we will be able to continue to compete successfully as a result of these
      or
      other factors.




11





***Operating
      Risks May Not Be Covered by Insurance.*** Our
      operations are subject to the operating hazards and risks normally incidental
      to
      handling, storing and transporting diesel fuel and gasoline, which are
      classified as hazardous materials. We maintain insurance policies in amounts
      and
      with coverages and deductibles that we believe are reasonable and prudent.
      There
      can be no assurance, however, that our insurance will be adequate to protect
      us
      from liabilities and expenses that may arise from claims for personal and
      property damage arising in the ordinary course of business, including business
      interruption; that we will be able to maintain acceptable levels of insurance;
      or that insurance will be available at economical prices.




***Governmental
      Regulation.*** Numerous
      federal, state and local laws, regulations and ordinances, including those
      relating to protection of the environment and worker safety, affect our
      operations. There can be no assurance that we will be able to continue to comply
      with existing and future regulatory requirements without incurring substantial
      costs or otherwise adversely affecting our operations.




***Changes
      in Environmental Requirements*** *.* We
      expect
      to generate future business by converting certain fleet operators, currently
      utilizing underground fuel storage tanks for their fueling needs, to commercial
      mobile fueling. The owners of underground storage tanks have been required
      to
      remove or retrofit those tanks to comply with technical regulatory requirements
      pertaining to their construction and operation. If other more economical means
      of compliance are developed or adopted by owners of underground storage tanks,
      the opportunity to market our services to these owners may be adversely
      affected.




***Terrorism
      and Warfare in the Middle East May Adversely Affect the Economy and the Price
      and Availability of Petroleum Products.*** Terrorist
      attacks, as well as the continuing political unrest and warfare in the Middle
      East, may adversely impact the price and availability of fuel, our results
      of
      operations, our ability to raise capital and our future growth. The impact
      of
      terrorism on the oil industry in general, and on us in particular, is not known
      at this time. An act of terror could result in disruptions of crude oil or
      natural gas supplies and markets, the sources of our products, and our
      infrastructure facilities or our suppliers could be direct or indirect targets.
      Terrorist activity may also hinder our ability to transport fuel if the means
      of
      supply transportation, such as rail or pipelines, become damaged as a result
      of
      an attack. A lower level of economic activity following a terrorist attack
      could
      result in a decline in energy consumption, which could adversely affect our
      revenues or restrict our future growth. Instability in the financial markets
      as
      a result of terrorism could also impair our ability to raise capital. Terrorist
      activity or further instability in the Middle East could also lead to increased
      volatility in fuel prices, which could adversely affect our business generally.





**Item
      1B. Unresolved Staff Comments**





Not
      applicable.




12


**Item
      2. Properties**





Our
      corporate headquarters are located in 20,400 square feet of leased office space
      in Fort Lauderdale, Florida. Our lease for this facility expires on July 31,
      2013.





In
      addition, we own truck yard and office space in Tampa, Florida. We also lease
      truck yard and office space for 14 locations specified below, primarily under
      1
      to 5 year leases which include lease renewal options. We believe that our
      facilities are adequate for our current needs.





**Location**
            
            **Lease
                Expiration**Bloomington,
                California
            
            7/15/2010Gardena,
                California
            
            7/15/2009Jacksonville,
                Florida
            
            8/31/2015Orlando,
                Florida
            
            11/1/2009Port
                Everglades, Florida
            
            5/31/2009Doraville,
                Georgia
            
            12/31/2008Gonzales,
                LA
            
            9/30/2009Freeport,
                Texas
            
            9/30/2010Ft.
                Worth, Texas
            
            12/31/2008Houston,
                Texas
            
            9/30/2010Lufkin,
                Texas
            
            9/30/2010Selma,
                Texas
            
            12/31/2013Temple,
                Texas
            
            12/31/2008Waxahachie,
                Texas
            
            9/30/2010




**Item
      3.  Legal Proceedings**




The
      Company and its subsidiaries are from time to time parties to legal proceedings,
      lawsuits and other claims incident to their business activities. Such matters
      may include, among other things, assertions of contract breach, claims for
      indemnity arising in the course of the business and claims by persons whose
      employment with us has been terminated. Such matters are subject to many
      uncertainties, and outcomes are not predictable with assurance. Consequently,
      management is unable to ascertain the ultimate aggregate amount of monetary
      liability, amounts which may be covered by insurance or recoverable from third
      parties, or the financial impact with respect to these matters as of June 30,
      2008. However, based on management’s knowledge at the time of this filing,
      management believes that the final resolution of such matters pending at the
      time of this report, individually and in the aggregate, will not have a material
      adverse effect upon the Company’s consolidated financial position, results of
      operations or cash flows.




13


On
      October 10, 2006, the Company commenced a civil action in Broward County,
      Florida Circuit Court against Financial Accounting Solutions Group, Inc.
      (“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
      officer, director, shareholder and control person of FAS and KPS (“Kramer”),
      alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
      Company to engage FAS to provide services with respect to (a) the implementation
      of certain Information Technology (“IT”) functions; (b) the modernization and
      expansion of the Company’s accounting and business technology capabilities, and
      (c) compliance with public company accounting requirements and the
      Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
      concerning the experience, capabilities and background of FAS and FAS’
personnel. FAS subsequently filed a countersuit in the same court seeking
      payment of additional fees allegedly due from the Company. The court is jointly
      administering the countersuit with the Company’s action. On January 25, 2007,
      the Company filed an amended complaint in its lawsuit by which Alex Zaldivar,
      the managing director and a principal of FAS, was added as an additional
      Defendant. In the amended complaint, the Company also made new claims for
      accounting malpractice, negligent training and supervision, and breach of
      fiduciary duty against the Defendants. The case is currently in the discovery
      stage.





The
      amount of damages recoverable from the Defendants in this action will depend
      on
      a number of factors, including but not limited to the costs incurred by the
      Company in completing the IT Projects, the amount of consequential damages
      suffered by the Company as a result of the delays and poor performance by FAS
      in
      implementing the IT projects, potential counterclaims or countersuit by FAS
      for
      amounts billed to the Company which the Company has refused to pay, and the
      assessment by the Company, based on input from the new vendor engaged by the
      Company to replace FAS, of the estimated costs to complete the IT Projects.
      The
      Company believes that, based on all available information, the likelihood of
      FAS
      prevailing in any litigation against the Company is remote and the chance of
      recovery by FAS against the Company is slight.




**Item
      4.  Submission of Matters to a Vote of Security
      Holders**




No
      matters were submitted to a vote of the security holders, through the
      solicitation of proxies or otherwise, during the fourth quarter of fiscal year
      2008.




14




**PART
      II**




**Item
      5.  Market for Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities**




SMF
      Energy Corporation’s common stock, par value $.01 (“common stock”) has traded in
      the National Association of Securities Dealers Automated Quotation System
      (“NASDAQ”) Market under the symbol “FUEL”, since December 11, 1996, the
      date of the Company’s initial public offering. The following table sets forth,
      for the periods indicated, the high and low prices for the common stock, as
      reported by NASDAQ.




**Common
                Stock****High**
            
            **Low****Year
                Ended June 30, 2008**1st
                quarter
            
            $
            1.62
            
            $
            1.202nd
                quarter
            
            $
            1.36
            
            $
            0.623rd
                quarter
            
            $
            1.03
            
            $
            0.404th
                quarter
            
            $
            1.03
            
            $
            0.53**Year
                Ended June 30, 2007**1st
                quarter
            
            $
            3.42
            
            $
            1.902nd
                quarter
            
            $
            1.90
            
            $
            1.353rd
                quarter
            
            $
            1.83
            
            $
            1.464th
                quarter
            
            $
            2.07
            
            $
            1.47





On
      June
      30, 2008, the closing price of the common stock was $0.60 per share. As of
      September 5, 2008 there were 71 holders of record of our common stock and over
      1,000 beneficial owners of our common stock.




**Dividends**




We
      have
      never declared or paid any dividends on our common stock. The payment of
      dividends on our common stock, if any, is within the discretion of the Board
      of
      Directors and will depend upon our earnings, our capital requirements and
      financial condition and other relevant factors. The Board of Directors does
      not
      intend to declare dividends in the foreseeable future and intends to retain
      any
      future earnings for use in our business operations.




Dividends
      on Series A and Series B Preferred Stock are paid when and if declared by the
      Board of Directors but only out of funds that are legally available each quarter
      at the rate of eighteen percent (18%) per annum of the sum of the originally
      issue price per share. Once the Company achieves positive Earnings Before
      Interest, Taxes and Amortization (“EBITDA”) for two consecutive quarters, which
      it did as of the quarter ended June 30, 2008, the dividend rate will
      decrease to 12% per annum effective two weeks after notice of such change is
      transmitted to the holders of the Series A and Series B Preferred Stock. The
      Company will notify the holders of the Preferred Stock immediately after the
      filing of this Form 10-K.




During
      fiscal 2008, the Company declared cumulative dividends from the original date
      of
      issuance until June 30, 2008 of $152,000 and $97,000 per share on the
      outstanding Series A and Series B Preferred Stock, respectively.




**Equity
      Compensation Plan Information**




The
      Company’s equity compensation plan information required by this item is
      incorporated by reference from our Definitive Proxy Statement in connection
      with
      our 2008 Annual Meeting of Stockholders to be filed with the Commission pursuant
      to Regulation 14A no later than 120 days after the end of the fiscal
      year covered by this report.




15




**Issuer
      Purchases of Equity Securities**




None.




**Item
      6.  Selected Financial Data**




The
      following table summarizes our selected historical financial information for
      each of the last five fiscal years. The information presented below has been
      derived from our audited consolidated financial statements. This table should
      be
      read in conjunction with such Consolidated Financial Statements and related
      notes and with “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” included in Item 7 of this Form 10K.




16


*(in
      thousands, except net margin per gallon and per share data)*





**Year
                  Ended June 30,****2008
                  (4)**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004
                  (4)*****Selected
                  Income Statement Data:***Total
                  revenue
              
              $
              260,689
              
              $
              229,769
              
              $
              248,699
              
              $
              133,563
              
              $
              89,110Gross
                  profit
              
              $
              12,912
              
              $
              12,631
              
              $
              12,409
              
              $
              6,588
              
              $
              4,298Selling,
                  general and administrative expense
              
              $
              14,881
              
              $
              15,836
              
              $
              13,262
              
              $
              6,145
              
              $
              4,394Operating
                  (loss) income
              
              $
              (1,969
              )
              $
              (3,205
              )
              $
              (853
              )
              $
              443
              
              $
              661Interest
                  expense and other income, net
              
              $
              3,051
              
              $
              3,384
              
              $
              4,025
              
              $
              1,903
              
              $
              1,361Loss
                  on extinguishment of promissory notes (6)
              
              $
              1,749
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  loss
              
              $
              (6,769
              )
              $
              (6,589
              )
              $
              (4,878
              )
              $
              (1,460
              )
              $
              (698
              )***Share
                  Data:***Net
                  loss
              
              $
              (6,769
              )
              $
              (6,589
              )
              $
              (4,878
              )
              $
              (1,460
              )
              $
              (698
              )Less:
                  Preferred stock dividends
              
              
              (249
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss attributable to common shareholders
              
              $
              (7,018
              )
              $
              (6,589
              )
              $
              (4,878
              )
              $
              (1,460
              )
              $
              (698
              )Basic
                        and diluted net loss per share attributable to common
                        shareholders
              
              $
              (0.49
              )
              $
              (0.57
              )
              $
              (0.50
              )
              $
              (0.19
              )
              $
              (0.10
              )Basic
                        and diluted weighted average common shares outstanding
              
              
              14,467
              
              
              11,509
              
              
              9,819
              
              
              7,857
              
              
              7,261
  **As
                    of June 30,****2008**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004**
 ***Selected
                  Balance Sheet Data:***Cash
                  and cash equivalents
              
              $
              48
              
              $
              987
              
              $
              4,103
              
              $
              4,108
              
              $
              2,708Accounts
                  receivable, net
              
              $
              30,169
              
              $
              25,442
              
              $
              24,345
              
              $
              14,129
              
              $
              8,280Restricted
                  cash
              
              $
              69
              
              $
              1,145
              
              $
              -
              
              $
              -
              
              $
              -Line
                  of credit payable
              
              $
              19,789
              
              $
              17,297
              
              $
              15,612
              
              $
              4,801
              
              $
              4,919Long-term
                  debt (including current portion)
              
              $
              8,794
              
              $
              10,250
              
              $
              13,136
              
              $
              11,141
              
              $
              5,558Shareholders’
                  equity
              
              $
              3,052
              
              $
              4,114
              
              $
              5,540
              
              $
              6,838
              
              $
              5,348Total
                  Assets
              
              $
              46,984
              
              $
              43,925
              
              $
              48,114
              
              $
              30,125
              
              $
              20,018***Financial
                  and Statistical Information:***EBITDA
                  (1)
              
              $
              1,240
              
              $
              252
              
              $
              1,781
              
              $
              2,278
              
              $
              1,983Net
                  Margin (2)
              
              $
              14,354
              
              $
              14,333
              
              $
              14,076
              
              $
              8,055
              
              $
              5,428Net
                  Margin per gallon (in dollars) (3)
              
              $
              0.194
              
              $
              0.169
              
              $
              0.149
              
              $
              0.121
              
              $
              0.099Total
                  Gallons
              
              
              73,871
              
              
              84,899
              
              
              94,261
              
              
              66,427
              
              
              54,594
  **Year
                  Ended June 30,****2008
                  (4)**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004
                  (4)**
 ***Non-GAAP
                  Measure Reconciliation, EBITDA
                  Calculation:***Net
                  loss
              
              $
              (6,769
              )
              $
              (6,589
              )
              $
              (4,878
              )
              $
              (1,460
              )
              $
              (698
              )Add
                  back:Interest
                  expense (5)
              
              
              3,060
              
              
              3,727
              
              
              4,025
              
              
              1,903
              
              
              1,361Depreciation
                  and amortization expense:Within
                  cost of sales and SG&A
              
              
              2,696
              
              
              2,623
              
              
              2,123
              
              
              1,835
              
              
              1,320Amortization
                  of stock compensation expense
              
              
              504
              
              
              491
              
              
              511
              
              
              -
              
              
              -Loss
                  on extinguishment of promissory notes (6)
              
              
              1,749
              
              
              -
              
              
              -
              
              
              -
              
              
              -Subtotal
              
              
              8,009
              
              
              6,841
              
              
              6,659
              
              
              3,738
              
              
              2,681EBITDA
              
              $
              1,240
              
              $
              252
              
              $
              1,781
              
              $
              2,278
              
              $
              1,983




17




(1)
            EBITDAis
                earnings before interest, taxes, depreciation and, amortization expense,a
                non-GAAP financial measure within the meaning of Regulation G promulgated
                by the Securities and Exchange Commission. To the extent that loss
                on
                extinguishment of promissory notes constitutes the recognition of
                previously deferred interest, it is considered interest expense for
                the
                calculation of certain interest expense amounts.


(2)
            Net
                margin = Gross profit plus cost of sales
                depreciation


(3)
            Net
                margin per gallon = Net margin divided by total gallons
                sold


(4)
            Net
                loss and EBITDA for the year ended June 30, 2004, included a $757,000
                gainon
                extinguishment of debt. Net loss and EBITDA for the year ended June
                30,
                2008, included a $1.7 million loss on extinguishment of promissory
                notes.


(5)
            The
                year ended June 30, 2006 included $472,000 in interest expense to
                write-off debt discounts and deferred debt costs and a prepayment
                penalty
                related to the warrants issued on June 30, 2006, to convert a portion
                of
                the August 2003, January 2005, and September 2005 Notes.


(6)
            The
                year ended June 30, 2008 included $1.7 million as loss on extinguishment
                of promissory notes to write-off debt discounts and deferred debt
                costs, a
                prepayment penalty and a gain on extinguishment related to the August
                2007
                refinancing of debt and the exchange of the November 2007 note and
                a
                portion of the August 2007 note into Series A and Series B Preferred
                Stock.To
                the extent that loss on extinguishment of promissory notes constitutes
                the recognition of previously deferred interest, it is considered
                interest expense for the calculation of EBITDA and certain interest
                expense amounts.




**Item
      7.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations**




The
      following discussion of our financial condition, results of operations,
      liquidity and capital resources should be read in conjunction with our audited
      consolidated financial statements and related notes included in Part III of
      this
      Form 10-K, commencing on page F-1.




**FORWARD
      LOOKING STATEMENTS**




This
      report, including but not limited to this Item 7 and the footnotes to the
      financial statements in Section F, contains “forward looking statements”
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”). These statements concern expectations, beliefs,
      projections, future plans and strategies, anticipated events or trends and
      similar expressions concerning matters that are not historical facts. Statements
      preceded by, followed by, or that include the words “believes,” “expects,”
“anticipates,” or similar expressions are generally considered to be
      forward-looking statements.





The
      forward-looking statements include, but are not limited, to the
      following:




·
            Our
                beliefs regarding our position in the commercial mobile fueling and
                bulk
                fueling; lubricant and chemical packaging, distribution and sales;
                integrated out-sourced fuel management services; and transportation
                logistics markets;




·
            Our
                strategies, plan, objectives and expectations concerning our future
                operations, cash flows, margins, revenues, profitability, liquidity
                and
                capital resources;




·
            Our
                efforts to improve operational, financial and management controls
                and
                reporting systems and procedures;
                and




·
            Our
                plans to expand and diversify our business through acquisitions of
                existing companies or their operations and customer
                bases.




The
      forward-looking statements reflect our current view about future events and
      are
      subject to risks, uncertainties and assumptions. We caution readers of this
      report that certain important factors may have affected and could in the future
      affect our actual results and could cause actual results to differ significantly
      from those expressed in any forward-looking statement. In addition to the Risk
      Factors included in Part 1, Item 1A, of this report, t he
      inaccuracy of any of the following assumptions could
      prevent us from achieving our goals, and cause the assumptions underlying the
      forward-looking statements and the actual results to differ materially from
      those expressed in or implied by those forward-looking statements:




18





·
            the
                avoidance of future net losses;




·
            the
                avoidance of adverse consequences relating to our outstanding
                debt;




·
            our
                continuing ability to pay interest and principal on our debt instruments,
                and to pay our accounts payable and other liabilities when
                due;




·
            our
                continuing ability to comply with financial covenants contained in
                our
                credit agreements;




·
            our
                continuing ability to obtain all necessary waivers of covenant violations,
                if any, in our debt agreements;




·
            our
                ability to pay our dividend on our Preferred
                Stock;




·
            the
                avoidance of significant provisions for bad debt reserves on our
                accounts
                receivable;




·
            the
                continuing demand for our products and services at competitive prices
                and
                acceptable margins;




·
            the
                avoidance of negative customer reactions to new or existing marketing
                strategies;




·
            the
                avoidance of significant inventory reserves for slow moving
                products;




·
            our
                continuing ability to acquire sufficient trade credit from fuel and
                lubricants suppliers and other
                vendors;




·
            our
                continuing ability to obtain fuel supply in all markets in the event
                of
                product outages or shortages of
                supply;




·
            the
                successful integration of acquired companies into our existing operations,
                and enhancing the profitability of the integrated businesses;




·
            the
                successful execution of our acquisition and diversification strategy,
                including the availability of sufficient capital to acquire additional
                businesses and to support the infrastructure requirements of a larger
                combined company;




·
            the
                success in responding to competition from other providers of similar
                services;




·
            the
                impact of generally positive economic and market conditions; and




·
            the
                ability to retire or convert debt to
                equity.




**OVERVIEW**




**Our
      Business**





We
      are a
      leading provider of petroleum product distribution services, transportation
      logistics and emergency response services to the trucking,
      manufacturing, construction, shipping, utility, energy, chemical,
      telecommunications and government services industries. At
      June
      30, 2008, we were conducting operations through 26 service locations in the
      ten
      states of Alabama, California, Florida, Georgia, Louisiana, Mississippi, North
      Carolina, South Carolina, Tennessee and Texas.





We
      provide commercial mobile and bulk fueling, integrated out-sourced fuel
      management, packaging, distribution and sale of lubricants and chemicals,
      transportation logistics, and emergency response services. Our fleet delivers
      diesel fuel and gasoline to customer locations on a regularly scheduled or
      as
      needed basis, refueling vehicles and equipment, re-supplying bulk storage tanks,
      and providing fuel for emergency power generation systems. We also distribute
      a
      wide variety of specialized petroleum products, lubricants and chemicals
      primarily to our customers in Texas. Our fleet of special duty
      tractor-trailer units provides heavy haul transportation logistics services
      over
      short and long distances to customers requiring the movement of over-sized
      and/or over-weight equipment and heavy manufactured products.




19




We
      compete with several large and numerous small distributors, jobbers and other
      companies offering services and products in the same markets in which we
      operate. We believe that the industry and these markets offer us opportunities
      for consolidation, as customers increasingly demand one-stop shopping for their
      petroleum based needs and seek reliable supply deliveries particularly to
      prevent business interruptions during emergencies. We believe that certain
      factors, such as our ability to provide a range of services and petroleum based
      products and services, create advantages for us when compared to our
      competitors.




An
      objective of our business strategy is to become the leading “single source”
provider of petroleum products and services in the markets we currently operate
      in, as well as expanding into additional contiguous markets. To achieve this
      objective we plan to focus on increasing revenues in our core operations and
      in
      expanding through selective acquisitions.




***Executive
      Summary***




The
      following is a summary discussion of our financial results in fiscal 2008 and
      our execution on several core strategies that impacted results of operations
      in
      fiscal 2008 and the fourth quarter ended June 30, 2008:





·
            In
                fiscal 2008, we had a net loss of $6.8 million. These results include
                $5.1
                million in non-cash charges, such as depreciation and amortization
                of
                fixed assets, debt costs, debt discounts, and amortization of stock
                compensation expense, provision for allowance for doubtful accounts,
                and a
                loss on extinguishments of debt. The net loss also includes $2.7
                million
                in stated interest expense associated with servicing our debt, $888,000
                in
                non-legal public company costs, and $583,000 in legal expenses.





·
            The
                net margin in fiscal 2008, 2007 and 2006 was $14.4 million, $14.3
                million
                and $14.1 million on 74 million, 85 million and 94 million gallons
                sold, resulting in net margin per gallon of 19.4 cents, 16.9 cents,
                and
                14.9 cents, respectively. The net margin in fiscal 2008 improved
                slightly
                over fiscal 2007 despite a decrease of 11 million gallons of petroleum
                products sold over the same period. The net margin in fiscal 2008
                was
                higher on 74 million gallons than the net margin in fiscal 2006 when
                we
                sold 94 million gallons, a decrease of 20 million gallons over two
                years.
                These continued higher net margins on lower volumes are the direct
                result
                of the integration of our 2005 acquisitions with our new ERP system
                and
                utilizing our margin control tools to eliminate non-contributory
                lower
                margin business. Such elimination allows for increased capacity of
                our
                fleet and for personnel to be deployed for emergency response business
                as
                needed.





·
            We
                achieved improvements in our operating results as reflected through
                our
                net loss, EBITDA and net margin per gallon when compared to our most
                recent sequential quarterly results. Specifically, EBITDA improved
                $664,000 from the second quarter to the third quarter of fiscal 2008
                and
                $877,000 from the third quarter to the fourth quarter of fiscal 2008,
                due
                to improvements in net margins. Additionally, EBITDA improved $1.0
                million
                from the fourth quarter of fiscal 2007 to the fourth quarter of fiscal
                2008, due to improvements in net margins and reduction of our selling,
                general and administrative costs. Our volumes have stabilized over
                the
                last two quarters primarily due to the addition of new customers
                as they
                seek to control their fuel costs and the stabilization of demand
                of
                existing customers. The results for operating income show an upward
                trend.
                We ended the year with operating income of $445,000 for the fourth
                fiscal
                quarter of 2008, compared to an operating loss of $1.0 million for
                the
                fourth quarter of 2007.




20




The
      following chart presents certain operating results for the last six sequential
      quarters (in thousands, except net margin per gallon):


For
                  the three months endedMarch
                  31,
              
              June
                  30,
              
              September 30,
              
              December 31,
              
              March
                  31,
              
              June
                  30,2007
              
              2007
              
              2007
              
              2007
              
              2008
              
              2008Revenues
              
              $
              51,817
              
              $
              57,526
              
              $
              55,497
              
              $
              58,994
              
              $
              64,162
              
              $
              82,036Gross
                  profit
              
              $
              2,478
              
              $
              2,921
              
              $
              3,182
              
              $
              2,565
              
              $
              2,875
              
              $
              4,290Selling,
                  general and administrative
              
              
              4,077
              
              
              3,950
              
              
              3,803
              
              
              3,788
              
              
              3,445
              
              
              3,845Operating
                  (loss) income
              
              
              (1,599
              )
              
              (1,029
              )
              
              (621
              )
              
              (1,223
              )
              
              (570
              )
              
              445Interest
                  expense and other income, net
              
              
              (1,019
              )
              
              (585
              )
              
              (757
              )
              
              (763
              )
              
              (720
              )
              
              (811
              )Loss
                  on extinguishment of promissory notes
              
              
              -
              
              
              -
              
              
              (1,641
              )
              
              -
              
              
              (108
              )
              
              -Net
                  loss
              
              $
              (2,618
              )
              $
              (1,614
              )
              $
              (3,019
              )
              $
              (1,986
              )
              $
              (1,398
              )
              $
              (366
              )EBITDA
              
              $
              (787
              )
              $
              127
              
              $
              196
              
              $
              (387
              )
              $
              277
              
              $
              1,154Net
                  margin
              
              $
              2,915
              
              $
              3,307
              
              $
              3,569
              
              $
              2,945
              
              $
              3,228
              
              $
              4,611Net
                  margin per gallon
              
              $
              0.14
              
              $
              0.17
              
              $
              0.19
              
              $
              0.16
              
              $
              0.18
              
              $
              0.24Gallons
                  sold
              
              
              20,407
              
              
              19,678
              
              
              18,695
              
              
              18,050
              
              
              18,102
              
              
              19,024





EBITDA
      is
      defined as earnings before interest, taxes, depreciation, and
      amortization, a
      non-GAAP financial measure within the meaning of Regulation G promulgated by
      the
      Securities and Exchange Commission. To the extent that loss on extinguishment
      of
      debt constitutes the recognition of previously deferred interest, it is
      considered interest expense for the calculation of certain interest expense
      amounts. We believe that EBITDA provides useful information to investors because
      it excludes transactions not related to the core cash operating business
      activities. We believe that excluding these transactions allows investors to
      meaningfully trend and analyze the performance of our core cash operations.




The
      following chart reconciles EBITDA to the net loss for each of the six quarterly
      periods presented above (in thousands):




For
                the three months endedMarch
                31,
            
            June
                30,
            
            September 30,
            
            December 31,
            
            March
                31,
            
            June
                30,2007
            
            2007
            
            2007
            
            2007
            
            2008
            
            2008Net
                loss
            
            $
            (2,618
            )
            $
            (1,614
            )
            $
            (3,019
            )
            $
            (1,986
            )
            $
            (1,398
            )
            $
            (366
            )Add
                back:Interest
                expense
            
            
            1,023
            
            
            919
            
            
            778
            
            
            782
            
            
            780
            
            
            720Depreciation
                andamortization
                expense:Within
                cost of sales
            
            
            436
            
            
            386
            
            
            388
            
            
            380
            
            
            353
            
            
            321Within
                selling, general andadministrative
                expenses
            
            
            219
            
            
            249
            
            
            282
            
            
            304
            
            
            311
            
            
            357Amortization
                of stockcompensation
                expense
            
            
            153
            
            
            187
            
            
            126
            
            
            133
            
            
            123
            
            
            122Loss
                on extinguishmentof
                promissory notes
            
            
            -
            
            
            -
            
            
            1,641
            
            
            -
            
            
            108
            
            
            -EBITDA
            
            $
            (787
            )
            $
            127
            
            $
            196
            
            $
            (387
            )
            $
            277
            
            $
            1,154




21




·
            Earnings
                before interest, taxes, depreciation and amortization (“EBITDA”), a
                non-GAAP measure, for fiscal 2008 were $1.2 million compared to $252,000
                for fiscal 2007. The primary reason for the $988,000 increase was
                the
                decrease in selling, general and administrative expenses discussed
                above.




·
            As
                petroleum prices continue to soar during 2008 exceeding $5.00 per
                gallon,
                including taxes, the Company’s receivables increased in line with these
                increasing fuel prices. Notwithstanding these higher prices, the
                days
                sales outstanding decreased from 37 days at June 30, 2007 to 30 days
                at
                June 30, 2008.




·
            During
                fiscal 2008, we reduced our outstanding promissory notes by $2.4
                million.
                The reduction in fiscal 2008 was partially due to the issuance of
                new
                senior secured convertible subordinated debt, proceeds which were
                used to
                reduce the principal outstanding and to refinance the secured promissory
                notes issued in August 2003, January 2005 and September 2005 with
                new
                senior secured convertible subordinated notes. In the third quarter
                of
                2008, we reduced our debt by exchanging $1.75 million of the senior
                secured convertible subordinated debt with shares of non-redeemable
                preferred stock. In the third quarter of 2008, our debt was reduced,
                as
                the holders of the November 2007 notes, the short-term promissory
                notes,
                exchanged the entire $2.0 million principal balance into preferred
                stock.
                In addition to the exchange of debt, we raised $516,000 in cash,
                in the
                third quarter of fiscal 2008, from selling shares of preferred stock
                to a
                small group of investors, including some of the Company’s officers.





·
            We
                entered into amendments to the line of credit with our principal
                lender to
                extend to the current maturity of July 1, 2009, and modified certain
                financial covenants. We believe that this extension will enable us
                to
                continue to meet the working capital needs of our business.





·
            During
                fiscal 2008, our fleet was upgraded through the purchase of $1.22
                million
                in newer and under warranty equipment, thus reducing current and
                future
                repair and maintenance costs. The proceeds used for the purchase
                derived
                from the equipment sold in fiscal 2007.




·
            Financial
                results from our commercial mobile and bulk fueling services continue
                to
                be largely dependent on the number of gallons of fuel sold and the
                net
                margin per gallon achieved. We experienced a 13% gallon reduction
                in
                fiscal 2008 year compared to 2007 primarily because of lower volumes
                demanded by some of our existing customers in response to higher
                fuel
                prices and a weakening economy, the elimination of lower margin customers
                and our pursuit of business with higher net margin contributions.




·
            Escalating
                fuel prices and the resulting lower demand from our customers have
                continued to impact our results of operations. While fuel price
                fluctuations have always affected our revenues, our gross profits
                were
                historically not affected since we were able to pass on the increased
                market cost of the product to our customers. More recently, however,
                the
                increases in petroleum and fuel prices have dampened the demand for
                the
                services and goods provided by much of our customer base and have
                increased the fuel running costs of our own delivery fleet. In addition,
                the higher fuel prices have substantially increased the amount of
                short-term credit that we need to obtain to cover the time between
                payment
                for fuel to the suppliers and our receipt of payment from our customers.
                Our higher demand for credit has caused new and pre-existing limitations
                on supplier credit, some of which may be attributable to the sub
                prime
                credit problems facing many financial institutions, to become a negative
                factor in our business by increasing our borrowing costs.




·
            Increasing
                the overall size of the Company while diversifying the services and
                products we offer to the industry are integral to the execution of
                our
                strategic business plan and critical to the utilization of the
                infrastructure and systems that we now have in place. We believe
                that this
                infrastructure and these systems are today unique in the industry
                and give
                us the ability to rapidly and effectively integrate operations and
                gain
                efficiencies. To this end, we are actively pursuing acquisition
                opportunities that we believe would meet our goals.




22




**RESULTS
      OF OPERATIONS:**





To
      monitor our results of operations, we review key financial information,
      including net revenues, gross profit, selling, general and administrative
      expenses, net income or losses, and non-GAAP measures, such as EBITDA. We
      continue to seek ways to more efficiently manage and monitor our business
      performance. We also review other key operating metrics, such as the number
      of
      gallons sold and net margins per gallon sold. As our business is dependent
      on
      the supply of fuel and lubricants, we closely monitor pricing and fuel
      availability from our suppliers in order to purchase the most cost effective
      products. We calculate our net margin per gallon by adding gross profit and
      the
      depreciation and amortization components of cost of sales, and dividing that
      sum
      by the number of gallons sold.





**Comparison
      of Year Ended June 30, 2008 (“fiscal 2008”) to Year Ended June 30, 2007 (“fiscal
      2007”)**





***Revenues***





Revenues
      were $260.7 million in fiscal 2008 compared to $229.8 million in fiscal 2007,
      an
      increase of $30.9 million or 13%, as a result of the increases in prices per
      gallon of petroleum products. Market fuel prices have increased approximately
      45% in fiscal 2008 compared to last year. Price variances resulted in an
      increase of $60.8 million in revenues, partially offset by a $29.9 million
      decrease in revenues due to a 13% reduction in gallons sold compared to the
      prior year. We believe that the lower sales volume is largely the result of
      the
      contraction of the national economy, particularly as it is impacting the
      industries and geographic locations we serve, as well as some of our customers’
efforts to reduce their fuel consumption in light of substantially higher fuel
      prices. In addition, the decrease in volume is due to our decision to reduce
      business with net margin contributions below acceptable levels as well as lower
      emergency response services this year.




***Gross
      Profit***





Gross
      profit was $12.9 million in fiscal 2008 compared to $12.6 million in fiscal
      2007, an increase of $281,000 or 2%. The increase was primarily due to our
      emphasis on concentrating in higher margin business. The net margins per gallon
      for fiscal 2008 and 2007 were 19.4 cents and 16.9 cents, respectively. While
      there can be no assurance that the gross profit and net margin trends will
      not
      decrease in the future as a result of increased competition, customer resistance
      to higher prices for our services or reduction in emergency response services,
      the Company believes that these recent positive trends will continue and that
      operating results will continue to improve for the foreseeable future.




23




***Selling,
      General and Administrative Expenses***




Selling,
      general and administrative expenses were $14.9 million in fiscal 2008 compared
      to $15.8 million in fiscal 2007, a decrease of $955,000 or 6%. This decrease
      is
      attributable to the following (in thousands):





Reduction
                in SG&A costs primarily personnel expenses as system efficiencies are
                gained and acquired companies are integrated
            
            $
            (559
            )Legal
                fees related to public company costs and other general
                matters
            
            
            (312
            )Non-legal
                public company compliance
            
            
            (294
            )Provision
                for doubtful accounts and collection fees
            
            
            (268
            )Reduction
                in facilities expenses related to the integration of certain Texas
                locations
            
            
            (83
            )Increase
                in SG&A depreciation primarily related to ERP system
                implementation
            
            
            331Increase
                in credit card fees due to the continuing escalating fuel
                prices
            
            
            133Other,
                net
            
            
            97Total
                decrease
            
            $
            (955
            )




***Interest
      Expense***




Interest
      expense was $3.1 million in fiscal 2008 compared to $3.7 million in fiscal
      2007, a decrease of $667,000 or 18%. The decrease was primarily due to lower
      non-cash deferred debt costs and discounts amortization as a result of the
      August 2007 refinancing of the promissory notes issued in August 2003, January
      2005 and September 2005.




24





The
      components of interest expense are as follows (in thousands):


**Year
                  Ended****June
                  30,****2008**
              
              **2007**Stated
                  Rate Interest Expense:Line
                  of credit
              
              $
              1,267
              
              $
              1,212Long
                  term debt
              
              
              1,270
              
              
              1,363Other
              
              
              125
              
              
              64Total
                  stated rate interest expense
              
              
              2,662
              
              
              2,639Non-Cash
                  Interest Amortization:Amortization
                  of deferred debt costs
              
              
              318
              
              
              342Amortization
                  of debt discount
              
              
              80
              
              
              746Total
                  amortization in interest expense
              
              
              398
              
              
              1,088Total
                  interest expense
              
              $
              3,060
              
              $
              3,727




***Other
      Income, Net***




Other
      income, net was $9,000 in fiscal 2008 compared to $343,000 in fiscal 2007,
      a
      decrease of $334,000 or 97%. The decrease was primarily due to $246,000 lower
      gain on sale of assets in fiscal 2008 than in fiscal 2007, and an additional
      other expense of $104,000 in fiscal 2008 related to legal costs incurred related
      to the acquisition of H & W.




***Loss
      on Extinguishment of Promissory Notes***





We
      have
      recorded a loss on extinguishment of promissory notes of $1.7 million. The
      loss
      is related to write offs of costs and gain realized as a result of the August
      2007 refinancing of our outstanding secured promissory notes issued on August
      2003, January 2005 and September 2005 with new senior secured convertible
      subordinated notes, and the exchange of $3.75 million of the debt of the
      November 2007 Notes and a portion of the August 2007 Notes into Series A and
      Series B Preferred Stock.




25




The
      following summarizes the components of the net loss on extinguishment of
      promissory notes that the Company recorded in its consolidated statements of
      operations during fiscal 2008 (in thousands):




**Year
                  Ended****June
                  30, 2008**Write
                  offs of costs and gain related to the refinancing of the August
                  2003,January
                  2005 and September 2005 Notes:Unamortized
                  debt costs
              
              $
              443Unamortized
                  debt discounts
              
              
              978Cash
                  pre-payment penalty
              
              
              270Gain
                  on extinguishment
              
              
              (50
              )Write
                  off of unamortized debt costs related to the exchanged November
                  2007 Notes
                  for Preferred Stock Series A
              
              
              24Write
                  offs related to exchanged August 2007 Notes for Preferred Stock
                  Series
                  B:Unamortized
                  debt costs
              
              
              69Unamortized
                  debt discounts
              
              
              15Loss
                  on extinguishment of promissory notes, net
              
              $
              1,749




***Income
      Taxes***




No
      income
      tax expense was recorded for fiscal 2008 or fiscal 2007. The net operating
      loss
      carryforward at June 30, 2008 was $29.8 million , which
      includes a $2.2 million  net
      operating loss carryforward acquired in connection with the H & W
      acquisition.




***Net
      Loss***




Net
      loss
      was $6.8 million in fiscal 2008, compared to $6.6 million in fiscal 2007. The
      $180,000 increase in net loss resulted primarily from the loss on extinguishment
      of promissory notes of $1.7 million discussed above. The increase in net loss
      was partially offset by a decrease of $955,000 in selling, general and
      administrative costs, primarily attributable to improvements in the integration
      of the H&W and Shank acquisitions and lower personnel costs stemming from
      efficiencies gained from our new Enterprise Resource Planning (“ERP”) system.
      Additionally, interest expense decreased $667,000 as a result of a decrease
      in
      non-cash interest amortization expense related to the August 2007 refinancing
      of
      the secured promissory notes issued on August 2003, January 2005 and September
      2005 with new senior secured convertible subordinated notes.




26




***EBITDA –
      Non-GAAP Measure***





As
      noted
      above, EBITDA is a
      non-GAAP financial measure within the meaning of Regulation G promulgated by
      the
      Securities and Exchange Commission. EBITDA
      is
      defined as earnings before interest, taxes, depreciation, and amortization. To
      the
      extent that loss on extinguishment of debt constitutes the recognition of
      previously deferred interest, it is considered interest expense for the
      calculation of certain interest expense amounts.  We
      believe that EBITDA provides useful information to investors because it excludes
      transactions not related to the core cash operating business activities. We
      believe that excluding these transactions allows investors to meaningfully
      trend
      and analyze the performance of our core cash operations.




EBITDA
      was $1.2 million in fiscal 2008 compared to $252,000 in fiscal 2007, an increase
      of $988,000. The increase in EBITDA is the result of the decrease in selling,
      general and administrative expenses excluding depreciation and
      amortization.




Reconciliation
      of EBITDA for fiscal 2008 and 2007 is as follows (in thousands):


**Years
                  Ended June 30,****2008**
              
              **2007**Net
                  loss
              
              $
              (6,769
              )
              $
              (6,589
              )Add
                  back:Interest
                  expense
              
              
              3,060
              
              
              3,727Depreciation
                  and amortization expense:Cost
                  of sales
              
              
              1,442
              
              
              1,702Selling,
                  general and administrative expenses
              
              
              1,254
              
              
              921Stock-based
                  compensation amortization expense
              
              
              504
              
              
              491Loss
                  on extinguishment of promissory notes
              
              
              1,749
              
              
              -EBITDA
              
              $
              1,240
              
              $
              252




**Capital
      Resources and Liquidity**





At
      June
      30, 2008 and 2007, we had total cash and cash availability of $1.9 million
      and
      $2.8 million, which consisted of cash and cash equivalents of $48,000 and
      additional cash availability of $1.8 million through our line of credit. The
      principal decrease from last year's cash and cash availability was due to the
      placement of $1.35 million in supplier letters of credit. As of September 10,
      2008, our cash and cash availability was approximately $2.0 million. We are
      able
      to draw on our line of credit on a daily basis subject to debt covenant
      requirements.





Since
      fiscal year 2005, we have made significant investments in implementing our
      growth acquisition strategy. In fiscal 2005 and 2006, we acquired two new
      companies. Our efforts to consolidate and integrate these acquisitions were
      delayed due to the ERP system development and we incurred additional costs
      that
      have reduced our cash availability. During the same period of time, our cash
      resources were reduced by the expenditures for development of our new, enhanced,
      corporate infrastructure, including the operating, accounting and information
      management system, which was substantially completed in the fourth quarter
      of
      fiscal 2007.





The
      escalating fuel prices over the past twelve months have adversely affected
      our
      capital resources. Historically, while we generally avoided the impact of higher
      fuel prices by passing along the higher prices to our customers, the higher
      costs for operating our own delivery fleet and the decreased demand for the
      services and goods provided by most of our customer base, and in turn, those
      customers’ demand for fuel, have had an indirect effect on our profitability. In
      addition, the drastic increase in fuel prices over the last twelve months has
      substantially increased the amount of short-term credit that we need to obtain
      from our suppliers of fuel. Our higher demand for credit has led to limitations
      on the supplier credit available to us and has increased our costs of obtaining
      that credit, adversely affecting our profitability.




27




We
      initially addressed the limitations on supplier credit by obtaining short-term
      notes from a limited number of investors in November 2007, which we used for
      credit enhancements in those markets where our credit was most limited. These
      notes were subsequently exchanged for Series A Preferred Stock in February
      2008,
      which strengthened our balance sheet and helped us achieve compliance with
      listing standards of the Nasdaq Stock Market. We also believe that the exchange
      of the November 2007 notes for Series A Preferred Stock and the March 2008
      exchange of $1.75 million in senior secured promissory notes for Series B
      Preferred Stock, has improved our access to supplier credit. Nevertheless,
      with
      the continuing higher fuel prices and our resulting need for additional supplier
      credit, the availability of short term credit for fuel purchases remains an
      important issue for us. See *Adequacy
      of Capital Resources* below
      for further discussion.





***Sources
      of Cash***





*Debt
      Financing and Equity Offerings*





We
      have a
      $25 million line of credit facility with a national financial institution,
      which
      permits us to borrow up to 85% of the total amount of eligible accounts
      receivable and 65% of eligible inventory, both as defined. Outstanding letters
      of credit reduce the maximum amount available for borrowing. Our line of credit
      finances the timing difference between petroleum product purchases payable
      generally in 10 to 12 days from date of delivery and the collection of
      receivables from our customers, generally in 30 to 45 days from date of
      delivery.





Interest
      is payable monthly at prime plus 0.75% through September 30, 2008, and may
      increase up to prime plus 2.75% after such date based on the Company meeting
      certain fixed charge coverage ratios. At June 30, 2008 the interest rate was
      5.75%. Outstanding borrowings under the line of credit are secured by
      substantially all of our assets other than our truck fleet and related
      equipment. The maturity date of the line of credit is July 1, 2009.





During
      fiscal 2008, we obtained letters of credit for an aggregate amount of $1.35
      million to obtain better purchasing terms and pricing than was then available
      in
      certain markets. The letters of credit have twelve-month expirations and renew
      automatically. No amounts have been drawn on any of the letters of credit,
      however, as described above, outstanding letters of credit reduce our cash
      availability under our line of credit facility.





As
      of June 30, 2008 and June 30, 2007, we had outstanding borrowings of $19.8
      million and
      $17.3 million, respectively, under our $25.0 million line of credit.  The
      line
      of credit is classified as a current liability in
      accordance with EITF 95-22, “Balance Sheet Classification of Borrowings
      Outstanding under Revolving Credit Agreement”  due
      to
      certain provisions in the agreement providing for subjective acceleration rights
      and requiring the Company to maintain a lockbox arrangement whereby cash
      deposits are automatically utilized to reduce amounts outstanding under the
      line
      of credit. Based
      on
      eligible receivables and inventories, and letters of credit outstanding at
      June
      30, 2008 and 2007, we had $1.8
      million and $1.8
      million, respectively, of cash availability under the line of credit.





In
      addition to obtaining funds through the line of credit, we have obtained funds
      through the issuance of promissory notes, common stock, preferred stock and
      warrants to purchase our common stock. In August 2003, we raised $6.9 million
      from the issuance of five-year 10% promissory notes (the “August 2003 Notes”)
      and warrants to purchase 2,008,250 shares of our common stock. We used the
      net
      proceeds for general working capital purposes. In January 2005, we raised $6.1
      million from the issuance of five-year 10% promissory notes (the “January 2005
      Notes”) and four-year warrants to purchase 1,006,500 shares of our common stock.
      The funding provided by the January 2005 Notes was used for the Shank Services
      acquisition and for other general corporate purposes. On September 1, 2005,
      we
      issued $3.0 million in 10% five-year Senior Secured Notes (the “September 2005
      Notes”) and four- year warrants to purchase 360,000 shares of our common stock.
      These notes were issued in order to fund the H & W acquisition, to develop
      our operations and for general working capital purposes. In August 2007, these
      notes were satisfied with proceeds from a new senior secured convertible
      subordinated debt and equity offering, discussed below.




28




On
      February 15, 2007, we completed a $3.3 million private placement offering of
      unregistered shares of common stock and common stock purchase warrants to a
      group of qualified institutional buyers and accredited investors. As a result
      of
      this transaction, we issued 2,119,100 shares of common stock at an exercise
      price of $1.52 per share and warrants to purchase 423,800 shares of common
      stock
      at an exercise price of $1.52 per share. The net proceeds of the offering were
      approximately $2.9 million, net of costs of issuance of $364,000 and were used
      for the repayment of $732,000 of principal on our August 2003 Notes. The
      remainder of the proceeds were used for general working capital
      purposes.





Previously,
      on June 30, 2006, we issued 1,057,283 non-detachable warrants (the “Conversion
      Warrants”), exercisable for 90 days to certain note holders of the August 2003
      Notes and the January 2005 Promissory Notes, by which those note holders could
      exchange up to $2.6 million of existing August 2003 and January 2005 Notes
      for
      the purchase of shares of our common stock at an exercise price of $2.54 per
      share, the closing market price on the date of the agreement. By subsequent
      amendments, the exercise period of the Conversion Warrants was extended to
      March
      31, 2007, and the exercise price was lowered to $1.52 per share, the market
      price on the date of the amendment. On March 29, 2007, we further amended the
      agreements extending the exercise period of the warrants to June 30,
      2007.





As
      of
      June 30, 2007, the note holders had exercised all of the Conversion Warrants,
      as
      follows:





Date
              Of
              Exercise
            
            Common
              Shares
              Issued
            
            Note
              Converted
            
            Principal
              Amount
              Converted
            
            Prepayment
              Penalty
              ReductionMarch
                29, 2007
            
            
            424,835
            
            
            January
                2005
            
            $
            630,000
            
            $
            16,000April
                3, 2007
            
            
            203,651
            
            
            August
                2003
            
            
            302,000
            
            
            8,000May
                18, 2007
            
            
            362,391
            
            
            August
                2003
            
            
            538,000
            
            
            13,000June
                18, 2007
            
            
            66,406
            
            
            August
                2003
            
            
            99,000
            
            
            2,0001,057,283
            
            
            
            
            $
            1,569,000
            
            $
            39,000


On
      August
      8, 2007, we sold $11.8 million in debt and equity securities (the “August 2007
      Offering”). We used a portion of the proceeds to satisfy the balance of our
      outstanding secured promissory notes issued in August 2003, January 2005, and
      September 2005, and to lower the total senior secured convertible subordinated
      debt from $11.2 million **** to
      $10.6
      million. As a result of this transaction, we recognized $1.6 million in loss
      on
      extinguishment of promissory notes. The loss was the result of the write-off
      of
      unamortized debt discounts of $978,000, **** the
      write-off of debt costs of $443,000, a pre-payment penalty of $270,000, which
      was incurred due to the satisfaction of the notes prior to their maturity dates,
      partially offset by a gain of $50,000 due to the excess of the carrying value
      of
      the notes over the extinguishment price.





In
      the
      August 2007 Offering, we sold $10.6 million in 111⁄2% senior secured convertible
      subordinated promissory notes maturing December 31, 2009 (the “August 2007
      Notes”), including $5.7 million sold to new institutional and private investors
      and $4.9 million to current holders of our secured debt, together with 790,542
      shares of common stock (the “Shares”) and 39,528 four-year warrants to purchase
      common stock at $1.752 per share (the “Warrants”). All principal on the August
      2007 Notes is due on December 31, 2009. The Shares and Warrants were sold at
      $1.48 per Share and one twentieth of a Warrant, or $29.60 for twenty (20) Shares
      and one (1) Warrant, for total equity proceeds of $1,170,000. We paid a total
      commission of $400,000 to the placement agent, $94,000 of which was paid through
      the issuance of 63,327 shares of our common stock at the offering price of
      $1.48
      per share, along with 39,528 warrants with the same terms as the Warrants sold
      to investors.




29




The
      August 2007 Notes are secured by specified vehicles and field equipment owned
      by
      us and are senior to all other of our existing debt other than any amounts
      owed
      now or in the future to our primary lender, Wachovia Bank, N.A, to which the
      August 2007 Notes are expressly subordinated. Interest on the August 2007 Notes
      is due semi-annually, on each January 1 and July 1, beginning January 1, 2008,
      until the outstanding principal balance is paid in full. The amounts due under
      the August 2007 Notes will become due and payable immediately upon the
      occurrence of customary events of default. The Notes are redeemable by us,
      in
      whole or in part, without pre-payment penalty or premium, except that, if such
      pre-payment is made before the first anniversary of the issuance of the August
      2007 Notes, a pre-payment penalty equal to 3% of the principal amount being
      redeemed, together with accrued but unpaid interest shall be paid.




Fifty
      percent (50%) of the principal amount of the August 2007 Notes may be converted
      into shares of our common stock at $1.46 per share. We may elect, in our
      discretion, to grant additional conversion rights for some or all of the
      remaining principal amount of the August 2007 Notes at a price not less than
      the
      higher of $1.46, or the most recent closing price for our common stock on the
      Nasdaq Stock Market at the time of such grant. We registered the resale of
      the
      Shares under the Securities Act of 1933, as  amended,
      including the Shares into which the August 2007 Notes may be converted and
      the
      Shares obtained upon exercise of the Warrants. As a result of the conversion
      feature, we recorded $37,000 as a beneficial conversion feature which is being
      amortized under the effective interest method as a non-cash discount over the
      respective term of the debt.





On
      November 19, 2007, we obtained an aggregate of $2.0 million from the sale of
      unsecured short-term notes to a small group of individual and institutional
      investors (the “November 2007 Notes”). The proceeds were used for general
      working capital purposes. The November 2007 Notes originally had a six-month
      term maturing in May 2008, which was extended to July 2008. The Company incurred
      $42,000 in issuance costs which were being amortized over the term of the notes.
      Interest paid on the outstanding principal balance of the November 2007 Notes
      was 1.5% per month. These notes were exchanged for preferred stock in February
      2008 as described below.





On
      February 29, 2008, we sold 4,587 shares of Series A Preferred Stock, $0.01
      par
      value (the “Series A Preferred Stock”) at $550 per share for an aggregate
      purchase price of $2.5 million. In the offering, 3,648 of the shares were issued
      by exchanging the entire $2.0 million principal balance of the November 2007
      Notes, plus a portion of the accrued but unpaid interest thereon. In addition,
      we sold 939 of the shares for $516,000 in cash to a small group of investors,
      which includes the sale of 155 shares to certain officers of the
      Company.





On
      March
      12, 2008, we sold 1,985 **** shares
      of
      Series B Convertible Preferred Stock, $0.01 par value (the “Series B Preferred
      Stock”) at $900 per share for an aggregate of $1.8 million by exchanging $1.75
      million in principal balance of August 2007 Notes, plus a portion of the accrued
      but unpaid interest thereon.





On
      August
      15, 2008, we issued 229 shares of our Series C Convertible Preferred Stock,
      $0.01 par value, at a price of $650 per share, or an aggregate of $148,850
      (the
“Series C Preferred Stock”). Each share of Series C Preferred Stock is
      convertible into 1,000 shares of the Company’s common stock at a price per share
      of $0.65 per share, which is greater than the $0.49 closing price of the
      Company’s common stock on August 14, 2008.





Dividends
      will be paid on the Preferred Stock when, as and if declared by the Board of
      Directors, but only out of funds that are legally available, in quarterly cash
      dividends at the rate of eighteen percent (18%) per annum of the sum of the
      original issue price per share, provided, however, that if we report in an
      SEC
      filing that we have achieved positive Earnings Before Interest, Taxes,
      Depreciation and Amortization  for
      two
      consecutive fiscal quarters, the quarterly cash dividend shall be changed from
      eighteen percent (18%) per annum to twelve percent (12%) per annum of the sum
      of
      the original issue price, effective two weeks after notice of such change is
      transmitted to holders of the Series A and Series B Preferred Stock. Dividends
      are cumulative from the date of the original issuance of the Preferred Stock.
      Accumulated unpaid dividends on shares of Preferred Stock do not bear interest.
      During fiscal 2008, we declared cumulative dividends from the original date
      of
      issuance until June 30, 2008 of $152,000 and $97,000 per share on the
      outstanding Series A and Series B Preferred Stock, respectively. The dividends
      payable is paid quarterly; the fourth quarter dividend payable of $193,000
      on
      the Series A and Series B Preferred Stock is outstanding as of the date of
      this
      filing.




30




On
      September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
      notes maturing on September 1, 2010. The promissory notes are unsecured and
      are expressly subordinated to any amounts owed now or in the future to our
      primary lender pursuant to a subordination agreement between the note holders
      and the lender. Interest on the notes is payable semi-annually, on each March
      1
      and September 1, beginning March 1, 2009. The notes may be redeemed by us,
      in
      whole or in part, without prepayment penalty or premium, except that, if such
      pre-payment is proposed to be made before September 2, 2009, a 1% prepayment
      penalty shall be paid. The unpaid principal amount of the promissory notes
      and
      the accrued but unpaid interest thereon may be converted into shares of our
      common stock at $0.65 per share. In
      addition, the notes will automatically be converted into common stock, (A)
      if
      the closing price of the common stock is equal to or greater than two times
      the
      conversion price then in effect for a period of twenty (20) consecutive business
      days, or (B) upon the election of the holders of two thirds of the principal
      outstanding Notes, or (C) upon the closing of a firmly underwritten public
      offering at a price that is two times the conversion price with cash proceeds
      to
      the Company of at least $10,000,000.




Our
      debt
      agreements have covenants that define certain financial requirements and
      operating restrictions. Our failure to comply with any covenant or material
      obligation contained in these debt agreements, absent a waiver or forbearance
      from the lenders, would result in an event of default which could accelerate
      debt repayment terms under the debt agreements. Due to cross-default provisions
      contained in our debt agreements, an event of default under one agreement could
      accelerate repayment terms under the other agreements, which would have a
      material adverse effect on our liquidity and capital resources. At the date
      of
      this filing, we are in compliance with the requirements of the applicable
      covenants required by our debt agreements, though there is no assurance that
      we
      will be able to do so in the future.




***Cash
      Flows***




During
      fiscal years 2008 and 2007, cash and cash equivalents decreased $939,000 and
      $3.1 million, respectively.





We
      generated cash from the following sources (in thousands):




**Years
                Ended**
              **June
                30,****2008**
            
            **2007**Proceeds
                from issuance of promissory notes
            
            $
            7,690
            
            $
            -Proceeds
                from issuance of common stock and warrants
            
            
            1,170
            
            
            2,910Proceeds
                from issuance of preferred stock
            
            
            516
            
            
            -Proceeds
                from exercise of common stock options and warrants
            
            
            -
            
            
            31Net
                proceeds on line of credit payable
            
            
            2,492
            
            
            1,685Decrease
                in restricted cash
            
            
            1,076
            
            
            -Proceeds
                from sale of equipment
            
            
            86
            
            
            1,141$
            13,030
            
            $
            5,767




31




We
      used
      cash primarily for (in thousands):





**Years
                Ended**
              **June
                30,****2008**
            
            **2007**Principal
                payments on promissory notes
            
            $
            6,359
            
            $
            1,794Purchases
                of property and equipment
            
            
            2,459
            
            
            1,344Increase
                in restricted cash
            
            
            -
            
            
            1,145Payments
                of debt and equity issuance costs
            
            
            770
            
            
            114Payment
                of dividends
            
            
            56
            
            
            -Capital
                lease payments
            
            
            82
            
            
            123Cash
                used in operations
            
            
            4,243
            
            
            4,363$
            13,969
            
            $
            8,883Net
                change in cash and cash equivalents
            
            $
            (939
            )
            $
            (3,116
            )




As
      of
      June 30, 2008, we had $19.8 million outstanding under our line of credit. The
      amounts disclosed in the captions titled “Proceeds from line of credit” and
“Repayments of line of credit” in the accompanying consolidated statements of
      cash flows for the year ended June 30, 2008 include the cumulative activity
      of
      the daily borrowings and repayments, $263.7 million and $261.2 million
      respectively, under the line of credit. The availability under the line of
      credit at June 30, 2008 amounted to $1.8 million. The net cash borrowings from
      or repayments of the line of credit during the years ended June 30, 2008 and
      2007, respectively, have been included as sources or uses of cash in the tables
      above.





*Adequacy
      of Capital Resources*





Our
      liquidity and ability to meet financial obligations is dependent on, among
      other
      things, the generation of cash flow from operating activities, obtaining or
      maintaining sufficient trade credit from vendors, complying with our debt
      covenants, continuing renewal of our line of credit facility, and/or raising
      any
      required additional capital through the issuance of debt or equity securities
      or
      additional borrowings.





Our
      sources of cash during fiscal 2009 are expected to be cash on hand, cash
      generated from operations, borrowings under our credit facility, and any other
      capital sources that may be deemed necessary. There is no assurance, however,
      that if additional capital is required, it will be available to us or available
      on acceptable terms.




Our
      uses
      of cash over the next twelve months are expected to be principally for operating
      working capital needs, maintaining our line of credit, servicing the interest
      on
      our debt and dividend requirements on our preferred stock. We will continue
      to
      pursue additional conversions of debt into equity or other capital infusions
      to
      reduce the amounts owed under our new senior secured convertible subordinated
      debt.




32




We
      purchase the fuel sold to our customers from multiple suppliers at daily market
      prices, typically on 10 to 12 day credit terms. Recent and continuing increases
      in the cost of fuel have correspondingly increased the amount of short-term
      credit that we extend to our customers and, in turn, that we seek from our
      suppliers. In some cases, fixed dollar credit limits have limited the total
      gallons of fuel available to us from certain suppliers. As a result, the product
      demand from our customers in a given market may exceed the aggregate credit
      available to us from the pool of suppliers in that market. Historically, when
      individual suppliers declined to offer credit terms acceptable to us, we were
      able to acquire fuel on our customary 10 to 12 day payment terms from other
      suppliers. During fiscal 2008, however, in some of our markets, we were unable
      to obtain credit terms from available suppliers. We responded by using the
      $2.0
      million in proceeds from the November 2007 Notes to obtain credit enhancements
      in these markets. We now consider the terms and availability of supplier credit
      as a critical factor in our selection of fuel suppliers. With the continuation
      of record high fuel prices and, as a result, our need for additional supplier
      credit, the availability of short-term credit for fuel purchases remains a
      major
      concern for us. While we believe that we will continue to have adequate credit
      from our suppliers, there is no assurance that we will be able to do so. In
      particular, if fuel prices continue to rise and we are unable to obtain
      additional suppliers offering acceptable terms or arrange other short-term
      financing for our fuel purchases, we may have to change payment terms or raise
      prices for some of our customers, either of which could reduce the level of
      our
      fueling business and could have a material adverse effect on the Company’s
      financial performance and cash resources.





Although
      various factors could negatively impact our access to supplier credit terms
      and
      the cash available to us under our line of credit, including but not limited
      to
      uncollected accounts receivable, operating losses, delays in collections from
      customers, higher operating expenses or other increases in cash expenditures,
      we
      believe that we will be able to maintain or obtain adequate short-term credit
      from our suppliers in all of the markets we serve, or make other financing
      arrangements in those markets where supplier credit is limited, and that our
      cash available under our bank line of credit will continue providing sufficient
      working capital to maintain our business during fiscal 2009. The
      bank
      line of credit, which was scheduled to expire on December 31, 2008, has recently
      been extended until July 1, 2009. Historically,
      the Company has been able to renew the line of credit and will be addressing
      its
      renewal prior to its maturity in July 2009, although there can be no assurance
      that a renewal or a replacement line of credit can be obtained on acceptable
      terms or that the Company has the ability to obtain a line of credit with a
      different bank. If the line of credit is not renewed or extended and the Company
      can not find an alternate lender, the Company would not be able to repay its
      lender for the line of credit balance.





In
      order
      to accomplish our business plan of organic growth and strategic acquisitions,
      we
      need to raise additional equity capital, some of which would be utilized to
      support our pursuit of new acquisitions and working capital requirements.
      Ongoing expenditures for our corporate infrastructure, credit to finance higher
      fuel costs, and integration of future acquisitions may also require us to seek
      additional capital. There is no assurance that we will be able to obtain any
      such additional capital at acceptable terms, or that we will be able to raise
      the additional capital needed to execute our acquisition plan. While we believe
      that we will continue to comply with the covenants in our debt agreements,
      fund
      our operations and service our debt as it becomes due, there is no assurance
      that we will be able to do so. Any such failure to do so may require us to
      change our capital structure or alter our operations.




***Off-Balance
      Sheet Arrangements***




At
      June
      30, 2008, we do not have any material off-balance sheet
      arrangements.




33


**NEW
      ACCOUNTING STANDARDS AND CRITICAL ACCOUNTING POLICIES AND
      ESTIMATES**




***Recent
      Accounting Pronouncements***





In
      September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
      assets and liabilities. Under FAS No. 157, fair value refers to the price that
      would be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. In this standard, the FASB clarifies the principle that fair
      value should be based on the assumptions that market participants would use
      when
      pricing the asset or liability. In support of this principle, FAS No. 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. The fair value hierarchy gives the highest priority
      to quoted prices in active markets and the lowest priority to unobservable
      data,
      for example, the reporting entity’s own data. Under the standard, fair value
      measurements would be separately disclosed by level within the fair value
      hierarchy. The application of FAS No. 157 is effective for financial statements
      issued for the Company’s first quarter of fiscal year 2009. FASB
      Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157,”
issued in February 2008, provides a one-year deferral of the effective date
      of
      FAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those
      that are recognized or disclosed in financial statements at least annually
      at
      fair value on a recurring basis. The
      Company has not yet determined the impact, if any, that the adoption of FAS
      No.
      157 and FAS No. 157-2 will have on its consolidated financial position, results
      of operations or cash flows.





In
      February 2007, FAS Statement No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“FAS No. 159”), was issued.  FAS No. 159
      enables companies to report selected financial assets and liabilities at their
      fair value.  This statement requires companies to provide additional
      information to help investors and other users of financial statements understand
      the effects of a company’s election to use fair value on its earnings.  FAS
      No. 159 also requires companies to display the fair value of assets and
      liabilities on the face of the balance sheet when a company elects to use fair
      value.  FAS No. 159 is effective for the Company’s first quarter of fiscal
      year 2009. The Company has not yet determined the impact, if any, that the
      adoption of FAS No. 159 will have on its financial condition or results of
      operations.




In
      December 2007, the FASB issued FAS Statement No. 141 (revised 2007), *Business
      Combinations* (“FAS
      No.
      141R”), which replaces FAS No 141. The statement retains the purchase method of
      accounting for acquisitions, but requires a number of changes, including changes
      in the way assets and liabilities are recognized in the purchase accounting.
      It
      also changes the recognition of assets acquired and liabilities assumed arising
      from contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. FAS No. 141R is effective for the Company beginning
      July 1, 2009 and will apply prospectively to business combinations
      completed on or after that date.




In
      December 2007, the FASB issued FAS Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting for minority interests (“FAS No. 160”).
      Minority interests will be recharacterized as noncontrolling interests and
      will
      be reported as a component of equity separate from the parent’s equity, and
      purchases or sales of equity interests that do not result in a change in control
      will be accounted for as equity transactions. In addition, net income
      attributable to the noncontrolling interest will be included in consolidated
      net
      income on the face of the income statement and, upon a loss of control, the
      interest sold, as well as any interest retained, will be recorded at fair value
      with any gain or loss recognized in earnings. FAS No. 160 is effective for
      the Company beginning July 1, 2009 and will apply prospectively, except for
      the presentation and disclosure requirements, which will apply retrospectively.
      The Company is currently assessing the potential impact, if any, that adoption
      of SFAS No. 160 would have on its financial statements.




34




In
      March
      2008, the FASB issued FAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities — an amendment of FAS
      Statement No. 133* (“FAS
      No. 161”). This Standard requires enhanced disclosures regarding derivatives and
      hedging activities, including: (a) the manner in which an entity uses derivative
      instruments; (b) the manner in which derivative instruments and related hedged
      items are accounted for under FAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ;
      and (c)
      the effect of derivative instruments and related hedged items on an entity’s
      financial position, financial performance, and cash flows. FAS No. 161 is
      effective for the Company beginning July 1, 2009. As FAS No. 161 relates
      specifically to disclosures, the standard will have no impact on our financial
      condition, results of operations or cash flows.




In
      April
      2008, the FASB issued FAS Statement No. 142-3, “Determination of the Useful Life
      of Intangible Assets,” (“FAS No. 142-3”). The standard revises the factors that
      an entity should consider to develop renewal or extension assumptions used
      in
      determining the useful life of a recognized intangible asset. FAS No. 142-3
      is
      effective for the Company beginning July 1, 2009. The Company has not yet
      determined the impact, if any, that the adoption of FAS No. 142-3 will have
      on
      its consolidated financial position or results of operations.




In
      May
      2008, the FASB issued FAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* (“FAS
      No. 162”). This Standard identifies the sources of accounting principles and the
      framework for selecting the principles to be used in the preparation of
      financial statements of nongovernmental entities that are presented in
      conformity with generally accepted accounting principles. FAS No. 162 directs
      the hierarchy to the entity, rather than the independent auditors, as the entity
      is responsible for selecting accounting principles for financial statements
      that
      are presented in conformity with generally accepted accounting principles.
      The
      Standard is effective 60 days following SEC approval of the Public Company
      Accounting Oversight Board amendments to remove the hierarchy of generally
      accepted accounting principles from the auditing standards. FAS No. 162 is
      not
      expected to have an impact on our financial condition, results of operations
      or
      cash flows.





***Critical
      Accounting Policies and Estimates***





The
      accompanying discussion and analysis of our financial condition and results
      of
      operations are based upon our consolidated financial statements, which have
      been
      prepared in accordance with generally accepted accounting principles in the
      United States (U.S. GAAP). Note 2 to the Consolidated Financial Statements
      describes the significant accounting policies and estimates used in preparation
      of the Consolidated Financial Statements. Some of our accounting policies
      require us to make difficult and subjective judgments, often as a result of
      the
      need to make estimates of matters that are inherently uncertain. We base our
      estimates and judgments on historical experience and on various other
      assumptions that we believe are reasonable under the circumstances; however,
      to
      the extent there are material differences between these estimates, judgments
      or
      assumptions and our actual results, our financial statements will be affected.
      There can be no assurance that actual results will not differ from those
      estimates. We believe the accounting policies discussed below reflect our most
      significant assumptions, estimates and judgments and are the most critical
      to
      aid in fully understanding and evaluating our reported financial
      results.




**Accounts
      Receivable and Allowance for Doubtful Accounts**





We
      perform ongoing credit evaluations of our customers and adjust credit limits
      based upon payment history and the customers' current credit worthiness.
      Management continuously monitors collections and payments from customers and
      maintains a provision for estimated credit losses based upon historical
      experience and any specific customer collection issues that are identified.
      While such credit losses have historically been within expectations and the
      provisions established, we cannot assure that we will continue to experience
      the
      same credit loss rates that have occurred in the past.





**Inventory
      Valuation Reserves**





We
      make
      estimates relating to the net realizable value of inventories, based upon our
      assumptions about future demand, historical trends and market conditions. If
      we
      estimate that the net realizable value of inventory is less than the cost of
      the
      inventory recorded on our books, we record a reserve for the difference between
      the cost of the inventory and the estimated net realizable value. This reserve
      is recorded as a charge to cost of sales.




35




**Property
      and Equipment**




We
      record
      property and equipment at cost and depreciate that cost over the estimated
      useful life of the asset on a straight-line basis. Ordinary maintenance and
      repairs are expensed as incurred and improvements that significantly increase
      the useful life of property and equipment are capitalized.




We
      test
      property and equipment for impairment whenever events or changes in
      circumstances indicate that the carrying value of an asset may not be
      recoverable. The conditions that would trigger an impairment assessment of
      property, plant and equipment would include, but not be limited to, a
      significant, sustained negative trend in operating results or cash flows; a
      decrease in demand for our services; a change in the competitive environment;
      and other industry and economic factors. Recoverability of assets to be held
      and
      used is measured by a comparison of the carrying amount of the asset to future
      net cash flows expected to be generated by the asset. If such assets are deemed
      to be impaired, the impairment to be recognized is measured by the amount by
      which the carrying amount of the assets exceeds the fair value of the assets
      based on the projected net cash flows discounted at a rate commensurate with
      the
      risk of the assets.




**Goodwill
      and Other Intangible Assets**




In
      accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No.
      142”), goodwill and intangible assets with indefinite lives are not amortized
      but instead are measured for impairment at least annually, or when events
      indicate that an impairment exists. As required by FAS No. 142, in our
      impairment test for goodwill, we compare the estimated fair value of goodwill
      to
      the carrying value. If the carrying value exceeds our estimate of fair value,
      we
      calculate impairment as the excess of the carrying value over our estimate
      of
      fair value. Our estimates of fair value utilized in goodwill tests may be based
      upon a number of factors, including our assumptions about the expected future
      operating performance of our reporting units. Our estimates may change in future
      periods due to, among other things, political and economic conditions and
      changes to our business operations or inability to meet business plans. Such
      changes may result in impairment charges recorded in future periods.




Intangible
      assets that are determined to have finite lives are amortized over their useful
      lives and are measured for impairment only when events or circumstances indicate
      the carrying value may be impaired. In these cases, we estimate the future
      undiscounted cash flows to be derived from the asset to determine whether or
      not
      a potential impairment exists. If the carrying value exceeds our estimate of
      future undiscounted cash flows, we then calculate the impairment as the excess
      of the carrying value of the asset over our estimate of its fair value.




**Income
      Taxes**




The
      provision for income taxes and corresponding balance sheet accounts are
      determined in accordance with Financial Accounting Standard No. 109, “Accounting
      for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and
      liabilities are determined based on the temporary differences between the bases
      of certain assets and liabilities for income tax and financial reporting
      purposes. The deferred tax assets and liabilities are classified according
      to
      the financial statement classification of the net assets and liabilities
      generating the differences. The Company provides a valuation allowance for
      that
      portion of deferred tax assets which it cannot determine is more likely than
      not
      to be recognized.




36




On
      July
      1, 2007, the Company adopted the provisions of Financial Accounting Standards
      (“FAS”) Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” ** (“FIN
      No.
      48”). The Company previously had accounted for tax contingencies in accordance
      with FAS No. 5, “Accounting for Contingencies”. As required by FIN No. 48, which
      clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
      financial statement benefit of a tax position only after determining that the
      relevant tax authority would more likely than not sustain the position following
      an audit. For tax positions meeting the more likely than not threshold, the
      amount recognized in the financial statements is the largest benefit that has
      a
      greater than 50 percent likelihood of being realized upon ultimate settlement
      with the relevant tax authority. At the adoption date, the Company applied
      FIN
      No. 48 to tax positions for all open tax years. The adoption of FIN No. 48
      resulted in a decrease to deferred tax assets and the related valuation
      allowance of approximately $352,000 as of July 1, 2007. At June 30, 2008, the
      amount of unrecognized tax benefits was approximately $777,000, of which
      approximately $360,000 would, if recognized, affect the Company’s effective tax
      rate.





To
      the
      extent a valuation allowance is established or an increase in the allowance
      is
      recorded in a period, a tax expense is provided in the statement of operations.
      Management judgment is required in determining the provision for income taxes,
      the deferred tax assets and liabilities and any valuation allowance recorded
      against net deferred tax assets. A valuation allowance of $10.8 million was
      recorded as of June 30, 2008, due to uncertainties related to utilizing some
      of
      the deferred tax assets, primarily consisting of certain net operating losses
      carried forward, before they expire. The valuation allowance is based on
      estimates of taxable income and the period over which deferred tax assets will
      be recoverable. In the event that actual results differ from these estimates,
      or
      these estimates are adjusted in future periods, it may be necessary to establish
      an additional valuation allowance that could materially impact the Company’s
      financial position and results of operations.





**Item
      8.  Financial Statements and Supplementary Data**





Our
      financial statements required by Form 10-K are attached following Part III
      of
      this report, commencing on page F-1.





**Item
      9.  Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure**





None.





**Item
      9A. Controls and Procedures**





*Evaluation
      of disclosure controls and procedures.*





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including the Chief Executive Officer, the Chief Financial
      Officer and the Chief Information Officer of the effectiveness of the design
      and
      operation of our disclosure controls and procedures pursuant to Exchange Act
      Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual
      Report on Form 10-K. Based upon this evaluation, the Chief Executive Officer
      and
      the Chief Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective as of June 30, 2008.





*Management’s
      Report on Internal Control over Financial Reporting*





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as that term is defined In Exchange Act Rule
      13a-15(f). Our internal control over financial reporting is a process designed
      to provide reasonable assurance regarding the reliability of our financial
      reporting and the preparation of our financial statements for external purposes
      in accordance with U.S. generally accepted accounting principles. Our control
      environment is the foundation for our system of internal control over financial
      reporting. Internal control over financial reporting includes those policies
      and
      procedures that (i) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect our transactions and dispositions of
      our
      assets; (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of our financial statements in accordance with
      generally accepted accounting principles, and that our receipts and expenditures
      are being made only in accordance with authorizations of our management and
      directors; and (iii) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use or disposition of our assets that
      could have a material effect on our financial statements.




37





Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting as of June 30, 2008. In making this assessment, management used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO) in Internal Control-Integrated framework. Based
      on
      our assessment, management has concluded that our internal control over
      financial reporting was effective as of June 30, 2008 to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external reporting purposes in accordance with
      U.S.
      generally accepted accounting principles.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the SEC that permit the
      Company to provide only management’s report in this annual report.





*Changes
      in Internal Control Over Financial Reporting*





No
      change
      in our internal control over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
      June 30, 2008 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial
      reporting.




*Inherent
      Limitations on Effectiveness of Controls*




Due
      to
      its inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. In addition, projections of any evaluation
      of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions or that the degree of compliance
      with the policies or procedures may deteriorate.




A
      control
      system, no matter how well designed and operated, can provide only reasonable,
      not absolute, assurance that the control system’s objectives will be met. The
      design of a control system must reflect the fact that there are resource
      constraints, and the benefits of controls must be considered relative to their
      costs. Furthermore, due to the inherent limitations in all control systems,
      no
      evaluation of controls can provide absolute assurance that misstatements due
      to
      error or fraud will not occur or that all control issues and instances of fraud,
      if any, within the Company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty and that
      breakdowns can occur because of a simple error or mistake. Controls can also
      be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the controls. The design of any system
      of
      controls is based in part on certain assumptions about the likelihood of future
      events, and there can be no assurance that any system’s design will succeed in
      achieving its stated goals under all potential future conditions.





**Item
      9B. Other Information**





None




38


**PART
      III**




**Item
      10.  Directors, Executive Officers, and Corporate Governance**





The
      information required by this item is incorporated by reference from our
      Definitive Proxy Statement in connection with our 2008 Annual Meeting of
      Stockholders to be filed with the Commission pursuant to Regulation 14A not
      later than 120 days after the end of the fiscal year covered by this
      report.





**Item
      11.  Executive Compensation**





The
      information required by this item is incorporated by reference from our
      Definitive Proxy Statement in connection with our 2008 Annual Meeting of
      Stockholders to be filed with the Commission pursuant to Regulation 14A not
      later than 120 days after the end of the fiscal year covered by this
      report.





**Item
      12.  Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters**





The
      information required by this item is incorporated by reference from our
      Definitive Proxy Statement in connection with our 2008 Annual Meeting of
      Stockholders to be filed with the Commission pursuant to Regulation 14A not
      later than 120 days after the end of the fiscal year covered by this
      report.





**Item
      13.  Certain Relationships, Related Transactions, and Director
      Independence**





The
      information required by this item is incorporated by reference from our
      Definitive Proxy Statement in connection with our 2008 Annual Meeting of
      Stockholders to be filed with the Commission pursuant to Regulation 14A not
      later than 120 days after the end of the fiscal year covered by this
      report.





**Item
      14.  Principal Accounting Fees and Services**





The
      information required by this item is incorporated by reference from our
      Definitive Proxy Statement in connection with our 2008 Annual Meeting of
      Stockholders to be filed with the Commission pursuant to Regulation 14A not
      later than 120 days after the end of the fiscal year covered by this
      report.




39




**PART
      IV**




**Item
      15.  Exhibits and Financial Statement Schedules**




**(a)
      Exhibits**




**Exhibits**
            
            **Description**2.1
            
            Asset
                Purchase Agreement by and among SMF Energy Corporation., SMF Services,
                Inc., Shank C&E Investments, L.L.C., Jerry C. Shanklin and Claudette
                Shanklin dated January 25, 2005 filed as Exhibit 2.1 to the Company’s Form
                8-K filed January 31, 2005 and incorporated by reference
                herein.2.2
            
            Supplemental
                Agreement dated February 18, 2005 to the Asset Purchase Agreement
                by and
                among SMF Energy Corporation., SMF Services, Inc., Shank C&E
                Investments, L.L.C., Jerry C. Shanklin and Claudette Shanklin dated
                January 25, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
                February 25, 2005 and incorporated by reference herein.2.3
            
            Stock
                Purchase Agreement by and among SMF Energy Corporation, H & W
                Petroleum Co., Inc., Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon
                Harkrider, William M. Harkrider II, W. M. Harkrider Testamentary
                Trust,
                Harkrider Distributing Company, Inc. and W & H Interests dated
                September 7, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
                September 8, 2005 and incorporated by reference herein.2.4
            
            Agreement
                of Merger and Plan of Merger and Reorganization between Streicher
                Mobile
                Fueling, Inc. and SMF Energy Corporation dated February 13, 2007.
                Filed as
                Exhibit 2.1 to the Company’s Form 8-K filed February 14, 2007 and
                incorporated by reference herein.3.1
            
            Restated
                Articles of Incorporation filed as Exhibit 3.1 to the Company’s Form 10-K
                for the fiscal year ended June 30, 2003 and incorporated by reference
                herein.3.2
            
            Amended
                and Restated Bylaws filed as Exhibit 3.2 to the Company’s Form 10-Q for
                the quarter ended December 31, 2003 and incorporated by reference
                herein.3.3
            
            Certificate
                of Incorporation of SMF Energy Corporation and Certificate of Amendment
                of
                Certificate of Incorporation of SMF Energy Corporation (incorporated
                by
                reference to Appendix B to the Company’s Definitive Proxy Statement on
                Schedule 14A, filed on October 30, 2006).3.4
            
            Bylaws
                of SMF Energy Corporation (incorporated by reference to Appendix
                D to the
                Company’s Definitive Proxy Statement on Schedule 14A, filed on October 30,
                2006).3.5
            
            Certificate
                of Designation of Series A Convertible Preferred Stock. Filed as
                Exhibit
                3.1 to the Company’s Form 8-K filed March 6, 2008 and incorporated by
                reference herein.




40




3.6
            
            Certificate
                of Designation of Series B Convertible Preferred Stock. Filed as
                Exhibit
                3.1 to the Company’s Form 8-K filed March 14, 2008 and incorporated by
                reference herein.3.7
            
            Certificate
                of Designation of Series C Convertible Preferred Stock. Filed as
                Exhibit
                3.1 to the Company’s Form 8-K filed August 21, 2008 and incorporated by
                reference herein.4.1
            
            Form
                of Common Stock Certificate filed as Exhibit 4.1 to the Company’s
                Registration Statement on Form SB-2 (No. 333-11541) and incorporated
                by
                reference herein.4.2
            
            Form
                of Redeemable Common Stock Purchase Warrant filed as Exhibit 4.2
                to the
                Company’s Registration Statement on Form SB-2 (No. 333-11541) and
                incorporated by reference herein.4.3
            
            Underwriters’
                Purchase Option Agreement between the Company and Argent Securities,
                Inc.
                filed as Exhibit 4.3 to the Company’s Registration Statement on Form SB-2
                (No. 333-11541) and incorporated by reference herein.4.4
            
            Warrant
                Agreement between the Company and American Stock Transfer & Trust
                Company filed as Exhibit 4.4 to the Company’s Registration Statement on
                Form SB-2 (No. 333-11541) and incorporated by reference herein.4.5
            
            Indenture
                with The Bank of Cherry Creek dated August 29, 2003 filed as Exhibit
                10.14
                to the Company’s Form 10-K for the fiscal year ended June 30, 2003 and
                incorporated by reference herein.4.6
            
            Form
                of 10% Promissory Note dated January 25, 2005 filed as Exhibit 10.2
                to the
                Company’s Form 8-K filed January 31, 2005 and incorporated by reference
                herein.4.7
            
            Form
                of Investor Warrant dated January 25, 2005 filed as Exhibit 10.3
                to the
                Company’s Form 8-K filed January 31, 2005 and incorporated by reference
                herein.4.8
            
            Indenture
                Agreement with American National Bank dated January 25, 2005 filed
                as
                Exhibit 10.4 to the Company’s Form 8-K filed January 31, 2005 and
                incorporated by reference herein.4.9
            
            Form
                of Placement Agent Warrants dated January 25, 2005 filed as Exhibit
                10.5
                to the Company’s Form 8-K filed January 31, 2005 and incorporated by
                reference herein.4.10
            
            Form
                of Note for Stock Purchase Agreement in Exhibit 2.3 herein filed
                as
                Exhibit 10.1 to the Company’s Form 8-K filed September 8, 2005 and
                incorporated by reference herein.4.11
            
            Form
                of 10% Promissory Note filed as Exhibit 10.3 to the Company’s Form 8-K
                filed September 8, 2005 and incorporated by reference
                herein.4.12
            
            Form
                of Investor Warrant filed as Exhibit 10.4 to the Company’s Form 8-K filed
                September 8, 2005 and incorporated by reference
                herein.




41




4.13
            
            Form
                of Indenture Agreement filed as Exhibit 10.5 to the Company’s Form 8-K
                filed September 8, 2005 and incorporated by reference
                herein.4.14
            
            Form
                of Warrant. Filed as Exhibit 10.1 to the Company’s Form 8-K filed February
                22, 2007 and incorporated by reference herein.4.15
            
            Form
                of 11% Senior Secured Convertible Promissory Note dated August 8,
                2007.
                Filed as Exhibit 10.2 to the Company’s Form 8-K filed August 14, 2007 and
                incorporated by reference herein.4.16
            
            Form
                of Indenture dated August 8, 2007. Filed as Exhibit 10.3 to the Company’s
                Form 8-K filed August 14, 2007 and incorporated by reference
                herein.4.17
            
            Form
                of Warrant dated August 8, 2007. Filed as Exhibit 10.5 to the Company’s
                Form 8-K filed August 14, 2007 and incorporated by reference
                herein.4.18
            
            Final
                form of 11% Senior Secured Convertible Promissory Note dated August
                8,
                2007. Filed as Exhibit 4.18 to the Company’s Form 10-K for the fiscal year
                ended June 30, 2007 and incorporated by reference
                herein.4.19
            
            Form
                of Promissory Note dated November 19, 2007. Filed as Exhibit 4.1
                to the
                Company’s Form 8-K filed November 23, 2007 and incorporated by reference
                herein.4.20
            
            Form
                of Allonge – Amendment to Promissory Note dated November 19, 2007. Filed
                as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended December
                31, 2007 filed February 14, 2008 and incorporated by reference
                herein.4.21
            
            Form
                of 12% Unsecured Convertible Promissory Note dated September 2, 2008.
                Filed as Exhibit 4.1 to the Company’s Form 8-K filed September 8, 2008 and
                incorporated by reference herein.10.1
            
            Registrant’s
                1996 Stock Option Plan filed as Exhibit 10.2 to the Company’s Registration
                Statement on Form SB-2 (No. 333-1154) and incorporated by reference
                herein.10.2
            
            2000
                Stock Option Plan filed as Exhibit 10.6 to the Company’s Form 10-K for the
                fiscal year ended January 31, 2001 and incorporated by reference
                herein.10.5
            
            2001
                Directors Stock Option Plan filed as Appendix A to the Company’s Proxy
                Statement for the Annual Meeting of Stockholders on December 9, 2004
                and
                incorporated by reference herein.10.6
            
            Loan
                and Security Agreement with Congress Financial Corporation dated
                September
                26, 2002 filed as Exhibit 99.1 to the Company’s Form 8-K filed September
                30, 2002 and incorporated by reference herein.10.7
            
            First
                Amendment to Loan and Security Agreement with Congress Financial
                Corporation dated March 31, 2003 filed as Exhibit 10.13 to the Company’s
                Form 10-K for the fiscal year ended June 30, 2003 and incorporated
                by
                reference herein.




42




10.8
            
            Security
                Agreement with The Bank of Cherry Creek dated August 29, 2003 filed
                as
                Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended June
                30, 2003 and incorporated by reference herein.10.9
            
            Second
                Amendment to Loan and Security Agreement with Congress Financial
                Corporation dated August 29, 2003 filed as Exhibit 10.1 to the Company’s
                Form 10-Q for the quarter ended September 30, 2003 and incorporated
                by
                reference herein.10.10
            
            Third
                Amendment to Loan and Security Agreement with Congress Financial
                Corporation dated August 3, 2003 filed as Exhibit 10.1 to the Company’s
                Form 10-Q for the quarter ended December 31, 2004 and incorporated
                by
                reference herein.10.11
            
            Form
                of Securities Purchase Agreement dated January 25, 2005 filed as
                Exhibit
                10.1 to the Company’s Form 8-K filed January 31, 2005 and incorporated by
                reference herein.10.12
            
            Fourth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, SMF Services, Inc. and Wachovia Bank, National Association,
                successor by merger to Congress Financial Corporation (Florida) dated
                February 18, 2005 filed as Exhibit 10.1 to the Company’s Form 8-K filed
                February 25, 2005 and incorporated by reference herein.10.13
            
            Subordination
                Agreement by, between and among Shank C&E Investments, L.L.C.,
                Wachovia Bank, National Association, successor by merger to Congress
                Financial Corporation (Florida), SMF Services, Inc. and SMF Energy
                Corporation dated February 18, 2005 filed as Exhibit 10.2 to the
                Company’s
                Form 8-K filed February 25, 2005 and incorporated by reference
                herein.10.14
            
            Amended
                and Restated Employment Agreement by and between SMF Energy Corporation
                and Richard E. Gathright executed May 14, 2005, effective as of March
                1,
                2005 filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter
                ended March 31, 2005, and incorporated by reference
                herein.10.15
            
            Form
                of Note Purchase Agreement filed as Exhibit 10.2 to the Company’s Form 8-K
                filed September 8, 2005 and incorporated by reference
                herein.10.16
            
            Form
                of Security Agreement filed as Exhibit 10.6 to the Company’s Form 8-K
                filed September 8, 2005 and incorporated by reference
                herein.10.17
            
            Fifth
                Amendment to Loan and Security Agreement by among SMF Energy Corporation,
                SMF Services, Inc. and Wachovia Bank, National Association, successor
                by
                merger to Congress Financial Corporation (Florida) dated October 1,
                2005. Filed as Exhibit 10.1 to the Company’s Form 8-K filed October 6,
                2005 and incorporated by reference herein.10.18
            
            Subordination
                Agreement executed effective as of the 1st day of October, 2005,
                by,
                between and among Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon Harkrider,
                William M. Harkrider II, W. M. Harkrider Testamentary Trust, Harkrider
                Distributing Company, Inc. and W & H Interests, Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (FLORIDA), and SMF Energy Corporation Filed as Exhibit
                10.2 to
                the Company’s Form 8-K filed October 6, 2005 and incorporated by reference
                herein.




43




10.19
            
            Warrant
                Purchase Agreement dated June 30, 2006. Filed as Exhibit 10.1 to
                the
                Company’s Form 8-K filed July 7, 2006 and incorporated by reference
                herein.10.20
            
            Form
                of Stock Purchase Warrant. Filed as Exhibit 10.2 to the Company’s Form 8-K
                filed July 7, 2006 and incorporated by reference
                herein.10.21
            
            Sixth
                Amendment to Loan and Security Agreement by among SMF Energy Corporation,
                SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated September 22, 2006 and effective March
                31,
                2006. Filed as Exhibit 10.1 to the Company’s Form 8-K filed October 2,
                2006 and incorporated by reference herein.10.22
            
            Seventh
                Amendment to Loan and Security Agreement by among SMF Energy Corporation,
                SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) effective September 22, 2006. Filed as Exhibit
                10.2
                to the Company’s Form 8-K filed October 2, 2006 and incorporated by
                reference herein.10.23
            
            Amendment
                to Warrant Purchase Agreement and Stock Purchase Warrant between
                Streicher
                Mobile Fueling, Inc. and the Purchasers dated September 28, 2006.
                Filed as
                Exhibit 10.1 to the Company’s Form 8-K filed October 3, 2006 and
                incorporated by reference herein.10.24
            
            Second
                Amendment to Warrant Purchase Agreement and Stock Purchase Warrant
                between
                Streicher Mobile Fueling, Inc. and the Purchasers dated November
                29, 2006.
                Filed as Exhibit 10.1 to the Company’s Form 8-K filed December 4, 2006 and
                incorporated by reference herein.10.25
            
            Third
                Amendment to Warrant Purchase Agreement and Stock Purchase Warrant
                between
                Streicher Mobile Fueling, Inc. and the Purchasers dated January 14,
                2007.
                Filed as Exhibit 10.1 to the Company’s Form 8-K filed January 19, 2007 and
                incorporated by reference herein.10.26
            
            Assumption
                Agreement and Eighth Amendment to Loan and Security Agreement by
                and among
                SMF Energy Corporation, successor by merger to Streicher Mobile Fueling,
                Inc., SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia
                Bank, National Association, successor by merger to Congress Financial
                Corporation (Florida) dated February 14, 2007. Filed as Exhibit 10.1
                to
                the Company’s Form 8-K filed February 21, 2007 and incorporated by
                reference herein.10.27
            
            Ninth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated February 15, 2007. Filed as Exhibit 10.2
                to
                the Company’s Form 8-K filed February 21, 2007 and incorporated by
                reference herein.10.28
            
            Fourth
                Amendment to Warrant Purchase Agreement and Stock Purchase Warrant
                between
                SMF Energy Corporation, Triage Capital Management, L.P. and Triage
                Capital
                Management B L.P. dated February 14, 2007. Filed as Exhibit 10.3
                to the
                Company’s Form 8-K filed February 21, 2007 and incorporated by reference
                herein.




44




10.29
            
            Form
                of Securities Purchase Agreement. Filed as Exhibit 10.2 to the Company’s
                Form 8-K filed February 22, 2007 and incorporated by reference
                herein.10.30
            
            Fifth
                Amendment to Warrant Purchase Agreement and Stock Purchase Warrant
                between
                SMF Energy Corporation, Triage Capital Management, L.P. and Triage
                Capital
                Management B L.P. dated March 29, 2007. Filed as Exhibit 10.1 to
                the
                Company’s Form 8-K filed April 3, 2007 and incorporated by reference
                herein.10.31
            
            Tenth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated August 8, 2007. Filed as Exhibit 10.1
                to the
                Company’s Form 8-K filed August 14, 2007 and incorporated by reference
                herein.10.32
            
            Form
                of Security Agreement, dated August 8, 2007. Filed as Exhibit 10.4
                to the
                Company’s Form 8-K filed August 14, 2007 and incorporated by reference
                herein.10.33
            
            Form
                of Note Purchase Agreement dated August 8, 2007. Filed as Exhibit
                10.33 to
                the Company’s Form 10-K for the fiscal year ended June 30, 2007 and
                incorporated by reference herein.10.34
            
            Form
                of Securities Purchase Agreement dated August 8, 2007. Filed as Exhibit
                10.34 to the Company’s Form 10-K for the fiscal year ended June 30, 2007
                and incorporated by reference herein.10.35
            
            Subordination
                Agreement dated July 13, 2007. Filed as Exhibit 10.33 to the Company’s
                Form 10-K for the fiscal year ended June 30, 2007 and incorporated
                by
                reference herein.10.36
            
            Eleventh
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated October 31, 2007. Filed as Exhibit 10.1
                to the
                Company’s Form 8-K filed November 2, 2007 and incorporated by reference
                herein.10.37
            
            Form
                of Subordination Agreement dated November 19, 2007. Filed as Exhibit
                10.1
                to the Company’s Form 8-K filed November 23, 2007 and incorporated by
                reference herein.10.38
            
            Form
                of Subordination Agreement dated November 19, 2007. Filed as Exhibit
                10.2
                to the Company’s Form 8-K filed November 23, 2007 and incorporated by
                reference herein.10.39
            
            Twelfth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated November 21, 2007. Filed as Exhibit 10.3
                to
                the Company’s Form 8-K filed November 23, 2007 and incorporated by
                reference herein.




45




10.40
            
            Thirteenth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated February 8, 2008. Filed as Exhibit 10.1
                to the
                Company’s Form 8-K filed February 14, 2008 and incorporated by reference
                herein.10.41
            
            Fourteenth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated March 6, 2008. Filed as Exhibit 10.1
                to the
                Company’s Form 8-K filed March 6, 2008 and incorporated by reference
                herein.10.42
            
            Form
                of Exchange Agreement. Filed as Exhibit 10.2 to the Company’s Form 8-K
                filed March 6, 2008 and incorporated by reference
                herein.10.43
            
            Form
                of Securities Purchase Agreement. Filed as Exhibit 10.3 to the Company’s
                Form 8-K filed March 6, 2008 and incorporated by reference
                herein.10.44
            
            Fifteenth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated March 10, 2008. Filed as Exhibit 10.1
                to the
                Company’s Form 8-K filed March 14, 2008 and incorporated by reference
                herein.10.45
            
            Form
                of Exchange Agreement. Filed as Exhibit 10.2 to the Company’s Form 8-K
                filed March 14, 2008 and incorporated by reference
                herein.10.46
            
            Form
                of Securities Purchase Agreement. Filed as Exhibit 10.1 to the Company’s
                Form 8-K filed August 21, 2008 and incorporated by reference
                herein.10.47
            
            Sixteenth
                Amendment to Loan and Security Agreement by and among SMF Energy
                Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                SMF
                Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                National Association, successor by merger to Congress Financial
                Corporation (Florida) dated September 2, 2008. Filed as Exhibit 10.1
                to
                the Company’s Form 8-K filed September 8, 2008 and incorporated by
                reference herein.*10.48
            
            Seventeenth
              Amendment to Loan and Security Agreement by and among SMF Energy
              Corporation, successor by merger to Streicher Mobile Fueling, Inc.
              SMF
              Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
              National Association, successor by merger to Congress Financial Coporation
              (Florida), dated September 17, 2008.10.49
            
            Form
                of Subordination Agreement. Filed as Exhibit 10.2 to the Company’s Form
                8-K filed September 8, 2008 and incorporated by reference
                herein.10.50
            
            Form
                of Securities Purchase Agreement. Filed as Exhibit 10.3 to the Company’s
                Form 8-K filed September 8, 2008 and incorporated by reference
                herein.*21.1
            
            Subsidiaries
                of the Company*23.1
            
            Consent
                of Grant Thornton LLP





*31.1
            
            Certificate
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002




46




*31.2
            
            Certificate
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002*32.1
            
            Certificate
                of Principal Executive Officer and Principal Financial Officer pursuant
                to
                Section 906 of The Sarbanes-Oxley Act of 2002




*Filed
      herewith





**(b)**  **Financial
      Statements and Schedule**




Our
      financial statements are attached following Part III of this report, commencing
      on page F-1. Financial statement schedules have been omitted since they are
      not
      required, not applicable, or the information is otherwise included.




47




**SIGNATURES**




Pursuant
      to the requirement of Section 13 or 15(d) of the Exchange Act of 1934, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




Dated:
                September 18, 2008
            **SMF
                ENERGY CORPORATION**By:
            /s/
                Richard E. GathrightRichard
                E. Gathright, Chief Executive Officer and
                President




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




**Name**
            
            **Title**
            
            **Date**By:
            Richard
                E. Gathright
            
            Chairman
                of the Board, Chief Executive
            
            September
                18, 2008Richard
                E. Gathright
            
            Officer
                and President (Principal Executive Officer)By:
            /s/
                Michael S. Shore
            
            Chief
                Financial Officer, Treasurer and Senior Vice
            
            September
                18, 2008Michael
                S. Shore
            
            President
                (Principal Financial Officer)By:
            /s/
                Laura Patricia Messenbaugh
            
            Chief
                Accounting Officer and Vice
            
            September
                18, 2008Laura Patricia
              Messenbaugh
            
            President
                (Principal Accounting Officer)By:
            /s/
                Wendell R. Beard
            
            Director
            
            September
                18, 2008Wendell
                R. BeardBy:
            /s/
                Steven R. Goldberg
            
            Director
            
            September
                18, 2008Steven
                R. GoldbergBy:
            /s/
                Nat Moore
            
            Director
            
            September
                18, 2008Nat
                MooreBy:
            /s/
                Larry S. Mulkey
            
            Director
            
            September
                18, 2008Larry
                S. MulkeyBy:
            /s/
                C. Rodney O’Connor
            
            Director
            
            September
                18, 2008C.
                Rodney O’ConnorBy:
            /s/
                Robert S. Picow
            
            Director
            
            September
                18, 2008Robert
                S. Picow




48


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of June 30, 2008 and 2007
            
            F-3Consolidated
                Statements of Operations for the Years Ended June 30, 2008 and
                2007
            
            F-4Consolidated
                Statements of Shareholders’ Equity for the Years Ended June 30, 2008 and
                2007
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2008 and
                2007
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-8




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and


Shareholders
      of SMF Energy Corporation




We
      have
      audited the accompanying consolidated balance sheets of SMF Energy Corporation
      (Delaware Corporation) and subsidiaries as of June 30, 2008 and 2007, and the
      related consolidated statements of operations, shareholders’ equity, and cash
      flows for each of the years then ended.  These consolidated financial
      statements are the responsibility of the Company's management.  Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





I n
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of SMF Energy Corporation
      and
      subsidiaries as of June 30, 2008 and 2007, and the results of their operations
      and their cash flows for each of the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.





As
      discussed in Notes 2 and 11 to the consolidated financial statements,
      effective July 1, 2007, the Company adopted the provisions of Financial
      Accounting Standards Board Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes”.





/s/
      Grant
      Thornton LLP




Fort
      Lauderdale, Florida


September
      18, 2008




F-2




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


***(
      in 000’s, except share and per share data)***


**June 30, 2008**
              
              **June 30, 2007****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              48
              
              $
              987Accounts
                  receivable, net of allowances for doubtful accounts
              
              
              30,169
              
              
              25,442Inventories,
                  net of reserves
              
              
              2,535
              
              
              2,283Prepaid
                  expenses and other current assets
              
              
              855
              
              
              471Total
                  current assets
              
              
              33,607
              
              
              29,183Restricted
                  cash
              
              
              69
              
              
              1,145Property
                  and equipment, net of accumulated depreciation
              
              
              10,276
              
              
              10,017Identifiable
                  intangible assets, net of accumulated amortization
              
              
              2,392
              
              
              2,771Goodwill
              
              
              228
              
              
              228Deferred
                  debt costs, net of accumulated amortization
              
              
              348
              
              
              521Other
                  assets
              
              
              64
              
              
              60Total
                  assets
              
              $
              46,984
              
              $
              43,925**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Line
                  of credit payable
              
              $
              19,789
              
              $
              17,297Accounts
                  payable
              
              
              9,921
              
              
              7,887Accrued
                  expenses and other liabilities
              
              
              4,938
              
              
              3,831Total
                  current liabilities
              
              
              34,648
              
              
              29,015Long-term
                  liabilities:Promissory
                  notes, net of unamortized debt discount
              
              
              8,794
              
              
              10,250Other
                  long-term liabilities
              
              
              490
              
              
              546Total
                  liabilities
              
              
              43,932
              
              
              39,811Commitments
                  and contingenciesShareholders’
                  equity:Preferred
                  stock, $0.01 par value; 10,000Series
                  Ashares
                  authorized, and 4,587and
                  0 issued and outstanding at June 30, 2008 and 2007,
                  respectively
              
              
              -
              
              
              -Preferred
                  stock, $0.01 par value; 2,000Series
                  Bshares
                  authorized, and 1,985and
                  0 issued and outstanding at June 30, 2008 and 2007,
                  respectively
              
              
              -
              
              
              -Common
                  stock, $0.01 par value; 50,000,000 shares authorized;
                  14,556,295and
                  13,702,426 issued and outstanding at June 30, 2008 and 2007,
                  respectively
              
              
              146
              
              
              137Additional
                  paid-in capital
              
              
              30,719
              
              
              25,021Accumulated
                  deficit
              
              
              (27,813
              )
              
              (21,044
              )Total
                  shareholders’ equity
              
              
              3,052
              
              
              4,114Total
                  liabilities and shareholders’ equity
              
              $
              46,984
              
              $
              43,925




**The
      accompanying notes to consolidated financial statements are an integral part
      of
      these consolidated balance sheets.**




F-3


**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


***(in
      000’s, except per share data)***





**Years Ended June 30,****2008**
            
            **2007**Petroleum
                product sales and service revenues
            
            $
            235,215
            
            $
            203,375Petroleum
                product taxes
            
            
            25,474
            
            
            26,394Total
                revenues
            
            
            260,689
            
            
            229,769Cost
                of petroleum product sales and service
            
            
            222,303
            
            
            190,744Petroleum
                product taxes
            
            
            25,474
            
            
            26,394Total
                cost of sales
            
            
            247,777
            
            
            217,138Gross
                profit
            
            
            12,912
            
            
            12,631Selling,
                general and administrative expenses
            
            
            14,881
            
            
            15,836Operating
                loss
            
            
            (1,969
            )
            
            (3,205
            )Interest
                expense
            
            
            (3,060
            )
            
            (3,727
            )Other
                income, net
            
            
            9
            
            
            343Loss
                on extinguishment of promissory notes
            
            
            (1,749
            )
            
            -Loss
                before income taxes
            
            
            (6,769
            )
            
            (6,589
            )Income
                tax expense
            
            
            -
            
            
            -Net
                loss
            
            $
            (6,769
            )
            $
            (6,589
            )Basic
                and diluted net loss per share computation:Net
                loss
            
            $
            (6,769
            )
            $
            (6,589
            )Less:
                Preferred stock dividends
            
            
            (249
            )
            
            -Net
                loss attributable to common shareholders
            
            $
            (7,018
            )
            $
            (6,589
            )Basic
                and diluted net loss per share attributable to common
                shareholders
            
            $
            (0.49
            )
            $
            (0.57
            )Basic
                and diluted weighted average common shares outstanding
            
            
            14,467
            
            
            11,509





**The
      accompanying notes to consolidated financial statements are an integral part
      of
      these consolidated statements of operations.**




F-4


**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


***(in
      000’s except share data)***





**Preferred Stock**
            
            **Preferred Stock**
            
            
            
            **Additional****Series A**
            
            **Series B**
            
            **Common Stock**
            
            **Paid-in**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Total****Balance
                at June 30, 2006**
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            
            10,491,143
            
            $
            105
            
            $
            19,890
            
            $
            (14,455
            )
            $
            5,540Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,589
            )
            
            (6,589
            )Exercise
                of warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            35,000
            
            
            -
            
            
            31
            
            
            -
            
            
            31Issuance
                of common stock through the exercise of warrants related to the conversion
                of promissory notes, net of unamortized debt discount of
                $206
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,057,283
            
            
            11
            
            
            1,393
            
            
            -
            
            
            1,404Issuance
                of common stock and warrants from private placement, net of issuance
                costs
                of $364
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,119,000
            
            
            21
            
            
            2,889
            
            
            -
            
            
            2,910Adjustment
                for warrant extensions
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            327
            
            
            -
            
            
            327Amortization
                of stock compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            491
            
            
            -
            
            
            491**Balance
                at June 30, 2007**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,702,426
            
            
            137
            
            
            25,021
            
            
            (21,044
            )
            
            4,114Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,769
            )
            
            (6,769
            )Issuance
                of common stock and warrants from August 2007 offering, net of issuance
                costs of $123
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            853,869
            
            
            9
            
            
            1,234
            
            
            -
            
            
            1,243Issuance
                of Series A preferred stock, net of issuance costs of $56
            
            
            4,587
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,467
            
            
            -
            
            
            2,467Issuance
                of Series B preferred stock, net of issuance costs of $44
            
            
            -
            
            
            -
            
            
            1,985
            
            
            -
            
            
            -
            
            
            -
            
            
            1,742
            
            
            -
            
            
            1,742Series
                A preferred stock dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (152
            )
            
            -
            
            
            (152
            )Series
                B preferred stock dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (97
            )
            
            -
            
            
            (97
            )Amortization
                of stock compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            504
            
            
            -
            
            
            504**Balance
                at June 30, 2008**
            
            
            4,587
            
            $
            -
            
            
            1,985
            
            $
            -
            
            
            14,556,295
            
            $
            146
            
            $
            30,719
            
            $
            (27,813
            )
            $
            3,052




**The
      accompanying notes to consolidated financial statements are an integral part
      of
      these consolidated statements of shareholders’ equity.**




F-5




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 ***(in
        000’s)***
 **Years Ended June 30,****2008**
                
                **2007****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss
                
                $
                (6,769
                )
                $
                (6,589
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                    and amortization:Cost
                    of sales
                
                
                1,442
                
                
                1,702Selling,
                    general and administrative
                
                
                1,254
                
                
                921Amortization
                    of deferred debt costs
                
                
                318
                
                
                342Amortization
                    of debt discount
                
                
                81
                
                
                746Amortization
                    of stock-based compensation
                
                
                504
                
                
                491Gain
                    from sale of assets
                
                
                (70
                )
                
                (321
                )Inventory
                    reserve
                
                
                (139
                )
                
                (38
                )Provision
                    for doubtful accounts
                
                
                198
                
                
                477Non-cash
                    loss on extinguishment of promissory notes
                
                
                1,479
                
                
                -Other
                
                
                -
                
                
                (23
                )Changes
                    in operating assets and liabilities:Increase
                    in accounts receivable
                
                
                (4,925
                )
                
                (1,588
                )Decrease
                    (increase) in inventories, prepaid expenses and other assets
                
                
                (501
                )
                
                1,040Increase
                    (decrease) in accounts payable and other liabilities
                
                
                2,885
                
                
                (1,523
                )Net
                    cash used in operating activities
                
                
                (4,243
                )
                
                (4,363
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Purchases
                    of property and equipment
                
                
                (2,459
                )
                
                (1,344
                )Proceeds
                    from sale of equipment
                
                
                86
                
                
                1,141Decrease
                    (increase) in restricted cash
                
                
                1,076
                
                
                (1,145
                )Net
                    cash used in investing activities
                
                
                (1,297
                )
                
                (1,348
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                    from line of credit
                
                
                263,676
                
                
                246,210Repayments
                    of line of credit
                
                
                (261,184
                )
                
                (244,525
                )Proceeds
                    from issuance of promissory notes
                
                
                7,690
                
                
                -Proceeds
                    from issuance of common stock and warrants
                
                
                1,170
                
                
                2,910Proceeds
                    from issuance of preferred stock
                
                
                516
                
                
                -Principal
                    payments on promissory notes
                
                
                (6,359
                )
                
                (1,794
                )Debt
                    issuance costs
                
                
                (568
                )
                
                (114
                )Common
                    stock, preferred stock, and warrants issuance costs
                
                
                (202
                )
                
                -Payment
                    of preferred stock dividends
                
                
                (56
                )
                
                -Capital
                    lease payments
                
                
                (82
                )
                
                (123
                )Net
                    proceeds from exercise of common stock options and warrants
                
                
                -
                
                
                31Net
                    cash provided by financing activities
                
                
                4,601
                
                
                2,595NET
                    DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (939
                )
                
                (3,116
                )CASH
                    AND CASH EQUIVALENTS, beginning of period
                
                
                987
                
                
                4,103CASH
                    AND CASH EQUIVALENTS, end of period
                
                $
                48
                
                $
                987


**The
      accompanying notes to consolidated financial statements are an integral part
      of
      these consolidated statements of cash flows.**




F-6


**SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 ***(in
          000’s)***


**(Continued)**
              
              **Years Ended June 30,****2008**
              
              **2007****SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                  paid for interest
              
              $
              2,871
              
              $
              2,475**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH ACTIVITIES:**Refinancing
                  of August 2003, January 2005, and September 2005 notes into August
                  2007
                  notes
              
              $
              4,918
              
              $
              -Non-cash
                  costs related to issuance of stock, warrants and August 2007
                  notes
              
              $
              134
              
              $
              -Debt
                  discount costs related to issuance of stock, warrants, extensions
                  of
                  warrants and August 2007 notes
              
              $
              112
              
              $
              327Conversion
                  of promissory notes and accrued interest to preferred
                  stock
              
              $
              3,793
              
              $
              -Accrued
                  dividends related to preferred stock
              
              $
              193
              
              $
              -Acquisition
                  of equipment under capital leases
              
              $
              143
              
              $
              -Conversion
                  of promissory notes to common shares
              
              $
              -
              
              $
              1,404


**The
      accompanying notes to consolidated financial statements are an integral part
      of
      these consolidated statements of cash flows.**




F-7




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.**
            **NATURE
                OF OPERATIONS**




SMF
      Energy Corporation is a Delaware corporation (the “Company”) formed in 2006. In
      December 2006, the shareholders of Streicher Mobile Fueling, Inc. (“Streicher”),
      a Florida corporation formed in 1996, approved changing Streicher’s name to SMF
      Energy Corporation and the reincorporation of Streicher in Delaware by merger
      into the Company. The merger was effective February 14, 2007.




The
      Company provides petroleum product distribution services, transportation
      logistics and emergency response services to the trucking, manufacturing,
      construction, shipping, utility, energy, chemical, telecommunications, and
      government services industries. The Company generates its revenues from
      commercial mobile and bulk fueling; the packaging, distribution and sale of
      lubricants; integrated out-sourced fuel management; transportation logistics,
      and emergency response services. The Company’s fleet of custom specialized tank
      wagons, tractor-trailer transports, box trucks and customized flatbed vehicles
      delivers diesel fuel and gasoline to customers’ locations on a regularly
      scheduled or as needed basis, refueling vehicles and equipment, re-supplying
      fixed-site and temporary bulk storage tanks, and emergency power generation
      systems; and distributes a wide variety of specialized petroleum products,
      lubricants and chemicals to its customers. In addition, the Company’s fleet of
      special duty tractor-trailer units provides heavy haul transportation services
      over short and long distances to customers requiring the movement of over-sized
      or over-weight equipment and manufactured products .





At
      June
      30, 2008, the Company was conducting operations in the ten states of Alabama,
      California, Florida, Georgia, Louisiana, Mississippi, North Carolina, South
      Carolina, Tennessee and Texas.





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





***Basis
      of Presentation***





The
      consolidated financial statements include the accounts of SMF Energy Corporation
      and its wholly owned subsidiaries, SMF Services, Inc., H & W Petroleum
      Company, Inc. (“H & W”) and Streicher Realty, Inc. All significant
      intercompany balances and transactions have been eliminated in
      consolidation.





***Segment
      Information***





The
      Company follows Financial Accounting Standard No. 131, “ *Disclosures
      about Segments of an Enterprise and Related Information* ”
(“FAS
      No. 131”) to report financial and descriptive information about its reportable
      operating segments. Operating segments are components of an enterprise for
      which
      separate financial information is available and is evaluated regularly by the
      chief operating decision maker in deciding how to allocate resources and in
      assessing performance. The Company’s chief operating decision maker currently
      evaluates the Company’s operations from a number of different operational
      perspectives including but not limited to geographic location. Although the
      Company records revenue by type of service, management does not assign and/or
      allocate specific resources and assets to these services. The Company’s assets
      are used interchangeably for the different types of services; as a result,
      earnings information related to each type of service is limited.





Reports
      reviewed by management based on geographic location are prepared for ease of
      review. However, these geographic areas have similar economic characteristics
      in
      regards to the nature of the products and services, nature of processes, type
      of
      customers, methods used to distribute the products, and the nature of the
      regulatory environment. As a result, many business decisions are based on
      consolidated metrics such as total gallons sold, net margin per total gallons
      sold, gross margin per total gallons sold, and other consolidated results.
      Due
      to the nature of the business, at June 30, 2008 and 2007, the Company had only
      one reportable segment of business: distribution of petroleum products from
      integrated out-sourced management services. Nevertheless, management evaluates,
      at least quarterly, whether the Company continues to have one single reportable
      segment.





F-8




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




***Cash
      and Cash Equivalents***




The
      Company considers all highly liquid investments purchased with an original
      maturity of three months or less to be cash equivalents. The Company maintains
      its cash balances at financial institutions, which at times may exceed federally
      insured limits. Balances up to $100,000 are insured by the Federal Deposit
      Insurance Corporation. The Company has not experienced any losses in such bank
      accounts.




***Restricted
      Cash***





In
      May
      2007, the Company sold 29 pieces of equipment for an aggregate amount of $1.1
      million. The proceeds of the sale were collateral for the August 2007 Notes,
      and
      therefore, were designated for the purchase of replacement equipment. At June
      30, 2007, these proceeds were held by the indenture trustee, and recorded as
      restricted cash. Any proceeds from insurance receipts related to loss, or the
      sale of equipment held in collateral, and any interest income associated with
      restricted cash balances are recorded as restricted cash.




During
      fiscal 2008, the Company purchased thirteen pieces of equipment for an aggregate
      amount of $1.22 million. At June 30, 2008, restricted cash was
      $69,000.




***Accounts
      Receivable***




Accounts
      receivable mainly consist of amounts due from customers within a diverse range
      of industries and are generally unsecured. The carrying amount of accounts
      receivable is reduced by an allowance for doubtful accounts that reflects
      management’s best estimate of the amounts that will not be collected. The
      Company provides for credit losses based on management’s evaluation of
      collectability including current and historical performance, credit worthiness
      and experience of each customer. Uncollectible accounts receivables are written
      off when a settlement is reached for an amount less than the outstanding balance
      or when the Company determines that the balance will not be
      collected.




Activity
      in the allowance for doubtful accounts for the indicated periods is as follows
      (in thousands):





**June
                30,****2008**
            
            **2007**Balance
                – beginning of period
            
            $
            1,401
            
            $
            1,252Provision
                for doubtful accounts
            
            
            198
            
            
            477Write-offs,
                net of recoveries
            
            
            (316
            )
            
            (328
            )Balance
                – end of period
            
            $
            1,283
            
            $
            1,401




***Inventories***




Inventories,
      consisting primarily of lubricants, chemicals, diesel fuel and gasoline, are
      stated at the lower of cost or market and include federal and state petroleum
      product taxes payable to vendors. Cost is determined using the first-in,
      first-out method. Inventories of $2.5 million and $2.3 million at June 30,
      2008
      and 2007 are net of reserves for slow moving inventory of $99,000 and $238,000,
      respectively.




F-9




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




***Property
      and Equipment***




Property
      and equipment are stated at cost less accumulated depreciation. Ordinary
      maintenance, repairs and replacement parts are expensed as incurred.
      Improvements that significantly increase the value or useful life of property
      and equipment are capitalized. Property and equipment are depreciated using
      the
      straight-line method over the estimated useful lives of the assets. Leasehold
      improvements are depreciated over the lesser of the useful life of the assets
      or
      the lease term using the straight-line method. Depreciation expense for property
      and equipment and leasehold improvements was $2.3 million and $2.2 million,
      for
      the years ended June 30, 2008 and 2007, respectively.




Property
      and equipment balances and the estimated useful lives were as follows at the
      indicated dates (in thousands):




**June
                30,**
            
            **Estimated
                Useful****2008**
            
            **2007**
            
            **Life**Fuel
                trucks, tanks and vehicles
            
            $
            18,126
            
            $
            16,964
            
            
            5 –
                25 yearsMachinery,
                equipment and software
            
            
            1,488
            
            
            1,334
            
            
            3
                – 5 yearsFurniture
                and fixtures
            
            
            596
            
            
            587
            
            
            5
                – 10 yearsLeasehold
                improvements
            
            
            459
            
            
            457
            
            
            Lesser of lease term or useful lifeSoftware
                development / ERP
            
            
            3,521
            
            
            2,415
            
            
            5
                yearsLand
            
            
            67
            
            
            67
            
            
            —24,257
            
            
            21,824Less:
                Accumulated depreciation
            
            
            (13,981
            )
            
            (11,807
            )Property
                and equipment, net
            
            $
            10,276
            
            $
            10,017




In
      accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of
      Computer Software Developed or Obtained for Internal Use,” the Company
      capitalizes certain costs used in the development of internal use software,
      which consists primarily of the Company’s new Enterprise Resource Planning
      (“ERP”) operating system. These costs include external software and consulting
      costs that were incurred as a result of the costs associated with the
      implementation, coding and software configuration. The Company substantially
      completed the implementation of its ERP system in the fourth quarter of fiscal
      2007, and during fiscal 2008, put in place additional improvements of $1.1
      million. At June 30, 2008 and 2007, the capitalized costs relating to internal
      use software were $3.5 million and $2.4 million, respectively. The Company
      did
      not capitalize any interest associated with the software development as the
      amounts were immaterial.





***Income
      Taxes***




The
      provision for income taxes and corresponding balance sheet accounts are
      determined in accordance with Financial Accounting Standard No. 109, “Accounting
      for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and
      liabilities are determined based on the temporary differences between the bases
      of certain assets and liabilities for income tax and financial reporting
      purposes. The deferred tax assets and liabilities are classified according
      to
      the financial statement classification of the net assets and liabilities
      generating the differences. The Company provides a valuation allowance for
      that
      portion of deferred tax assets, which it cannot determine is more likely than
      not to be recognized.





F-10





**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**– ***Continued***





On
      July
      1, 2007, the Company adopted the provisions of Financial Accounting Standards
      (“FAS”) Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” ** (“FIN
      No.
      48”). The Company previously had accounted for tax contingencies in accordance
      with FAS No. 5, “Accounting for Contingencies”. As required by FIN No. 48, which
      clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
      financial statement benefit of a tax position only after determining that the
      relevant tax authority would more likely than not sustain the position following
      an audit. For tax positions meeting the more likely than not threshold, the
      amount recognized in the financial statements is the largest benefit that has
      a
      greater than 50 percent likelihood of being realized upon ultimate settlement
      with the relevant tax authority. At the adoption date, the Company applied
      FIN
      No. 48 to tax positions for all open tax years. The adoption of FIN No. 48
      resulted in a decrease to deferred tax assets and the related valuation
      allowance of approximately $352,000 as of July 1, 2007.





At
      July
      1, 2007 and June 30, 2008, the amount of unrecognized tax benefits was
      approximately $847,000 and $777,000 respectively, of which approximately
      $352,000 and $360,000 would, if recognized, affect the Company’s effective tax
      rate for each respective tax year.





The
      Company recognizes accrued interest and penalties related to unrecognized tax
      benefits in income taxes. No interest and penalties were accrued upon the
      adoption of FIN No. 48 due to the existence of net operating loss carryforwards
      benefits that would exceed any interest and penalties expense related to
      uncertain tax positions.




The
      Company or its subsidiaries file income tax returns in the U.S. federal
      jurisdiction and various states and other local jurisdictions.




***Revenue
      Recognition***




The
      Company recognizes revenues at the time that its petroleum and other products
      and services are delivered, and the customer takes ownership and assumes risk
      of
      loss, provided that collections are reasonably assured at the time.




If
      the
      Company bears the risk of loss, the Company accounts for petroleum product
      taxes
      collected from its customers that are assessed from government authorities,
      on a
      gross basis, in accordance with Emerging Issues Task Force Issue No. 06-03
      (“EITF Issue No. 06-03”), “How Taxes Collected from Customers and Remitted to
      Governmental Authorities Should be Presented in the Income Statement (“That Is,
      Gross Versus Net Presentation”).




***Use
      of Estimates***




The
      preparation of the Consolidated Financial Statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect amounts
      reported in the financial statements and accompanying notes. These assumptions,
      if not realized, could affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.




***Fair
      Value of Financial Instruments***




The
      Company’s financial instruments, primarily consisting of cash and cash
      equivalents, restricted cash, accounts receivable, accounts payable, line of
      credit payable, promissory notes, equipment debt and long-term debt, approximate
      fair value due to the short-term maturity of these instruments or interest
      rates
      that approximate current market rates.





F-11





**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**– ***Continued***




***Deferred
      Debt Costs and Debt Discount***




The
      Company is amortizing its deferred debt costs and debt discount as interest
      expense under the effective interest method over the respective term of the
      debt
      issued. Activity related to the deferred debt costs and debt discount were
      as
      follows (in thousands):




**June
                30,****2008**
            
            **2007**Deferred
                Debt CostsBalance,
                net – beginning of period
            
            $
            521
            
            $
            749Amortization
            
            
            (318
            )
            
            (342
            )Write
                off of debt costs related to the conversion of debt
            
            
            (536
            )
            
            -Additional
                debt costs incurred during the year
            
            
            681
            
            
            114Balance
                – end of period
            
            $
            348
            
            $
            521Debt
                DiscountBalance,
                net – beginning of period
            
            $
            1,027
            
            $
            1,652Amortization
            
            
            (81
            )
            
            (746
            )Adjustment
                for warrant extension
            
            
            -
            
            
            327Write
                off of debt discount related to the conversion of debt
            
            
            (993
            )
            
            (206
            )Valuation
                of warrants issued and beneficial conversion feature
            
            
            112
            
            
            -Balance
                – end of period
            
            $
            65
            
            $
            1,027




During
      the year ended June 30, 2007, the Company wrote-off $206,000 of unamortized
      debt
      discounts related to the non-detachable conversion warrants issued on June
      30,
      2006 which were exercised in the conversion of a portion of the August 2003
      and
      January 2005 Notes into common shares. Since these write-offs were related
      to
      the conversion of notes, they were recorded as a reduction of additional paid-in
      capital. See Note 6 - Long Term Debt.





During
      the year ended June 30, 2008, the August 2003, January 2005 and September 2005
      senior promissory notes were satisfied, and as a result, the Company wrote-off
      $443,000 of unamortized debt discounts and $978,000 of unamortized debt costs
      as
      losses on extinguishment of promissory notes. In addition, during the year
      ended
      June 30, 2008, the November 2007 and a portion of the August 2007 Notes were
      exchanged into Series A and Series B Preferred Stock; as a result, the Company
      wrote-off $93,000 of unamortized debt costs and $15,000 of unamortized debt
      discounts as additional losses on extinguishment of promissory notes. See Note
      6
      - Long Term Debt - *Other* .





F-12




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




***Net
      Loss Per Share***





Basic
      net
      loss per share is computed by dividing the net loss attributable to common
      shareholders by the weighted average number of common shares outstanding during
      each year. Diluted earnings per share would be computed by dividing net earnings
      attributable to common shareholders by the weighted-average number of common
      shares outstanding, increased to include the number of additional common shares
      that would have been outstanding if the dilutive potential common shares had
      been issued. The dilutive effect of outstanding common share equivalents would
      be reflected in diluted earnings per share by application of the treasury stock
      method. Since the Company reported a net loss during the fiscal years ended
      June
      30, 2008 and 2007, the Company excluded the impact of its common stock
      equivalents in the computation of dilutive loss per share for those periods,
      as
      their effect would be anti-dilutive.




Common
      stock equivalents outstanding consisted of (in thousands):




**June
                30,****2008**
            
            **2007**Stock
                options
            
            
            1,997
            
            
            1,849Common
                stock warrants
            
            
            887
            
            
            808Promissory
                note conversion rights
            
            
            3,034
            
            
            -Preferred
                stock conversion rights
            
            
            6,572
            
            
            -Total
                common stock equivalents outstanding
            
            
            12,490
            
            
            2,657




The
      following table sets forth the computation of basic and diluted loss per share
      (in thousands, except per share amounts):




**Years
                Ended June 30,****2008**
            
            **2007**Net
                loss
            
            $
            (6,769
            )
            $
            (6,589
            )Less:
                Preferred stock dividends
            
            
            (249
            )
            
            -Net
                loss attributable to common shareholders
            
            $
            (7,018
            )
            $
            (6,589
            )Net
                loss per share attributable to common shareholders – basic and
                diluted
            
            $
            (0.49
            )
            $
            (0.57
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            14,467
            
            
            11,509








F-13




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




***Impairment
      or Disposal of Long-Lived Assets***




In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“FAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” (“FAS No. 144”), the Company reviews long-lived assets for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      an asset may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of an asset to forecasted future
      undiscounted cash flows expected to be generated by the asset. If the carrying
      amount of an asset exceeds its estimated future cash flows, an impairment charge
      would be recognized by the amount that the carrying amount of the asset exceeds
      the fair value of the asset based on the projected net cash flows discounted
      at
      a rate commensurate with the risk of the asset. Assets to be disposed of are
      reported at the lower of their carrying amount or fair value less costs to
      sell.
      As of June 30, 2008 and 2007, no impairment was recorded.




***Identifiable
      Intangible Assets and Goodwill***




In
      accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No.
      142”), the Company does not amortize goodwill and intangible assets with
      indefinite lives, but instead measures for impairment at least annually or
      when
      events indicate that an impairment exists. As required by FAS No. 142, the
      Company compares the fair value of the applicable reporting unit to its carrying
      value.




Intangible
      assets that are determined to have definite lives are amortized over their
      useful lives and are measured for impairment only when events or circumstances
      indicate the carrying value may be impaired in accordance with FAS No. 144,
      discussed above. As of June 30, 2008 and 2007, no impairment was recorded.




***Asset
      Retirement Obligation***




The
      Company accounts for asset retirement obligations in accordance with the
      provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” (“FAS
      No. 143”). This statement addresses financial accounting and reporting for
      obligations associated with the retirement of tangible long-lived assets and
      the
      associated retirement costs. Retirement is defined as the other-than-temporary
      removal of a long-lived asset from service. The term encompasses sale,
      abandonment, recycling or disposal in some other manner.





In
      fiscal
      year 2005, as a result of the H & W acquisition, the Company recorded an
      estimated liability for the removal and clean-up of three underground fuel
      storage tanks and has estimated the remaining useful life of those tanks to
      be
      ten years. At June 30, 2008 and 2007, the Company had a liability for asset
      retirement obligations of $136,000 and $126,000, respectively, which is
      classified as Other long-term liabilities in the accompanying Consolidated
      Balance Sheets.




***Stock-Based
      Compensation***




In
      July
      2005, the Company adopted the provisions of FAS No. 123R, “Share-Based Payment”,
      a revision of FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS No.
      123R”), using the modified prospective method in which stock-based compensation
      cost was recognized beginning with the effective date (a) based on the
      requirements of FAS No. 123R for all share-based payments granted after July
      1,
      2005 and (b) based on the requirements of FAS No. 123R for all awards granted
      to
      employees prior to July 1, 2005 that remained unvested on
      July 1, 2005. The standard required companies to expense the
      grant-date fair value of stock options and other equity-based compensation
      granted to employees.




Amortization
      of stock compensation expense for the years ended June 30, 2008 and 2007 was
      $504,000 and $491,000, respectively, and is included in selling, general and
      administrative expenses in the Consolidated Statements of Operations.





F-14




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***





The
      fair
      value of each option is estimated on the date of grant using the Black-Scholes
      option valuation model with the following weighted average assumptions:





**Year Ended June 30,****2008**
            
            **2007**Risk
                free interest rate
            
            
            4.57
            %
            
            4.70
            %Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            103.4
            %
            
            106.5
            %Expected
                life
            
            
            7.9
                years
            
            
            7.9
                years





Use
      of
      the Black-Scholes model requires management to make certain assumptions with
      respect to selected model input. The risk-free rate is based on a U.S. Treasury
      zero-coupon bond issue with a remaining term equal to the expected term of
      the
      option. The dividend yield is zero per share because we have not paid dividends
      on common stock in the past and do not expect to pay dividends in the
      foreseeable future. Expected volatilities are based on the historical volatility
      of the Company’s stock. The Company uses historical data to estimate option
      exercises and employee terminations within the valuation model. The expected
      life of the options granted is derived from the output of the option valuation
      model and represents the period of time that options granted are expected to
      be
      outstanding. The fair value of the stock options is expensed on a uniform
      straight-line basis over the vesting period.





***Recent
      Accounting Pronouncements***




In
      September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
      assets and liabilities. Under FAS No. 157, fair value refers to the price that
      would be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. In this standard, the FASB clarifies the principle that fair
      value should be based on the assumptions that market participants would use
      when
      pricing the asset or liability. In support of this principle, FAS No. 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. The fair value hierarchy gives the highest priority
      to quoted prices in active markets and the lowest priority to unobservable
      data,
      for example, the reporting entity’s own data. Under the standard, fair value
      measurements would be separately disclosed by level within the fair value
      hierarchy. The application of FAS No. 157 is effective for financial statements
      issued for the Company’s first quarter of fiscal year 2009. FASB Staff Position
      (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157,” issued in February
      2008, provides a one-year deferral of the effective date of FAS No. 157 for
      nonfinancial assets and nonfinancial liabilities, except those that are
      recognized or disclosed in financial statements at least annually at fair value
      on a recurring basis. The Company has not yet determined the impact, if any,
      that the adoption of FAS No. 157 and FAS No. 157-2 will have on its consolidated
      financial position, results of operations or cash flows.





In
      February 2007, FAS Statement No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities” (“FAS No. 159”), was issued.  FAS No. 159
      enables companies to report selected financial assets and liabilities at their
      fair value.  This statement requires companies to provide additional
      information to help investors and other users of financial statements understand
      the effects of a company’s election to use fair value on its earnings.  FAS
      No. 159 also requires companies to display the fair value of assets and
      liabilities on the face of the balance sheet when a company elects to use fair
      value.  FAS No. 159 is effective for the Company’s first quarter of fiscal
      year 2009. The Company has not yet determined the impact, if any, that the
      adoption of FAS No. 159 will have on its financial condition or results of
      operations.




In
      December 2007, the FASB issued FAS Statement No. 141 (revised 2007), *Business
      Combinations* (FAS
      No.
      141R”), which replaces FAS No 141. The statement retains the purchase method of
      accounting for acquisitions, but requires a number of changes, including changes
      in the way assets and liabilities are recognized in the purchase accounting.
      It
      also changes the recognition of assets acquired and liabilities assumed arising
      from contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. FAS No. 141R is effective for the Company beginning
      July 1, 2009 and will apply prospectively to business combinations
      completed on or after that date.





F-15




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




In
      December 2007, the FASB issued FAS Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting for minority interests (“FAS No. 160”).
      Minority interests will be recharacterized as noncontrolling interests and
      will
      be reported as a component of equity separate from the parent’s equity, and
      purchases or sales of equity interests that do not result in a change in control
      will be accounted for as equity transactions. In addition, net income
      attributable to the noncontrolling interest will be included in consolidated
      net
      income on the face of the income statement and, upon a loss of control, the
      interest sold, as well as any interest retained, will be recorded at fair value
      with any gain or loss recognized in earnings. FAS No. 160 is effective for
      the Company beginning July 1, 2009 and will apply prospectively, except for
      the presentation and disclosure requirements, which will apply retrospectively.
      The Company is currently assessing the potential impact that adoption of SFAS
      No. 160 would have on its financial statements.




In
      March
      2008, the FASB issued FAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities — an amendment of FAS
      Statement No. 133* (“FAS
      No. 161”). This Standard requires enhanced disclosures regarding derivatives and
      hedging activities, including: (a) the manner in which an entity uses derivative
      instruments; (b) the manner in which derivative instruments and related hedged
      items are accounted for under FAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ;
      and (c)
      the effect of derivative instruments and related hedged items on an entity’s
      financial position, financial performance, and cash flows. FAS No. 161 is
      effective for the Company beginning July 1, 2009. As FAS No. 161 relates
      specifically to disclosures, the standard will have no impact on our financial
      condition, results of operations or cash flows.




In
      April
      2008, the FASB issued FAS Statement No. 142-3, “Determination of the Useful Life
      of Intangible Assets,” (“FAS No. 142-3”). The standard revises the factors that
      an entity should consider to develop renewal or extension assumptions used
      in
      determining the useful life of a recognized intangible asset. FAS No. 142-3
      is
      effective for the Company beginning July 1, 2009. The Company has not yet
      determined the impact, if any, that the adoption of FAS No. 142-3 will have
      on
      its consolidated financial position or results of operations.




In
      May
      2008, the FASB issued FAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* (“FAS
      No. 162”). This Standard identifies the sources of accounting principles and the
      framework for selecting the principles to be used in the preparation of
      financial statements of nongovernmental entities that are presented in
      conformity with generally accepted accounting principles. FAS No. 162 directs
      the hierarchy to the entity, rather than the independent auditors, as the entity
      is responsible for selecting accounting principles for financial statements
      that
      are presented in conformity with generally accepted accounting principles.
      The
      Standard is effective 60 days following SEC approval of the Public Company
      Accounting Oversight Board amendments to remove the hierarchy of generally
      accepted accounting principles from the auditing standards. FAS No. 162 is
      not
      expected to have an impact on our financial condition, results of operations
      or
      cash flows.





F-16


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***




**3.**
            **IDENTIFIABLE
                INTANGIBLE ASSETS AND GOODWILL**





The
      following table summarizes the Company’s identifiable intangible assets and
      goodwill balances as of June 30, 2008 and 2007 (in thousands):





**2008**
            
            **2007****Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**
              **Carrying**
              **Amount**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**
              **Carrying**
              **Amount**
            
            **Amortization**
              **Period**
              **(Years)**Amortized intangible
                assets:Customer
                relationships
            
            $
            1,768
            
            $
            385
            
            $
            1,383
            
            $
            1,768
            
            $
            253
            
            $
            1,515
            
            
            15Favorable
                leases
            
            
            196
            
            
            108
            
            
            88
            
            
            196
            
            
            68
            
            
            128
            
            
            5Trademarks
            
            
            687
            
            
            126
            
            
            561
            
            
            687
            
            
            80
            
            
            607
            
            
            15Supplier
                contracts
            
            
            801
            
            
            441
            
            
            360
            
            
            801
            
            
            280
            
            
            521
            
            
            5Total
            
            $
            3,452
            
            $
            1,060
            
            $
            2,392
            
            $
            3,452
            
            $
            681
            
            $
            2,771Goodwill
            
            
            
            
            
            
            
            $
            228
            
            
            
            
            
            
            
            $
            228





Amortization
      expense is computed using the straight-line method over the useful lives of
      the
      assets. Amortization expense for the years ended June 30, 2008 and 2007 was
      $379,000 and $378,000, respectively. Amortization expense for the five
      succeeding fiscal years and thereafter is as follows (in thousands):





Fiscal
                year:2009
            
            $
            3732010
            
            
            3572011
            
            
            2072012
            
            
            1572013
            
            
            157Thereafter
            
            
            1,141$
            2,392





**4.**
                **LINE
                    OF CREDIT
                    PAYABLE**




The
      Company has a $25.0 million credit facility with a national financial
      institution, which permits the Company to borrow up to 85% of the total amount
      of eligible accounts receivable and 65% of eligible inventory, both as defined.
      Outstanding letters of credit reduce the maximum amount available for borrowing.
      Interest is payable monthly at prime plus 0.75% through September 30, 2008,
      and
      may increase up to prime plus 2.75% after such date based on the Company meeting
      certain fixed charge coverage ratios. At June 30, 2008, the interest rate was
      5.75%. Outstanding borrowings under the line are secured by substantially all
      Company assets other than its transportation fleet and related field
      equipment.





F-17




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


As
      of
      June 30, 2008 and 2007, the Company had outstanding borrowings of $19.8 million
      and $17.3 million, respectively, under its $25.0 million line of credit. The
      line of credit is classified as a current liability in accordance with EIFT
      95-22, “ *Balance
      Sheet, Classification of Borrowings Outstanding under Revolving Credit
      Agreements* ”.
      Based
      on eligible receivables and inventories, and letters of credit outstanding
      at
      June 30, 2008 and 2007, the Company had $1.8 million of cash availability under
      the line of credit.





The
      Company’s line of credit provides for certain affirmative and negative covenants
      that may limit the total availability based upon the Company’s ability to meet
      these covenants. At June 30, 2007, the financial covenants included a minimum
      availability of $750,000 and an average monthly availability of $2.5 million
      covenant which, if not maintained, would trigger a fixed charge coverage ratio
      of 1.0 to 1.0. In addition as of June 30, 2007, the Company had a capital
      expenditure limitation for fiscal year 2008 of $750,000 without approval from
      the line of credit lender. During fiscal 2008, the Company and its line of
      credit lender have entered into several agreements to amend the loan and
      security agreements. As a result of these amendments, the average monthly
      availability requirement became $1.35 million effective April 2008.





These
      agreements also amended the maximum amount for which letters of credit could
      be
      issued increasing it from $300,000 at June 30, 2007, to $1,500,000 effective
      March 2008, of which $1.35 million have been issued as of June 30, 2008.
      Additionally, the capital expenditure limitation without lender approval was
      increased from $750,000 at June 30, 2007, to $1.25 million for fiscal 2008
      and
      $750,000 thereafter.





In
      September 2008, the Company and its line of credit lender entered the Sixteenth
      Amendment and also into the Seventeenth Amendment to the loan and security
      agreement. The Sixteenth Amendment changed, among other things, the interest
      rate to prime plus 2.75%, and allowed for the issuance of unsecured promissory
      notes. The Seventeenth Amendment extended the maturity date from December 31,
      2008 to July 1, 2009, deferred and modified the variable interest rate of 2.75%
      over prime to a range between 0.75% to 2.75% based on the Company meeting
      certain fixed charge coverage ratios. Additionally, effective October 31, 2008,
      the average monthly availability requirement has been eliminated and replaced
      with the fixed charge coverage ratio of 1.0 to 1.0 through November 2008 and
      1.3
      to 1.0 thereafter. Lastly, the termination fee of 0.5% has been eliminated
      for
      the period of September 2008 through December 31, 2008. See Note 14 - Subsequent
      Events.




The
      line
      of credit agreement also requires the Company to obtain the consent of the
      financial institution prior to incurring additional debt, or entering into
      mergers, consolidations or sales of assets. Failure to comply with one or more
      of the covenants in the future could affect the amount the Company can borrow
      and thereby adversely affect the Company’s liquidity and financial condition. At
      June 30, 2008, the Company was in compliance with all the requirements of these
      covenants as well as its financial covenants.




**5.**
                **SHORT-TERM
                    PROMISSORY
                    NOTES**





On
      November 19, 2007, the Company obtained an aggregate of $2.0 million in
      short-term notes from a small group of individual and institutional investors
      (the “November 2007 Notes”). The proceeds were used for general working capital
      purposes. The Company’s obligations under the November 2007 Notes were
      unsecured. The November 2007 Notes originally had a six-month term maturing
      in
      May 2008, which was extended to July 2008. The Company incurred $42,000 in
      issuance costs which were amortized over the term of the notes. Interest paid
      on
      the outstanding principal balance of the November 2007 Notes was 1.5% per month.
      The effective yield of these notes was 21.0%.





On
      February 29, 2008, the holders of the November 2007 Notes exchanged the entire
      $2.0 million principal balance, plus a portion of the accrued but unpaid
      interest thereon in the amount of $6,000 into shares of the Company’s Series A
      Preferred Stock at $550 per share. For additional information see Note 8,
      Shareholders’ Equity. The issuance costs of $42,000 had a remaining unamortized
      balance of $24,000 which was written-off and recorded as a loss on
      extinguishment of promissory notes.





F-18





**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


**6.**
            **LONG-TERM
                DEBT**





As
      of
      June 30, 2008 and 2007, long-term debt consisted of the following (in
      thousands):





**2008**
            
            **2007**August
                2007 senior secured convertible subordinated promissory notes (the
“August
                2007 Notes”) (11.5% interest due semi-annually, January 1 and July 1);
                matures December 31, 2009 in its entirety; effective interest rate
                of
                14.5% including cost of warrants and other debt issue costs. For
                additional details, see below.
            
            $
            8,859
            
            $
            -September
                2005 promissory notes (the “September 2005 Notes”). The notes were
                refinanced on August 8, 2007, see below for details. Prior to refinance,
                10% interest due semi-annually, February 28 and August 31; six principal
                payments of $300,000 due semi-annually on August 31 and February
                28;
                balloon payment of $1,200,000 due at maturity on August 31, 2010;
                effective interest rate of 20.3% included cost of warrants and other
                debt
                issue costs. The notes were issued as a result of a September 1,
                2005
                private debt placement with institutional and other accredited investors
                in order to fund the H & W acquisition, develop its operations and for
                other general working capital purposes. The offering consisted of
                $3.0
                million notes and four year warrants to purchase a total of 360,000
                shares
                of the Company’s common stock at an exercise price of $2.28 per share. The
                September 2005 Notes were secured by a first priority interest in
                the
                vehicles, equipment and other physical assets, other than inventory
                of H
                & W.
            
            
            -
            
            
            3,000January
                2005 promissory notes (the “January 2005 Notes”). The notes were
                refinanced on August 8, 2007, see below for details. Prior to refinance,
                10% interest due semi-annually, July 24 and January 24; remaining
                five
                principal payments of $540,000 due semi-annually on January 24 and
                July
                24; balloon payment of $2,160,000 due at maturity on January 24,
                2010;
                effective interest rate of 20.4% includes cost of warrants and other
                debt
                issue costs. The notes were issued as a result of a January 25, 2005
                offering to a limited group of institutions and other accredited
                investors
                in connection with the acquisition of the assets and business of
                Shank
                Services consisting of $6.1 million in notes and four-year warrants
                to
                purchase 1,006,500 shares of the Company’s common stock at $1.60. The
                January 2005 Notes were secured by a first priority security interest
                in
                the Shank Services assets.
            
            
            -
            
            
            4,860





F-19




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


***(Continued)***
            
            **2008**
            
            **2007**August
                2003 promissory notes (the “August 2003 Notes”). The notes were refinanced
                on August 8, 2007, see below for details. Prior to refinance, 10%
                interest
                due semi-annually, December 31 and June 30; remaining two principal
                payments of $752,800 and $552,600 due on August 28, 2007 and February
                28, 2008; balloon payment of $2,111,925 due at maturity on August
                28,
                2008; effective interest rate of 19.9% includes cost of warrants
                and other
                debt issue costs. The notes were issued as a result of the August
                29, 2003
                offering to institutions and other accredited lenders consisting
                of the
                $6.925 million notes and five-year warrants to purchase a total 2,008,250
                shares of the Company’s common stock at $1.00 per share. The notes were
                collateralized by a first priority security interest in its specialized
                fueling truck fleet and related equipment and by patents on its
                proprietary fuel management system.
            
            
            -
            
            
            3,417Unamortized
                debt discount, net of amortization
            
            
            (65
            )
            
            (1,027
            )8,794
            
            
            10,250Less:
                current portion
            
            
            -
            
            
            -Long-term
                debt, net
            
            $
            8,794
            
            $
            10,250




On
      August
      8, 2007, the Company sold $11.8 million in debt and equity securities (the
      “August 2007 Offering”). The Company used a portion of the proceeds to satisfy
      the balance of its outstanding secured promissory notes issued on August 29,
      2003, January 25, 2005 and September 1, 2005 (the “Satisfied Notes”), described
      in the table above, and to lower the Company’s total senior secured convertible
      subordinated debt from $11.2 million **** to
      $10.6
      million on August 8, 2007. As a result of this transaction, the Company recorded
      a loss on extinguishment of promissory notes of $1.6 million consisting of
      the
      write-off of unamortized debt discount and debt costs, a pre-payment penalty,
      and a gain for the excess carrying value of the Notes over the extinguishment
      price. See Note 6-Long-term Debt- *Other*




In
      the
      August 2007 Offering, the Company sold $10.6 million in 111⁄2% senior secured
      convertible subordinated promissory notes maturing in their entirety on December
      31, 2009, including $5.7 million sold to new institutional and private investors
      and $4.9 million to then current holders of the Company’s secured debt. The
      Company paid a total commission of $400,000 to the placement agent, $94,000
      of
      which was paid through the issuance of 63,327 shares of the Company’s common
      stock at the offering price of $1.48 per share. For information on the $1.2
      million in equity securities sold in the August 2007 Offering, see Note 8 –
Shareholders’ Equity.





F-20




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      August 2007 Notes are secured by specified vehicles and field equipment of
      the
      Company and its subsidiaries and are senior to all other existing debt of the
      Company other than any amounts owed now or in the future to the Company’s line
      of credit lender, to which the August 2007 Notes are expressly subordinated.
      The
      amounts due under the August 2007 Notes will become due and payable immediately
      upon the occurrence of customary events of default. The Notes are currently
      redeemable by the Company, in whole or in part, without pre-payment penalty
      or
      premium.




The
      holders of the Notes have the right to convert up to fifty percent (50%) of
      the
      principal amount of the August 2007 Notes into shares of the Company’s common
      stock at $1.46 per share. The Company may elect, in its discretion, to grant
      additional conversion rights for some or all of the remaining principal amount
      of the August 2007 Notes at a price not less than the higher of $1.46, or the
      most recent closing price for the Company’s common stock on the Nasdaq Stock
      Market at the time of such grant. The Company registered the resale of the
      shares under the Securities Act of 1933, as amended, including the shares
      into which the August 2007 Notes may be converted and the shares obtained upon
      exercise of the warrants. As a result of the conversion feature, the Company
      recorded $37,000 as a beneficial conversion feature which is being amortized
      under the effective interest method as a non-cash discount over the respective
      term of the debt. As of June 30, 2008, there are 3,033,981 conversion share
      rights outstanding.





On
      March
      12, 2008, some of the holders of the August 2007 Notes exchanged $1.75 million
      in principal balance of the August 2007 Notes, plus a portion of the accrued
      but
      unpaid interest thereon in the amount of $37,000 into shares of the Company’s
      Series B Preferred Stock at $900 per share. For additional information see
      Note
      8- Shareholders’ Equity. The Company recorded a loss on debt extinguishment of
      $84,000 consisting of the write off of unamortized deferred debt costs and
      unamortized discounts related to these notes. See Note 6 - Long-Term Debt - *Other.* As a
      result of the exchange of $1.75 million in notes, the related conversion rights
      of these notes (599,315 common stock equivalents) were cancelled.




The
      remaining August 2007 Notes have cross-default provisions contained in the
      debt
      agreement. Accordingly, an event of default under the line of credit facility
      described in Note 4 could also cause a default under the August 2007 Notes.
      As
      of June 30, 2008, the Company was in compliance with the requirements of these
      covenants.




At
      June
      30, 2007, in accordance with FAS No. 6, “Classification of Short-term
      Obligations Expected to be Refinanced”, the Company classified all of the then
      outstanding balances related to the secured promissory notes as long-term debt,
      since they were refinanced with the proceeds from the August 2007 Notes, which
      mature on December 31, 2009.





***Conversion
      Warrants***





On
      June
      30, 2006, the Company issued 1,057,283 non-detachable warrants (the “Conversion
      Warrants”), exercisable for 90 days to certain note holders of the August 2003
      Notes and the January 2005 Promissory Notes, by which those note holders could
      exchange up to $2.6 million of existing August 2003 and January 2005 Notes
      for
      the purchase of shares of the Company’s common stock. In the fourth quarter of
      fiscal year 2007, the note holders exercised all of the Conversion Warrants.
      For
      additional information on the Conversion Warrants, see Note 7 -
      Warrants.





F-21


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


***Other***





In
      connection with the issuance of the August 2003, January 2005 and September
      2005
      Notes, the Company had recorded unamortized debt discounts which were being
      amortized under the effective interest method as non-cash interest expense
      over
      the respective term of the debt issued. These were non-cash discounts related
      to
      the valuation of the common stock warrants issued to the note holders and the
      placement agent in the financing transactions that did not reduce the amount
      of
      principal cash repayments required to be made by the Company. On August 8,
      2007,
      as a result of the early satisfaction of these Notes, the Company recorded
      a
      loss on extinguishment of $1.6 million consisting of the write-off of
      unamortized debt discounts of $978,000, the write-off of unamortized deferred
      debt costs of $443,000 and a $270,000 cash pre-payment penalty. Partially
      offsetting the losses on extinguishment of promissory notes was a gain on
      extinguishment of promissory notes of $50,000 as a result of the excess of
      the
      carrying value of the Satisfied Notes over the extinguishment price.





In
      connection with the August 2007 Notes, the Company recorded unamortized debt
      discounts of $112,000, related to a beneficial conversion feature and to the
      valuation of the common stock warrants issued to noteholders. The debt discounts
      were being amortized as non-cash interest expense over the term of the notes.
      As
      a result of the March 2008 exchange of some of the August 2007 Notes into shares
      of the Company’s Series B Preferred Stock, the Company recorded a loss on
      extinguishment of $84,000, consisting of the write-off of $15,000 of unamortized
      debt discounts costs and the write off of $69,000 of other unamortized debt
      costs.





The
      following summarizes the components of the net loss on extinguishment of
      promissory notes that the Company recorded in its consolidated statements of
      operations during fiscal 2008 (in thousands):





**Year Ended****June 30, 2008**Write
                offs of costs and gain related to the refinancing of the August 2003,
                January 2005 and September 2005 Notes:Unamortized
                debt costs
            
            $
            443Unamortized
                debt discounts
            
            
            978Cash
                pre-payment penalty
            
            
            270Gain
                on extinguishment
            
            
            (50
            )Write
                off of unamortized debt costs related to the exchanged November 2007
                Notes
                for Preferred Stock Series A
            
            
            24Write
                offs related to exchanged August 2007 Notes for Preferred Stock Series
                B:Unamortized
                debt costs
            
            
            69Unamortized
                debt discounts
            
            
            15Loss
                on extinguishment of promissory notes, net
            
            $
            1,749





To
      the
      extent that loss on extinguishment of promissory notes constitutes
      the recognition of previously deferred interest, it is considered interest
      expense for the calculation of certain interest expense amounts.





F-22


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


**7.**
            **WARRANTS**




***August
      2003 Warrants***





On
      August
      29, 2003, the Company raised $6.9 million and issued 2,008,250 five-year
      detachable warrants to purchase the Company’s common stock at $1.00 per share.
      During the year ended June 30, 2006, 280,491 warrants were exercised for gross
      proceeds of $280,491. At June 30, 2008, the August 2003 warrant holders had
      a
      balance of 140,000 warrants available to exercise into common shares.




***January
      2005 Warrants***





On
      January 25, 2005, the Company raised $6.1 million and issued 1,006,500 four-year
      detachable warrants to purchase the Company’s common stock at an exercise price
      of $1.60 per share. During the year ended June 30, 2006, 969,208 warrants were
      exercised for gross proceeds of $1,550,733. At June 30, 2008, the January 2005
      warrant holders had a balance of 37,292 warrants available to exercise into
      common shares.




***September
      2005 Warrants***





On
      September 1, 2005, the Company raised $3.0 million and issued 360,000 four-year
      detachable warrants to purchase the Company’s common stock at an exercise price
      of $2.28 per share. During the year ended June 30, 2006, 284,160 warrants were
      exercised for gross proceeds of $647,885. At June 30, 2008, the September 2005
      warrant holders had a balance of 75,840 warrants available to exercise into
      common shares.




***Conversion
      Warrants***





On
      June
      30, 2006, the Company issued 1,057,283 non-detachable warrants (the “Conversion
      Warrants”), exercisable for 90 days to certain note holders of the August 2003
      Notes and the January 2005 Promissory Notes, by which those note holders could
      exchange up to $2.6 million of existing August 2003 and January 2005 Notes
      for
      the purchase of shares of the Company’s common stock at an exercise price of
      $2.54 per share, the closing market price on the date of the agreement. Included
      in these warrants were 25,787 warrants, valued at $65,500, issued to pay 50%
      of
      the 5% call penalty, or a 2.5% penalty. The warrants were non-detachable, and
      if
      they were exercised they could only be settled by satisfaction of the Notes.
      On
      June 30, 2006, the Company wrote-off $317,000 and $155,000 of debt discount
      and
      deferred debt costs, respectively, to interest expense related to the notes
      at
      the time the notes were modified. Additionally the Company recorded an accrued
      interest expense of $65,500 related to the prepayment penalty warrants issued
      and adjusted the balance on a mark to market basis at the end of each reporting
      period.





By
      subsequent amendments, the exercise period of the Conversion Warrants was
      extended to March 31, 2007, and the exercise price was lowered to $1.52 per
      share, the market price on the date of the amendment. In exchange, the Company
      received a deferral of $200,200 of the Company’s next scheduled principal
      payment on the August 2003 Notes to August 28, 2007. On March 29, 2007, the
      Company further amended the agreements extending the exercise period of the
      warrants to June 30, 2007. As a result of the extensions, the Company recorded
      $327,000 as a valuation adjustment to the unamortized debt discount and
      additional paid-in-capital.





F-23


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


During
      fiscal 2007, the note holders had exercised all of the Conversion Warrants,
      as
      follows:





Date
            
            Common
            
            
            
            Principal
            
            PrepaymentOf
            
            Shares
            
            Note
            
            Amount
            
            PenaltyExercise
            
            Issued
            
            Converted
            
            Converted
            
            ReductionMarch 29, 2007
            
            
            424,835
            
            
            January 2005
            
            $
            630,000
            
            $
            16,000April
                3, 2007
            
            
            203,651
            
            
            August
                2003
            
            
            302,000
            
            
            8,000May
                18, 2007
            
            
            362,391
            
            
            August
                2003
            
            
            538,000
            
            
            13,000June
                18, 2007
            
            
            66,406
            
            
            August
                2003
            
            
            99,000
            
            
            2,0001,057,283
            
            
            
            
            $
            1,569,000
            
            $
            39,000





As
      of
      June 30, 2007, all the conversion warrants and all the prepayment penalty
      warrants were exercised.





There
      were no warrants exercised in fiscal 2008.




***February
      2007 Warrants***





In
      conjunction with the February 15, 2007, private placement offering further
      described below in Note 8 - Shareholder’s Equity, the Company issued warrants to
      purchase 423,800 shares of the Company’s common stock at an exercise price of
      $1.52 per share. In addition, the placement agent received additional warrants
      to purchase 130,955 shares of the Company’s common stock at an exercise price of
      $1.90 per share. As of June 30, 2008, these warrants remain outstanding.





***August
      2007 Warrants***





In
      conjunction with the August 8, 2007 promissory notes and equity offering,
      further described in Note 6 - Long-Term Debt and Note 8 - Shareholders’ Equity,
      the Company issued detachable warrants to the noteholders to purchase 39,528
      shares of the Company’s common stock at an exercise price of $1.752 per share.
      In addition, the placement agent received additional warrants to purchase 39,526
      shares of the Company’s common stock at an exercise price of $1.752 per share.
      The August 2007 warrants will terminate on the fourth anniversary of the
      offering closing date. As of June 30, 2008, these warrants remain outstanding.




**8.**
            **SHAREHOLDERS’
                EQUITY**





In
      September and October 2006, the Company issued an aggregate of 35,000 shares
      of
      its common stock for $31,000 as a result of the exercise of warrants issued
      in
      May 2003.





The
      Company issued an aggregate of 1,057,283 shares of its common stock at an
      exercise price of $1.52 for an aggregate amount of approximately $1.4 million,
      net of $206,000 unamortized debt discount write-off, as a result of the four
      conversions of outstanding promissory notes through the exercise of common
      stock
      warrants that occurred in the third and fourth quarters of fiscal year 2007,
      see
      Note 6 - Long-Term Debt.





F-24


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


On
      February 15, 2007, the Company completed a $3.3 million private placement
      offering of its common stock and warrants to purchase its common stock to a
      group of qualified institutional buyers and accredited investors. The offer
      consisted of the sale of 423,800 units (“Units”) at a price of $7.725 per Unit.
      Each Unit was comprised of five shares of the Company’s common stock valued at
      $1.52 each and one warrant to purchase one share of the Company’s common stock
      at an exercise price of $1.52. The offering warrants will terminate on the
      earliest of the fourth anniversary of the offering closing date or the week
      after the common stock trades at 200% of the exercise price for twenty
      consecutive days. The offering warrants have customary anti-dilution and
      underlying stock registration rights. As a result of this transaction, the
      Company issued 2.1 million shares of common stock and warrants to purchase
      423,800 shares of the Company’s common stock. The placement agent also received
      additional warrants to purchase 130,955 shares of the Company’s common stock at
      an exercise price of $1.90 per share. All of these common shares and warrants
      were subsequently registered. The net proceeds of the offering were
      approximately $2.9 million, after payment of a $196,000 placement fee and other
      costs of approximately $168,000. A portion of the proceeds was used for
      repayment of $732,000 of principal on the Company’s August 2003 Notes.





As
      a
      result of the amendments made between the Company and the note holders as
      described in Note 6 – Long-Term Debt – *Conversion
      Warrants* ,
      whereby
      the exercise price of the warrants was lowered and the exercise period of such
      warrants was extended, the Company, in accordance with EITF Issue No. 05-07,
      “Accounting for Modifications to Conversion Options Embedded in Debt Instruments
      and Related Issues”, EITF Issue No. 06-06, “Application of Issue No. 05-07 -
      Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt
      Instruments”, and EITF Issue No. 96-19, “Debtor’s Accounting for a Modification
      or Exchange of Debt Instruments”, revalued those warrants and recorded a
      $327,000 adjustment during fiscal 2007. The adjustment affected additional
      paid-in capital as well as the unamortized debt discount associated with the
      promissory notes.





On
      August
      8, 2007, the Company sold $11.8 million in debt and equity securities (the
      “August 2007 Offering”). The Company used a portion of the proceeds to satisfy
      the balance of its outstanding secured promissory notes issued on August 29,
      2003, January 25, 2005 and September 1, 2005, respectively, and to lower the
      Company’s total senior secured convertible subordinated debt from $11.2
      million **** to
      $10.6
      million on August 8, 2007.





In
      the
      August 2007 Offering, the Company sold 790,542 shares of common stock (the
      “Shares”) and 39,528 four year warrants to purchase common stock at $1.752 per
      share (the “Warrants”). The Shares and Warrants were sold at $1.48 per Share and
      one twentieth of a Warrant, or $29.60 for twenty (20) Shares and one (1)
      Warrant, for net equity proceeds of $1.2 million. The Company incurred
      transaction costs of $639,000 of which $123,000 were recorded to equity and
      $516,000 to debt, allocated on a percentage basis. Included in these transaction
      costs were commissions of $400,000 paid to the placement agent for the offering,
      $94,000 of which was paid through the issuance of 63,327 shares of our common
      stock at the offering price of $1.48 per share, along with 39,528 warrants
      with
      the same terms as the Warrants sold to investors.





On
      February 29, 2008, the Company sold 4,587 shares of Series A Preferred Stock,
      $0.01 par value (the “Series A Preferred Stock”) at $550 per share for an
      aggregate of $2.5 million (the “February 2008 Offering”). In the February 2008
      offering, the holders of the November 2007 Notes exchanged the entire $2.0
      million principal balance of those Notes, plus $6,000 of the accrued but unpaid
      interest thereon, into 3,648 shares of Series A Preferred Stock. Also in the
      February 2008 offering, the Company sold 939 of the shares for $516,000 in
      cash
      to a small group of investors, including 155 shares sold for an aggregate of
      $85,000 to certain Company officers.





On
      March
      12, 2008, the Company sold 1,985 **** shares
      of
      Series B Convertible Preferred Stock, $0.01 par value (the “Series B Preferred
      Stock”) at $900 per share for an aggregate of $1.8 million (the “March 2008
      Offering”). In the March 2008 offering, some of the holders of the August 2007
      Notes exchanged $1.75 million in principal balance of the 111⁄2% senior secured
      convertible promissory notes issued by the Company, plus $37,000 of the accrued
      but unpaid interest thereon.





F-25


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      Company has filed with the Secretary of State of Delaware the Certificates
      of
      Designation of the Series A and Series B Convertible Preferred Stock. The
      Certificates authorize the issuance of up to 10,000 and 2,000 shares of Series
      A
      and Series B Preferred Stock, respectively, which have such rights,
      qualifications, limitations and restrictions as are set forth in the Certificate
      and described as follows:





***Ranking***





The
      Series A and Series B Preferred Stock ranks senior to the Company’s $0.01 par
      value common stock (the “Common Stock”), as to both the payment of dividends and
      the distribution of assets. The Series A and Series B are on parity and will
      be
      on parity with the holders of any other series of preferred stock that may
      be
      issued in the future.





***Liquidation
      Preference***





Upon
      liquidation, dissolution or winding up of the Company, holders of Series A
      and
      Series B Preferred Stock are entitled to be paid out of the assets of the
      Company an amount per share of Series A and Series B Preferred Stock equal
      to
      the greater of the original issue price of the Series A and Series B Preferred
      Stock, plus all accumulated but unpaid dividends; or the fair market value
      of
      the Series A and Series B Preferred Stock on an as-converted to Common Stock
      basis, plus all accumulated but unpaid dividends. If upon liquidation, the
      assets of the Company are insufficient to make payment in full, then such assets
      will be distributed ratably in proportion to the full amounts to which each
      Preferred Stockholder would have been entitled.





***Voting***





Holders
      of Series A and Series B Preferred Stock are entitled to one vote per share
      of
      Preferred Stock at each meeting of shareholders of the Company with respect
      to
      any and all matters presented to the shareholders of the Company.





***Dividends***





Dividends
      will be paid on the Series A and Series B Preferred Stock when, as and if
      declared by the Board of Directors, but only out of funds that are legally
      available, in quarterly cash dividends at the rate of eighteen percent (18%)
      per
      annum of the sum of the original issue price per share, provided, however,
      that
      if the Company reports in an SEC filing that it has achieved positive Earnings
      Before Interest, Taxes, Depreciation and Amortization (which to the extent
      that
      loss on extinguishment of promissory notes constitutes the recognition of
      previously deferred interest, it is considered interest expense for the
      calculation of certain interest expense amounts) for two consecutive fiscal
      quarters, the quarterly cash dividend shall be changed from eighteen percent
      (18%) per annum to twelve percent (12%) per annum of the sum of the original
      issue price effective two weeks after notice of such change is transmitted
      to
      holders of the Series A and Series B Preferred Stock. Dividends are cumulative
      from the date of the original issuance of the Series A and Series B Preferred
      Stock. Accumulated unpaid dividends on Shares of Series A and Series B Preferred
      Stock do not bear interest.





***Conversion
      Rights***





Each
      share of Series A and Series B Preferred Stock is currently convertible, at
      the
      option of the holder, into 1,000 shares of Common Stock based on a conversion
      price equal to $0.55 and $0.90 per share of Common Stock, respectively. The
      conversion prices are subject to adjustment for stock dividends, stock splits
      and other similar recapitalization events.





Each
      share of Series A and Series B Preferred Stock shall automatically be converted
      without action by the holder, into shares of Common Stock, at the then-effective
      Series A and Series B conversion price:





F-26


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


(A)
      if
      the closing price of the Common Stock as reported on the Nasdaq Capital Stock
      Market (or on such other public securities trading market, such as the OTC
      Bulletin Board, as then constitutes the primary trading market for the Common
      Stock) is equal to or greater than an amount equal to two times the Series
      A and
      Series B conversion price then in effect (the “Automatic Conversion Price”), for
      a period of twenty consecutive business days, or





(B)
      at
      any time upon the affirmative election of the holders of at least sixty-six
      and
      two-thirds percent (66 2/3%) of the outstanding shares of the Series A and
      Series B Preferred Stock, or





(C)
      upon
      closing of a firmly underwritten public offering pursuant to an effective
      registration statement under the Securities Act covering the offer and sale
      of
      Common Stock for the account of the Company in which (i) the per share price
      is
      at least two times the Series A and Series B Automatic Conversion Price and
      (ii)
      the cash proceeds to the Company (before underwriting discounts, commissions
      and
      fees) are at least ten million dollars ($10,000,000).





For
      the
      Series A Preferred Stock, the automatic conversion would also occur upon the
      closing of an Acquisition or an Asset Transfer (as these terms are defined
      in
      the Series A Certificates) that results in the holders of the Series A Preferred
      Stock receiving cash consideration per share not less than the Series A
      Automatic Conversion Price.





***Redemption***





The
      Series A and Series B Preferred Stock may be redeemed by the Company for the
      original issue price plus any accumulated but unpaid dividends after ten days
      notice. In the event of a partial redemption, the Company is not required to
      redeem the shares held by various shareholders on a pro rata or similar basis
      but may select, in its sole discretion, which shares to redeem.




During
      fiscal 2008, the Company declared cumulative dividends from the original date
      of
      issuance until June 30, 2008 of $152,000 and $97,000 per share on the
      outstanding Series A and Series B Preferred Stock, respectively. The dividends
      payable is paid quarterly; the fourth quarter dividend payable of $193,000
      is
      outstanding as of the date of this filing.




**9.**
            **STOCK
                OPTIONS**





***Employee
      Stock Options***





The
      Company has two employee option plans, the “1996 Plan” and the “2000 Plan”. The
      purpose of the 1996 Plan and the 2000 Plan is to provide an incentive to
      attract, motivate and retain qualified competent employees whose efforts and
      judgment are important to the Company’s success through the encouragement of the
      ownership of stock by such persons.





Under
      the
      1996 Plan, 500,000 shares of common stock were reserved for issuance upon
      exercise of options granted. Since the Board of Directors has determined that
      no
      additional options will be granted under the 1996 Plan, no options to purchase
      shares of stock are available to be granted under this plan. Options granted
      under the 1996 Plan expire no later than ten years from the date of grant.
      As of
      June 30, 2008, the 1996 Plan has 42,052 shares outstanding, all of which are
      fully vested and have a weighted average exercise price of $5.92 and a weighted
      average remaining contractual life of 0.97 years.





F-27


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


Under
      the
      2000 Plan, 1,000,000 shares of common stock are reserved for issuance to
      employees, including officers and directors, consultants and non-employee
      directors upon the exercise of options, with the amount reserved being increased
      each year by ten percent of the total shares subject to the 2000 Plan at the
      end
      of the previous calendar year. Options granted under the 2000 Plan generally
      vest over three years of continuous service and expire no later than ten years
      from the date of grant. As of June 30, 2008, options to purchase 261,053 shares
      of stock were available to be granted under the 2000 Plan.




While
      the
      Company has historically granted options under the 2000 Plan only to employees
      of the Company and its subsidiaries, when the shares reserved for the Directors
      Plan (discussed below) were exhausted in July 2008, the Compensation Committee
      resolved to make the automatic grants of fully vested options to non-employee
      members of the Board of Directors from the 2000 Plan until such time as there
      were additional shares available to resume such automatic grants under the
      Directors Plan.




The
      following table summarizes the stock option transactions under both plans
      discussed above:





**1996 and**
              **2000 Plans**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**
              **(In Thousands)**Outstanding
                at June 30, 2007
            
            
            1,532,852
            
            $
            1.96
            
            
            5.71
            
            $
            54Granted
            
            
            266,000
            
            $
            1.27Cancelled
            
            
            (151,400
            )
            $
            2.84Exercised
            
            
            —
            
            $
            —Outstanding
                at June 30, 2008
            
            
            1,647,452
            
            $
            1.78
            
            
            5.28
            
            $
            -Exercisable
            
            
            1,208,052
            
            $
            1.79
            
            
            4.01
            
            $
            -Available
                for future grant (2000 Plan only)
            
            
            261,053





The
      weighted average grant date fair value of stock options granted during the
      years
      ended June 30, 2008 and 2007 was $1.11 and $1.65, respectively. For the years
      ended June 30, 2008 and 2007, there were no stock options exercised.





As
      of
      June 30, 2008, there was $419,000  of
      total
      unrecognized compensation cost related to unvested share options granted under
      the plans. That cost is expected to be recognized over a weighted-average period
      of 1.6 years.





F-28


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      following table summarizes information about stock options outstanding under
      both plans as of June 30, 2008:





**Options Outstanding**
            
            **Options Exercisable****Exercise**
              **Price**
            
            **Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life (years)**
            
            ****
              **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **of Shares**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$ .00 to $0.94
            
            
            13,000
            
            
            9.94
            
            $
            0.74
            
            
            3,000
            
            $
            0.60$
                .95 to $1.89
            
            
            1,361,400
            
            
            5.00
            
            $
            1.44
            
            
            1,024,400
            
            $
            1.46$1.90 to $2.84
            
            
            80,500
            
            
            7.34
            
            $
            2.50
            
            
            48,300
            
            $
            2.50$2.85 to $3.79
            
            
            154,052
            
            
            7.28
            
            $
            3.34
            
            
            93,852
            
            $
            3.34$3.80 to $4.74
            
            
            15,000
            
            
            0.81
            
            $
            4.13
            
            
            15,000
            
            $
            4.13$5.70 to $6.65
            
            
            4,000
            
            
            0.98
            
            $
            6.56
            
            
            4,000
            
            $
            6.56$7.60 to $8.54
            
            
            19,500
            
            
            1.25
            
            $
            7.63
            
            
            19,500
            
            $
            7.63**Total**
            
            
            1,647,452
            
            
            
            
            
            
            
            
            1,208,052




***Director
      Stock Options***





In
      May
      2001, the Company adopted a separate stock option plan for non-employee members
      of the Company’s Board of Directors (the “Directors’ Plan”). The purpose of the
      Directors’ Plan is to provide an additional incentive to attract and retain
      qualified competent directors upon whose efforts and judgment are important
      to
      the Company’s success through the encouragement of the ownership of stock by
      such persons.




Under
      the
      Directors’ Plan, 350,000 shares of common stock are reserved for issuance upon
      the exercise of options granted. Each non-employee who serves as a member of
      the
      Company’s board of directors as of the effective date of the Directors’ Plan,
      and each non-employee who is elected or otherwise appointed as one of the
      Company’s directors thereafter, will receive a fully vested option to purchase
      20,000 shares of stock. On the last day of each fiscal quarter while the
      Directors’ Plan is in effect, each non-employee director will receive an
      additional grant of an option to purchase 1,500 shares of stock, increased
      from
      725 shares per quarter beginning March 31, 2007. Further, in accordance with
      the
      Directors’ Plan, additional options may be granted to non-employee directors
      from time to time. Options to purchase 349,650 shares of common stock are
      outstanding at June 30, 2008 under the Directors’ Plan and 350 shares of stock
      are available to be granted in the future.




Options
      granted under the Directors Plan expire no later than ten years from the date
      of
      grant and are with limited exceptions exercisable as of the grant date. All
      outstanding options under the Directors Plan as of June 30, 2008 are fully
      vested.





F-29


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      following table summarizes the stock option activity under the Directors’ Plan
      for the periods indicated:


**2001 Plan**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
              
              **Aggregate**
                **Intrinsic**
                **Value**
                **(In Thousands)**Outstanding
                  at June 30, 2007
              
              
              316,650
              
              $
              1.74
              
              
              5.86
              
              $
              17Granted
              
              
              33,000
              
              $
              0.90Cancelled
              
              
              -
              
              $
              -Exercised
              
              
              -
              
              $
              -Outstanding
                  at June 30, 2008
              
              
              349,650
              
              $
              1.66
              
              
              5.31
              
              $
              -Exercisable
              
              
              349,650
              
              $
              1.66
              
              
              5.31
              
              $
              -Available
                  for future grant
              
              
              350





The
      weighted average grant date fair value of Directors’ stock options granted
      during the years ended June 30, 2008 and 2007 was $0.77 and $1.46, respectively.
      For the years ended June 30, 2008 and 2007, there were no stock options
      exercised.





The
      following table summarizes information about the Directors’ stock options
      outstanding under the Plan as of June 30, 2008:





**Options Outstanding**
            
            **Options Exercisable****Exercise**
              **Price**
            
            **Number**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life (years)**
            
            ****
              **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **of Shares**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.00 to $0.94
            
            
            27,125
            
            
            9.15
            
            $
            0.77
            
            
            27,125
            
            $
            0.77$0.95
                to $1.89
            
            
            255,100
            
            
            4.32
            
            $
            1.50
            
            
            255,100
            
            $
            1.50$1.90
                to $2.84
            
            
            59,925
            
            
            7.51
            
            $
            2.55
            
            
            59,925
            
            $
            2.55$2.85
                to $3.80
            
            
            7,500
            
            
            7.38
            
            $
            3.30
            
            
            7,500
            
            $
            3.30**Total**
            
            
            349,650
            
            
            
            
            
            
            
            
            349,650





Per
      FAS
      123R, “Share-Based Payment”, companies are required to amortize to expense the
      grant-date fair value of stock options and other equity-based compensation
      granted to employees. In accordance with FAS 123R, for the year ended June
      30,
      2008 and 2007, the Company recorded amortization of stock compensation expense,
      with a correlating increase to shareholder’s equity, in the amount of $504,000,
      and $491,000, respectively.





F-30


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


**10.**
            **SIGNIFICANT
                CUSTOMERS AND VENDORS**





In
      fiscal
      years 2008 and 2007, no single customer had revenues over 10% of the Company’s
      total petroleum product revenues.





During
      fiscal year 2008 and 2007, the Company had three vendors that each year,
      represented more than 10% of cost of sales under a non contractual, at will
      business arrangement which can be terminated by either party at any time. The
      vendors accounted for 43%, and 39%, of total cost of sales during fiscal years
      2008 and 2007, respectively.




**11.**
            **INCOME
                TAXES**





The
      actual tax benefit of the Company for the years ended June 30, 2008 and 2007
      differs from the statutory Federal tax rate of 34%, due to the following (in
      thousands):




**Year Ended June 30,****2008**
            
            **2007**Expected
                benefit for income taxes at the statutory Federal income tax rate
                of
                34%
            
            $
            2,301
            
            $
            2,198Net
                operating loss carryforward adjustment
            
            
            43
            
            
            (49
            )Change
                in tax rate
            
            
            95
            
            
            -State
                income taxes, net of federal benefit
            
            
            12
            
            
            134Effect
                of FIN 48
            
            
            (360
            )
            
            -Other,
                net
            
            
            15
            
            
            (1
            )Nondeductible
                expenses
            
            
            (263
            )
            
            (38
            )Deferred
                tax valuation allowance
            
            
            (1,843
            )
            
            (2,244
            )Benefit
                (provision) for income taxes
            
            $
            -
            
            $
            -




Deferred
      income taxes reflect the net effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      their income tax bases, and operating loss carryforwards.





F-31


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      tax
      effects of temporary differences and net operating loss carryforwards that
      give
      rise to significant portions of the deferred tax assets and liabilities at
      June
      30, 2008 and 2007 are presented below (in thousands):




**June
                30,****2008**
            
            **2007**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            11,259
            
            $
            9,524Asset
                basis adjustment for Section 357 gain
            
            
            -
            
            
            155Reserves
                and allowances
            
            
            435
            
            
            371Intangible
                assets
            
            
            159
            
            
            188Stock-based
                compensation expense
            
            
            602
            
            
            394Accrued
                expenses and deferred income
            
            
            386
            
            
            429Other
            
            
            55
            
            
            133Total
                gross deferred tax assets
            
            
            12,896
            
            
            11,194Less:
                valuation allowance
            
            
            (10,827
            )
            
            (8,984
            )Total
                deferred tax assets
            
            
            2,069
            
            
            2,210Deferred
                tax liabilities:Property
                and equipment
            
            
            (2,069
            )
            
            (2,210
            )Total
                deferred tax liabilities
            
            
            (2,069
            )
            
            (2,210
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -




Realization
      of deferred tax assets is dependent upon generating sufficient taxable income
      in
      future periods. FAS No. 109 requires a valuation allowance to reduce the
      deferred tax assets reported, if, based on management's analysis, it is more
      likely than not that some portion or all of the deferred tax assets will not
      be
      realized. After consideration of all the information available, management
      has
      determined that a $10.8 million and $9.0 million valuation allowance at June
      30,
      2008 and 2007, respectively, is necessary to reduce the deferred tax assets
      to
      the amount that will likely be realized.




On
      July
      1, 2007, the Company adopted the provisions of Financial Accounting Standards
      (“FAS”) Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” ** (“FIN
      No.
      48”). The Company previously had accounted for tax contingencies in accordance
      with FAS No. 5, “Accounting for Contingencies”. As required by FIN No. 48, which
      clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
      financial statement benefit of a tax position only after determining that the
      relevant tax authority would more likely than not sustain the position following
      an audit. For tax positions meeting the more likely than not threshold, the
      amount recognized in the financial statements is the largest benefit that has
      a
      greater than 50 percent likelihood of being realized upon ultimate settlement
      with the relevant tax authority. At the adoption date, the Company applied
      FIN
      No. 48 to tax positions for all open tax years. The adoption of FIN No. 48
      resulted in a net decrease to deferred tax assets and the related valuation
      allowance of approximately $352,000 as of July 1, 2007.





A
      reconciliation of the beginning and ending amount of unrecognized tax benefits
      for fiscal 2008 is as follows (in thousands):.







Balance
                at July 1, 2008
            
            $
            847Additions
                based on tax positions related to the current
                year
            
            
            12Additions
                for tax positions of prior years
            
            
            57Reductions
                for tax positions of prior years
            
            
            (54
            )Reductions
                as result of lapse of applicable statue of limitations
            
            
            (85
            )Balance
                at June 30, 2008
            
            $
            777




At
      June
      30, 2008 and July 1, 2007, the amount of unrecognized tax benefits was
      approximately $777,000 and $847,000, respectively of which approximately
      $360,000 and $352,000 would, if recognized, affect the Company’s effective tax
      rate.





F-32


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


The
      Company recognizes accrued interest and penalties related to unrecognized tax
      benefits in income taxes. The Company did not accrue any interest and penalties
      for fiscal years 2008 and 2007 due to the existence of net operating loss
      carryforwards.




The
      Company and/or its subsidiaries file income tax returns in the U.S. federal
      jurisdiction and various states and other local jurisdictions. The Company’s
      federal income tax returns for years prior to June 30, 2004 are no longer
      subject to examination. Returns for some state and local jurisdictions prior
      to
      that date remain subject to examination but are not individually considered
      material.





As
      of
      June 30, 2008, the Company has net operating loss carryforwards for federal
      income tax purposes of approximately $29.8 million, which will begin to expire
      in the year 2011. The utilization of the net operating loss
      carryforwards may be subject to the Internal Revenue Code Section 382 limitation
      related to ownership changes. Additionally, the Company has state net
      operating loss carryforwards which expire in varying years.





**12.**
            **COMMITMENTS
                AND CONTINGENCIES**





***Operating
      Leases***





The
      Company leases real property and equipment under operating leases that expire
      at
      various times through fiscal year 2016. Rent expense amounted to approximately
      $1.6 million and $1.5 million, for the years ended June 30, 2008 and 2007,
      respectively. Certain leases contain escalation clauses and renewal
      options.




Future
      minimum lease payments under non-cancelable operating leases as of June 30,
      2008
      are (in thousands):




**Year Ended**
              **June 30,**
            
            **Operating Lease**
              **Payments**2009
            
            $
            1,0782010
            
            
            8352011
            
            
            5742012
            
            
            4402013
            
            
            439Thereafter
            
            
            78$
            3,444





F-33


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


As
      a
      result of the H & W acquisition in October 2005, the Company is obligated to
      certain former owners of H & W, of which one is currently an officer of the
      Company, under five operating leases covering property utilized for certain
      operating facilities. Rent expense paid to the former owners was $261,000 for
      each of the years ended June 30, 2008 and 2007. Future minimum lease payments
      under these leases are $261,000 per year, and the leases expire in September
      30,
      2010.




***Governmental
      Regulation***




Numerous
      federal, state and local laws, regulations and ordinances, including those
      relating to protection of the environment affect the Company’s operations. The
      operation of the Company’s mobile fueling fleet and its transportation of diesel
      fuel and gasoline are subject to extensive regulation by the U.S. Department
      of
      Transportation (“DOT”) under the Federal Motor Carrier Safety Act (“FMCSA”) and
      the Hazardous Materials Transportation Act (“HMTA”).




These
      laws may impose penalties or sanctions for damages to natural resources or
      threats to public health and safety. Such laws and regulations may also expose
      the Company to liability for the conduct of, or conditions caused by others,
      or
      for acts of the Company that were in compliance with all applicable laws at
      the
      time such acts were performed. Certain environmental laws provide for joint
      and
      several liabilities for remediation of spills and releases of hazardous
      substances. In addition, the Company may be subject to claims alleging personal
      injury or property damage as a result of alleged exposure to hazardous
      substances, as well as damage to natural resources. These future costs are
      not
      fully determinable due to such factors as the unknown magnitude of possible
      contamination, the unknown timing and extent of the corrective actions that
      may
      be required, the determination of the company’s liability in proportion to other
      responsible parties, and the extent to which such costs are recoverable from
      third parties.




***Employment
      Agreements***




The
      Company has entered into written employment agreements with certain officers
      and
      employees. The agreements vary in length of term and may provide for severance
      payments upon termination without cause or for automatic renewal for successive
      periods unless notice of termination is given prior to a renewal
      period.




***Litigation***




The
      Company and its subsidiaries are from time to time parties to legal proceedings,
      lawsuits and other claims incident to their business activities. Such matters
      may include, among other things, assertions of contract breach, claims for
      indemnity arising in the course of the business and claims by persons whose
      employment with us has been terminated. Such matters are subject to many
      uncertainties, and outcomes are not predictable with assurance. Consequently,
      management is unable to ascertain the ultimate aggregate amount of monetary
      liability, amounts which may be covered by insurance or recoverable from third
      parties, or the financial impact with respect to these matters as of June 30,
      2008. However, based on management’s knowledge at the time of this filing,
      management believes that the final resolution of such matters pending at the
      time of this report, individually and in the aggregate, will not have a material
      adverse effect upon the Company’s consolidated financial position, results of
      operations or cash flows.




On
      October 10, 2006, the Company commenced a civil action in Broward County,
      Florida Circuit Court against Financial Accounting Solutions Group, Inc.
      (“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
      officer, director, shareholder and control person of FAS and KPS (“Kramer”),
      alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
      Company to engage FAS to provide services with respect to (a) the implementation
      of certain Information Technology (“IT”) functions; (b) the modernization and
      expansion of the Company’s accounting and business technology capabilities, and
      (c) compliance with public company accounting requirements and the
      Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
      concerning the experience, capabilities and background of FAS and FAS’
personnel. FAS subsequently filed a countersuit in the same court seeking
      payment of additional fees allegedly due from the Company. The court is jointly
      administering the countersuit with the Company’s action. On January 25, 2007,
      the Company filed an amended complaint in its lawsuit by which Alex Zaldivar,
      the managing director and a principal of FAS, was added as an additional
      Defendant. In the amended complaint, the Company also made new claims for
      accounting malpractice, negligent training and supervision, and breach of
      fiduciary duty against the Defendants. The case is currently in the discovery
      stage.





F-34


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS –** ***Continued***


**13.**
            **RELATED
                PARTY TRANSACTIONS**





The
      Company paid in ordinary commercial terms $79,000, for each of the years ended
      June 30, 2008 and 2007, to a provider of investor relations and public relations
      services whose Chief Executive Officer is a member of the Company’s Board of
      Directors.





The
      Company is obligated to certain former owners of H & W under four operating
      leases which expire in September 30, 2010 covering property utilized for the
      division’s operating facility, see Operating Leases in Note 12, “Commitments and
      Contingencies.” These leases were negotiated prior to the acquisition of H &
W as an arm’s length transaction. One of the former owners of H & W was
      hired after the acquisition and is currently an officer of the
      Company.




**14.**
            **SUBSEQUENT
                EVENTS**





On
      August
      15, 2008, we issued 229 shares of our Series C Convertible Preferred Stock,
      $0.01 par value, at a price of $650 per share, or an aggregate of $148,850
      (the
“Series C Preferred Stock”) to accredited investors. Each share of Series C
      Preferred Stock is convertible into 1,000 shares of the Company’s common stock
      at a price per share of $0.65 per share, which is greater than the $0.49 closing
      price of the Company’s common stock on August 14, 2008.





On
      September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
      notes maturing on September 1, 2010 to accredited investors. The promissory
      notes are unsecured and are expressly subordinated to any amounts owed now
      or in
      the future to our primary lender pursuant to a subordination agreement between
      the note holders and the lender. Interest on the notes is payable semi-annually,
      on each March 1 and September 1, beginning March 1, 2009. The notes may be
      redeemed by us, in whole or in part, without prepayment penalty or premium,
      except that, if such pre-payment is proposed to be made before September 2,
      2009, a 1% prepayment penalty shall be paid. The unpaid principal amount of
      the
      promissory notes and the accrued but unpaid interest thereon may be converted
      into shares of our common stock at $0.65 per share. In addition, the notes
      will
      be automatically converted into common stock, (A) if the closing price of the
      common stock is equal to or greater than two times the conversion price then
      in
      effect for a period of twenty (20) consecutive business days, or (B) upon the
      election of the holders of two thirds of the principal outstanding Notes, or
      (C)
      upon the closing of a firmly underwritten public offering at a price that is
      two
      times the conversion price with cash proceeds to the Company of at least
      $10,000,000.




On
      September 2, 2008, the Company and its line of credit lender entered into the
      Sixteenth Amendment to the loan and security agreement. The amendment approved
      the issuance of the Company's unsecured convertible promissory notes,
      established that the maximum amount that the Company can received through the
      issuance of the Company's unsecured convertible promissory notes and through
      the
      issuance of the Company's additional series of preferred stock cannot exceed
      $1.5 million. Additionally, the amendment increased the interest rate to prime
      plus 2.75% per annum.


On
        September 17, 2008, the Company and its line of credit lender entered into
        the
        Seventeenth amendment to the Loan and Security Agreement which has extended
        the
        line of credit facility from December 31, 2008 to July 1, 2009 and included
        various pricing and covenant adjustments. The interest rate of prime plus
        2.75%
        per annum under the Sixteenth amendment has been deferred until October 31,
        2008
        and adjusted to an interest rate pricing matrix that allows the company to
        incur
        a lower interest rate under the Seventeenth Amendment than the interest rate
        included in the Sixteenth Amendment. The new interest rate will consist of
        a
        range of prime plus .75% to 2.75% per annum depending upon the fixed charge
        coverage ratio achieved. The covenants were also modified to eliminate the
        monthly average availability effective for the month ending October 31, 2008
        and
        replaced with the requirement to maintain a fixed charge coverage ratio of
        1.0
        to 1.0 through November 2008 and increasing to 1.3 to 1.0 in December 2008
        through the term of the extension. Lastly, the Bank eliminated the termination
        fee of 0.5% through the end of December 2008.




F-35


**EXHIBIT
        INDEX**
 
 **Exhibit**
 **Number**
              **Description**
 
 10.48
              
              Seventeenth
                  Amendment to Loan and Security Agreement by and among SMF Energy
                  Corporation, successor by merger to Streicher Mobile Fueling, Inc.,
                  SMF
                  Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
                  National Association, successor by merger to Congress Financial
                  Corporation (Florida), dated September 17,
                  2008
 
 21.1
              Subsidiaries
                  of the Company
 
 23.1
              Consent
                  of Grant Thornton LLP
 
 31.1
              
              Certificate
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
 
 31.2
              
              Certificate
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
 
 32.1
              
              Certificate
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  Section 906 of The Sarbanes-Oxley Act of
                  2002