**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 September 30, 2008**




OR




 ̈
            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  ̈ .





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




Large accelerated filer  ̈
            Accelerated filer  ̈Non-accelerated filer  ̈(Do not check if a smaller reporting company)
            Smaller reporting company x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ .
      No x .





As
      of
      November 12, 2008 there were 14,938,295 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 September 30, 2008 (unaudited)
                and June
                30, 2008
            3Condensed
                Unaudited Consolidated Statements of Operations for the three-months
                ended
                September 30, 2008 and 2007
            4Condensed
                Unaudited Consolidated Statements of Cash Flows for the three-months
                ended
                September 30, 2008 and 2007
            5Notes
                to Condensed Unaudited Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            31Item
                4.
            Controls
                and Procedures
            31Part
                II
            Other
              Information:Item
                1.
            Legal
                Proceedings
            32Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            32Item
                3.
            Defaults
                Upon Senior Securities
            32Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            32Item
                5.
            Other
                Information
            32Item
                6.
            Exhibits
            32Signatures
            33Certifications




2




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS (UNAUDITED)**


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


**September 30, 2008**
              
              **June
                  30, 2008****ASSETS**
              
              
              **(Unaudited**)****Current
                  assets:Cash
                  and cash equivalents
              
              $
              51
              
              $
              48Accounts
                  receivable, net of allowances of $1,605 and $1,283
              
              
              28,210
              
              
              30,169Inventories,
                  net of reserve of $82 and $99
              
              
              2,338
              
              
              2,535Prepaid
                  expenses and other current assets
              
              
              962
              
              
              855Total
                  current assets
              
              
              31,561
              
              
              33,607Property
                  and equipment, net of accumulated depreciation of$14,100
                  and $13,981
              
              
              9,786
              
              
              10,276Identifiable
                  intangible assets, net of accumulated amortization of$1,156
                  and $1,060
              
              
              2,296
              
              
              2,392Goodwill
              
              
              228
              
              
              228Deferred
                  debt costs, net of accumulated amortization of$627
                  and $556
              
              
              310
              
              
              348Other
                  assets
              
              
              78
              
              
              133Total
                  assets
              
              $
              44,259
              
              $
              46,984**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Line
                  of credit payable
              
              $
              15,959
              
              $
              19,789Accounts
                  payable
              
              
              8,931
              
              
              9,921Accrued
                  expenses and other liabilities
              
              
              5,784
              
              
              4,938Total
                  current liabilities
              
              
              30,674
              
              
              34,648Long-term
                  liabilities:Promissory
                  notes, net of unamortized debt discount of$55
                  and $65
              
              
              9,529
              
              
              8,794Other
                  long-term liabilities
              
              
              472
              
              
              490Total
                  liabilities
              
              
              40,675
              
              
              43,932ContingenciesShareholders’
                  equity:Preferred
                  stock, $0.01 par value; 10,000 Series A sharesauthorized,
                  4,205 and 4,587 issued and outstanding atSeptember
                  30, 2008 and June 30, 2008, respectively
              
              
              -
              
              
              -Preferred
                  stock, $0.01 par value; 2,000 Series B sharesauthorized,
                  1,985 issued and outstanding atSeptember
                  30, 2008 and June 30, 2008
              
              
              -
              
              
              -Preferred
                  stock, $0.01 par value; 2,000 Series C sharesauthorized,
                  229 and 0 issued and outstanding atSeptember
                  30, 2008 and June 30, 2008, respectively
              
              
              -
              
              
              -Common
                  stock, $.01 par value; 50,000,000 shares authorized;14,938,295
                  and 14,556,295 issued and outstandingat
                  September 30, 2008 and June 30, 2008, respectively
              
              
              149
              
              
              146Additional
                  paid-in capital
              
              
              30,736
              
              
              30,719Accumulated
                  deficit
              
              
              (27,301
              )
              
              (27,813
              )Total
                  shareholders’ equity
              
              
              3,584
              
              
              3,052Total
                  liabilities and shareholders’ equity
              
              $
              44,259
              
              $
              46,984




The
      accompanying notes to the condensed unaudited financial statements are an
      integral part of these 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 September 30,****2008**
              
              **2007**Petroleum
                  product sales and service revenues
              
              $
              72,962
              
              $
              49,189Petroleum
                  product taxes
              
              
              6,309
              
              
              6,308Total
                  revenues
              
              
              79,271
              
              
              55,497Cost
                  of petroleum product sales and service
              
              
              67,143
              
              
              46,007Petroleum
                  product taxes
              
              
              6,309
              
              
              6,308Total
                  cost of sales
              
              
              73,452
              
              
              52,315Gross
                  profit
              
              
              5,819
              
              
              3,182Selling,
                  general and administrative expenses
              
              
              4,632
              
              
              3,803Operating
                  income (loss)
              
              
              1,187
              
              
              (621
              )Interest
                  expense
              
              
              (683
              )
              
              (778
              )Interest
                  and other income
              
              
              16
              
              
              21Loss
                  on extinguishment of promissory notes
              
              
              -
              
              
              (1,641
              )Income
                  (loss) before income taxes
              
              
              520
              
              
              (3,019
              )Income
                  tax expense
              
              
              (8
              )
              
              -Net
                  income (loss)
              
              $
              512
              
              $
              (3,019
              )Basic
                  and diluted net income (loss) per share computation:Net
                  income (loss)
              
              $
              512
              
              $
              (3,019
              )Less:
                  Preferred stock dividends
              
              
              (196
              )
              
              -Net
                  income (loss) attributable to common stockholders
              
              $
              316
              
              $
              (3,019
              )Basic
                  and diluted net income (loss) per shareattributable
                  to common stockholders
              
              $
              0.02
              
              $
              (0.21
              )Basic
                  and diluted weighted average commonshares
                  outstanding
              
              
              14,645
              
              
              14,200




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




4


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


**Three Months Ended September 30,****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            512
            
            $
            (3,019
            )Adjustments
                to reconcile net income (loss) to net cash provided byoperating
                activities:Depreciation
                and amortization:Cost
                of sales
            
            
            342
            
            
            388Selling,
                general and administrative
            
            
            341
            
            
            282Amortization
                of deferred debt cost
            
            
            72
            
            
            47Amortization
                of debt discount
            
            
            10
            
            
            50Amortization
                of stock-based compensation
            
            
            104
            
            
            126Gain
                from sale of assets
            
            
            (4
            )
            
            (6
            )Inventory
                reserve
            
            
            (16
            )
            
            (19
            )Provision
                for doubtful accounts
            
            
            418
            
            
            161Non-cash
                loss on extinguishment of debt
            
            
            -
            
            
            1,371Changes
                in operating assets and liabilities:Decrease
                in accounts receivable
            
            
            1,541
            
            
            2,355Decrease
                in inventories, prepaid expenses and other assets
            
            
            106
            
            
            255(Decrease)
                increase in accounts payable and other liabilities
            
            
            (379
            )
            
            547Net
                cash provided by operating activities
            
            
            3,047
            
            
            2,538**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of property and equipment
            
            
            (153
            )
            
            (882
            )Proceeds
                from sale of equipment
            
            
            91
            
            
            6Decrease
                in restricted cash
            
            
            56
            
            
            424Net
                cash used in investing activities
            
            
            (6
            )
            
            (452
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                from line of credit
            
            
            80,625
            
            
            55,980Repayments
                of line of credit
            
            
            (84,455
            )
            
            (59,083
            )Proceeds
                from issuance of promissory notes
            
            
            725
            
            
            5,690Proceeds
                from issuance of common stock and warrants
            
            
            -
            
            
            1,170Proceeds
                from issuance of preferred stock
            
            
            149
            
            
            -Principal
                payments on promissory notes
            
            
            -
            
            
            (6,359
            )Debt
                issuance costs
            
            
            (33
            )
            
            (379
            )Common
                stock, preferred stock, and warrants issuance costs
            
            
            (37
            )
            
            (60
            )Capital
                lease payments
            
            
            (12
            )
            
            (13
            )Net
                cash used in financing activities
            
            
            (3,038
            )
            
            (3,054
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            3
            
            
            (968
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            48
            
            
            987CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            51
            
            $
            19





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




5


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


**(Continued)**
              
              **Three Months Ended September 30,****2008**
              
              **2007****SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                  paid for interest
              
              $
              849
              
              $
              998**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH ACTIVITIES:**Accrued
                  dividends related to preferred stock
              
              $
              196
              
              $
              -Capital
                  leases
              
              $
              32
              
              $
              -Conversion
                  of promissory notes to common shares
              
              $
              210
              
              $
              -Refinancing
                  of August 2003, January 2005, and September 2005notes
                  into August 2007 notes
              
              $
              -
              
              $
              4,918Non-cash
                  costs related to issuance of stock, warrants andAugust
                  2007 notes
              
              $
              -
              
              $
              134Debt
                  discount costs related to issuance of stock, warrants,extensions
                  of warrants and August 2007 notes
              
              $
              -
              
              $
              112




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




At
      September 30, 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, SMF Services, Inc.,
      H
& W Petroleum Company, 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 months ended September 30, 2008 (the “first quarter of
      fiscal 2009”) are not necessarily indicative of the results that may be expected
      for any subsequent period or the fiscal year ending June 30, 2009. 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, 2008, as filed with
      the
      United States Securities and Exchange Commission (the “2008 Form
      10-K”).





7


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


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





In
      September 2006, the FASB issued FAS Statement No. 157, “ *Fair
      Value Measurements* ”
(“FAS
      No. 157”). This standard provides guidance for using fair value to measure
      assets and liabilities. Under FAS No. 157, fair value refers to the price that
      would be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. In this standard, the FASB clarifies the principle that fair
      value should be based on the assumptions that market participants would use
      when
      pricing the asset or liability. In support of this principle, FAS No. 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. The fair value hierarchy gives the highest priority
      to quoted prices in active markets and the lowest priority to unobservable
      data,
      for example, the reporting entity’s own data. Under the standard, fair value
      measurements would be separately disclosed by level within the fair value
      hierarchy. Certain aspects of this standard were effective for the financial
      statements issued for the Company’s first quarter of fiscal year 2009. The
      adoption of FAS No. 157 had no impact on the Company’s consolidated financial
      position, results of operations or cash flows. 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. 157-2 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’s adoption of
      FAS No. 159 had no impact on the Company’s financial condition or results of
      operations.




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




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




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





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




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





During
      the first quarter of fiscal 2009, the Company paid down $3.8 million **** on
      its
      line of credit payable. Total cash and cash availability was $3.5
      million **** and
      $1.9
      million **** at
      September 30, 2008 and June 30, 2008, respectively, and was $2.6
      million **** at
      November 12, 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.





The
      Company considers all highly liquid investments purchased with an original
      maturity of three months or less to be cash equivalents. The Company maintains
      its cash balances at financial institutions, which at times may exceed federally
      insured limits. Balances up to $250,000 are insured by the Federal Deposit
      Insurance Corporation. The Company has not experienced any losses in such bank
      accounts.




**5.**
            **NET
                INCOME (LOSS) PER SHARE**




Basic
      net
      income (loss) per share is computed by dividing the net income (loss)
      attributable to common shareholders by the weighted average number of common
      shares outstanding during the period.




Diluted
      earnings per share is computed by dividing net earnings attributable to common
      shareholders by the weighted-average number of common shares outstanding,
      increased to include the number of additional common shares that would have
      been
      outstanding if the dilutive potential common shares had been issued. Conversion
      or exercise of the potential common shares are not reflected in diluted earnings
      unless the effect is dilutive. Those potential common shares will have a
      dilutive effect if the average market price of the Company’s common stock for
      the period exceeds the exercise price. The dilutive effect of outstanding common
      share equivalents would be reflected in diluted earnings per share by
      application of the if-converted and the treasury stock method, as applicable.
      The Company excluded the impact of its common stock equivalents in the
      computation of diluted net income (loss) per share for the first fiscal quarters
      ended September 30, 2008 and 2007, as their effect is not dilutive.




9


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


Common
      stock equivalents outstanding consisted of (in thousands):




**September 30,****2008**
            
            **2007**Stock
                options
            
            
            2,001
            
            
            1,814Common
                stock warrants
            
            
            887
            
            
            887Promissory
                note conversion rights
            
            
            4,149
            
            
            3,633Preferred
                stock conversion rights
            
            
            6,419
            
            
            -Total
                common stock equivalents outstanding
            
            
            13,456
            
            
            6,334




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





**Three
                Months Ended****September
                30,****2008**
            
            **2007**Net
                income (loss)
            
            $
            512
            
            $
            (3,019
            )Less:
                Preferred stock dividends
            
            
            (196
            )
            
            -Net
                income (loss) attributable to common stockholders
            
            $
            316
            
            $
            (3,019
            )Net
                income (loss) per share attributable to commonstockholders –
                basic and diluted
            
            $
            0.02
            
            $
            (0.21
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            14,645
            
            
            14,200




**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, both as defined.
      Outstanding letters of credit reduce the maximum amount available for borrowing.
      Interest is payable monthly at prime plus 0.75% through September 30, 2008.
      At
      September 30, 2008, the interest rate was 5.75%. Outstanding borrowings under
      the line are secured by substantially all Company assets other than its
      transportation fleet and related field equipment.





As
      of
      September 30, 2008 and June 30, 2008, the Company had outstanding borrowings
      of
      $16.0 million and $19.8 million, respectively, under its $25.0 million line
      of
      credit. The line of credit is classified as a current liability in accordance
      with EIFT 95-22, “ *Balance
      Sheet Classification of Borrowings Outstanding under Revolving Credit
      Agreements* ”.
      Based
      on eligible receivables and inventories, and letters of credit outstanding
      at
      September 30, 2008 and June 30, 2008, the Company had $3.5 million and $1.8
      million of cash availability under the line of credit.




10


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


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 September 30, 2008, the financial covenants included a
      minimum availability of $750,000 **** and
      an
      average monthly availability of $1.35 million covenant which, if not maintained,
      would trigger a fixed charge coverage ratio of 1.0 to 1.0. In addition as of
      September 30, 2008, the Company had a capital expenditure limitation for fiscal
      year 2009 of $750,000 **** without
      approval from the line of credit lender, and a maximum amount of $1.5 million
      for which letters of credit could be issued, of which $1.35 million were issued
      in fiscal 2008. As of November 12, 2008, the allowable letter of credit maximum
      amount was $1.750 million of which a total of $1.7 million has been
      issued.





In
      September 2008, the Company and its line of credit lender entered into the
      Sixteenth Amendment and also into the Seventeenth Amendment to the loan and
      security agreement. These amendments allowed for the issuance of unsecured
      promissory notes, extended the maturity date from December 31, 2008 to July
      1,
      2009, and modified the variable interest rate to a range between 0.75% to 2.75%
      over the prime lending rate based on the Company meeting certain fixed charge
      coverage ratios. Additionally, effective October 31, 2008, the average monthly
      availability requirement was eliminated and replaced with a required fixed
      charge coverage ratio of 1.0 to 1.0 through November 2008 and 1.3 to 1.0
      thereafter. The termination fee of 0.5% was also eliminated for the period
      of
      September 2008 through December 31, 2008.




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




11


**SMF
        ENERGY CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**
  **7.**
              **LONG-TERM
                  DEBT**





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




**September
                  30,**
              
              **June
                  30,****2008**
              
              **2008**September
                  2008 unsecured convertible subordinated promissory notes (the “September
                  2008 Notes”) (12% interest due semi-annually, March 1 and September 1
                  beginning March 1, 2009); matures September 1, 2010 in its entirety;
                  effective interest rate of 12%. For additional details, see
                  below.
              
              $
              725
              
              $
              -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
                  14.6% including cost of warrants and other debt issue costs.
              
              
              8,859
              
              
              8,859Unamortized
                  debt discount
              
              
              (55
              )
              
              (65
              )9,529
              
              
              8,794Less:
                  current portion
              
              
              -
              
              
              -Long-term
                  debt, net
              
              $
              9,529
              
              $
              8,794




On
      September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
      notes (the “September 2008 Notes”) maturing on September 1, 2010 to
      accredited investors, including a $250,000 participation by a related party.
      The
      Company used the proceeds for working capital purposes, including the
      enhancement of short-term supplier credit. The September 2008 Notes are
      unsecured and are expressly subordinated to any amounts owed now or in the
      future to our primary lender pursuant to a subordination agreement between
      the
      note holders and the lender. These promissory notes may be redeemed by us,
      in
      whole or in part, without prepayment penalty or premium, except that, if such
      pre-payment is proposed to be made before September 2, 2009, a 1% prepayment
      penalty shall be paid. The unpaid principal amount of the September 2008 Notes
      and the accrued but unpaid interest thereon may be converted into shares of
      our
      common stock at $0.65 per share, which was above the market price of the
      Company’s common stock on the date of the offering. In addition, these
      promissory notes will be automatically converted into common stock, (A) if
      the
      closing price of the common stock is equal to or greater than two times the
      conversion price then in effect for a period of twenty (20) consecutive business
      days, or (B) upon the election of the holders of two thirds of the principal
      outstanding notes, or (C) upon the closing of a firmly underwritten public
      offering at a price that is two times the conversion price with cash proceeds
      to
      the Company of at least $10,000,000.




12


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


**Other**





In
      connection with the issuance of certain promissory notes in August 2003, January
      2005 and September 2005, which have since been redeemed, the Company had
      recorded unamortized debt discounts which were being amortized under the
      effective interest method as non-cash interest expense over the respective
      term
      of the debt issued. These were non-cash discounts related to the valuation
      of
      the common stock warrants issued to the note holders and the placement agent
      in
      the financing transactions that did not reduce the amount of principal cash
      repayments required to be made by the Company. On August 8, 2007, as a result
      of
      the early redemption of these promissory notes, the Company recorded a loss
      on
      extinguishment of $1.6 million, as follows:


**Three
                  Months Ended****September
                  30, 2007**Write
                  offs of costs and gain related to the refinancing of the August
                  2003,January
                  2005 and September 2005 Notes:Unamortized
                  debt costs
              
              $
              443Unamortized
                  debt discounts
              
              
              978Cash
                  pre-payment penalty
              
              
              270Gain
                  on extinguishment
              
              
              (50
              )Loss
                  on extinguishment of promissory notes, net
              
              $
              1,641





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




13


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




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




The
      following reflects the change in shareholders’ equity for the three months ended
      September 30, 2008 (in thousands, except share data):





**Preferred
                Stock**
            
            **Preferred
                Stock**
            
            **Preferred
                Stock**
            
            
            
            **Additional****Series
                A**
            
            **Series
                B**
            
            **Series
                C**
            
            **Common
                Stock**
            
            **Paid-in**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Total****Balance
                at June 30, 2008**
            
            
            4,587
            
            $
            -
            
            
            1,985
            
            $
            -
            
            
            -
            
            $
            -
            
            
            14,556,295
            
            $
            146
            
            $
            30,719
            
            $
            (27,813
            )
            $
            3,052Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            512
            
            
            512Issuance
                  of Series C preferred stock, net ofissuance
                  costs of $37
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            229
            
            
            -
            
            
            -
            
            
            -
            
            
            112
            
            
            -
            
            
            112Conversion
                  of Series A preferred stockto
                  common stock
            
            
            (382
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            382,000
            
            
            3
            
            
            (3
            )
            
            -
            
            
            -Series
                A preferred stock dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (112
            )
            
            -
            
            
            (112
            )Series
                B preferred stock dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (81
            )
            
            -
            
            
            (81
            )Series
                C preferred stock dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3
            )
            
            -
            
            
            (3
            )Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            104
            
            
            -
            
            
            104**Balance
                at September 30, 2008**
            
            
            4,205
            
            $
            -
            
            
            1,985
            
            $
            -
            
            
            229
            
            $
            -
            
            
            14,938,295
            
            $
            149
            
            $
            30,736
            
            $
            (27,301
            )
            $
            3,584




14




**Issuance
      of Series C Preferred Stock**





On
      August
      15, 2008, the Company issued, in a private offering to accredited investors,
      $148,850 in equity securities, consisting of 229 shares of Series C Convertible
      Preferred Stock, $0.01 par value, at a price of $650 per share (the “Series C
      Preferred Stock”). Each share of Series C Preferred Stock is convertible into
      1,000 shares of the Company’s common stock at a price per share of $0.65 per
      share, which was above the closing market price of the Company’s common stock on
      the date of the offering. The rights and preferences of the Series C Preferred
      Stock are substantially similar to those of the Series A and Series B Preferred
      Stock.




The
      Series C Preferred Stock ranks senior to the common stock, $0.01 par value
      (the
“Common Stock”) of the Company and is on parity with the holders of any other
      series of preferred stock as to the payment of dividends and distribution of
      assets, including the currently outstanding shares of Series A Preferred Stock
      and Series B Preferred Stock.  Upon
      liquidation, dissolution or winding up of the Company, holders of Series C
      Preferred Stock are entitled to be paid out of the assets of the Company an
      amount per share of Series C Preferred Stock equal to the greater of: (i) the
      original issue price of the Series C Preferred Stock, plus all accumulated
      but
      unpaid dividends; or (ii) the fair market value of the Series C Preferred Stock
      on an as-converted to Common Stock basis, plus all accumulated but unpaid
      dividends.  Each
      holder of Series C Preferred Stock is entitled to one vote per share at each
      meeting of stockholders of the Company with respect to any and all matters
      presented to the stockholders of the Company.





Dividends
      will be paid on the Series C 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 Series C Original Issue Price of $650 per share, provided, however,
      that when 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 Series C Original Issue Price effective two weeks after notice of such
      change is transmitted to holders of the Series C Preferred Stock. Accordingly,
      the dividend rate on the Series C Preferred Stock is expected to be changed
      to
      twelve percent (12%) on or about December 1, 2008.





Each
      share of Series C 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
      $0.65 per share of Common Stock (the “Series C Conversion Price”). The Series C
      Conversion Price is subject to adjustment for stock dividends, stock splits
      and
      other similar recapitalization events. In addition, each share of Series C
      Preferred Stock shall automatically be converted into shares of Common Stock,
      based on the then-effective Series C Conversion Price, if:





(A)
            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 two times the Series C
                Conversion Price then in effect (the “Series C Automatic Conversion
                Price”), for a period of twenty (20) 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 C Preferred Stock, or


(C)
            upon
                the earliest to occur of (x) the 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 C 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).





**Conversion
      of Series A Preferred Stock**





In
      September 2008, the holders of an aggregate of 382 shares of the Company’s
      Series A Preferred Stock elected to convert those shares at the 1 to 1000
      conversion ratio set by the Certificate of Designation for the Series A into
      an
      aggregate of 382,000 shares of the Company’s Common Stock.





15




**Preferred
      Stock Dividends**




During
      the first quarter of fiscal 2009, the Company declared dividends of $112,000,
      $81,000, and $3,000 per share on the outstanding Series A, Series B and Series
      C
      Preferred Stock, respectively. The dividends payable is paid quarterly; the
      dividend payable for the first quarter of fiscal 2009 of $196,000 on the Series
      A, Series B, and Series C Preferred Stock is outstanding as of the date of
      this
      filing. During fiscal 2008, we declared cumulative dividends from the original
      date of issuance until June 30, 2008 of $152,000 and $97,000 per share on the
      outstanding Series A and Series B Preferred Stock, respectively, of which the
      total fourth quarter dividend of $193,000 on the Series A and Series B Preferred
      Stock was paid in October 2008.




**Employee
      Stock Options**




During
      the first quarter of fiscal 2009, the Company granted 9,000 stock options under
      the Employee Stock Options Plan. The weighted average grant date fair value
      of
      the options granted was $0.33.




**9.**
            **CONTINGENCIES**





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 September
      30, 2008, therefore no contingency gains or losses have been recorded as of
      September 30, 2008. However, based on management’s knowledge at the time of this
      filing, management believes that the final resolution of such matters pending
      at
      the time of this report, individually and in the aggregate, will not have a
      material adverse effect upon the Company’s consolidated financial position,
      results of operations or cash flows.




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




16





**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 I, Item 1A, of the Company’s Annual Report on Form 10-K
      for the year ended June 30, 2008, as filed with the United States Securities
      and
      Exchange Commission, 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;




17




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




·
            The
                successful integration of acquired companies and/or organic geographic
                expansion into our existing operations, and enhancing the profitability
                of
                the integrated businesses or new markets;




·
            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.





**OUR
      BUSINESS**





We
      are a
      supplier of specialized transportation and distribution services for petroleum
      products and chemicals. We provide commercial mobile and bulk fueling, lubricant
      and chemical distribution, emergency response services and transportation
      logistics to the trucking,
      manufacturing, construction, shipping, utility, energy, chemical,
      telecommunications and government services industries. At
      September 30, 2008, we were conducting operations through 26 service locations
      in the ten states of Alabama, California, Florida, Georgia, Louisiana,
      Mississippi, North Carolina, South Carolina, Tennessee and Texas. In November
      2008, we expanded our operations into the state of Nevada. We have recently
      opened five additional service locations, giving us a total of 31 service
      location in eleven states.





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 specialized
      equipment 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. Our fleet also handles the movement of customer equipment
      and storage tanks we provide for use by our customers. We also distribute a
      wide
      variety of specialized petroleum products, lubricants and chemicals to our
      customers in Texas and in certain other markets that we service.




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.




18




**OVERVIEW**





The
      first
      quarter of fiscal 2009 was a very exciting and successful quarter for the
      Company and its management team.





·
            We
                achieved net income of $512,000 and EBITDA of $2.0 million for the
                quarter
                compared to a net loss of $3.0 million and EBITDA of $196,000 for
                the same
                period a year ago, a $3.5 million and $1.8 million improvement to
                our
                financial performance, respectively. In the quarter, we saw a continuation
                of the improvements in net margin contribution, bolstered by an increased
                level of emergency response services provided during this period.
                See the
                quarterly financial trend table below. We believe that, with our
                substantially improved performance and the complete implementation
                of our
                new Enterprise Resource Planning (“ERP’) system, we are now positioned to
                execute our acquisition strategy, with the ability to integrate acquired
                companies within six to twelve months from closing and achieve new
                economies of scale. While our ability to accelerate the execution
                of our
                acquisition plan may be limited by the global economic crisis and
                the
                resulting tight capital markets, we expect that, as those markets
                loosen,
                we will be in a position to make a number of valuable strategic
                acquisitions.





·
            During
                the quarter, we were awarded a new, two-year agreement to provide
                fleet
                and emergency fueling services to the United States Postal Service
                (USPS).
                 Under this expanded agreement, the Company will provide scheduled
                fueling services to approximately 10,000 postal vehicles domiciled
                at over
                350 locations across the United States.  In the new contract, we were
                awarded the servicing rights for new Vehicle Maintenance Facilities
                covering a large number of additional USPS delivery points, representing
                a
                40% increase in volumes over the prior contract. The USPS was already
                our
                largest customer, representing 8% of our business in fiscal 2008,
                before
                these expanded services began on November 1, 2008.





·
            We
                entered into a new multi-year Lubrication Marketer Agreement with
                Chevron
                Products Company to market Chevron branded lubricants, supplementing
                the
                Company’s similar 2005 agreement with Chevron for its Texaco brand of
                lubricants. Our rights with respect to the newly consolidated Chevron
                and
                Texaco brands and product lines eliminates product gaps in the Texaco
                line, allowing us to provide a single source solution for our lubricant
                customers. We will be able to leverage the strength of both brands
                in
                specific applications and offer a more inclusive product line, with
                continuing availability of the historical Texaco product formulations
                to
                those customers who rely on them in their applications. Most importantly,
                the addition of the Chevron product line to our Texaco portfolio
                will
                allow us to reach out to new customers that in the past would have
                required multiple vendors.





·
            During
                the quarter, we expanded our May 2008 exclusive distribution agreement
                with Enviro Tech International, Inc., the manufacturer of  DrySolvTM,
                its patented environmentally friendly dry cleaning solvent, soap,
                and
                spotting chemicals, to include the states of Arizona and California,
                in
                addition to our previously granted rights for the states of Florida,
                Georgia, Louisiana, North Carolina, South Carolina, Tennessee and
                Texas.
                DrySolvTM is an environmentally friendly dry cleaning product and natural
                replacement product for PERC, the hazardous material used by most
                dry
                cleaners in the United States today. While the margin contribution
                of the
                DrySolvTM product is minimal today, we expect significant growth in the
                future as the U.S. Environmental Protection Agency (“EPA”) and other
                regulatory agencies continue to focus on the elimination of
                PERC.





·
            During
                the quarter, we provided emergency response services following both
                Hurricane Gustav and Hurricane Ike, helping to stabilize the disaster
                areas by providing services to various customers, including many
                governmental agencies, utilities, hospitals, telecommunications and
                commercial fleet distributors. A portion of the improved performance
                during the first quarter over the prior year is attributable to these
                emergency response services.






19




·
            The
                active hurricane season also affected the petroleum products supply
                distribution during the quarter, which caused delays in fuel availability
                in many of our markets. As such, we made a considerable effort in
                order to
                procure product from alternative markets and transport it into the
                markets
                where the supply was limited. In conjunction with these efforts,
                on
                September 2, 2008 we sold $725,000 in 12% unsecured convertible promissory
                notes maturing on September 1, 2010 to accredited investors. Since
                the new
                notes mature in September 1, 2010, the debt associated with the promissory
                notes was classified in our condensed unaudited consolidated balance
                sheet
                as long-term debt. The Company used the proceeds for working capital
                purposes, including the enhancement of supplier credit for those
                markets
                that had limited supply to purchase from alternative petroleum products
                suppliers. The additional credit is now being used to improve the
                overall
                product procurement opportunities for the
                Company.





·
            We
                entered into amendments to our revolving line of credit agreement
                with our
                principal lender Wachovia, N.A., to extend the current maturity to
                July 1,
                2009, and modified certain financial covenants. We believe that this
                extension will enable us to continue to meet the working capital
                needs of
                our business. It has recently been announced that Wachovia is to
                be
                acquired by Wells Fargo Corporation, a move that is widely expected
                to
                solidify Wachovia’s assets and lending ability going forward.





·
            On
                October 16, 2008, our previously announced extension of time from
                the
                Nasdaq Stock Market to attain a minimum bid price of $1.00 until
                December
                23, 2008 was, in light of the current extraordinary market conditions,
                further extended to March 30, 2009. According to Nasdaq, this temporary
                suspension should help to restore investor confidence in affected
                Nasdaq
                companies, allowing investors to make decisions without considering
                the
                likelihood of a near-term delisting. Nasdaq indicated that it would
                continue to monitor the affect that market conditions are having
                on the
                operation of its rules. Under the terms of the extension, as amended,
                the
                Company is required to have a closing bid price of $1.00 or more
                for a
                minimum of ten prior consecutive trading days on or before March
                30, 2009,
                and to otherwise maintain compliance with all other applicable NASDAQ
                listing standards.





·
            During
                the quarter, Taglich Brothers,a
                full-service broker dealer offering institutional and retail brokerage
                services, investment banking and comprehensive research coverage
                to the
                investment community, focused exclusively on companies with less
                than $250
                million in market capitalization, initiated research coverage on
                the
                Company. During the past four years, Taglich has provided coverage
                on
                approximately 100 companies. The Company has paid a fee of $12,000
                to
                Taglich for the creation and dissemination of research reports for
                the
                first six months and will pay a similar fee per six month period
                thereafter.





·
            As
                previously noted, we are reporting net income for the first quarter
                of
                fiscal 2009 of $512,000 compared to a loss of $3.0 million a year
                ago.
                Notwithstanding the Company’s ability to achieve a profit this quarter,
                the financial results of the Company still carry a high burden of
                non-cash
                charges, stated rate interest expense, legal fees and additional
                public
                company costs. The $512,000 profit included $1.3 million in non-cash
                charges, such as depreciation and amortization of assets, debt costs,
                debt
                discounts, stock based compensation, and provision for doubtful accounts.
                The results include stated interest expense associated with servicing
                of
                our debt of $601,000, legal expenses of $351,000 and public company
                costs
                of $182,000.





·
            The
                net margin in the first quarter of fiscal 2009 and 2008 was $6.2
                million
                and $3.6 million on 18.6 million and 18.7 million gallons sold, resulting
                in net margin per gallon of 33.2 cents and 19.1 cents, respectively.
                The
                increase in net margin was primarily due to the continuation of the
                higher
                net margin per gallon trend reported in the fourth quarter of fiscal
                year
                2008 plus the incremental margin contribution from the emergency
                response
                services provided in Louisiana and Texas during Hurricanes Gustav
                and Ike.
                The increase in net margins may also be attributed, in part, to the
                efficiencies of our new ERP system, which have helped us to identify
                and
                eliminate non-contributory lower margin business. Such elimination
                allows
                for increased capacity of our fleet and for personnel to be deployed
                for
                emergency response business as needed.




20




·
            We
                achieved improvements in our operating results as reflected through
                our
                net income, EBITDA and net margin per gallon when compared to our
                most
                recent sequential quarterly results. Specifically, EBITDA improved
                by
                $836,000 from the fourth quarter of fiscal 2008 to the first quarter
                of
                fiscal 2009, and $1.8 million from the first quarter of fiscal 2008
                to the
                first quarter of fiscal 2009, primarily due to the higher net margin
                contributions discussed above. The results for operating income also
                show
                an upward trend over the last three sequential quarters.




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


For the three months endedJune 30,
              
              September 30,
              
              December 31,
              
              March 31,
              
              June 30,
              
              September 30,2007
              
              2007
              
              2007
              
              2008
              
              2008
              
              2008Revenues
              
              $
              57,526
              
              $
              55,497
              
              $
              58,994
              
              $
              64,162
              
              $
              82,036
              
              $
              79,271Gross
                  profit
              
              $
              2,921
              
              $
              3,182
              
              $
              2,565
              
              $
              2,875
              
              $
              4,290
              
              $
              5,819Selling,
                  general andadministrative
              
              $
              3,950
              
              $
              3,803
              
              $
              3,788
              
              $
              3,445
              
              $
              3,845
              
              $
              4,632Operating
                  income (loss)
              
              $
              (1,029
              )
              $
              (621
              )
              $
              (1,223
              )
              $
              (570
              )
              $
              445
              
              $
              1,187Interest
                  expense andother
                  income, net
              
              $
              (585
              )
              $
              (757
              )
              $
              (763
              )
              $
              (720
              )
              $
              (811
              )
              $
              (667
              )Loss
                  on extinguishmentof
                  promissory notes
              
              $
              -
              
              $
              (1,641
              )
              $
              -
              
              $
              (108
              )
              $
              -
              
              $
              -Net
                  income (loss)
              
              $
              (1,614
              )
              $
              (3,019
              )
              $
              (1,986
              )
              $
              (1,398
              )
              $
              (366
              )
              $
              512EBITDA
                  1
              
              $
              127
              
              $
              196
              
              $
              (387
              )
              $
              277
              
              $
              1,154
              
              $
              1,990Net
                  margin
              
              $
              3,307
              
              $
              3,569
              
              $
              2,945
              
              $
              3,228
              
              $
              4,611
              
              $
              6,161Net
                  margin per gallon
              
              $
              0.17
              
              $
              0.19
              
              $
              0.16
              
              $
              0.18
              
              $
              0.24
              
              $
              0.33Gallons
                  sold
              
              
              19,678
              
              
              18,695
              
              
              18,050
              
              
              18,102
              
              
              19,024
              
              
              18,550




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




21




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


For
                  the three months endedJune 30,
              
              September 30,
              
              December 31,
              
              March 31,
              
              June 30,
              
              September 30,2007
              
              2007
              
              2007
              
              2008
              
              2008
              
              2008Net
                  income (loss)
              
              $
              (1,614
              )
              $
              (3,019
              )
              $
              (1,986
              )
              $
              (1,398
              )
              $
              (366
              )
              $
              512Add
                  back:Income
                  tax expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8Interest
                  expense
              
              
              919
              
              
              778
              
              
              782
              
              
              780
              
              
              720
              
              
              683Depreciation
                  andamortization
                  expense:Cost
                  of sales
              
              
              386
              
              
              388
              
              
              380
              
              
              353
              
              
              321
              
              
              342Selling,
                  general andadministrative
                  expenses
              
              
              249
              
              
              282
              
              
              304
              
              
              311
              
              
              357
              
              
              341Stock-based
                  compensationamortization
                  expense
              
              
              187
              
              
              126
              
              
              133
              
              
              123
              
              
              122
              
              
              104Loss
                  on extinguishment of
                  promissory notes
              
              
              -
              
              
              1,641
              
              
              -
              
              
              108
              
              
              -
              
              
              -EBITDA
              
              $
              127
              
              $
              196
              
              $
              (387
              )
              $
              277
              
              $
              1,154
              
              $
              1,990





·
            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. The first quarter of 2009 continued to
                reflect
                a decrease in the number of gallons sold compared to the same period
                in
                2008 due to lower volumes demanded by some of our existing customers
                in
                response to higher fuel prices and a weaker economy, the elimination
                of
                lower margin customers and our pursuit of business with higher net
                margin
                contributions partially
                offset by the volume generated from new customer additions.When
                compared to the fourth quarter, the lower gallons sold resulted from
                the
                hurricanes that impacted the Gulf Coast in August and September of
                2008.
                Specifically, the Company preferentially reduced certain lower margin,
                high volume bulk day business in order to increase the delivery of
                higher
                margin emergency response services, but generate fewer gallons
                sold.





·
            Escalating
                fuel prices in fiscal 2008 continued into most of the first quarter
                of
                fiscal 2009. In the first three quarters of fiscal 2008, however,
                these
                increases dampened the demand for the services and goods provided
                by much
                of our customer base and increased the fuel running costs of our
                own
                delivery fleet. In addition in
                fiscal 2008 and the first quarter of fiscal 2009,the higher fuel
                prices substantially increased the credit needed to cover the time
                between
                our payment for fuel and our receipt of payment from our customers.
                Our
                higher demand for credit caused new and pre-existing limitations
                on
                supplier credit, some of which may be attributable to the broader
                credit problems currently facing many financial institutions, to
                become a
                negative factor in our business by increasing our borrowing costs.
                While
                market fuel prices decreased an average of 8% in the first quarter
                of
                fiscal 2009 when compared to the preceding quarter, the situation
                remains
                volatile, as
                recently imposed limitations on credit availability for fuel purchases
                persist and suppliers limit product supply availability to avoid
                market
                adjustments on stored inventory. As a result, we still consider the
                terms
                and availability of supplier credit to be a critical factor in our
                selection of fuel suppliers.




22




**RESULTS
      OF OPERATIONS:**





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




**Comparison
      of Three Months Ended September 30, 2008 (“first quarter of fiscal 2009”) to
      Three Months Ended September 30, 2007 (“first quarter of fiscal
      2008”)**





***Revenues***





Revenues
      were $79.3 million in the first quarter of fiscal 2009, as compared to $55.5
      million in the same period of the prior year, an increase of $23.8 million,
      or
      43%, primarily as a result of price variances due to overall higher market
      prices of petroleum products. Market fuel prices have increased approximately
      55% in the first quarter of fiscal 2009 compared to the same period in the
      prior
      year. Price variances resulted in an increase of $24.2 million in revenues,
      including a partial contribution from the emergency response services provided
      during the current quarter, partially offset by a $430,000 decrease in revenues
      due to a 1% reduction in gallons sold compared to prior year. While we continued
      to add new customers during the first quarter of fiscal 2009, we believe that
      the slightly lower sales volume is largely the result of the contraction of
      the
      national economy, particularly as it is impacting the industries and geographic
      locations we serve, as well as some of our customers’ efforts to reduce their
      fuel consumption in light of substantially higher fuel prices. We cannot be
      certain that the recent easing of fuel prices will cause these customers to
      increase their fuel usage.




***Gross
      Profit***





Gross
      profit was $5.8 million in the first quarter of fiscal 2009, as compared to
      $3.2
      million in the same period of the prior year, an increase of $2.6 million,
      or
      83%. The net margin per gallon for the first quarters of fiscals 2009 and 2008
      was 33.2 cents and 19.1 cents, respectively, an increase of 14.1 cents. This
      improvement was the result of the continued trend in higher net margin per
      gallon we achieved in the fourth quarter of fiscal year 2008 plus the
      incremental margin contribution from the emergency response services provided
      in
      Louisiana and Texas for Hurricanes Gustav and Ike.




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




Selling,
      general and administrative expenses were $4.6 million in the first quarter
      of
      fiscal 2009, as compared to $3.8 million in the same period of the prior year,
      an increase of $829,000, or 22%. The increases in selling, general and
      administrative expenses were due to increases of $257,000 in the provision
      for
      doubtful accounts, $195,000 for legal expenses related to public company costs
      and other matters, $119,000 in credit card fees due to higher fuel prices,
      $114,000 in payroll related expenses, $62,000 in travel expenses primarily
      due
      to the emergency response work performed, $59,000 increase in SG&A
      depreciation due to the additions in fixed assets, and $24,000 in other
      expenses.




23




***Interest
      Expense***





Interest
      expense was $683,000 in the first quarter of fiscal 2009, as compared to
      $778,000 in the same period of the prior year, a decrease of $95,000, or 12%.
      The decrease was due to the reduction in 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 and the decrease in the base interest rate related to our line of credit
      which is prime rate plus a margin of 0.75%. At September 30, 2008, the effective
      rate on our line of credit was 5.75% as compared to 9.0% at September 30,
      2007.





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


**Three
                  Months Ended****September
                  30,****2008**
              
              **2007**Stated
                  Rate Interest Expense:Line
                  of credit
              
              $
              313
              
              $
              359Long
                  term debt
              
              
              267
              
              
              302Other
              
              
              21
              
              
              20Total
                  stated rate interest expense
              
              
              601
              
              
              681Non-Cash
                  Interest Amortization:Amortization
                  of deferred debt costs
              
              
              72
              
              
              47Amortization
                  of debt discount
              
              
              10
              
              
              50Total
                  non-cash interest amortization
              
              
              82
              
              
              97Total
                  interest expense
              
              $
              683
              
              $
              778




***Loss
      on Extinguishment of Debt***





In
      August
      2007, we recorded a loss on extinguishment of debt of $1.6 million related
      to
      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 loss on extinguishment of
      debt 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, and
      a
      gain of $50,000 due to the excess of the carrying value of the notes over the
      extinguishment price.




***Income
      Taxes***




State
      income tax expense of $8,000 was recorded for the first quarter of fiscal 2009.
      No federal income tax expense was recorded for the first quarters of fiscals
      2009 and 2008. The net operating loss carryforward at June 30, 2008 was $29.8
      million, which includes a $2.2 million net operating loss carryforward acquired
      in connection with the H & W acquisition.




24




***Net
      Income (Loss)***




Net
      income was $512,000 in the first quarter of fiscal 2009, as compared to a loss
      of $3.0 million in the same period in the prior year. The $3.5 million increase
      in earnings resulted due to the continuing higher net margin per gallon trend
      we
      established in the fourth quarter of fiscal year 2008 plus the incremental
      margin contribution from the emergency response services provided in Louisiana
      and Texas during Hurricanes Gustav and Ike. The increase in earnings was also
      partially due to the loss on extinguishment of debt of $1.6 million recorded
      in
      the first quarter of fiscal 2008, 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. The increase in
      earnings was partially offset by an increase of $829,000 in selling, general
      and
      administrative expenses as discussed above.




***EBITDA***




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




EBITDA
      was $2.0 million in the first quarter of fiscal 2009, as compared to $196,000
      in
      the same period of the prior year, an increase of $1.8 million. The increase
      was
      due to the continued higher net margin per gallon traction we achieved in the
      fourth quarter of fiscal year 2008 plus the incremental margin contribution
      from
      the emergency response services provided in Louisiana and Texas during Hurricane
      Gustav and Ike as described above in our Business Overview. The increase was
      partially offset by an increase in selling, general, and administrative
      expenses.




The
      reconciliation of EBITDA to net income (loss) for the first quarters of fiscals
      2009 and 2008 was as follows (in thousands):


**Three
                  Months Ended****September
                  30,****2008**
              
              **2007**Net
                  income (loss)
              
              $
              512
              
              $
              (3,019
              )Add
                  back:Income
                  tax expense
              
              
              8
              
              
              -Interest
                  expense
              
              
              683
              
              
              778Depreciation
                  and amortization expense:Cost
                  of sales
              
              
              342
              
              
              388Selling,
                  general and administrative expenses
              
              
              341
              
              
              282Stock-based
                  compensation amortization expense
              
              
              104
              
              
              126Loss
                  on extinguishment of promissory notes
              
              
              -
              
              
              1,641EBITDA
              
              $
              1,990
              
              $
              196




25




**Capital
      Resources and Liquidity**





At
      September 30, 2008, we had total cash and cash availability of $3.5 million,
      which consisted of cash and cash equivalents of $51,000 and additional cash
      availability of approximately $3.5 million through our line of credit. As of
      November 12, 2008, our cash and cash availability was approximately $2.6 million
      +WP# D-3|. We are able to draw on our line of credit on a daily basis subject
      to
      debt covenant requirements.





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





The
      escalating fuel prices in fiscal 2008, which continued into most of the first
      quarter of fiscal 2009, adversely affected our capital resources. Historically,
      while we generally avoided the impact of higher fuel prices by passing along
      the
      higher prices to our customers, the higher costs for operating our own delivery
      fleet and the decreased demand for the services and goods provided by most
      of
      our customer base, and in turn, those customers’ demand for fuel, have had an
      indirect effect on our profitability. In addition, the higher fuel prices
      substantially increased the amount of credit that we needed to obtain from
      our
      suppliers of fuel. Our higher demand for credit led to limitations on the
      supplier credit available to us and increased our costs of obtaining that
      credit. We initially addressed the limitations on supplier credit by issuing
      short-term notes to a limited number of investors in November 2007, the proceeds
      from which we used for credit enhancements in those markets where our credit
      was
      most limited. These notes were subsequently exchanged for Series A Preferred
      Stock in February 2008, which strengthened our balance sheet and helped us
      achieve compliance with listing standards of the Nasdaq Stock Market. The
      exchange of the November 2007 notes for Series A Preferred Stock and the March
      2008 exchange of $1.75 million in senior secured promissory notes for Series
      B
      Preferred Stock, improved our access to supplier credit. In addition in
      September 2008, we sold $725,000 in unsecured convertible promissory notes
      to
      accredited investors. Nevertheless, even with fuel prices decreasing in recent
      weeks, the availability of 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 Wachovia N.A., which permits us to
      borrow up to 85% of the total amount of eligible accounts receivable and 65%
      of
      eligible inventory, both as defined. Outstanding letters of credit reduce the
      maximum amount available for borrowing. Our line of credit finances the timing
      difference between petroleum product purchases payable generally in 10 to 12
      days from date of delivery and the collection of receivables from our customers,
      generally in 30 to 45 days from date of delivery.




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





As
      of
      September 30, 2008, we issued letters of credit for an aggregate amount of
      $1.35
      million and as of November 12, 2008, we have issued $1.7 million. These letters
      of credit were issued to obtain better purchasing terms and pricing than was
      then available in certain markets. The letters of credit have twelve-month
      expirations and renew automatically. No amounts have been drawn on any of the
      letters of credit, however, as described above, outstanding letters of credit
      reduce our cash availability under our line of credit facility.




26




As
      of
      September 30, 2008 and June 30, 2008, we had outstanding borrowings of $16.0
      million and $19.8 million, respectively, under our $25.0 million line of credit.
      The line of credit is classified as a current liability in accordance with
      EITF
      95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving
      Credit Agreement” due to certain provisions in the agreement providing for
      subjective acceleration rights and requiring the Company to maintain a lockbox
      arrangement whereby cash deposits are automatically utilized to reduce amounts
      outstanding under the line of credit. Based on eligible receivables and
      inventories, and letters of credit outstanding at September 30, 2008 and June
      30, 2008, we had $3.5 million and $1.8 million, respectively, of cash
      availability under the line of credit.





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





Dividends
      will be paid on the Series C 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 with the
      report in this SEC filing that we have achieved positive Earnings Before
      Interest, Taxes, Depreciation and Amortization  for
      two
      consecutive fiscal quarters, the quarterly cash dividend shall be changed from
      eighteen percent (18%) per annum to twelve percent (12%) per annum of the sum
      of
      the original issue price, effective two weeks after notice of such change is
      transmitted to holders the Preferred Stock. Dividends are cumulative from the
      date of the original issuance of the Series C Preferred Stock. Accumulated
      unpaid dividends on shares of Series C Preferred Stock do not bear interest.
      While the original issue price per share varies, the rights and preferences
      of
      the previously issued Series A and Series B Preferred Stock are substantially
      similar to those of the Series C Preferred Stock.





During
      the first quarter of fiscal 2009, we declared dividends of $196,000 on the
      outstanding Series A, Series B and Series C Preferred Stock. The dividends
      payable is paid quarterly; the first quarter of fiscal 2009 dividend
      payable is outstanding as of the date of this filing but will be paid shortly
      after the filing of the Form 10-Q.





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




Our
      debt
      agreements have covenants that define certain financial requirements and
      operating restrictions. Our failure to comply with any covenant or material
      obligation contained in these debt agreements, absent a waiver or forbearance
      from the lenders, would result in an event of default which could accelerate
      debt repayment terms under the debt agreements. Due to cross-default provisions
      contained in our debt agreements, an event of default under one agreement could
      accelerate repayment terms under the other agreements, which would have a
      material adverse effect on our liquidity and capital resources. At the date
      of
      this filing, we are in compliance with the requirements of the applicable
      covenants required by our debt agreements.




27





***Cash
      Flows***





During
      the first quarters of fiscal year 2009 and 2008, cash and cash equivalents
      increased $3,000 and decreased $1.0 million, respectively.





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




**Three
                Months Ended****September
                30,****2008**
            
            **2007**Proceeds
                from issuance of promissory notes
            
            $
            725
            
            $
            5,690Proceeds
                from issuance of preferred stock
            
            
            149
            
            
            -Cash
                provided by operating activities
            
            
            3,047
            
            
            2,538Decrease
                in restricted cash
            
            
            56
            
            
            424Proceeds
                from sale of equipment
            
            
            91
            
            
            6Proceeds
                from issuance of common stock warrants
            
            
            -
            
            
            1,170$
            4,068
            
            $
            9,828





We
      used
      cash primarily for (in thousands):


**Three
                    Months Ended****September
                    30,****2008**
                
                **2007**Principal
                    payments on promissory notes
                
                $
                -
                
                $
                (6,359
                )Net
                    payments on line of credit payable
                
                
                (3,830
                )
                
                (3,103
                )Purchases
                    of property and equipment
                
                
                (153
                )
                
                (882
                )Payments
                    of debt, preferred stock and warrantissuance
                    costs
                
                
                (70
                )
                
                (439
                )Capital
                    lease payments
                
                
                (12
                )
                
                (13
                )$
                (4,065
                )
                $
                (10,796
                )Net
                    change in cash and cash equivalents
                
                $
                3
                
                $
                (968
                )




As
      of
      September 30, 2008, we had $16.0 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 first quarter of fiscal 2009
      include the cumulative activity of the daily borrowings and repayments, $80.6
      million and $84.5 million, respectively, under the line of credit. The
      availability under the line of credit at September 30, 2008 amounted to $3.5
      million. The net cash borrowings from, or repayments of, the line of credit
      during the first quarters of fiscals 2009 and 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 operating activities, obtaining or
      maintaining sufficient trade credit from vendors, complying with our debt
      covenants, continuing renewal of our line of credit facility, and/or raising
      any
      required additional capital through the issuance of debt or equity securities
      or
      additional borrowings.





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




28




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





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





In
      order
      to accomplish our business plan of organic growth and strategic acquisitions,
      we
      need to raise additional equity capital, some of which would be utilized to
      support our pursuit of new acquisitions and working capital requirements.
      Ongoing expenditures for our corporate infrastructure, letters of credit needed
      to procure supply or obtain more favorable pricing, 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
      September 30, 2008, we do not have any material off-balance sheet
      arrangements.




***Recent
      Accounting Pronouncements***





In
      September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
      assets and liabilities. Under FAS No. 157, fair value refers to the price that
      would be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. In this standard, the FASB clarifies the principle that fair
      value should be based on the assumptions that market participants would use
      when
      pricing the asset or liability. In support of this principle, FAS No. 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. The fair value hierarchy gives the highest priority
      to quoted prices in active markets and the lowest priority to unobservable
      data,
      for example, the reporting entity’s own data. Under the standard, fair value
      measurements would be separately disclosed by level within the fair value
      hierarchy. Certain aspects of this standard were effective for the financial
      statements issued for the Company’s first quarter of fiscal year 2009. The
      adoption of FAS No. 157 had no impact on the Company’s consolidated financial
      position, results of operations or cash flows. 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. 157-2 will have on its consolidated financial
      position, results of operations or cash flows.




29




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’s adoption of FAS No. 159 had no impact on the Company’s
      financial condition or results of operations.




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




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




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




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




***Critical
      Accounting Policies***




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, 2008.




30





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





Not
      Applicable. ****





**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 September 30, 2008.





*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 September 30, 2008 that has materially affected, or is reasonably likely
      to materially affect, our internal control over financial
      reporting.




*Inherent
      Limitations on Effectiveness of Controls*




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




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




31




**PART
      II. Other Information**





**ITEM
      1. LEGAL PROCEEDINGS**





Not
      applicable.





**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
                
                Certification
                    of Principal Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.2
                
                Certification
                    of Principal Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200232.1
                
                Certification
                    of Principal Executive Officer and Principal Financial Officer
                    pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002




32




**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 CORPORATIONNovember
                  14, 2008
              By:
              /s/
                  Richard E. GathrightRichard
                  E. GathrightChairman
                  of the Board, Chief Executive Officer andPresident
                  (Principal Executive Officer)By:
              /s/
                  Michael S. ShoreMichael
                  S. ShoreChief
                  Financial Officer, Treasurer and Senior VicePresident
                  (Principal Financial Officer)




33




**INDEX
      OF EXHIBITS**





31.1
              
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.2
              
              Certification
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200232.1
              
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002




34