**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, 2007**




OR




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




Commission
      File Number 000-21825




**SMF
      ENERGY CORPORATION**


(Exact
      name of registrant as specified in its charter)




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





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





**(954)
      308-4200**


(Issuer's
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





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


Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer x


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





As
      of
      November 8, 2007 there were 14,556,295 shares of the registrant’s common stock
      outstanding.







**SMF
      ENERGY CORPORATION**




**FORM
      10-Q**




**INDEX**




Form
      10-Q Part and Item No.


Part
                  I
              Financial
                  Information:Item 1.
              Condensed
                  Unaudited Consolidated Financial StatementsCondensed
                  Consolidated Balance Sheets as of September 30, 2007 (unaudited)
                  and June
                  30, 2007
              
              
              3Condensed
                  Unaudited Consolidated Statements of Operations for the three-months
                  ended
                  September 30, 2007 and 2006
              
              
              4Condensed
                  Unaudited Consolidated Statements of Cash Flows for the three-months
                  ended
                  September 30, 2007 and 2006
              
              
              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
              
              
              29Item 4.
              Controls
                  and Procedures
              
              
              29Part
                  II
              
              Other
                  Information:Items
                  1. through 6.
              
              
              31Signatures
              
              
              
              32Certifications
              
              
              
              33
  2
 
  **SMF
            ENERGY CORPORATION AND SUBSIDIARIES**
  **CONDENSED
            CONSOLIDATED BALANCE SHEETS**
  ***(in
            000’s, except share and per share
            data)***





**September
                30, 2007**
            
            **June
                30, 2007****ASSETS**
            
            **(unaudited)**Current
                assets:Cash
                and cash equivalents
            
            $
            19
            
            $
            987Accounts
                receivable, net of allowances of $1,454 and $1,401
            
            
            22,926
            
            
            25,442Inventories,
                net of reserve of $219 and $238
            
            
            2,202
            
            
            2,283Prepaid
                expenses and other current assets
            
            
            316
            
            
            471Total
                current assets
            
            
            25,463
            
            
            29,183Restricted
                cash
            
            
            721
            
            
            1,145Property
                and equipment, net of accumulated depreciation of$12,358
                and $11,807
            
            
            10,322
            
            
            10,017Identifiable
                intangible assets, net of accumulated amortization of$775
                and $681
            
            
            2,678
            
            
            2,771Goodwill
            
            
            228
            
            
            228Deferred
                debt costs, net of accumulated amortization of $319 and
                $1,197and
                other assets
            
            
            584
            
            
            581Total
                assets
            
            $
            39,996
            
            $
            43,925**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Line
                of credit payable
            
            $
            14,194
            
            $
            17,297Accounts
                payable
            
            
            8,500
            
            
            7,887Accrued
                expenses and other liabilities
            
            
            3,762
            
            
            3,831Total
                current liabilities
            
            
            26,456
            
            
            29,015Long-term
                liabilities:Promissory
                notes, net of unamortized debt discount of $111and
                $1,027
            
            
            10,498
            
            
            10,250Other
                long-term liabilities
            
            
            535
            
            
            546Total
                liabilities
            
            
            37,489
            
            
            39,811ContingenciesShareholders’
                equity:Common
                stock, par value $.01 per share; 50,000,000 shares
                authorized;14,556,295
                and 13,702,426 issued and outstandingat
                September 30, 2007 and June 30, 2007,
                respectively
            
            
            146
            
            
            137Additional
                paid-in capital
            
            
            26,424
            
            
            25,021Accumulated
                deficit
            
            
            (24,063
            )
            
            (21,044
            )Total
                shareholders’ equity
            
            
            2,507
            
            
            4,114Total
                liabilities and shareholders’ equity
            
            $
            39,996
            
            $
            43,925




**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,****2007**
            
            **2006**Petroleum
                product sales and service revenues
            
            $
            49,189
            
            $
            58,644Petroleum
                product taxes
            
            
            6,308
            
            
            6,984Total
                revenues
            
            
            55,497
            
            
            65,628Cost
                of petroleum product sales and service
            
            
            46,007
            
            
            54,522Petroleum
                product taxes
            
            
            6,308
            
            
            6,984Total
                cost of sales
            
            
            52,315
            
            
            61,506Gross
                profit
            
            
            3,182
            
            
            4,122Selling,
                general and administrative expenses
            
            
            3,803
            
            
            3,650Operating
                (loss) income
            
            
            (621
            )
            
            472Interest
                expense
            
            
            (778
            )
            
            (949
            )Interest
                and other income
            
            
            21
            
            
            15Loss
                on extinguishment of promissory notes
            
            
            (1,641
            )
            
            -Loss
                before income taxes
            
            
            (3,019
            )
            
            (462
            )Income
                tax expense
            
            
            -
            
            
            -Net
                loss
            
            $
            (3,019
            )
            $
            (462
            )Basic
                and diluted net loss per share
            
            $
            (0.21
            )
            $
            (0.04
            )Basic
                and diluted weighted average commonshares
                outstanding
            
            
            14,200
            
            
            10,496




**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,****2007**
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (3,019
            )
            $
            (462
            )Adjustments
                to reconcile net loss to net cash provided by (used in)operating
                activities:Depreciation
                and amortization:Cost
                of sales
            
            
            388
            
            
            431Selling,
                general and administrative
            
            
            282
            
            
            223Amortization
                of deferred debt cost
            
            
            47
            
            
            79Amortization
                of debt discount
            
            
            50
            
            
            150Stock-based
                compensation expense
            
            
            126
            
            
            27Gain
                from sale of assets
            
            
            (6
            )
            
            -Inventory
                reserve
            
            
            (19
            )
            
            -Provision
                for doubtful accounts
            
            
            161
            
            
            32Non-cash
                loss on extinguishment of debt
            
            
            1,371
            
            
            -Other
            
            
            -
            
            
            (9
            )Changes
                in operating assets and liabilities, net of effects of
                acquisitions:Decrease
                in accounts receivable
            
            
            2,355
            
            
            315Decrease
                in prepaid expenses and other assets
            
            
            155
            
            
            196Decrease
                in inventories
            
            
            100
            
            
            312Increase
                (decrease) in accounts payable and other liabilities
            
            
            547
            
            
            (2,261
            )Net
                cash provided by (used in) operating activities
            
            
            2,538
            
            
            (967
            )**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Purchases
                of property and equipment
            
            
            (882
            )
            
            (127
            )Proceeds
                from sale of equipment
            
            
            6
            
            
            -Decrease
                in restricted cash
            
            
            424
            
            
            -Net
                cash used in investing activities
            
            
            (452
            )
            
            (127
            )**CASH
                FLOWS USED IN FINANCING ACTIVITIES:**Proceeds
                from line of credit
            
            
            55,980
            
            
            68,027Repayments
                of line of credit
            
            
            (59,083
            )
            
            (70,015
            )Proceeds
                from issuance of promissory notes
            
            
            5,690
            
            
            -Proceeds
                from issuance of common stock
            
            
            1,170
            
            
            -Principal
                payment on promissory notes
            
            
            (6,359
            )
            
            (452
            )Debt
                issuance costs
            
            
            (379
            )
            
            (29
            )Common
                stock issuance costs
            
            
            (60
            )
            
            -Capital
                lease payments
            
            
            (13
            )
            
            (43
            )Net
                proceeds from exercise of common stock options and warrants
            
            
            -
            
            
            16Net
                cash used in financing activities
            
            
            (3,054
            )
            
            (2,496
            )NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (968
            )
            
            (3,590
            )CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            987
            
            
            4,103CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            19
            
            $
            513




**(Continued)**




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




5
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **CONDENSED
          UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**
  ***(in
          000’s)***





**(Continued)**
            
            **Three
                Months Ended September 30,****2007**
            
            **2006****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid for interest
            
            $
            998
            
            $
            811**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH ACTIVITIES:**Refinancing
                of August 2003, January 2005, and September 2005notes
                into August 2007 notes
            
            $
            4,918
            
            $
            -Non-cash
                costs related to issuance of stock, warrants andAugust
                2007 notes
            
            $
            134
            
            $
            -Debt
                discount costs related to issuance of stock, warrants andAugust
                2007 notes
            
            $
            112
            
            $
            -




**The
      accompanying notes to consolidated 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 our customers. In addition, the Company’s fleet of
      special duty tractor-trailer units provides heavy haul transportation services
      over short and long distances to customers requiring the movement of over-sized
      or over-weight equipment and manufactured products .
      The
      Company manages its business asa
      single
      reportable operating segment of business: distribution and sale of petroleum
      products from integrated out-sourced management services. Accordingly, the
      Company does not report more than one segment; nevertheless, management
      evaluates, at least quarterly, whether the Company continues to have one single
      reportable segment.





At
      September 30, 2007, 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. Certain prior period amounts have been reclassified
      to conform to the current period presentation, see Note 3, Reclassifications.





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




7
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





**3.**
            **RECLASSIFICATIONS**





Certain
      prior year amounts have been reclassified to conform to the current period
      presentation. These changes had no impact on previously reported results of
      operations or shareholders’ equity. In accordance with EITF Issue No. 04-13,
“Accounting for Purchases and Sales of Inventory with the Same Counterparty”,
      the Company has reclassified its treatment of reporting for sales of inventory
      to one of the Company’s vendors from a gross basis to a net basis (net of
      service charges). Revenue and cost of sales were reduced by $337,000 from
      amounts previously reported for the three months ended September 30, 2006 (the
      “first quarter of fiscal 2007”) to reflect this reclassification.




**4.**
            **RECENT
                ACCOUNTING PRONOUNCEMENTS**





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




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





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




8
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**




**5.**
            **CASH
                AND CASH EQUIVALENTS**





During
      the first quarter of fiscal 2008, the Company paid down $3.1 million on its
      line
      of credit payable. Total cash and cash availability was $2.1 million **** and
      $2.8
      million at September 30, 2007 and June 30, 2007, respectively, and was $2.2
      million at November 8, 2007. 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 7 - Line of Credit Payable.




**6.**
            **RESTRICTED
                CASH**





In
      May
      2007, the Company sold 29 pieces of equipment for an aggregate amount of $1.1
      million. The proceeds of the sale were collateral for the August 2007 Notes,
      and
      therefore, were designated for the purchase of replacement equipment. At June
      30, 2007, these proceeds were held by the indenture trustee, and recorded as
      restricted cash.




In
      August
      2007, the Company entered into commitments to purchase $1.1 million in trucks
      and field equipment. Six pieces of equipment for an aggregate amount of $434,000
      were delivered in the first quarter of fiscal 2008. At September 30, 2007,
      the
      remaining proceeds of $721,000 remain in restricted cash and continue to be
      held
      by the indenture trustee.




**7.**
            **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. Interest is
      payable monthly at prime plus 0.75% (9.0% at September 30, 2007) and outstanding
      borrowings under the line are secured by substantially all Company assets other
      than its transportation fleet and related field equipment.





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, 2007, the financial covenants included a
      minimum availability of $750,000 or average monthly availability of $2.5
      million, covenant which, if not achieved, would trigger a fixed charge coverage
      ratio of 1.0 to 1.0 and limitations on annual capital expenditures at $750,000
      effective July 1, 2007. In October 2007, the Company and its line of credit
      lender amended the loan and security agreement to amend and restate the fixed
      charge coverage ratio which reduced the required average excess availability
      from $2.5 million to $1.8 million starting with the month of October
      2007.




The
      line
      of credit agreement also requires the Company to obtain the consent of the
      financial institution prior to incurring additional debt, or mergers,
      consolidations or sales. Failure to comply with one or more of the covenants
      in
      the future could affect the amount the Company can borrow, and thereby,
      adversely affect the Company’s liquidity and financial condition. At September
      30, 2007, the Company was in compliance with the requirements of these
      covenants.





As
      of
      September 30, 2007 and June 30, 2007, the Company had outstanding borrowings
      of
      $14.2 million and $17.3 million, respectively, under its $25.0 million line
      of
      credit. The line of credit is classified as a current liability since it expires
      on June 30, 2008. Based on eligible receivables and inventories outstanding
      at
      September 30, 2007, the Company had $2.0 million of cash availability under
      the
      line of credit compared to $1.8 million availability at June 30, 2007.




9
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**




**8.**
            **NET
                INCOME (LOSS) PER SHARE**





Basic
      net
      income per share is computed by dividing the net income attributable to common
      shareholders by the weighted-average number of common shares outstanding during
      the period. Diluted net income per share is computed by dividing net income
      attributable to common shareholders by the weighted-average number of common
      shares outstanding during the period, increased to include the number of
      additional common shares that would have been outstanding if the dilutive
      potential common shares had been issued. The dilutive effect of outstanding
      stock options and warrants is reflected in diluted earnings per share by
      application of the treasury stock method.





Common
      stock equivalents, consisting of stock options, common stock warrants, and
      promissory note conversion rights in the amounts of 1,814,202, 886,941, and
      3,633,296, respectively, at prices ranging from $.92 **** to
      $7.63 **** per
      share
      for the period ending September 30, 2007, were antidilutive due to the net
      loss
      incurred for the period, and therefore, were not included in the computation
      of
      net loss per share.





Common
      stock equivalents, consisting of stock options and common stock warrants in
      the
      amounts of 1,757,652 and 1,327,915, respectively, at prices ranging from
      $.86 **** to
      $7.63 **** per
      share
      for the period ending September 30, 2006, were antidilutive due to the net
      loss
      incurred for the period, and therefore, were not included in the computation
      of
      net loss per share.




10
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**




**9.**
            **LONG-TERM
                DEBT**





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





**September
                30,**
            
            **June
                30,****2007**
            
            **2007**August
                2007 senior secured convertible subordinated promissory notes (the
“August
                2007 Notes”) (11.5% interest due semi-annually, December 31 and June 30);
                matures December 31, 2009 in its entirety; effective interest rate
                of
                14.3% includes cost of warrants and other debt issue
                costs.
            
            $
            10,609
            
            $
            -August
                2003 promissory notes (the “August 2003 Notes”) (10% interest due
                semi-annually, December 31 and June 30); at June 30, 2007, two
                principal payments of $752,800 and $552,600 were due on August 28,
                2007 and February 28, 2008; balloon payment of $2,111,925 was due
                at
                maturity on August 28, 2008; effective interest rate of 19.9% included
                cost of warrants and other debt issue costs. The notes were refinanced
                on
                August 8, 2007.
            
            
            -
            
            
            3,417January
                2005 promissory notes (the “January 2005 Notes”) (10% interest due
                semi-annually, July 24 and January 24); at June 30, 2007, five principal
                payments of $540,000 were due semi-annually on January 24 and July
                24;
                balloon payment of $2,160,000 was due at maturity on January 24,
                2010;
                effective interest rate of 20.4% included cost of warrants and other
                debt
                issue costs. The notes were refinanced on August 8, 2007.
            
            
            -
            
            
            4,860September
                2005 promissory notes (the “September 2005 Notes”) (10% interest due
                semi-annually, February 28 and August 31); at June 30, 2007, six
                principal
                payments of $300,000 were due semi-annually on August 31 and February
                28;
                balloon payment of $1,200,000 was due at maturity on August 31, 2010;
                effective interest rate of 20.3% included cost of warrants and other
                debt
                issue costs. The notes were refinanced on August 8, 2007.
            
            
            -
            
            
            3,000Various
                capital leases, interest rates range from 5.27% to 15.78%, monthly
                principal and interest payments, leases expire August 2006 to March
                2008.
            
            
            13
            
            
            26Unamortized
                debt discount
            
            
            (111
            )
            
            (1,027
            )10,511
            
            
            10,276Less:
                current portion
            
            
            (13
            )
            
            (26
            )Long-term
                debt, net
            
            $
            10,498
            
            $
            10,250




11
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**








On
      August
      8, 2007, the Company sold $11.8 million in debt and equity securities (the
      “Offering”). The Company used a portion of the proceeds to satisfy the balance
      of its outstanding secured promissory notes issued on August 29, 2003, January
      25, 2005 and September 1, 2005 (the “Satisfied Notes”), respectively, and to
      lower the Company’s total senior secured convertible subordinated debt from
      $11.2 million **** to
      $10.6
      million on August 8, 2007. As a result of this transaction, the Company
      wrote-off approximately $978,000 and $443,000 of unamortized debt discount
      and
      debt costs, respectively.




In
      the
      Offering, the Company sold $10.6 million in 111⁄2% senior secured convertible
      subordinated promissory notes maturing in its entirety on December 31, 2009,
      including $5.7 million sold to new institutional and private investors and
      $4.9
      million to then current holders of the Company’s secured debt. The Company paid
      a total commission of $400,000 to the placement agent, $94,000 of which was
      paid
      through the issuance of 63,327 shares of the Company’s common stock at the
      offering price of $1.48 per share. For information on the equity securities
      sold, see Note 11 - Stockholders’ Equity.




The
      August 2007 Notes are secured by specified vehicles and field equipment of
      the
      Company and its subsidiaries and are senior to all other existing debt of the
      Company other than any amounts owed now or in the future to the Company’s
      primary lender, Wachovia Bank, N.A, to which the August 2007 Notes are expressly
      subordinated. The amounts due under the August 2007 Notes will become due and
      payable immediately upon the occurrence of customary events of default. The
      Notes are redeemable by the Company, in whole or in part, without pre-payment
      penalty or premium, except that, if such pre-payment is made before the first
      anniversary of the issuance of the August 2007 Notes, a pre-payment penalty
      equal to 3% of the principal amount being redeemed, together with accrued but
      unpaid interest shall be paid.




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




The
      August 2007 Notes have cross-default provisions contained in the debt agreement.
      Accordingly, an event of default under the line of credit facility, described
      in
      Note 7, could also cause a default under the August 2007 Notes. As of September
      30, 2007, the Company was in compliance with the requirements of these
      covenants.




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




12
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




***Other***




In
      connection with the August 2003, January 2005 and September 2005 Notes, the
      Company recorded at issuance unamortized debt discounts which were being
      amortized as non-cash interest expense over the respective term of the debt
      issued under the effective interest method. 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 do not reduce the
      amount of principal cash repayments required to be made by the Company. On
      August 8, 2007, there were unamortized debt discounts of $978,000 which were
      written-off when the Redeemed Notes were satisfied. As a result of the early
      satisfaction of the notes, the Company incurred $270,000 as a pre-payment
      penalty. The unamortized debt discounts of $978,000 and the pre-payment penalty
      of $270,000, along with deferred debt costs of $443,000, were recorded as
      non-cash losses on extinguishment of debt in our consolidated results of
      operations. The Company also recorded a gain on extinguishment of debt of
      $50,000 as a result of the excess in the carrying value of the Satisfied Notes
      over the extinguishment price.





In
      connection with the August 2007 Notes, the Company recorded unamortized debt
      amounts of $112,000, to be amortized as non-cash interest expense over the
      term
      of the notes, related to the valuation of the common stock warrants issued
      to
      noteholders. Total amortization expense related to the debt discounts for the
      first quarters of fiscals 2008 and 2007 was $50,000 and $150,000, respectively.




**10.**
            **WARRANTS**




In
      conjunction with **t** he
      issuance of the August 2003, January 2005 and September 2005 Notes described
      in
      Note 9, the Company issued detachable common stock purchase warrants, described
      below as the August 2003, January 2005, and September 2005 Warrants,
      respectively. In addition, in June 2006, the Company issued non-detachable
      warrants to certain note holders (the “Conversion Warrants”). In conjunction
      with a private offering of its common stock in February 2007, the Company issued
      warrants described below as February 2007 warrants. In August 2007, in
      conjunction with the sale of promissory notes and equity, the company issued
      warrants described below as August 2007 warrants. As of June 30, 2007, all
      of
      the Conversion Warrants had been exercised.





There
      was
      no exercise of warrants in the first quarter of fiscal 2008.





***August
      2003 Warrants***





On
      August
      29, 2003, the Company raised $6.9 million and issued 2,008,250 five-year
      detachable warrants to purchase the Company’s common stock at $1.00 per share.
      At September 30, 2007, the warrant holders had a balance of 140,000 warrants
      available to exercise into common shares.





***January
      2005 Warrants***





On
      January 25, 2005, the Company raised $6.1 million and issued 1,006,500 four-year
      detachable warrants to purchase the Company’s common stock at an exercise price
      of $1.60 per share. At September 30, 2007, the warrant holders had a balance
      of
      37,292 warrants available to exercise into common shares.





S ***eptember
      2005 Warrants***





On
      September 1, 2005, the Company raised $3.0 million and issued 360,000 four-year
      detachable warrants to purchase the Company’s common stock at an exercise price
      of $2.28 per share. At September 30, 2007, the warrant holders had a balance
      of
      75,840 warrants available to exercise into common shares.




13
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**








***Conversion
      Warrants***





On
      June
      30, 2006, the Company issued 1,057,283 non-detachable warrants (the “Conversion
      Warrants”), exercisable for 90 days to certain note holders of the August 2003
      Notes and the January 2005 Promissory Notes, by which those note holders could
      exchange up to $2.6 million of existing August 2003 and January 2005 Notes
      for
      the purchase of shares of the Company’s common stock at an exercise price of
      $2.54 per share, the closing market price on the date of the agreement. Included
      in these warrants were 25,787 warrants, valued at $65,500, issued to pay 50%
      of
      the 5% call penalty, or a 2.5% penalty. As of June 30, 2007, the note holders
      had exercised all of the Conversion Warrants.





***February
      2007 Warrants***





In
      conjunction with the February 15, 2007 private placement offering, the Company
      issued detachable warrants to purchase 423,800 of the Company’s common stock at
      an exercise price of $1.52 per share. In addition, the placement agent received
      additional warrants to purchase 130,955 shares of the Company’s common stock at
      an exercise price of $1.90 per share. As of September 30, 2007, these warrants
      remain outstanding.





***August
      2007 Warrants***





In
      conjunction with the August 8, 2007 promissory and equity offering, further
      described in Note 9 - Long-Term Debt and Note 11 - Shareholders’ Equity, the
      Company issued detachable warrants to the noteholders to purchase 39,528 of
      the
      Company’s common stock at an exercise price of $1.752 per share. In addition,
      the placement agent received additional warrants to purchase 39,526 shares
      of
      the Company’s common stock at an exercise price of $1.752 per share. The August
      2007 warrants will terminate on the fourth anniversary of the offering closing
      date. The August 2007 warrants also have customary anti-dilution and underlying
      stock registration rights. As of September 30, 2007, these warrants remain
      outstanding.





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





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





In
      the
      Offering, the Company sold 790,542 shares of common stock (the “Shares”) and
      39,528 four year warrants to purchase common stock at $1.752 per share (the
      “Warrants”). The Shares and Warrants were sold at $1.48 per Share and one
      twentieth of a Warrant, or $29.60 for twenty (20) Shares and one (1) Warrant,
      for equity proceeds of $1.2 million. The Company incurred transaction costs
      of
      $561,000 which were allocated on a percentage basis to equity and debt. Included
      in these transaction costs were commissions of $400,000 paid to the placement
      agent for the offering, $94,000 of which was paid through the issuance of 63,327
      shares of our common stock at the offering price of $1.48 per share, along
      with
      39,528 warrants with the same terms as the Warrants sold to
      investors.




14
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL
          STATEMENTS**




The
      following reflects the change in shareholders’ equity for the three months ended
      September 30, 2007 (in thousands):




**Additional**
            
            
            
            **Total****Common**
            
            **Paid-in**
            
            **Accumulated**
            
            **Shareholders’****Stock**
            
            **Capital**
            
            **Deficit**
            
            **Equity**Balance
                at June 30, 2007
            
            $
            137
            
            $
            25,021
            
            $
            (21,044
            )
            $
            4,114Issuance
                of common stock and warrantsfrom
                August 2007 offering, net ofissuance
                costs of $80,000
            
            
            9
            
            
            1,277
            
            
            -
            
            
            1,286Stock-based
                compensation expense
            
            
            -
            
            
            126
            
            
            -
            
            
            126Net
                loss
            
            
            -
            
            
            -
            
            
            (3,019
            )
            
            (3,019
            )Balance
                at September 30, 2007
            
            $
            146
            
            $
            26,424
            
            $
            (24,063
            )
            $
            2,507




During
      the first quarter of fiscal 2008, the Company granted 15,000 and 9,000 stock
      options under the Employee Stock Options and Director Stock Options plans,
      respectively. The weighted average grant date fair value of the options granted
      was $1.41. For the first quarter of fiscal 2008, there were no stock options
      exercised.




**12.**
            **CONTINGENCIES**





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





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




15
 
 **SMF
          ENERGY CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company and its subsidiaries are from time to time parties to legal proceedings,
      lawsuits and other claims incident to their business activities. Such matters
      may include, among other things, assertions of contract breach, claims for
      indemnity arising in the course of the business and claims by persons whose
      employment with us has been terminated. Such matters are subject to many
      uncertainties, and outcomes are not predictable with assurance. Consequently,
      management is unable to ascertain the ultimate aggregate amount of monetary
      liability, amounts which may be covered by insurance or recoverable from third
      parties, or the financial impact with respect to these matters as of September
      30, 2007. However, based on management’s knowledge at September 30, 2007,
      management believes that the final resolution of such matters pending at the
      time of this report, individually and in the aggregate, will not have a material
      adverse effect upon the Company’s consolidated financial position, results of
      operations or cash flows.




**13.**
            **INCOME
                TAXES**





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





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





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




The
      Company is not currently under examination by the Internal Revenue Service
      or
      any state or local tax authorities. The Company’s federal income tax returns for
      years prior to June 30, 2004 are no longer subject to examination. Other state
      and local jurisdictions remain subject to examination but are not individually
      considered material.




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
      proceeded by, followed by, or that include the words “believes,” “expects,”
“anticipates,” or similar expressions are generally considered to be
      forward-looking statements.





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




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




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




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




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




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





·
            The
                avoidance of future net losses;




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




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




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




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




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




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




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




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




17




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




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




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




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




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




·
            The
                ability to retire or convert debt to
                equity.




**OVERVIEW**




**Our
      Business**





We
      are a
      provider of petroleum product distribution services, transportation logistics
      and emergency response services to the trucking,
      manufacturing, construction, shipping, utility, energy, chemical,
      telecommunications and government services industries. At
      September 30, 2007, we were conducting operations through 26 locations in the
      ten states of Alabama, California, Florida, Georgia, Louisiana, Mississippi,
      North Carolina, South Carolina, Tennessee and Texas.





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




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




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




18





The
      following is a summary discussion of our financial results for the first quarter
      of fiscal 2008 and our execution on several core strategies that impacted
      results of operations:





·
            In
                the first quarter of fiscal 2008, we had a net loss of $3.0 million.
                These
                results include $2.4 million in non-cash charges, such as depreciation
                and
                amortization of assets, debt costs, debt discounts, stock based
                compensation, provision for doubtful accounts, and non-cash loss
                on
                extinguishment of debt. Additionally the results include stated interest
                expense associated with servicing of our debt of $681,000, cash loss
                on
                extinguishment of debt of $270,000, legal expenses of $244,000, and
                public
                company costs of $220,000.





·
            On
                August 8, 2007, we sold $11.8 million in debt and equity securities
                (the
                “Offering”). We used the proceeds of the Offering to satisfy the principal
                balance of our then outstanding August 2003, January 2005 and September
                2005 promissory notes. As a result of this transaction, we lowered
                our
                senior secured convertible subordinated debt from $11.2 million to
                $10.6
                million at August 8, 2007. Since the new notes mature in December
                31,
                2009, the debt associated with the promissory notes was classified
                in our
                condensed unaudited consolidated balance sheet as long-term debt.





·
            External
                factors beyond our control have continued to impact our results of
                operations. While fuel price fluctuations affect our revenues, our
                gross
                profits are generally not affected by such fluctuations since we
                are able
                to pass the increased cost of the product on to our customers. However,
                higher fuel prices coupled with negative economic conditions in certain
                markets have decreased the demand for the services and goods provided
                by
                the transportation, manufacturing, services and other industries
                that
                comprise the majority of our customer base. While we have continued
                to increase the organic growth in our mobile fueling services through
                the
                addition of new customers seeking to reduce fuel costs, the decrease
                in
                our existing customers’ business has resulted in lower volumes of fuel
                being supplied by us to these customers. Moreover, in addition to
                increased running costs for the Company’s fuel delivery fleet, higher fuel
                prices have increased the amount of short term credit that we extend
                to
                our mobile fueling customers from delivery until payment.





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





·
            The
                net loss from operations for the first quarter of fiscal 2008 was
                $3.0
                million compared to a loss of $462,000 for the same period in the
                prior
                year. The primary reason for the $2.5 million increase in the net
                loss was
                due to a loss on extinguishment of debt of $1.6 million related to
                the
                refinancing of our outstanding secured promissory notes 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. Additionally, the increase in the
                net loss
                was due to a $940,000 decrease in gross profit partially due to the
                reduction in business with net margin contributions below acceptable
                levels, such as the curtailment of the low margin fuel transport
                business
                in August 2006. The prior year results also included additional emergency
                response revenues generated for services provided to our customers
                as they
                prepared for Hurricane Ernesto. We also believe that our results
                were
                impacted by the decrease in industry demand stemming from the general
                economic conditions in the industries and geographic locations we
                serve.




·
            For
                the first quarter of fiscal 2008, the net margin was 19.1 cents per
                gallon
                compared to 19.4 cents per gallon for the same period in the prior
                year.
                The higher margins in the first quarter of fiscal 2007 were due to
                some
                higher margin emergency response revenue generated, as our customers
                utilized our services in anticipation of Hurricane Ernesto.




19




·
            Earnings
                before interest, taxes, depreciation, amortization, stock-based
                compensation expense, and loss on extinguishment of debt (“EBITDA”), a
                non-GAAP measure, for the first quarter of fiscal 2008 were $196,000
                compared to $1.2 million for the same period in the prior year. The
                primary reason for the $1.0 million decrease was the decrease in
                gross
                margins, as discussed above.




·
            Financial
                results from our commercial mobile and bulk fueling services business
                continue to be largely dependent on the number of gallons of fuel
                sold and
                the net margin per gallon achieved. The 4.7 million gallon reduction
                in
                the first quarter of fiscal 2008, as compared to the same period
                in the
                prior year was primarily due to the reduction in business with net
                margin
                contributions below acceptable levels, the decrease in emergency
                response
                revenues generated for services provided to our customers as they
                prepared
                for Hurricane Ernesto, and a decrease in industry demand stemming
                from the
                general economic conditions in the industries and geographic locations
                we
                serve, and our customers’ efforts to reduce fuel consumption in light of
                increased fuel prices.




**RESULTS
      OF OPERATIONS:**





To
      monitor our results of operations, we review key financial information including
      net revenues, gross profit, selling, general and administrative expense, net
      income or losses, and non-GAAP measures such as EBITDA and Proforma 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 of our suppliers in order to choose the most cost effective
      products.




Net
      margin per gallon is calculated by adding gross profit to the depreciation
      and
      amortization component of cost of sales, and dividing that sum by the number
      of
      gallons sold.




**Comparison
      of Three Months Ended September 30, 2007 (“first quarter of fiscal 2008”) to
      Three Months Ended September 30, 2006 (“first quarter of fiscal
      2007”)**





***Revenues***





Revenues
      were $55.5 million in the first quarter of fiscal 2008, as compared to $65.6
      million in the same period of the prior year, a decrease of $10.1 million,
      or
      15%, primarily as a result of a decrease of 4.7 million or 20% in gallons sold.
      The volume reduction caused $13.2 million of the decrease in revenue offset
      by a
      positive $3.1 million price variance largely due to overall higher market prices
      of petroleum products. The volume reduction was primarily due to the reduction
      in business with net margin contributions below acceptable levels, including
      the
      curtailment in August 2006 of a portion of the fuel transport business.
      Additionally, the decrease in revenues was due to emergency response revenue
      related to preparation for Hurricane Ernesto earned in the first quarter of
      fiscal 2007. We believe our volume decrease was also a result of a decrease
      in
      industry demand stemming from the contraction of the national economy, impacting
      the industries we serve, and our customers’ efforts to reduce fuel consumption
      in light of dramatically increased fuel prices.




20




***Gross
      Profit***





Gross
      profit was $3.2 million in the first quarter of fiscal 2008, as compared to
      $4.1
      million in the same period of the prior year, a decrease of $940,000, or 23%.
      The decrease was primarily due to the reduction in business with net margin
      contributions below acceptable levels, the decrease in emergency response
      business earned in the first quarter of fiscal 2007 and the decrease in industry
      demand stemming from the contraction of the national economy, described above.
      The net margin per gallon for the first quarters of fiscals 2008 and 2007 was
      19.1 cents and 19.4 cents, respectively. The small decrease in net margin per
      gallon was due to the high margin emergency response revenue generated, in
      the
      first quarter of fiscal 2007, as our customers demanded our services in
      anticipation of Hurricane Ernesto.




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




Selling,
      general and administrative expenses were $3.8 million in the first quarter
      of
      fiscal 2008, as compared to $3.7 million in the same period of the prior year,
      an increase of $153,000, or 4%. The increase in selling, general and
      administrative expenses was primarily due to an increase of $427,000 in
      corporate infrastructure costs such as, personnel resources and office rental
      expense. The increase was also partially due to an increase of $130,000 in
      the
      provision for doubtful accounts. The increases were partially offset by a
      reduction of $423,000 in selling, general and administrative expenses associated
      with the H&W and Shank Services acquisitions.





Corporate
      infrastructure costs are directly related to executing our business plan and
      represent an investment in future growth, which we intend to achieve both
      organically and through selective acquisitions. While some of these costs would
      have been incurred even without our concerted infrastructure development
      program, the majority of the costs were primarily incurred at the present levels
      to support our long-term objective to enhance shareholder value by investing
      in
      infrastructure in the present to benefit future performance.




***Interest
      Expense***




Interest
      expense was $778,000 in the first quarter of fiscal 2008, as compared to
      $949,000 in the same period of the prior year, a decrease of $171,000, or 18%.
      The decrease was primarily due to the refinancing of our long-term debt, as
      the
      outstanding secured promissory notes issued on August 2003, January 2005 and
      September 2005 were refinanced in August 2007 with new senior secured
      convertible subordinated notes.





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


**Three
                  Months Ended****September
                  30,****2007**
              
              **2006**Stated
                  Rate Interest Expense:Line
                  of credit
              
              $
              359
              
              $
              338Long
                  term debt
              
              
              302
              
              
              355Other
              
              
              20
              
              
              27Total
                  stated rate interest expense
              
              
              681
              
              
              720Non-Cash
                  Interest Amortization:Amortization
                  of deferred debt costs
              
              
              47
              
              
              79Amortization
                  of debt discount
              
              
              50
              
              
              150Total
                  amortization of interest expense
              
              
              97
              
              
              229Total
                  interest expense
              
              $
              778
              
              $
              949
  21




***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 which
      was
      incurred due to the satisfaction of the notes prior to their maturity dates,
      and
      a gain of $50,000 due to the excess of the carrying value of the notes over
      the
      extinguishment price.




***Income
      Taxes***




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




***Net
      Loss***




Net
      loss
      was $3.0 million in the first quarter of fiscal 2008, as compared to $462,000
      in
      the same period in the prior year. The $2.5 million increase in net loss
      resulted primarily from the loss on extinguishment of debt of $1.6 million
      related to our long-term debt, as the outstanding secured promissory notes
      issued in August 2003, January 2005 and September 2005 were refinanced in August
      2007 with new senior secured convertible subordinated notes.





The
      increase in net loss was also partially due to the reduction in business with
      net margin contributions below acceptable levels, the decrease in emergency
      response business earned in the first quarter of fiscal 2007, and the decrease
      in industry demand stemming from the contraction of the national economy,
      described above in our Business Overview.




***EBITDA***




We
      define
      EBITDA as earnings before interest, taxes, depreciation, amortization,
      stock-based compensation expense and loss on extinguishment of debt, a non-GAAP
      financial measure within the meaning of Regulation G promulgated by the
      Securities and Exchange Commission. EBITDA is commonly defined as earnings
      or
      loss before interest, taxes, depreciation and amortization. We believe that
      EBITDA provides useful information to investors because it excludes transactions
      not related to the core cash operating business activities. We believe that
      excluding these transactions allows investors to meaningfully trend and analyze
      the performance of our core cash operations. All companies do not calculate
      EBITDA in the same manner, and EBITDA as presented by SMF may not be comparable
      to EBITDA presented by other companies.





EBITDA
      were $196,000 in the first quarter of fiscal 2008, as compared to $1.2 million
      in the same period of the prior year, a decrease of $1.0 million, or 83%. The
      decrease in EBITDA was primarily due to the reduction in business with net
      margin contributions below acceptable levels, the decrease in the emergency
      response revenue generated in first quarter of fiscal 2007, and the decrease
      in
      industry demand stemming from the contraction of the national economy, described
      above in our Business Overview.




22




The
      reconciliation of EBITDA to net loss for the first quarters of fiscals 2008
      and
      2007 was as follows (in thousands):




**Three
                Months Ended****September
                30,****2007**
            
            **2006**Net
                loss
            
            $
            (3,019
            )
            $
            (462
            )Add
                back:Interest
                expense
            
            
            778
            
            
            949Stock-based
                compensation expense
            
            
            126
            
            
            27Depreciation
                and amortization expense:Cost
                of sales
            
            
            388
            
            
            431Selling,
                general and administrative expenses
            
            
            282
            
            
            223Loss
                on extinguishment of debt
            
            
            1,641
            
            
            -EBITDA
            
            $
            196
            
            $
            1,168




23




Below
      is
      a reconciliation of Proforma EBITDA, a non-GAAP measurement used and defined
      by
      us as net loss excluding non-cash items, corporate infrastructure and
      integration costs, stated interest expense, and cash loss on extinguishment
      of
      debt. We believe this non-GAAP measurement is useful to the investor because
      it
      demonstrates the material effect our financing, acquisition and corporate
      development programs have on the performance of our business.




**Three
                Months Ended****September
                30,****2007**
            
            **2006**Net
                loss
            
            $
            (3,019
            )
            $
            (462
            )Add:
                non-cash items:Depreciation
                - cost of sales
            
            
            388
            
            
            431Depreciation
                and amortization - SG&A
            
            
            282
            
            
            223Amortization
                of deferred debt costs
            
            
            47
            
            
            79Amortization
                of debt discount
            
            
            50
            
            
            150Stock-based
                compensation expense
            
            
            126
            
            
            27Other
                non-cash expenses
            
            
            -
            
            
            (9
            )Inventory
                reserve
            
            
            (19
            )
            
            -Provision
                for doubtful accounts
            
            
            161
            
            
            32Non-cash
                loss on extinguishment of debt
            
            
            1,371
            
            
            -Total
                non-cash items
            
            
            2,406
            
            
            933Net
                (loss) income before non-cash items
            
            
            (613
            )
            
            471Add:
                Corporate infrastructure and integration costs
            
            
            427
            
            
            653Net
                (loss) income before non-cash items and corporateinfrastructure
                and integration costs
            
            
            (186
            )
            
            1,124Add:
                Stated rate interest expense (See interest expense table)
            
            
            681
            
            
            720Cash
                loss on extinguishment of debt
            
            
            270
            
            
            -Deduct:
                Gain from sale of assets
            
            
            (6
            )
            
            -Proforma
                EBITDA
            
            $
            759
            
            $
            1,844




**Capital
      Resources and Liquidity**





At
      September 30, 2007, we had total cash and cash availability of $2.1 million,
      which consisted of cash and cash equivalents of $19,000 and additional cash
      availability of approximately $2.0 through our line of credit. As of November
      8,
      2007, our cash and cash availability was approximately $2.2 million. We are
      able
      to draw on our line of credit on a daily basis subject to debt covenant
      requirements.





In
      fiscal
      years 2005 and 2006, we made significant investments in acquiring two new
      companies. We have concentrated our efforts on integrating these acquisitions
      into our existing operations, thereby incurring additional costs that have
      reduced our cash availability. In addition, our cash resources were reduced
      by
      the expenditures for development of the corporate infrastructure, including
      the
      operating, accounting and information management system, which was completed
      in
      the fourth quarter of fiscal 2007. During the first quarter of fiscal 2008,
      we
      also paid-down $3.1 million on our line of credit.




24





***Sources
      of Cash***





*Debt
      Financing and Equity Offerings*





On
      September 26, 2006, we increased our line of credit with our institutional
      lender from $20.0 million to $25.0 million. Our line of credit facilitates
      financing 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. As of September 30, 2007 and June 30, 2007, we had outstanding
      borrowings of $14.2 and $17.3 million, respectively, under our $25.0 million
      line of credit.





Our
      line
      of credit permits us to borrow up to 85% of the total amount of eligible
      accounts receivable and 65% of H & W’s eligible inventory. Interest is
      payable monthly at prime plus 0.75% (9.0% at September 30, 2007) and 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 June 30, 2008.





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





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




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




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




25





Our
      debt
      agreements have covenants that define certain financial requirements and
      operating restrictions. Our failure to comply with any covenant or material
      obligation contained in these debt agreements, absent a waiver or forbearance
      from the lenders, would result in an event of default which could accelerate
      debt repayment terms under the debt agreements. Due to cross-default provisions
      contained in our debt agreements, an event of default under one agreement could
      accelerate repayment terms under the other agreements, which would have a
      material adverse effect on our liquidity and capital resources. At the date
      of
      this filing, we are in compliance with the requirements of the applicable
      covenants required by our debt agreements, though there is no assurance that
      we
      will be able to do so in the future. For example, while the minimum cash
      availability required by our line of credit agreement is waived if we satisfy
      the fixed charge debt coverage ratio covenant established by that agreement,
      because we do not currently expect that we would meet the ratio, a failure
      to
      meet the minimum cash availability under the agreement would result in a
      violation of that covenant.




***Cash
      Flows***





During
      the first quarters of fiscals 2008 and 2007, cash and cash equivalents decreased
      $1.0 million and $3.6 million, respectively.





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





**Three
                Months Ended****September
                30,****2007**
            
            **2006**Proceeds
                from issuance of promissory notes
            
            $
            5,690
            
            $
            16Proceeds
                from issuance of common stock
            
            
            1,170
            
            
            -Cash
                provided by operating activities
            
            
            2,538
            
            
            -Decrease
                in restricted cash
            
            
            424
            
            
            -Proceeds
                from sale of equipment
            
            
            6
            
            
            -$
            9,828
            
            $
            16





We
      used
      cash primarily for (in thousands):





**Three
                Months Ended****September
                30,****2007**
            
            **2006**Principal
                payments on promissory notes
            
            $
            6,359
            
            $
            452Net
                payments on line of credit payable
            
            
            3,103
            
            
            1,988Purchases
                of property and equipment
            
            
            882
            
            
            127Payments
                of debt and warrant issuance costs
            
            
            439
            
            
            29Capital
                lease payments
            
            
            13
            
            
            43Cash
                used in operations
            
            
            -
            
            
            967$
            10,796
            
            $
            3,606Net
                change in cash and cash equivalents
            
            $
            (968
            )
            $
            (3,590
            )




As
      of
      September 30, 2007, we had $14.2 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 2008
      include the cumulative activity of the daily borrowings and repayments, $56.0
      million and $59.1 million, respectively, under the line of credit. The
      availability under the line of credit at September 30, 2007 amounted to $2.0
      million. The net cash borrowings from, or repayments of, the line of credit
      during the first quarters of fiscals 2008 and 2007, respectively, have been
      included as sources or uses of cash in the tables above.




26




*Adequacy
      of Capital Resources*





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





Our
      sources of cash during the remainder of fiscal 2008 are expected to be cash
      on
      hand, cash generated from operations, borrowings under our credit facility,
      and
      other capital sources that may be available. There is no assurance, however,
      that if additional capital is required, it will be available to us or available
      on acceptable terms.




Our
      uses
      of cash during the remainder of fiscal 2008 are expected to be principally
      for
      operating working capital needs, maintaining our line of credit, and servicing
      the interest on our debt. We will continue to pursue additional conversions
      of
      debt into equity or other capital infusions to reduce the amounts owed under
      our
      new senior secured convertible subordinated debt.





We
      purchase the fuel sold to our customers from multiple suppliers at daily market
      prices, typically on 10 to 12 day credit terms. Recent increases in the cost
      of
      fuel have correspondingly increased the amount of short term credit that we
      extend to our customers and, in turn, that we seek from our suppliers. In some
      cases, fixed dollar credit limits have limited the total gallons of fuel
      available to us from certain suppliers. As a result, in those markets where
      there is a high demand for fuel but a limited number of fuel suppliers, the
      product demand from our customers may exceed the aggregate credit available
      to
      us from the pool of suppliers in that market. Historically, when individual
      suppliers declined to offer credit terms acceptable to us, we were able to
      acquire fuel on our customary 10 to 12 day payment terms from other suppliers.
      Recently, however, in one of our markets, some of our existing suppliers
      declined to provide us with such credit terms. While we were able to use other
      existing suppliers to provide product to our customers, in some cases, this
      required us to pay for fuel earlier than our typical 10 to 12 day terms, which
      in turn reduced our cash availability under our bank line of credit. We are
      currently seeking additional suppliers in this market who will provide
      acceptable pricing and credit terms to maximize our credit capacity but there
      is
      no assurance that we will be able to do so. We are also exploring various
      financing alternatives that would permit existing suppliers to increase the
      amount of short term credit available to us. However, if higher fuel prices
      continue and we are unable to obtain additional suppliers offering acceptable
      terms or arrange other short term financing for our fuel purchases, we may
      have
      to change payment terms or raise prices for some of our customers, either of
      which could reduce the level of our fueling business and could have a material
      adverse effect on the Company’s financial performance and cash resources.





Although
      there can be no assurance, 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 provide
      sufficient working capital to maintain our business during the remainder of
      fiscal 2008. Various factors could negatively impact our access to supplier
      credit terms and our cash available under our line of credit, however, including
      but not limited to uncollected accounts receivable, operating losses, delays
      in
      collections from customers, higher operating expenses or other increases in
      cash
      expenditures, which could in turn restrict our working capital and impair our
      operations or financial condition.





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 working capital requirements as needed. Ongoing expenditures for our
      corporate infrastructure, additional supplier lines of credit to finance higher
      fuel costs, and integration of future acquisitions may also require us to seek
      additional capital. In any event, 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.
      Similarly, 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.




27




***Off-Balance
      Sheet Arrangements***




At
      September 30, 2007, we do not have any material off-balance sheet
      arrangements.




***Recent
      Accounting Pronouncements***





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Financial
      Accounting Standard (“FAS”) Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes - an interpretation of FAS Statement No. 109” (“FIN No. 48”).
      FIN No. 48 clarifies the accounting for uncertainty in income taxes by
      prescribing a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. The interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Application of FIN No. 48 is effective
      for
      the Company during this first quarter of fiscal 2008. The Company disclosed
      its
      conclusion on the application of FIN No. 48 in Note 13 - Income Taxes of Item
      1.
      Condensed Unaudited Consolidated Financial Statements of this Quarterly Report
      on Form 10Q.




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





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




***Critical
      Accounting Policies***




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




28




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





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





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





Increases
      or decreases in market interest rates could have a material impact on our
      financial condition, results of operations and cash flows. The interest on
      our
      line of credit of up to $25.0 million is variable and may increase or decrease
      with future changes in interest rates, but interest rates are not the only
      factor which could affect interest expense on the line of credit. For example,
      interest expense on the line of credit for the quarter ended September 30,
      2007
      was $359,000, an increase of $21,000 over the same period in the prior year.
      If
      our line of credit average outstanding balance were $20.0 million, an increase
      of 1% in the variable interest rate would result in additional interest expense
      of $200,000 per annum.





On
      August
      8, 2007, we sold $10.6 million in 111⁄2% senior secured convertible subordinated
      promissory notes maturing December 31, 2009. We used the proceeds of the
      offering to satisfy our outstanding secured promissory notes issued on August
      2003, January 2005, and September 2005. We believe that the estimated fair
      value
      of our fixed rate notes outstanding at September 30, 2007, approximated the
      outstanding principal amount of $10.6 million.





Historically,
      we have been relatively immune to increases in the price of fuel that we deliver
      to our customers since we have passed on price increases from our suppliers
      to
      our customers, subject only to reduced demand for fuel by some customers seeking
      to control their own fuel costs. As a result of the continuing escalation of
      fuel prices and the record high prices for crude oil, however, we have recently
      begun to face limitations on short term credit from some of our suppliers.
      If
      fuel prices remain high and our customers’ demand for fuel remains at current
      levels or increases, we will continue to deal with limitations on our ability
      to
      obtain supplier financing for our fuel purchases. As discussed above in Part
      I,
      Item 2, Management’s Discussion and Analysis of Financial Condition and Results
      of Operations—Liquidity and Capital Resources: Adequacy of Capital Resources, we
      are seeking additional suppliers and alternative financing arrangements to
      address this problem but there is no assurance that we will be able to avoid
      such limitations in the future.




**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, 2007.





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




29




*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, 2007 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.




30


**PART
      II. Other Information**








**ITEM
      1. LEGAL PROCEEDINGS**





Not
      applicable.




**ITEM
      1A. RISK FACTORS**




During
      the quarter ended September 30, 2007, there were no material changes in the
      Risk
      Factors applicable to our business from those reported in our Form 10-K for
      the
      year ended June 30, 2007 except for the increased working capital risks created
      by the recent limitations on supplier credit described above in Part I, Item
      2,
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations—Liquidity and Capital Resources: Adequacy of Capital
      Resources. ****





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





Not
      Applicable.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





Not
      Applicable.





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





Not
      Applicable.





**ITEM
      5. OTHER INFORMATION**





Not
      Applicable.





**ITEM
      6. EXHIBITS**




**Exhibits**




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




31




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, 2007
            By:
            /s/
              Richard E. GathrightRichard
              E. GathrightChief
              Executive Officer and President




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




32