**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




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




**For
      the quarterly period ended March 31, 2008**




OR




o
            TRANSITION REPORT PURSUANT TO SECTION
              13 OF
              15(D) OR THE SECURITIES EXCHANGE ACT OF
              1934




Commission
      File Number 000-21825




**SMF
      ENERGY CORPORATION**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **65-0707824**(State
                of Incorporation)
            
            (IRS
                Employer Identification Number)






**200
                West Cypress Creek Road, Suite 400, Fort Lauderdale,
                Florida**
            
            **33309**(Address
                of principal executive offices)
            
            (Zip
                Code)




**(954)
      308-4200**


(Issuer's
      telephone number, including area code)




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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large accelerated filer o
                Smaller reporting company x
              Accelerated
                  filer o
              Non-accelerated
                  filero





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





As
      of May
      8, 2008 there were 14,556,295 shares of the registrant’s common stock
      outstanding.









**SMF
      ENERGY CORPORATION**




**FORM
      10-Q**




**INDEX**




Form
                  10-Q Part and Item No.Part
                  I
              Financial
                Information:Item
                  1.
              Condensed
                  Unaudited Consolidated Financial StatementsCondensed
                  Consolidated Balance Sheets as of March 31, 2008 (unaudited)
                  and
                June
                  30, 2007
              3Condensed
                  Unaudited Consolidated Statements of Operations for the three
                  and
                nine
                  months ended March 31, 2008 and 2007
              4Condensed
                  Unaudited Consolidated Statements of Cash Flows for the nine
                months
                  ended March 31, 2008 and 2007
              5Notes
                  to Condensed Unaudited Consolidated Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              20Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              36Item
                  4.
              Controls
                  and Procedures
              37Part
                  II
              Other
                Information:Items
                1.
                through 6.
              39Signatures
              40Certifications
              41-43


2




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
  ***(in
        000’s, except share and per share data)***




**ASSETS**
            
            **March
                31, 2008**
            
            
            **June
                30, 2007**Current
                assets:
            
            **(unaudited)**Cash
                and cash equivalents
            $
            36
            
            $
            987Accounts
                receivable, net of allowances of $1,295 and $1,401
            
            24,299
            
            
            25,442Inventories,
                net of reserve of $187 and $238
            
            2,308
            
            
            2,283Prepaid
                expenses and other current assets
            
            436
            
            
            471Total
                current assets
            
            27,079
            
            
            29,183Restricted
                cash
            
            140
            
            
            1,145Property
                and equipment, net of accumulated depreciation of$13,435
                and $11,807
            
            10,478
            
            
            10,017Identifiable
                intangible assets, net of accumulated amortization of$965
                and $681
            
            2,488
            
            
            2,771Goodwill
            
            228
            
            
            228Deferred
                debt costs, net of accumulated amortization of $463 and
                $1,197and
                other assets
            
            481
            
            
            581Total
                assets
            $
            40,894
            
            $
            43,925**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Line
                of credit payable
            $
            14,848
            
            $
            17,297Accounts
                payable
            
            9,112
            
            
            7,887Accrued
                expenses and other liabilities
            
            4,096
            
            
            3,831Total
                current liabilities
            
            28,056
            
            
            29,015Long-term
                liabilities:Promissory
                notes, net of unamortized debt discount of $72and
                $1,027
            
            8,787
            
            
            10,250Other
                long-term liabilities
            
            463
            
            
            546Total
                liabilities
            
            37,306
            
            
            39,811ContingenciesShareholders’
                equity:Preferred
                stock, $0.01 par value; 10,000 Series A sharesauthorized,
                and 4,587 issued and outstanding atMarch
                31, 2008
            
            -
            
            
            -Preferred
                stock, $0.01 par value; 2,000 Series B sharesauthorized,
                and 1,985 issued and outstanding atMarch
                31, 2008
            
            -
            
            
            -Common
                stock, $.01 par value; 50,000,000 shares authorized;14,556,295
                and 13,702,426 issued and outstandingat
                March 31, 2008 and June 30, 2007, respectively
            
            146
            
            
            137Additional
                paid-in capital
            
            30,889
            
            
            25,021Accumulated
                deficit
            
            (27,447
            )
            
            (21,044
            )Total
                shareholders’ equity
            
            3,588
            
            
            4,114Total
                liabilities and shareholders’ equity
            $
            40,894
            
            $
            43,925





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




3




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **CONDENSED
        UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**
  ***(in
        000’s, except per share data)***




**Three
                Months Ended March 31,**
            
            **Nine
                Months Ended March 31,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Petroleum
                product sales and service revenues
            
            $
            57,744
            
            $
            45,450
            
            $
            159,838
            
            $
            152,368Petroleum
                product taxes
            
            
            6,418
            
            
            6,367
            
            
            18,815
            
            
            19,875Total
                revenues
            
            
            64,162
            
            
            51,817
            
            
            178,653
            
            
            172,243Cost
                of petroleum product sales and service
            
            
            54,869
            
            
            42,972
            
            
            151,216
            
            
            142,658Petroleum
                product taxes
            
            
            6,418
            
            
            6,367
            
            
            18,815
            
            
            19,875Total
                cost of sales
            
            
            61,287
            
            
            49,339
            
            
            170,031
            
            
            162,533Gross
                profit
            
            
            2,875
            
            
            2,478
            
            
            8,622
            
            
            9,710Selling,
                general and administrative expenses
            
            
            3,445
            
            
            4,077
            
            
            11,036
            
            
            11,886Operating
                loss
            
            
            (570
            )
            
            (1,599
            )
            
            (2,414
            )
            
            (2,176
            )Interest
                expense
            
            
            (780
            )
            
            (1,023
            )
            
            (2,340
            )
            
            (2,808
            )Other
                income
            
            
            60
            
            
            4
            
            
            100
            
            
            9Loss
                on extinguishment of promissory notes
            
            
            (108
            )
            
            -
            
            
            (1,749
            )
            
            -Loss
                before income taxes
            
            
            (1,398
            )
            
            (2,618
            )
            
            (6,403
            )
            
            (4,975
            )Income
                tax expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            $
            (1,398
            )
            $
            (2,618
            )
            $
            (6,403
            )
            $
            (4,975
            )Basic
                and diluted net loss per share computation:Net
                loss
            
            $
            (1,398
            )
            $
            (2,618
            )
            $
            (6,403
            )
            $
            (4,975
            )Less:
                Preferred stock dividends
            
            
            (56
            )
            
            -
            
            
            (56
            )
            
            -Net
                loss attributable to common stockholders
            
            $
            (1,454
            )
            $
            (2,618
            )
            $
            (6,459
            )
            $
            (4,975
            )Basic
                and diluted net loss per shareattributable
                to common stockholders
            
            $
            (0.10
            )
            $
            (0.23
            )
            $
            (0.45
            )
            $
            (0.46
            )Basic
                and diluted weighted average commonshares
                outstanding
            
            
            14,556
            
            
            11,600
            
            
            14,438
            
            
            10,867




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




4




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


**Nine
                Months Ended March 31,****2008**
            
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            $
            (6,403
            )
            $
            (4,975
            )Adjustments
                to reconcile net loss to net cash provided by (used in)operating
                activities:Depreciation
                and amortization:Cost
                of sales
            
            1,121
            
            
            1,316Selling,
                general and administrative
            
            897
            
            
            672Amortization
                of deferred debt cost
            
            224
            
            
            248Amortization
                of debt discount
            
            74
            
            
            573Stock-based
                compensation amortization expense
            
            382
            
            
            304Gain
                from sale of assets
            
            (59
            )
            
            -Inventory
                reserve
            
            (51
            )
            
            100Provision
                for doubtful accounts
            
            213
            
            
            370Non-cash
                loss on extinguishment of debt
            
            1,479
            
            
            -Other
            
            -
            
            
            17Changes
                in operating assets and liabilities:Decrease
                in accounts receivable
            
            930
            
            
            2,735Decrease
                in inventories, prepaid expenses and other assets
            
            55
            
            
            992Increase
                (decrease) in accounts payable and other liabilities
            
            1,419
            
            
            (2,398
            )Net
                cash provided by (used in) operating activities
            
            281
            
            
            (46
            )**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Purchases
                of property and equipment
            
            (2,222
            )
            
            (796
            )Proceeds
                from sale of equipment
            
            85
            
            
            -Decrease
                in restricted cash
            
            1,005
            
            
            -Net
                cash used in investing activities
            
            (1,132
            )
            
            (796
            )**CASH
                FLOWS USED IN FINANCING ACTIVITIES:**Proceeds
                from line of credit
            
            184,908
            
            
            185,882Repayments
                of line of credit
            
            (187,357
            )
            
            (186,689
            )Proceeds
                from issuance of promissory notes
            
            7,690
            
            
            -Proceeds
                from issuance of common stock and warrants
            
            1,170
            
            
            3,274Proceeds
                from issuance of preferred stock
            
            516
            
            
            -Principal
                payments on promissory notes
            
            (6,359
            )
            
            (1,794
            )Debt
                issuance costs
            
            (541
            )
            
            (114
            )Common
                stock and preferred stock issuance costs
            
            (101
            )
            
            (256
            )Capital
                lease payments
            
            (26
            )
            
            (110
            )Net
                proceeds from exercise of common stock options and warrants
            
            -
            
            
            31Net
                cash provided by (used in) financing activities
            
            (100
            )
            
            224NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            (951
            )
            
            (618
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            987
            
            
            4,103CASH
                AND CASH EQUIVALENTS, end of period
            $
            36
            
            $
            3,485


****** **(Continued)**




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




5




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


**(Continued)**
            
            
            **Nine
                Months Ended March 31,****2008**
            
            
            **2007****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid for interest
            
            $
            2,183
            
            $
            2,084**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:**Refinancing
                of August 2003, January 2005, and September 2005notes
                into August 2007 notes
            
            $
            4,918
            
            $
            -Non-cash
                costs related to issuance of stock, warrants andAugust
                2007 notes
            
            $
            134
            
            $
            -Debt
                discount costs related to issuance of stock, warrants andAugust
                2007 notes
            
            $
            112
            
            $
            -Exchange
                of promissory notes and accrued interestfor
                preferred stock
            
            $
            3,793
            
            $
            -Accrued
                dividends related to preferred stock
            
            $
            56
            
            $
            -Conversion
                of promissory notes to common shares
            
            $
            -
            
            $
            630Unamortized
                debt discount related to warrants andwarrants'
                extension
            
            $
            -
            
            $
            327




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




6




**SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


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





SMF
      Energy Corporation (the “Company”) is a Delaware corporation 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
      March
      31, 2008, the Company was conducting operations in ten states: Alabama,
      California, Florida, Georgia, Louisiana, Mississippi, North Carolina, South
      Carolina, Tennessee, and Texas.




******2****.**
            **BASIS
                OF PRESENTATION**





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





The
      condensed unaudited consolidated financial statements included herein have
      been
      prepared in accordance with the instructions of Form 10-Q, and do not include
      all the information and footnotes required by generally accepted accounting
      principles; however, they do include all adjustments of a normal recurring
      nature that, in the opinion of management, are necessary to present fairly
      the
      financial position and results of operations of the Company as of and for the
      interim periods presented.





Operating
      results for the three and nine months ended March 31, 2008 are not necessarily
      indicative of the results that may be expected for any subsequent period or
      the
      fiscal year ending June 30, 2008 (“fiscal 2008”). These interim financial
      statements should be read in conjunction with the Company’s audited consolidated
      financial statements and related notes included in the Company’s Annual Report
      on Form 10-K for the year ended June 30, 2007, as filed with the United States
      Securities and Exchange Commission.




**3.**
              **RECENT
                  ACCOUNTING
                  PRONOUNCEMENTS**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Financial
      Accounting Standard (“FAS”) Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes - an interpretation of FAS Statement No. 109” (“FIN No. 48”).
      FIN No. 48 clarifies the accounting for uncertainty in income taxes by
      prescribing a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. The interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Application of FIN No. 48 was effective
      for
      the Company during the first quarter of fiscal 2008. The Company discloses
      its
      conclusions with respect to the effect of the adoption of FIN No. 48 in Note
      13
      - Income Taxes.




7




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


In
      September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This new 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 Statement of Financial Accounting Standards
      (“SFAS”) No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS 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 SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting for minority interests. 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. SFAS 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.




8




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**4.**
            **CASH
                AND CASH EQUIVALENTS**





During
      the nine months ended March 31, 2008, the Company paid down $2.4
      million **** on
      its
      line of credit payable. Total cash and cash availability was $2.1 million and
      $2.8 million **** at
      March
      31, 2008 and June 30, 2007, respectively, and was $2.7 million **** at
      May 8,
      2008. Total cash and cash availability includes cash as presented in the
      Company’s balance sheet and cash available to the Company through its line of
      credit, described in Note 6 - Line of Credit Payable.




**5.**
            **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.




In
      August
      2007, the Company entered into commitments to purchase $1.1 million in trucks
      and field equipment. Ten pieces **** of
      equipment for an aggregate amount of $1.0 million **** were
      delivered in the nine months ended March 31, 2008. The remaining proceeds of
      $140,000 remain in restricted cash and continue to be held by the indenture
      trustee at March 31, 2008 pending the delivery of the remaining new
      equipment.




**6.**
            **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. Letters of credit reduce the maximum amount available for
      borrowing. Interest is payable monthly at prime plus 0.75% (6.0% at March 31,
      2008) and outstanding borrowings under the line are secured by substantially
      all
      Company assets other than its transportation fleet and related field equipment.





As
      of
      March 31, 2008 and June 30, 2007, the Company had outstanding borrowings of
      $14.8 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* ”.
      The
      line of credit was previously scheduled to expire on June 30, 2008; however,
      the
      Company amended its Loan and Security Agreement in March 2008 with the bank
      to,
      among other things, extend the term of the agreement to December 31, 2008.
      Based
      on eligible receivables and inventories, and letters of credit outstanding
      at
      March 31, 2008, the Company had $2.0 million of cash availability under the
      line
      of credit compared to $1.8 million availability at June 30, 2007.





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. Additionally, the
      Company had a current fiscal year capital expenditure limitation of
      $750,000 **** without
      approval from the line of credit lender. During the nine months ended March
      31,
      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, as of the date of this filing, the average monthly availability
      requirement was $1.3 million for March 2008, increasing to $1.4 million
      beginning in 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 $1.5 million in
      March 2008, of which $1.4 million have been issued. 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.




9




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**




The
      line
      of credit agreement also requires the Company to obtain the consent of the
      financial institution prior to incurring additional debt, or mergers,
      consolidations or sales. 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 March 31, 2008, the
      Company was in compliance with the requirements of these covenants.




**7.**
            **CURRENT
                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 had originally 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 $6,400 into shares of the Company’s Series A
      Preferred Stock at $550 per share. For additional information see Note 11,
      Shareholders’ Equity. The remaining unamortized deferred debt costs of $24,000
      were written-off and recorded as a loss on extinguishment of debt.




10




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**8.**
            **LONG-TERM
                DEBT**





Long-term
      debt consists of the following (in thousands):




**March
                31,**
            
            
            **June
                30,****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
                14.0% including cost of warrants and other debt issue
                costs.
            $
            8,859
            
            $
            -September
                2005 promissory notes (the “September 2005 Notes”). The notes were
                refinanced on August 8, 2007.
            
            -
            
            
            3,000January
                2005 promissory notes (the “January 2005 Notes”). The notes were
                refinanced on August 8, 2007.
            
            -
            
            
            4,860August
                2003 promissory notes (the “August 2003 Notes”). The notes were refinanced
                on August 8, 2007.
            
            -
            
            
            3,417Various
                capital leases
            
            -
            
            
            26Unamortized
                debt discount
            
            (72
            )
            
            (1,027
            )8,787
            
            
            10,276Less:
                current portion
            
            -
            
            
            (26
            )Long-term
                debt, net
            $
            8,787
            
            $
            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”), 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
      wrote-off approximately $978,000 and $443,000 of unamortized debt discount
      and
      debt costs, respectively.




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 equity
      securities sold, see Note 11 - Shareholders’ Equity.




11




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**




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
      primary 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 redeemable
      by
      the Company, 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.




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 March 31, 2008, there are 3,033,981 conversion share
      rights outstanding.





On
      March
      12, 2008, some of the holders of the August 2007 Notes exchanged $1.8 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
      11- Shareholders’ Equity. The unamortized deferred debt costs of $70,000 and the
      unamortized discount of $15,000 related to these notes were written-off and
      recorded as loss on extinguishment of debt. As a result of the exchange of
      $1.8
      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 6, could also cause a default under the August 2007 Notes.
      As
      of March 31, 2008, the Company was in compliance with the requirements of these
      covenants.




In
      accordance with FAS No. 6, “Classification of Short-term Obligations Expected to
      be Refinanced”, at June 30, 2007, 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.





***Other***





In
      connection with the August 2003, January 2005 and September 2005 Notes, the
      Company recorded at issuance 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,
      there were unamortized debt discounts of $978,000 which were written-off as
      a
      loss of extinguishment when the Satisfied Notes were redeemed. As a result
      of
      the early satisfaction of the notes, the Company incurred $270,000 as a
      pre-payment penalty which was also recorded as a loss of extinguishment along
      with the write-off of unamortized deferred debt costs of $443,000. Partially
      offsetting the losses on extinguishment of debt was a gain on extinguishment
      of
      debt of $50,000 as a result of the excess of the carrying value of the Satisfied
      Notes over the extinguishment price.


12




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
  In
          connection with the November 2007 Notes, the Company incurred $42,000 in
          issuance costs which were been amortized over the term of the notes. As
          a result
          of the exchange of the notes, the unamortized amount of $24,000 was written
          off
          and recorded as loss on extinguishment.


In
      connection with the August 2007 Notes, the Company recorded unamortized debt
      discounts of $112,000, to be amortized as non-cash interest expense over the
      term of the notes, related to the valuation of the common stock warrants issued
      to noteholders. As a result of the exchange of the August 2007 Notes into the
      Series A Preferred Stock, the unamortized debt discounts costs of $15,000
      related to the exchanged notes were recorded as part of a loss on extinguishment
      of debt along with the write off of $69,000 of unamortized debt costs.





Total
      amortization expense related to all debt discounts was $11,000 and $279,000
      for
      the three months ended March 31, 2008 and 2007, respectively, and $74,000,
      and
      $573,000 for the nine months ended March 31, 2008 and 2007, respectively.





The
      following summarizes the components of the net loss on extinguishment of
      promissory notes that the Company recorded in its condensed unaudited
      consolidated statements of operations during the three and nine months ended
      March 31, 2008 (in thousands):




**Three
                Months**
            
            
            **Nine
                Months****Ended**
            
            
            **Ended****March31,
                  2008**Write
                offs of costs and gain related to the converted 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 exchanged November 2007
                Notes
            
            24
            
            
            24Write
                offs related to exchanged August 2007 Notes:Unamortized
                debt costs
            
            69
            
            
            69Unamortized
                debt discounts
            
            15
            
            
            15Loss
                on extinguishment of promissory notes, net
            $
            108
            
            $
            1,749




**9.**
            **WARRANTS**




In
      conjunction with **t** he
      issuance of the August 2003, January 2005 and September 2005 Notes described
      in
      Note 8 - Long-Term Debt, the Company issued detachable common stock purchase
      warrants, described below as the August 2003, January 2005, and September 2005
      Warrants. In addition, in June 2006, the Company issued non-detachable warrants
      to certain note holders (the “Conversion Warrants”). In conjunction with a
      private offering of its common stock in February 2007, the Company issued
      warrants described below as the February 2007 warrants. In August 2007, in
      conjunction with the sale of promissory notes and equity, the company issued
      warrants described below as the August 2007 warrants. As of June 30, 2007,
      all
      of the Conversion Warrants had been exercised.





There
      was
      no exercise of warrants in the nine months ended March 31, 2008.


****


***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.
      At March 31, 2008, the warrant holders had a balance of 140,000 warrants
      available to exercise into common shares.




13




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**




***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. At March 31, 2008, the warrant holders had a balance of
      37,292 warrants available to exercise into common shares.





S ***eptember
      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. At March 31, 2008, the 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 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. As of June 30, 2007, the note holders
      had exercised all of the Conversion Warrants.





***February
      2007 Warrants***





In
      conjunction with the February 15, 2007 private placement offering, the Company
      issued detachable 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 March 31, 2008, these
      warrants remain outstanding.





***August
      2007 Warrants***





In
      conjunction with the August 8, 2007 promissory notes and equity offering,
      further described in Note 8 - Long-Term Debt and Note 11 - 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. The August 2007 warrants also have customary
      anti-dilution and underlying stock registration rights. As of March 31, 2008,
      these warrants remain outstanding.




**10.**
            **NET
                INCOME (LOSS) PER SHARE**





Basic
      net
      income per share is computed by dividing the net income attributable to common
      shareholders by the weighted-average number of common shares outstanding during
      the period. Diluted net income per share is computed by dividing net income
      attributable to common shareholders by the weighted-average number of common
      shares outstanding during the period, 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
      stock options and warrants is reflected in diluted earnings per share by
      application of the treasury stock method.




14




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**




The
      net
      loss per share computations for the three months and nine months ended March
      31,
      2008 and 2007 do not include common stock equivalents that the Company had
      outstanding during those periods as they were antidilutive due to the net loss
      incurred. At March 31, 2008, these common stock equivalents outstanding
      consisted of 1,989,302 stock options, 886,941 common stock warrants, 3,033,981
      promissory note conversion rights, and 6,572,000 preferred stock conversion
      rights, at prices ranging from $.55 to $7.63 per share. At March 31, 2007,
      the
      common stock equivalents outstanding consisted of 1,822,002 stock options and
      1,440,335 common stock warrants, at prices ranging from $.92 to $7.63 per share.








**11.**
            **SHAREHOLDERS’
                EQUITY**





The
      following reflects the changes in shareholders’ equity for the nine months ended
      March 31, 2008 (in thousands):




**Additional**
            
            
            
            
            
            **Total****Common**
            
            
            **Paid-in**
            
            
            **Accumulated**
            
            
            **Shareholders’****Stock**
            
            
            **Capital**
            
            
            **Deficit**
            
            
            **Equity**Balance
                at June 30, 2007
            
            $
            137
            
            $
            25,021
            
            $
            (21,044
            )
            $
            4,114Issuance
                of common stock and warrantsfrom
                August 2007 offering, net ofissuance
                costs of $112,000
            
            
            9
            
            
            1,245
            
            
            -
            
            
            1,254Issuance
                of Series A preferred stock, net ofissuance
                costs of $12,000
            
            
            -
            
            
            2,510
            
            
            -
            
            
            2,510Issuance
                of Series B preferred stock
            
            
            -
            
            
            1,787
            
            
            -
            
            
            1,787Series
                A preferred stock dividend
            
            
            -
            
            
            (39
            )
            
            -
            
            
            (39
            )Series
                B preferred stock dividend
            
            
            -
            
            
            (17
            )
            
            -
            
            
            (17
            )Stock-based
                compensation expense
            
            
            -
            
            
            382
            
            
            -
            
            
            382Net
                loss
            
            
            -
            
            
            -
            
            
            (6,403
            )
            
            (6,403
            )Balance
                at March 31, 2008
            
            $
            146
            
            $
            30,889
            
            $
            (27,447
            )
            $
            3,588





As
      discussed in Note 8 - Long-Term Debt, 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 and to lower the Company’s total senior secured convertible subordinated
      debt from $11.2 million **** to
      $10.6
      million on August 8, 2007.




15


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**




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 $621,000 of which $112,000 were recorded to equity and
      $509,000 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 offering, 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 $6,400 into 3,648 shares of Series A Preferred Stock. Included in the
      offering, the Company sold 939 of the shares for $516,000 in cash to a small
      group of investors which included 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 offering, some of the holders of the August
      2007 Notes exchanged $1.8 million in principal balance of the 111⁄2% senior
      secured convertible promissory notes issued by the Company, plus a portion
      of
      the accrued but unpaid interest thereon in the amount of $37,000.





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
      in 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.




16




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS**


***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 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:





(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 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.





On
      March
      31, 2008, the Company declared a dividend from the original date of issuance
      until March 31, 2008 of $8.41 and $8.43 per share on the outstanding Series
      A
      and Series B Preferred Stock, respectively.




17




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


During
      the nine months ended March 31, 2008, the Company granted 253,000 and 27,000
      stock options under the Employee Stock Options and Director Stock Options plans,
      respectively. The weighted average grant date fair value of the options granted
      was $1.26. For the nine months ended March 31, 2008, there were no stock options
      exercised.




**12.**
            **CONTINGENCIES**





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.




18




**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


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 March
      31,
      2008. However, based on management’s knowledge at March 31, 2008, 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.**
            **INCOME
                TAXES**




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. There was no impact
      on
      the previously reported accumulated deficit.





At
      July 1, 2007, the amount of unrecognized tax benefits was approximately
      $847,000, of which approximately $352,000 would, if recognized, affect the
      Company’s effective tax rate. There have been no material changes in
      unrecognized tax benefits since July 1, 2007.





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. 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.




19






**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




**Forward
      Looking Statements**





This
      report, including but not limited to this Item 2 and the footnotes to the
      financial statements in Item 1, 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 market for commercial mobile
                fueling
                and bulk fueling; lubricant and chemical packaging, distribution
                and
                sales; integrated out-sourced fuel management services; and transportation
                logistics;




·
            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 II, Item 1A, of this report, the 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:





·
            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;




·
            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;




20




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




**·**
            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
      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. As
      of the
      date of this report, we are conducting operations through 26 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.




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.




21




The
      following is a summary discussion of our financial results for the three months
      ended March 31, 2008 (the “third quarter of fiscal 2008”) and our execution on
      several core strategies that impacted results of operations:





·
            In
                the third quarter of fiscal 2008, we had a net loss of $1.4 million.
                These
                results include $971,000 in non-cash charges, such as depreciation
                and
                amortization of assets, debt costs, debt discounts, stock based
                compensation, provision for doubtful accounts and loss on extinguishment
                of promissory notes. The quarterly results also include stated interest
                expense associated with servicing of our debt of
                $675,000.





·
            Our
                net loss for the quarter decreased $1.2 million, from $2.6 million
                last
                year to $1.4 million this year as the result of a $397,000 increase
                in
                gross profit, a reduction of $632,000 in selling, general and
                administrative costs and a decrease of $243,000 in interest expense.





·
            We
                strengthened our balance sheet in the quarter, as reflected in the
                $2.9
                million increase in shareholder’s equity when compared to last quarter.
                The increase resulted from the issuance of $4.3 million in preferred
                stock, offset by the quarterly net loss of $1.4 million.
                .





·
            We
                reduced our senior secured subordinated debt by exchanging $3.8 million
                in
                promissory notes for shares of non-redeemable preferred stock. While
                this
                exchange of the promissory notes resulted in an additional non-cash
                loss
                on extinguishment of debt expense of $108,000 as a result of the
                write-offs of the related debt discounts and deferred debt costs,
                it
                favorably impacts our future cash needs by reducing the debt service
                requirements on the former notes.





·
            In
                addition to the exchange of debt, we raised $516,000 in cash from
                selling
                shares of preferred stock to a small group of investors, including
                some of
                the Company’s officers.





·
            We
                entered into an amendment to the line of credit to extend the maturity
                date from June 30, 2008 to December 31, 2008 and modified certain
                financial covenants. We believe that this extension will enable us
                to
                continue to meet the working capital needs of our business.





·
            Escalating
                fuel prices, resulting in decreased demand from our existing customers,
                have continued to impact our results of operations. While fuel price
                fluctuations affect our revenues, our gross profits were historically
                not
                affected by such fluctuations since we were able to pass the increased
                market cost of the product on to our customers. 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. In addition, these higher fuel prices have substantially
                increased the amount of short-term credit that we need to obtain
                to cover
                the time between our receipt of fuel from 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. These developments have negatively affected our
                profitability.





·
            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 merger and acquisition
                opportunities and are in discussions with key targets that we believe
                would meet our goals. While there can be no assurance that we will
                be able
                to acquire or merge with these targets, we do believe that,
                notwithstanding the current conditions in the credit markets, the
                capital
                necessary to execute this strategy will be available to us, including
                the
                opportunity to raise additional working capital in conjunction with
                these
                transactions.




22




Key
      financial and operating measures during the third quarter of fiscal 2008
      include:





·
            The
                net loss from operations for the third quarter of fiscal 2008 was
                $1.4
                million****compared
                to a net loss of $2.6 million for the same period in the prior year.
                The
                principal reasons for the $1.2 million decrease in the net loss were
                a
                $397,000 increase in gross profit, primarily as a result of our emphasis
                on developing new business with higher overall net margin per gallon
                contribution. The decrease in net loss was also due to a decrease
                of
                $632,000 in selling, general and administrative costs, primarily
                attributable to 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. The third major contributor
                to the lower net loss was a decrease of $243,000 in interest expense
                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.




·
            In
                the third quarter of fiscal 2008, the net margin was 17.8
                cents****per
                gallon compared to 14.3 cents per gallon for the same period in the
                prior
                year, primarily resulting from our emphasis on developing new business
                with higher overall net margin per gallon contribution.




·
            Earnings
                before interest, taxes, depreciation, amortization, stock-based
                compensation expense, and loss on extinguishment of debt (“EBITDA”), a
                non-GAAP measure, was $277,000****for
                the third quarter of fiscal 2008 compared to a negative EBITDA of
                $787,000
                for the same period a year ago. The primary reason for the $1.1 million
                improvement in EBITDA was the $397,000 increase in gross profit,
                and the
                decrease of $632,000 in selling, general and administrative costs,
                as
                discussed above.




·
            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 an 11% gallon reduction
                in the
                third quarter of fiscal 2008 when compared to the same period in
                the prior
                year. This volume reduction was primarily due to lower volume demanded
                by
                our existing customers, which we believe stems from the general economic
                conditions in the industries and the geographic locations we serve,
                our
                customers’ efforts to reduce fuel consumption in light of increased fuel
                prices, and the reduction in business with net margin contributions
                below
                acceptable levels. However, in the last sequential quarters, our
                volumes
                have stabilized as reflected in the table
                below.





·
            We
                achieved improvements on our operating results as reflected through
                our
                net loss, EBITDA and net margin when compared to our most recent
                sequential quarterly results. Specifically EBITDA improved $664,000
                in the
                third quarter ending March 31, 2008 compared to the second quarter
                ended
                December 31, 2007 due to improvements in net margins and reduction
                of our
                selling, general and administrative costs. Additionally, our monthly
                results show an improving trend from October 30, 2007 through March
                31,
                2008. The following chart presents certain operating results for
                the last
                five sequential quarters (in thousands, except net margin per gallon):




23




**For
                the three months ended****March
                31,**
            
            
            **June
                30,**
            
            
            **September
                30,**
            
            
            **December
                31,**
            
            
            **March
                31,****2007**
            
            
            **2007**
            
            
            **2007**
            
            
            **2007**
            
            
            **2008**Net
                loss
            
            $
            (2,618
            )
            $
            (1,614
            )
            $
            (3,019
            )
            $
            (1,986
            )
            $
            (1,398
            )EBITDA
            
            $
            (787
            )
            $
            127
            
            $
            196
            
            $
            (387
            )
            $
            277Selling,
                general and
              administrative
                expenses
            
            $
            4,077
            
            $
            3,950
            
            $
            3,803
            
            $
            3,788
            
            $
            3,445Net
                margin per gallon
            
            $
            0.14
            
            $
            0.17
            
            $
            0.19
            
            $
            0.16
            
            $
            0.18Gallons
                sold
            
            
            20,407
            
            
            19,678
            
            
            18,695
            
            
            18,050
            
            
            18,102




We
      define
      EBITDA as earnings before interest, taxes, depreciation, amortization,
      stock-based compensation expense and loss on extinguishment of debt, a non-GAAP
      financial measure within the meaning of Regulation G promulgated by the
      Securities and Exchange Commission. EBITDA is commonly defined as earnings
      or
      loss before interest, taxes, depreciation and amortization. We believe that
      EBITDA, as we define it, 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.
      All
      companies do not calculate EBITDA in the same manner, so EBITDA as presented
      by
      us may not be comparable to EBITDA presented by other companies. The following
      chart reconciles EBITDA to the net loss for each of the five quarterly periods
      presented above (in thousands):




**For
                the three months ended****March
                31,**
            
            
            **June
                30,**
            
            
            **September
                30,**
            
            
            **December
                31,**
            
            
            **March
                31,****2007**
            
            
            **2007**
            
            
            **2007**
            
            
            **2007**
            
            
            **2008**Net
                loss
            $
            (2,618
            )
            $
            (1,614
            )
            $
            (3,019
            )
            $
            (1,986
            )
            $
            (1,398
            )Add
                back:Interest
                expense,
              net
                of interest
              income
            
            1,023
            
            
            919
            
            
            778
            
            
            782
            
            
            780Depreciation
                and
              amortization
              expense:Cost
                of sales
            
            436
            
            
            386
            
            
            388
            
            
            380
            
            
            353Selling,
                general
              and
              administrative
              expenses
            
            219
            
            
            249
            
            
            282
            
            
            304
            
            
            311Stock-based
              compensation
              amortization
              expense
            
            153
            
            
            187
            
            
            126
            
            
            133
            
            
            123Loss
                on
              extinguishment
              of
                debt
            
            -
            
            
            -
            
            
            1,641
            
            
            -
            
            
            108EBITDA
            $
            (787
            )
            $
            127
            
            $
            196
            
            $
            (387
            )
            $
            277




24




**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 Three months ended March 31, 2008 (“third quarter of fiscal 2008”) to Three
      months ended March 31, 2007 (“third quarter of fiscal
      2007”)**





***Revenues***





Revenues
      were $64.2 million in the third quarter of fiscal 2008, as compared to $51.8
      million in the same period of the prior year, an increase of $12.4 million,
      or
      24%, as a result of the increases in prices per gallon of petroleum products.
      Market fuel prices have increased approximately 59% this quarter compared to
      last year. Price variances resulted in an increase of $18.2 million in revenues
      partially offset by a $5.8 million decrease in revenues due to an 11% 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 our customers’ efforts to reduce their fuel consumption in
      light of substantially higher fuel prices. In addition, a portion of the
      decrease in volume may be attributed to our decision to reduce business with
      net
      margin contributions below acceptable levels.





***Gross
      Profit***





Gross
      profit was $2.9 million in the third quarter of fiscal 2008, as compared to
      $2.5
      million in the same period of the prior year, an increase of $397,000, or 16%.
      The net margin per gallon for the third quarter of fiscal 2008 was 17.8
      cents **** versus
      14.3 cents in the quarter last year. The increases in gross profit and net
      margin per gallon were primarily the result of our continuing emphasis on
      developing new business with higher overall net margin per gallon contribution,
      described above.





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





Selling,
      general and administrative expenses were $3.4 million in the third quarter
      of
      fiscal 2008, as compared to $4.0 million in the same period of the prior year,
      a
      decrease of $632,000, or 16%. The decrease is attributable to the following
      (in
      thousands):





Non-legal
                public company compliance expense
            
            $
            (226
            )Provision
                for doubtful accounts and collection fees
            
            
            (214
            )Reduction
                in SG&A costs primarily personnel expenseas
                a result of efficiencies gained from new systemsand
                integration of the acquired companies
            
            
            (284
            )Increase
                in SG&A depreciation primarily related to ERP systemimplementation
            
            
            92Total
                decrease
            
            $
            (632
            )




25




***Interest
      Expense***




Interest
      expense was $780,000 in the third quarter of fiscal 2008, as compared to
      $1.0 million in the same period of the prior year, a decrease of $243,000,
      or
      24%. The decrease was primarily due to lower non-cash interest amortization
      as a
      result of the refinancing of our long-term debt, since the outstanding secured
      promissory notes issued on August 2003, January 2005 and September 2005 were
      refinanced in August 2007 with new senior secured convertible subordinated
      notes.





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




**Three
                Months Ended****March
                31,****2008**
            
            
            **2007**Stated
                Rate Interest Expense:Line
                of credit
            
            $
            295
            
            $
            252Long-term
                debt
            
            
            356
            
            
            372Other
            
            
            24
            
            
            28Total
                stated rate interest expense
            
            
            675
            
            
            652Non-Cash
                Interest Amortization:Amortization
                of deferred debt costs
            
            
            94
            
            
            92Amortization
                of debt discount
            
            
            11
            
            
            279Total
                amortization of interest expense
            
            
            105
            
            
            371Total
                interest expense
            
            $
            780
            
            $
            1,023







***Loss
      on Extinguishment of Debt***





In
      the
      quarter, we recorded losses on extinguishment of debt of $108,000. The losses
      are primarily due to the extinguishment of $3.8 million in debt by the exchange
      of $2.0 million of the November 2007 Notes and $1.8 million of the August 2007
      Notes into shares of Series A and Series B Preferred Stock, respectively. The
      loss on extinguishment of debt was the result of the write-off of unamortized
      debt discounts of $15,000, **** the
      write-off of unamortized debt costs of $69,000 related to the August 2007 Notes,
      and the write-off of $24,000 of unamortized debt costs related to the November
      2007 Notes.




***Income
      Taxes***




No
      income
      tax expense was recorded for the third quarter in either fiscal 2008 or 2007.
      The net operating loss carryforward at June 30, 2007 was $24.7 million, which
      includes a $2.2 million net operating loss carryforward acquired in connection
      with the H & W acquisition.




26




***Net
      Loss***




Net
      loss
      was $1.4 million in the third quarter of fiscal 2008, as compared to $2.6
      million in the same period in the prior year. The $1.2 million decrease in
      net
      loss was partially due to a $397,000 increase in gross profit primarily
      resulting from our emphasis on developing new business with higher overall
      net
      margin per gallon contribution. The decrease in net loss was also due to a
      decrease of $632,000 in selling, general and administrative costs, and a
      decrease of $243,000 in interest expense primarily as a result of the August
      2007 refinancing of our long-term debt.




***EBITDA***




As
      noted
      above, we define EBITDA as earnings before interest, taxes, depreciation,
      amortization, stock-based compensation expense and loss on extinguishment of
      debt, a non-GAAP financial measure within the meaning of Regulation G
      promulgated by the Securities and Exchange Commission. EBITDA is commonly
      defined as earnings or loss before interest, taxes, depreciation and
      amortization. We believe that EBITDA, as we define it, 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. All companies do not calculate EBITDA in the same
      manner, so EBITDA as presented by us may not be comparable to EBITDA presented
      by other companies.





EBITDA
      was $277,000 in the third quarter of fiscal 2008, as compared to negative EBITDA
      of $787,000 in the same period of the prior year, an increase of $1.1 million.
      The increase in EBITDA was primarily due to the reduction in business with
      net
      margin contributions below acceptable levels, and the decrease in selling,
      general and administrative costs described above. The following chart reconciles
      EBITDA to the net loss for the third quarters of fiscal 2008 and fiscal 2007
      (in
      thousands):




**Three
                Months Ended****March
                31,****2008**
            
            
            **2007**Net
                loss
            
            $
            (1,398
            )
            $
            (2,618
            )Add
                back:Interest
                expense
            
            
            780
            
            
            1,023Depreciation
                and amortization expense:Cost
                of sales
            
            
            353
            
            
            436Selling,
                general and administrative expenses
            
            
            311
            
            
            219Stock-based
                compensation amortization expense
            
            
            123
            
            
            153Loss
                on extinguishment of debt
            
            
            108
            
            
            -EBITDA
            
            $
            277
            
            $
            (787
            )




27




**Comparison
      of Nine months ended March 31, 2008 to Nine months ended March 31,
      2007**





***Revenues***





Revenues
      were $178.7 million in the nine months ended March 31, 2008, as compared to
      $172.2 million in the same period of the prior year, an increase of $6.5
      million, or 3.7%. The increase may be attributed to increases in prices per
      gallon of petroleum products, offset by lower volume of gallons sold. Market
      fuel prices have increased approximately 29% this year compared to last year.
      Price variances resulted in an increase of $33.8 million in revenues that was
      offset by a $27.3 million decrease in revenues reflecting a 16% reduction in
      gallons sold during the first nine months of fiscal 2008 when compared to the
      prior year. We believe that the lower volume is the result of the contraction
      of
      the national economy, particularly as it is impacting the industries and
      geographic locations we serve, and our customers’ efforts to reduce fuel
      consumption in light of substantially higher fuel prices. A portion of 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 $8.6 million in the nine months ended March 31, 2008, as compared
      to
      $9.7 million in the same period of the prior year, a decrease of $1.1 million,
      or 11%. The decrease was primarily due to the overall lower industry demand,
      the
      reduction in business with net margin contributions below acceptable levels,
      and
      the decrease in emergency response business. The net margin per gallon for
      the
      nine months ended March 31, 2008 and 2007 was 17.8 cents **** and
      16.9
      cents, respectively. The increase in net margin per gallon was primarily the
      result of our emphasis on developing new business with higher overall net margin
      per gallon contribution.





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





Selling,
      general and administrative expenses were $11.0 million in the nine months ended
      March 31, 2008, as compared to $11.9 million in the same period of the prior
      year, a decrease of $850,000, or 7%. The decrease is attributable to the
      following (in thousands):




Reduction
                in SG&A costs primarily personnel expensesas
                system efficiencies are gained
              and
                acquired companies are integrated
            
            $
            (597
            )Non-
                legal public company compliance expense
            
            
            (337
            )Provision
                for doubtful accounts and collection fees
            
            
            (191
            )Reduction
                in facilities expenses related to the integrationof
                certain Texas locations
            
            
            (85
            )Increase
                in SG&A depreciation primarily related to ERP systemimplementation
            
            
            226Employee
                stock compensation attributable to SFAS No. 123R
            
            
            78Other,
                net
            
            
            56Total
                decrease
            
            $
            (850
            )




28




***Interest
      Expense***




Interest
      expense was $2.3 million in the nine months ended March 31, 2008, as
      compared to $2.8 million in the same period of the prior year, a decrease of
      $468,000, or 17%. The decrease was primarily due to a decrease in non-cash
      amortization expense as a result of the refinancing of our long-term debt,
      as
      the outstanding secured promissory notes issued on August 2003, January 2005
      and
      September 2005 were refinanced in August 2007 with new senior secured
      convertible subordinated notes.





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




**Nine
                Months Ended****March
                31,****2008**
            
            
            **2007**Stated
              Rate Interest
              Expense:Line
                of credit
            
            $
            972
            
            $
            858Long-term
                debt
            
            
            1,012
            
            
            1,046Other
            
            
            58
            
            
            83Total
                stated rate interest expense
            
            
            2,042
            
            
            1,987Non-Cash
                Interest Amortization:Amortization
                of deferred debt costs
            
            
            224
            
            
            248Amortization
                of debt discount
            
            
            74
            
            
            573Total
                amortization of interest expense
            
            
            298
            
            
            821Total
                interest expense
            
            $
            2,340
            
            $
            2,808




***Loss
      on Extinguishment of Debt***





We
      have
      recorded losses on extinguishment of debt of $1.7 million. The losses are
      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 $3.8 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. The following summarizes the components of the net loss on extinguishment
      of promissory notes that the Company recorded in its condensed unaudited
      consolidated statement of operations during the nine months ended March 31,
      2008
      (in thousands):




Write
                offs of costs and gain related to the converted 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 exchanged November 2007
                Notes
            
            
            24Write
                offs related to exchanged August 2007 Notes:Unamortized
                debt costs
            
            
            69Unamortized
                debt discounts
            
            
            15Loss
                on extinguishment of promissory notes, net
            
            $
            1,749




29




***Income
      Taxes***




No
      income
      tax expense was recorded for the nine months of fiscals 2008 and 2007. The
      net
      operating loss carryforward at June 30, 2007 was $24.7 million, which includes
      a
      $2.2 million net operating loss carryforward acquired in connection with the
      H
& W acquisition.




***Net
      Loss***




Net
      loss
      was $6.4 million in the nine months ended March 31, 2008, as compared to $5.0
      million in the same period in the prior year. The $1.4 million increase in
      net
      loss resulted primarily from the loss on extinguishment of debt of $1.7 million
      primarily related to our long-term debt, as the outstanding secured promissory
      notes issued in August 2003, January 2005 and September 2005 were refinanced
      in
      August 2007 with new senior secured convertible subordinated notes.





***EBITDA***





EBITDA
      was $86,000 in the nine months ended March 31, 2008, as compared to $125,000
      in
      the same period of the prior year, a decrease of $39,000. The decrease in EBITDA
      is the result of the reduction in business with net margin contributions below
      acceptable levels, and the decrease in emergency response business partially
      offset by the decrease in selling, general and administrative costs, described
      above. The reconciliation of EBITDA to net loss for the nine months ended March
      31, 2008 and 2007 was as follows (in thousands):




**Nine
                Months Ended****March
                31,****2008**
            
            
            **2007**Net
                loss
            $
            (6,403
            )
            $
            (4,975
            )Add
                back:Interest
                expense
            
            2,340
            
            
            2,808Depreciation
                and amortization expense:Cost
                of sales
            
            1,121
            
            
            1,316Selling,
                general and administrative expenses
            
            897
            
            
            672Stock-based
                compensation amortization expense
            
            382
            
            
            304Loss
                on extinguishment of debt
            
            1,749
            
            
            -EBITDA
            $
            86
            
            $
            125




**CAPITAL
      RESOURCES AND LIQUIDITY**





At
      March
      31, 2008, we had total cash and cash availability of $2.1 million, which
      consisted of cash and cash equivalents of $36,000 and additional cash
      availability of approximately $2.0 million through our line of credit. As of
      May
      8, 2008, our cash and cash availability was approximately $2.7 million. We
      are
      able to draw on our line of credit on a daily basis subject to availability
      and
      debt covenant requirements.





In
      fiscal
      years 2005 and 2006, we made significant investments in acquiring two new
      companies. We have concentrated our efforts on integrating these acquisitions
      into our existing operations, incurring 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.
      During the nine months ended March 31, 2008, we paid-down $2.4 million on our
      line of credit.




30




As
      noted
      above, escalating fuel prices 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, had an indirect effect on our profitability. The recent spike in
      fuel
      prices has been so significant, however, that it 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.





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 exchanged for Series A Preferred Stock in February 2008, which
      improved our net worth. We believe that this exchange, as well as the March
      2008
      exchange of $1.8 million in senior secured promissory notes for Series B
      Preferred Stock, should improve our access to supplier credit. Nevertheless,
      with the continuation of record increases in fuel prices and, as a result,
      our
      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. 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% (6.0% at March 31, 2008) and outstanding
      borrowings under the line of credit are secured by substantially all of our
      assets other than our truck fleet and related equipment.





During
      the nine months ended March 31, 2008, we obtained letters of credit for an
      aggregate amount of $1.4 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.





As
      of
      March 31, 2008 and June 30, 2007, we had outstanding borrowings of $14.8 million
      and $17.3 million, respectively, under our $25.0 million line of credit. The
      line of credit was previously scheduled to expire on June 30, 2008; however,
      the
      Company entered into an agreement with the bank in March 2008 to, among other
      things, extend the term of the agreement to December 31, 2008. Based on eligible
      receivables and inventories, and letters of credit outstanding at March 31,
      2008, we had $2.0 million of cash availability under the line of credit compared
      to $1.8 million availability at June 30, 2007.





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 debt. 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.




31




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 payable at maturity. 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.




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.





As
      noted
      above, 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 had originally 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 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 $1.8 million in principal balance of August 2007 Notes, plus
      a
      portion of the accrued but unpaid interest thereon.




32




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 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.





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
      the nine months ended March 31, 2008 and 2007, cash and cash equivalents
      decreased $951,000 and $618,000, respectively.





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




**Nine
                Months Ended****March
                31,****2008**
            
            
            **2007**Proceeds
                from issuance of promissory notes
            
            $
            7,690
            
            $
            -Proceeds
                from issuance of common stock and warrants
            
            
            1,170
            
            
            3,274Decrease
                in restricted cash
            
            
            1,005
            
            
            -Proceeds
                from issuance of preferred stock
            
            
            516
            
            
            -Cash
                provided by operating activities
            
            
            281
            
            
            -Proceeds
                from sale of equipment
            
            
            85
            
            
            -Proceeds
                from exercise of common stock optionsand
                warrants
            
            
            -
            
            
            31$
            10,747
            
            $
            3,305




33




We
      used
      cash primarily for (in thousands):




**Nine
                Months Ended****March
                31,****2008**
            
            
            **2007**Principal
                payments on promissory notes
            
            $
            6,359
            
            $
            1,794Net
                payments on line of credit
            
            
            2,449
            
            
            807Purchases
                of property and equipment
            
            
            2,222
            
            
            796Payments
                of debt and equity issuance costs
            
            
            642
            
            
            370Capital
                lease payments
            
            
            26
            
            
            110Cash
                used in operations
            
            
            -
            
            
            46$
            11,698
            
            $
            3,923Net
                change in cash and cash equivalents
            
            $
            (951
            )
            $
            (618
            )




As
      of
      March 31, 2008, we had $14.8 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 condensed unaudited
      consolidated statements of cash flows for the nine months ended March 31, 2008
      include the cumulative activity of the daily borrowings and repayments, $184.9
      million and $187.4 million , respectively, under the line of credit. The
      availability under the line of credit at March 31, 2008 amounted to $2.0
      million. The net cash borrowings from, or repayments of, the line of credit
      during the nine months ended March 31, 2008, 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 operations, obtaining or maintaining
      sufficient trade credit from vendors, complying with our debt covenants, and
      raising any required additional capital through the issuance of debt or equity
      securities or additional borrowings.





Our
      sources of cash during the remainder of fiscal 2008 are expected to be cash
      on
      hand, cash generated from operations, borrowings under our credit facility,
      and
      other capital sources that may be available. 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 during the remainder of fiscal 2008 are expected to be principally
      for
      operating working capital needs, maintaining our line of credit, and servicing
      the interest on our debt. We will continue to pursue additional conversions
      or
      exchanges of debt into equity or other capital infusions to reduce the amounts
      owed under our senior secured convertible subordinated debt.




34




We
      purchase the fuel sold to our customers from multiple suppliers at daily market
      prices, typically on 10 to 12 day credit terms. As noted above, recent 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. Recently, 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. The exchange of the November
      2007 Notes for Series A Preferred Stock in February 2008 and the March 2008
      exchange of $1.8 million in August 2007 Notes for Series B Preferred Stock,
      by
      virtue of the corresponding reduction in our total debt outstanding and their
      improvement of our net worth since the last quarter, may improve our access
      to
      supplier credit. Nevertheless, with the continuation of record increases in
      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 through the end of 2008. The bank
      line
      of credit, which was scheduled to expire on June 30, 2008; has recently been
      extended until December 31, 2008. Historically, the Company has been able to
      renew the line of credit and will be addressing its renewal prior to its
      maturity in December 2008, although there can be no assurance that a renewal
      can
      be obtained on acceptable terms.





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 acquisition and merger initiatives 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
      March
      31, 2008, we do not have any material off-balance sheet
      arrangements.





***Recent
      Accounting Pronouncements***





See
      Note
      3, Recent Accounting Pronouncements, and Note 13, Income Taxes, to the financial
      statements included in Part I of this Report.




35




***Critical
      Accounting Policies***




We
      believe there are several accounting policies that are critical to understanding
      our historical and future performance as these policies affect the reported
      amount of revenues and expenses and other significant areas involving
      management's judgments and estimates. On an ongoing basis, management evaluates
      and adjusts its estimates and judgments, if necessary. The preparation of
      financial statements in conformity with accounting principles generally accepted
      in the United States of America requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenues
      and expenses and the disclosure of contingencies. Due to the inherent
      uncertainty involved in making estimates, actual results reported in future
      periods may be materially different from those estimates. There were no changes
      to our critical accounting policies as previously disclosed in our Annual Report
      on Form 10-K for the fiscal year ended June 30, 2007.




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





We
      are
      exposed to market risk in the form of changes in interest rates and the
      potential impact such changes may have on the cash flow from our floating rate
      debt and the fair values of our fixed rate debt. We attempt to limit the impact
      of changes in interest rates to our debt portfolio by attaining an appropriate
      mix of floating rate borrowings relative to our long-term fixed rate
      debt.





Our
      exposure to market risk related to fluctuating interest rates is associated
      with
      variable rate debt outstanding to finance working capital requirements. This
      debt bears interest at the United States prime interest rate plus a fixed markup
      and is subject to change based upon interest rate changes in the United States.
      We do not currently use, and have not historically used, derivative instruments
      to hedge against such market interest rate risk.





Increases
      or decreases in market interest rates could have a material impact on our
      financial condition, results of operations and cash flows. The interest on
      our
      line of credit of up to $25.0 million is variable and may increase or decrease
      with future changes in interest rates, but interest rates are not the only
      factor which could affect interest expense on the line of credit. For example,
      interest expense on the line of credit for the nine months ended March 31,
      2008
      was $972,000, an increase of $114,000 over the same period in the prior year.
      For illustration, if our line of credit average outstanding balance was $20.0
      million, an increase of 1% in the variable interest rate would result in
      additional interest expense of $200,000 per annum.





On
      August
      8, 2007, we sold $10.6 million in 111⁄2% senior secured convertible subordinated
      promissory notes maturing December 31, 2009. We used the proceeds of the
      offering to satisfy our outstanding secured promissory notes issued on August
      2003, January 2005, and September 2005. On March 12, 2008, the Company exchanged
      $1.8 million in principal balance of these notes into shares of Series B
      Preferred Stock.





On
      November 19, 2007, the Company issued $2.0 million in short-term promissory
      notes (the “November 2007 Notes”), to a small group of individual and
      institutional investors. The proceeds were used for general working capital
      purposes. Interest on the unpaid principal balance of these notes was paid
      monthly at an interest rate of 1.5% per month (18% per year). On February 29,
      2008, the Company exchanged the entire $2.0 million principal balance of the
      November 2007 Notes into shares of Series A Preferred Stock.





We
      believe that the estimated fair value of our fixed rate notes outstanding at
      March 31, 2008, approximated the outstanding principal amount of $8.9 million.




36




As
      noted
      above, escalating fuel prices, resulting in decreased demand from our existing
      customers, have continued to impact our results of operations. While fuel price
      fluctuations affect our revenues, our gross profits were historically not
      affected by such fluctuations since we were able to pass the increased cost
      of
      the product on to our customers. 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. In addition, these
      higher fuel prices have substantially increased the amount of short-term credit
      that we need to obtain to cover the time between our receipt of fuel from 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
      initially addressed the limitations on supplier credit by the sale of the
      November 2007 Notes. The exchange of the November 2007 Notes for Series A
      Preferred Stock in February 2008 and the March 2008 exchange of $1.8 million
      in
      August 2007 Notes for Series B Preferred Stock, by virtue of the corresponding
      reduction in our total debt outstanding and their improvement of our net worth
      since the last quarter, may improve our access to supplier credit. Nevertheless,
      with the continuation of record increases in 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. Although various factors could
      negatively impact our access to supplier credit terms and our cash available
      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 through the end of calendar 2008. Historically, the
      Company has been able to renew the line of credit, although there can be no
      assurance that we will be able to obtain a renewal for 2009 on acceptable terms.




**ITEM
      4. 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
      Quarterly Report on Form 10-Q. 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 March 31, 2008.





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




*Changes
      in Internal Controls 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 quarter
      ended March 31, 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.




38




**PART
      II. Other Information**








**ITEM
      1. LEGAL PROCEEDINGS**





Not
      applicable.




**ITEM
      1A. RISK FACTORS**




In
      evaluating the Company, investors should consider the risk factors in our Form
      10-K for the year ended June 30, 2007 and in our Form 10-Q for the quarter
      ended
      December 31, 2007.




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





Not
      Applicable.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





Not
      Applicable.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.




**ITEM
      5. OTHER INFORMATION**





Not
      Applicable.




**ITEM
      6. EXHIBITS**




**Exhibits**




Exhibit No.
            Description31.1
            Certificate of Chief
              Executive
              Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
              200231.2
            Certificate of Chief
              Financial
              Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
              200232.1
            Certificate
                of Chief Executive Officer, Chief Financial Officer pursuant to Section
                906 of the Sarbanes-Oxley Act of 2002




39




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned hereunto
      duly authorized.






SMF
                ENERGY
                CORPORATIONMay
                15,
                2008
              By:
              /s/ Richard
                E. GathrightRichard E. Gathright
                Chief Executive Officer and President




By:
            /s/
              Michael S.
              ShoreMichael
                S. Shore
              Chief
                Financial Officer and Senior Vice President




40