**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 December 31, 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
      February 12, 2008 there were 14,556,295 shares of the registrant’s common stock
      outstanding.










**SMF
      ENERGY CORPORATION**




**FORM
      10-Q**




**INDEX**




Form
      10-Q Part and Item No.





Part
                I
            Financial
                Information:Item
                1.
            Condensed
                Unaudited Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of December 31, 2007 (unaudited) and
                June
                30, 2007
            3Condensed
                Unaudited Consolidated Statements of Operations for the three and
                six
                months ended December 31, 2007 and 2006
            4Condensed
                Unaudited Consolidated Statements of Cash Flows for the six months
                ended
                December 31, 2007 and 2006
            5-6Notes
                to Condensed Unaudited Consolidated Financial Statements
            7-16Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            32Item
                4.
            Controls
                and Procedures
            33Part
                II
            Other
                Information:Items
              1. through 6.
            35
                - 37Signatures
            38Certifications
            39
                - 41




2




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




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


**December 31, 2007**
              
              **June 30, 2007****(unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              63
              
              $
              987Accounts
                  receivable, net of allowances of $1,381 and $1,401
              
              
              21,390
              
              
              25,442Inventories,
                  net of reserve of $192 and $238
              
              
              2,142
              
              
              2,283Prepaid
                  expenses and other current assets
              
              
              347
              
              
              471Total
                  current assets
              
              
              23,942
              
              
              29,183Restricted
                  cash
              
              
              520
              
              
              1,145Property
                  and equipment, net of accumulated depreciation of $12,942 and
                  $11,807
              
              
              10,266
              
              
              10,017Identifiable
                  intangible assets, net of accumulated amortization of $870 and
                  $681
              
              
              2,583
              
              
              2,771Goodwill
              
              
              228
              
              
              228Deferred
                  debt costs, net of accumulated amortization of $402 and $1,197
                  and other
                  assets
              
              
              579
              
              
              581Total
                  assets
              
              $
              38,118
              
              $
              43,925**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Line
                  of credit payable
              
              $
              12,947
              
              $
              17,297Promissory
                  notes
              
              
              2,000
              
              
              -Accounts
                  payable
              
              
              6,821
              
              
              7,887Accrued
                  expenses and other liabilities
              
              
              4,713
              
              
              3,831Total
                  current liabilities
              
              
              26,481
              
              
              29,015Long-term
                  liabilities:Promissory
                  notes, net of unamortized debt discount of $98 and $1,027
              
              
              10,511
              
              
              10,250Other
                  long-term liabilities
              
              
              491
              
              
              546Total
                  liabilities
              
              
              37,483
              
              
              39,811ContingenciesShareholders’
                  equity:Common
                  stock, par value $.01 per share; 50,000,000 shares authorized;
                  14,556,295and
                  13,702,426 issued and outstanding at December 31, 2007 and June
                  30, 2007,
                  respectively
              
              
              146
              
              
              137Additional
                  paid-in capital
              
              
              26,538
              
              
              25,021Accumulated
                  deficit
              
              
              (26,049
              )
              
              (21,044
              )Total
                  shareholders’ equity
              
              
              635
              
              
              4,114Total
                  liabilities and shareholders’ equity
              
              $
              38,118
              
              $
              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 December 31,**
                
                **Six Months Ended December 31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Petroleum
                    product sales and service revenues
                
                $
                52,905
                
                $
                48,276
                
                $
                102,094
                
                $
                106,920Petroleum
                    product taxes
                
                
                6,089
                
                
                6,522
                
                
                12,397
                
                
                13,506Total
                    revenues
                
                
                58,994
                
                
                54,798
                
                
                114,491
                
                
                120,426Cost
                    of petroleum product sales and service
                
                
                50,340
                
                
                45,176
                
                
                96,347
                
                
                99,699Petroleum
                    product taxes
                
                
                6,089
                
                
                6,522
                
                
                12,397
                
                
                13,506Total
                    cost of sales
                
                
                56,429
                
                
                51,698
                
                
                108,744
                
                
                113,205Gross
                    profit
                
                
                2,565
                
                
                3,100
                
                
                5,747
                
                
                7,221Selling,
                    general and administrative expenses
                
                
                3,788
                
                
                4,149
                
                
                7,591
                
                
                7,799Operating
                    loss
                
                
                (1,223
                )
                
                (1,049
                )
                
                (1,844
                )
                
                (578
                )Interest
                    expense
                
                
                (782
                )
                
                (835
                )
                
                (1,560
                )
                
                (1,785
                )Interest
                    and other income
                
                
                19
                
                
                (11
                )
                
                40
                
                
                6Loss
                    on extinguishment of promissory notes
                
                
                -
                
                
                -
                
                
                (1,641
                )
                
                -Loss
                    before income taxes
                
                
                (1,986
                )
                
                (1,895
                )
                
                (5,005
                )
                
                (2,357
                )Income
                    tax expense
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    loss
                
                $
                (1,986
                )
                $
                (1,895
                )
                $
                (5,005
                )
                $
                (2,357
                )Basic
                    and diluted net loss per share
                
                $
                (0.14
                )
                $
                (0.18
                )
                $
                (0.35
                )
                $
                (0.22
                )Basic
                    and diluted weighted average commonshares
                    outstanding
                
                
                14,556
                
                
                10,523
                
                
                14,379
                
                
                10,509




**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)***
 **Six Months Ended December 31,****2007**
                
                
                **2006****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss
                
                $
                (5,005
                )
                $
                (2,357
                )Adjustments
                    to reconcile net loss to net cash provided by operating
                    activities:Depreciation
                    and amortization:Cost
                    of sales
                
                
                768
                
                
                880Selling,
                    general and administrative
                
                
                398
                
                
                265Amortization
                    of deferred debt cost
                
                
                130
                
                
                156Amortization
                    of debt discount
                
                
                63
                
                
                294Amortization
                    of intangible assets
                
                
                188
                
                
                187Stock-based
                    compensation expense
                
                
                259
                
                
                151Gain
                    from sale of assets
                
                
                (11
                )
                
                -Inventory
                    reserve
                
                
                (46
                )
                
                -Provision
                    for doubtful accounts
                
                
                237
                
                
                219Non-cash
                    loss on extinguishment of debt
                
                
                1,371
                
                
                -Changes
                    in operating assets and liabilities:Decrease
                    in accounts receivable
                
                
                3,815
                
                
                2,530Decrease
                    in prepaid expenses and other assets
                
                
                124
                
                
                354Decrease
                    in inventories
                
                
                187
                
                
                -Decrease
                    in accounts payable and other liabilities
                
                
                (216
                )
                
                (2,665
                )Net
                    cash provided by operating activities
                
                
                2,262
                
                
                14**CASH
                    FLOWS USED IN INVESTING ACTIVITIES:**Purchases
                    of property and equipment
                
                
                (1,422
                )
                
                (365
                )Proceeds
                    from sale of equipment
                
                
                18
                
                
                -Decrease
                    in restricted cash
                
                
                625
                
                
                -Net
                    cash used in investing activities
                
                
                (779
                )
                
                (365
                )**CASH
                    FLOWS USED IN FINANCING ACTIVITIES:**Proceeds
                    from line of credit
                
                
                119,444
                
                
                126,766Repayments
                    of line of credit
                
                
                (123,794
                )
                
                (129,509
                )Proceeds
                    from issuance of promissory notes
                
                
                7,690
                
                
                -Proceeds
                    from issuance of common stock
                
                
                1,170
                
                
                -Principal
                    payments on promissory notes
                
                
                (6,359
                )
                
                (452
                )Debt
                    issuance costs
                
                
                (457
                )
                
                (44
                )Common
                    stock issuance costs
                
                
                (79
                )
                
                -Capital
                    lease payments
                
                
                (22
                )
                
                (83
                )Net
                    proceeds from exercise of common stock options and warrants
                
                
                -
                
                
                31Net
                    cash used in financing activities
                
                
                (2,407
                )
                
                (3,291
                )NET
                    DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (924
                )
                
                (3,642
                )CASH
                    AND CASH EQUIVALENTS, beginning of period
                
                
                987
                
                
                4,103CASH
                    AND CASH EQUIVALENTS, end of period
                
                $
                63
                
                $
                461
  ****** **(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)**
                
                **Six Months Ended December 31,****2007**
                
                **2006****SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                    paid for interest
                
                $
                1,310
                
                $
                1,091**SUPPLEMENTAL
                    DISCLOSURE OF NON-CASH ACTIVITIES:**Refinancing
                    of August 2003, January 2005, and September 2005 notes into August
                    2007
                    notes
                
                $
                4,918
                
                $
                -Non-cash
                    costs related to issuance of stock, warrants and August 2007
                    notes
                
                $
                134
                
                $
                -Debt
                    discount costs related to issuance of stock, warrants and August
                    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 its customers. In addition, the Company’s fleet of
      special duty tractor-trailer units provides heavy haul transportation services
      over short and long distances to customers requiring the movement of over-sized
      or over-weight equipment and manufactured products .





At
      December 31, 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 and six months ended December 31, 2007 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.





**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 $364,000 and
      $701,000 from amounts previously reported for the three and six months ended
      December 31, 2006, respectively, to reflect this reclassification.


7


**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**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 was effective
      for
      the Company during this first quarter of fiscal 2008. The Company discloses
      its
      conclusions with respect to the effect of the application of FIN No. 48 in
      Note
      14 – 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.




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




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


8


**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




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





During
      the six months ended December 31, 2007, the Company paid down $4.4 million
      on
      its line of credit payable. Total cash and cash availability was $1.8
      million **** and
      $2.8
      million at December 31, 2007 and June 30, 2007, respectively, and was $2.0
      million at February 12, 2008. Total cash and cash availability includes cash
      as
      presented in the Company’s balance sheet and cash available to the Company
      through its line of credit, described in Note 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. Eight pieces of equipment for an aggregate amount of
      $654,000 were delivered in the six months ended December 31, 2007. The remaining
      proceeds of $520,000 remain in restricted cash and continue to be held by the
      indenture trustee at December 31, 2007 pending the delivery of the remaining
      new
      equipment.




**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. Letters of credit
      reduce the maximum amount available for borrowing. Interest is payable monthly
      at prime plus 0.75% (8.0% at December 31, 2007) and outstanding borrowings
      under
      the line are secured by substantially all Company assets other than its
      transportation fleet and related field equipment.





As
      of
      December 31, 2007 and June 30, 2007, the Company had outstanding borrowings
      of $12.9
      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, and letters of credit outstanding at
      December 31, 2007, the Company had $1.8
      million of cash
      availability under the line of credit compared to $1.8 million availability
      at
      June 30, 2007.





The
      Company’s line of credit provides for certain affirmative and negative covenants
      that may limit the total availability based upon the Company’s ability to meet
      these covenants. At September 30, 2007, the financial covenants included a
      minimum availability of $750,000 and an average monthly availability of $2.5
      million, covenant which, if not maintained, would trigger a fixed charge
      coverage ratio of 1.0 to 1.0. Additionally, the Company had a current fiscal
      year capital expenditure limitation of $750,000 without approval from the line
      of credit lender. During the second quarter 2008, the Company and its line
      of
      credit lender amended the loan and security agreement to amend its average
      availability requirements from $2.5 million to $800,000 through January 31,
      2008, increasing thereafter to $1.8 million in February 2008 and to increase
      the
      maximum amount for which letters of credit could be issued from $300,000 to
      $1,000,000. The line of credit agreement was subsequently amended to increase
      the maximum for letters of credit from $1,000,000 to $1,500,000 of which $1.0
      million have been issued as of the date hereof. Additionally, the capital expenditure limitation without lender approval was
      increased to $1.3 million for fiscal 2008.




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 December 31, 2007,
      the Company was in compliance with the requirements of these
      covenants.


9


**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




**8.**
              **CURRENT
                  PROMISSORY NOTES**





On
      November 19, 2007, the Company obtained an aggregate of $2.0 million in
      short-term notes from a small group of individual and institutional investors
      (the “November 2007 Notes”). The proceeds were used for general working capital
      purposes. The Company’s obligations under the November 2007 Notes are unsecured.
      While the November 2007 Notes have a six-month term originally maturing in
      May
      2008, now extended until July 2008, they must be repaid earlier if and to the
      extent that the Company conducts an offering of its equity securities and the
      aggregate net proceeds of the equity offering, together with the net proceeds
      of
      the November 2007 Notes, exceed $3.5 million. The Company incurred $30,000
      in
      issuance costs which are being amortized over the term of the notes. Interest
      on
      the unpaid principal balance of the November 2007 Notes will be paid monthly
      at
      an interest rate of 1.5% per month. The effective yield of these notes is 21.0%.





Each
      of
      the investors of the November 2007 Notes also entered into a subordination
      agreement with the Company and its principal lender, Wachovia Bank, N.A. (the
      “Bank”), subordinating their rights under the notes to the Bank. The
      subordination agreements were required by the terms of the amendment to the
      loan
      and security agreement between the Company and its line of credit lender, dated
      November 21, 2007.




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





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


**December 31,**
              
              **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
                  14.4%including
                  cost of warrants and other debt issue costs.
              
              $
              10,609
              
              $
              -September
                  2005 promissory notes (the “September 2005 Notes”). The notes were
                  refinanced on August 8, 2007.
              
              
              -
              
              
              3,000January
                  2005 promissory notes (the “January 2005 Notes”). The notes were
                  refinanced on August 8, 2007.
              
              
              -
              
              
              4,860August
                  2003 promissory notes (the “August 2003 Notes”). The notes were refinanced
                  on August 8, 2007.
              
              
              -
              
              
              3,417Various
                  capital leases
              
              
              4
              
              
              26Unamortized
                  debt discount
              
              
              (98
              )
              
              (1,027
              )10,515
              
              
              10,276Less:
                  current portion (included in accrued expenses and other current
                  liabilities)
              
              
              (4
              )
              
              (26
              )Long-term
                  debt, net
              
              $
              10,511
              
              $
              10,250




10





**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 their entirety on December 31, 2009,
      including $5.7 million sold to new institutional and private investors and
      $4.9
      million to then current holders of the Company’s secured debt. The Company paid
      a total commission of $400,000 to the placement agent, $94,000 of which was
      paid
      through the issuance of 63,327 shares of the Company’s common stock at the
      offering price of $1.48 per share. For information on the equity securities
      sold, see Note 12 – 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 registered the resale of the shares
      under
      the Securities Act of 1933, as amended, including the shares into which the
      August 2007 Notes may be converted and the shares obtained upon exercise of
      the
      warrants. As a result of the conversion feature, the Company recorded $37,000
      as
      a beneficial conversion feature which is being amortized under the effective
      interest method as a non-cash discount over the respective term of the debt.
      Through December 31, 2007, neither the Company nor the noteholders have granted
      additional conversion rights or exercised any of their existing conversion
      rights, respectively.




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 December
      31, 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 then
      outstanding balances related to the secured promissory notes as long-term debt,
      since they were refinanced with the proceeds from the August 2007 Notes, which
      mature on December 31, 2009.




11




**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 under the effective interest method as non-cash interest expense
      over
      the respective term of the debt issued. These were non-cash discounts related
      to
      the valuation of the common stock warrants issued to the note holders and the
      placement agent in the financing transactions that did not reduce the amount
      of
      principal cash repayments required to be made by the Company. On August 8,
      2007,
      there were unamortized debt discounts of $978,000 which were written-off when
      the Satisfied Notes were redeemed. As a result of the early satisfaction of
      the
      notes, the Company incurred $270,000 as a pre-payment penalty. 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 losses on extinguishment
      of
      debt in our unaudited condensed consolidated results of operations. Partially
      offsetting the losses on extinguishment of debt was a gain on extinguishment
      of
      debt of $50,000 as a result of the excess of the carrying value of the Satisfied
      Notes over the extinguishment price.





In
      connection with the August 2007 Notes, the Company recorded unamortized debt
      discounts of $112,000, to be amortized as non-cash interest expense over the
      term of the notes, related to the valuation of the common stock warrants issued
      to noteholders. Total amortization expense related to all debt discounts were
      $13,000 and $144,000 for the three months ended December 31, 2007 and 2006,
      respectively, and $63,000, and $294,000 for the six months ended December 31,
      2007 and 2006, respectively.




**10.**
                **WARRANTS**




In
      conjunction with **t** he
      issuance of the August 2003, January 2005 and September 2005 Notes described
      in
      Note 9 - Long Term Debt, 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 the February
      2007
      warrants. In August 2007, in conjunction with the sale of promissory notes
      and
      equity, the company issued warrants described below as the August 2007 warrants.
      As of June 30, 2007, all of the Conversion Warrants had been exercised.





There
      was
      no exercise of warrants in the six months ended December 31, 2007.


****


***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 December 31, 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 December 31, 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 December 31, 2007, the warrant holders had a balance
      of
      75,840 warrants available to exercise into common shares.




12




**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 December 31, 2007, these warrants
      remain outstanding.




***August
      2007 Warrants***





In
      conjunction with the August 8, 2007 promissory notes and equity offering,
      further described in Note 9 - Long-Term Debt and Note 12 – Shareholders’
Equity, the Company issued detachable warrants to the noteholders to purchase
      39,528 shares of the Company’s common stock at an exercise price of $1.752 per
      share. In addition, the placement agent received additional warrants to purchase
      39,526 shares of the Company’s common stock at an exercise price of $1.752 per
      share. The August 2007 warrants will terminate on the fourth anniversary of
      the
      offering closing date. The August 2007 warrants also have customary
      anti-dilution and underlying stock registration rights. As of December 31,
      2007,
      these warrants remain outstanding.




**11.**
            **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.





13




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**





The
      net
      loss per share computations for the three months and six months ended December
      31, 2007 and 2006 do not include common stock equivalents that the Company
      had
      outstanding during those periods as they were antidilutive due to the net loss
      incurred. At December 31, 2007, these common stock equivalents outstanding
      consisted of 2,040,202 stock options, 886,941 common stock warrants, and
      3,633,296 promissory note conversion rights, at prices ranging from
      $.67 **** to
      $7.63 **** per
      share. At December 31, 2006, the common stock equivalents outstanding consisted
      of 1,844,502 stock options and 1,310,415 common stock warrants, at prices
      ranging from $.92 **** to
      $7.63 **** per
      share.




**12.**
            **SHAREHOLDERS’
                EQUITY**





As
      discussed in Note 9 – Long-term Debt, 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
      $592,000 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.




The
      following reflects the change in shareholders’ equity for the six months ended
      December 31, 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 warrants from August 2007 offering, net of
                  issuance
                  costs of $99,000
              
              
              9
              
              
              1,258
              
              
              -
              
              
              1,267Stock-based
                  compensation expense
              
              
              -
              
              
              259
              
              
              -
              
              
              259Net
                  loss
              
              
              -
              
              
              -
              
              
              (5,005
              )
              
              (5,005
              )Balance
                  at December 31, 2007
              
              $
              146
              
              $
              26,538
              
              $
              (26,049
              )
              $
              635





14




**SMF
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




During
      the six months ended December 31, 2007, the Company granted 253,000 and 18,000
      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 $1.12. For the six months ended December 31, 2007, there were no stock
      options exercised.




**13.**
            **CONTINGENCIES**





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





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




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 December
      31, 2007. However, based on management’s knowledge at December 31, 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.




**14.**
                **INCOME
                    TAXES**




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





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





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




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




16




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




**Forward
      Looking Statements**





This
      report, including but not limited to this Item 2 and the footnotes to the
      financial statements in Item 1, contains “forward looking statements” within the
      meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”). These statements concern expectations, beliefs, projections,
      future plans and strategies, anticipated events or trends and similar
      expressions concerning matters that are not historical facts. Statements
      preceded by, followed by, or that include the words “believes,” “expects,”
“anticipates,” or similar expressions are generally considered to be
      forward-looking statements.





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




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




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




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




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




The
      forward-looking statements reflect our current view about future events and
      are
      subject to risks, uncertainties and assumptions. We caution readers of this
      report that certain important factors may have affected and could in the future
      affect our actual results and could cause actual results to differ significantly
      from those expressed in any forward-looking statement. In addition to the Risk
      Factors included
      in Part 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
      December 31, 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 three months
      ended December 31, 2007 (the “second quarter of fiscal 2008”) and our execution
      on several core strategies that impacted results of operations:





·
            In
                the second quarter of fiscal 2008, we had a net loss of $1.986 million.
                These results include $963,000 in non-cash charges, such as
                depreciation and amortization of assets, debt costs, debt discounts,
                stock
                based compensation, and provision for doubtful accounts. Additionally
                the
                results include stated interest expense associated with servicing
                of our
                debt of $686,000, legal expenses of $179,000, and non-legal public
                company
                costs of $256,000**,**including audit, director, filing, and other fees .





·
            On
                November 19, 2007, we obtained an aggregate of $2.0 million in short-term
                notes from a small group of individual and institutional investors
                (the
                “November 2007 Notes”). The proceeds were used for general working capital
                purposes.





·
            Escalating
                fuel prices resulting in decreased demand from our existing customers
                have
                continued to impact our results of operations. While fuel price
                fluctuations affect our revenues, our gross profits are generally
                not
                affected by such fluctuations since we were able to pass the increased
                cost of the product on to our customers. However, these historically
                high
                fuel prices are damping the demand for the services and goods provided
                by
                most of the transportation, manufacturing, services and other industries
                that comprise the majority of our customer base and are also raising
                the fuel running costs of our delivery fleet. In addition to negatively
                impacting our profitability, these higher fuel prices have substantially
                increased the amount of short term credit that we need to obtain
                to cover
                the time between our receipt of fuel from the suppliers and our receipt
                of
                payment from our customers. Our higher demand for credit has led
                to
                limitations on the availability of supplier credit and has increased
                our
                borrowing cost.





We
      initially addressed the limitations on supplier credit by obtaining $2.0 million
      in short-term notes from a limited number of investors in November 2007,
      including an agreement to repay the notes with the proceeds of a planned equity
      offering. The recent downturn in the equity markets and the tightening of the
      credit markets from the sub prime debt crisis have significantly delayed our
      efforts to obtain new equity financing in order to pay the November 2007
      investors and provide additional working capital for our operations. As a
      result we have obtained an extension of the maturity date of this debt from
      May
      18, 2008 until July 18, 2008 while we continue to seek replacement financing,
      which may be obtained as part of the financing of one or more new acquisitions.
      While we believe that we will be able to obtain such replacement
      financing or a further extension of the short-term notes, if needed, failure
      to
      do so or to make timely payment of the short-term notes could result in a
      default that could trigger a default in our other debt agreements because of
      cross-default provisions in those agreements.





·
            Increasing
                the overall size of the Company while diversifying the services and
                products we offer to the industry are integral to the execution of
                our
                strategic business plan and critical to the utilization of the
                infrastructure and systems which we now have in place. We believe
                that
                this infrastructure and these systems are today unique in the industry
                and
                give us the ability to rapidly and effectively integrate operations
                and
                gain efficiencies. To this end, we are actively pursuing merger and
                acquisition opportunities and are in discussions with key targets
                which we
                believe would meet our goals. While there can be no assurance that
                we will
                be able to acquire or merge with these targets, we do believe that,
                notwithstanding the current conditions in the credit markets, the
                capital
                necessary to execute this strategy will be available to us, including
                the
                opportunity to raise additional working capital in conjunction with
                these
                transactions.





19


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





·
            The
                net loss from operations for the second quarter of fiscal 2008 was
                $1.986
                million compared to a net loss of $1.895 million for the same period
                in the
                prior year. The primary reasons for the $91,000 increase in the net
                loss
                were a $535,000 decrease in gross profit as a result of the decrease
                in
                demand in the industries and geographic locations we serve, a reduction
                in
                business with net margin contributions below acceptable levels and
                lower
                emergency response revenue. The $535,000 decrease in gross profit
                was
                partially offset by a decrease of $361,000 in selling, general and
                administrative costs, primarily due to the integration of the H&W and
                Shank acquisitions and lower personnel costs stemming from efficiencies
                of
                our new Enterprise Resource Planning (“ERP”) system.




·
            For
                the second quarter of fiscal 2008, the net margin was 16.3 cents
                per
                gallon compared to 16.6 cents per gallon for the same period in the
                prior
                year, primarily due to higher margin emergency response revenue in
                fiscal
                2007.




·
            Earnings
                before interest, taxes, depreciation, amortization, stock-based
                compensation expense, and loss on extinguishment of debt (“EBITDA”), a
                non-GAAP measure, for the second quarter of fiscal 2008 was a loss
                of
                $387,000 compared to a loss of $258,000 for the same period in the
                prior
                year. The primary reason for the $129,000 increase in the EBITDA
                loss was
                the decrease in gross profit offset by the decrease in selling, general
                and administrative costs, 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. We experienced a 15.5% gallon
                reduction in the second quarter of fiscal 2008 when compared to the
                same
                period in the prior year. This volume reduction was primarily due
                to lower
                volume demanded by our existing customers, which we believe stems
                from the
                general economic conditions in the industries and geographic locations
                we
                serve, our customers’ efforts to reduce fuel consumption in light of
                increased fuel prices, and the reduction in business with net margin
                contributions below acceptable
                levels.




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 from our suppliers in order to purchase the most cost
      effective products.




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




20




**Comparison
      of Three Months Ended** **December
      31, 2007 (“second quarter of fiscal 2008”) to Three Months Ended December 31,
      2006 (“second quarter of fiscal 2007”)**




**Revenues**





Revenues
      were $59.0 million in the second quarter of fiscal 2008, as compared to $54.8
      million in the same period of the prior year, an increase of $4.2 million,
      or
      8%, as a result of the increases in prices per gallon of petroleum products.
      Price variances resulted in an increase of $12.6 million in revenues partially
      offset by a $8.4 million decrease in revenues due to a 15% reduction in gallons
      sold during the second quarter of fiscal 2008 when compared to the prior year.
      We believe that the lower volume is the result of the contraction of the
      national economy, particularly as it is impacting the industries and geographic
      locations we serve, and our customers’ efforts to reduce fuel consumption in
      light of substantially higher fuel prices. A portion of the decrease in volume
      is due to our decision to reduce the business with net margin
      contributions below acceptable levels as well as lower emergency response
      services this year.




***Gross
      Profit***





Gross
      profit was $2.6 million in the second quarter of fiscal 2008, as compared to
      $3.1 million in the same period of the prior year, a decrease of $535,000,
      or
      17%. The decrease was primarily due to the decrease in industry demand stemming
      from the contraction of the national economy, reduction in business with net
      margin contributions below acceptable levels, the decrease in emergency response
      business earned in the second quarter of fiscal 2007, all described above.
      The
      net margin per gallon for the second quarters of fiscals 2008 and 2007 was
      16.3
      cents and 16.6 cents, respectively. The decrease in net margin per gallon was
      due to the decrease in higher margin emergency response revenue since the demand
      for these services was greater in fiscal 2007.




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




Selling,
      general and administrative expenses were $3.8 million in the second quarter
      of
      fiscal 2008, as compared to $4.1 million in the same period of the prior year,
      a
      decrease of $361,000, or 9%. The decrease is attributable to the following
      (in
      thousands):




Reduction
                  in acquired SG&A costs associated with H & W and Shank
                  and certain personnel cost, as system efficiencies are
                  gained
            
            $
            (202
            )Non-legal
                public company compliance expense
            
            
            (58
            )Reduction
                  in facilities expenses related to the integration of
                  certain Texas locations
            
            
            (35
            )Increase
                  in SG&A depreciation primarily related to ERP system implementation
            
            
            75Reduction
                due to disaster recovery relocation of systems incurred in prior
                year
            
            
            (70
            )Other,
                net
            
            
            (71
            )Total
                decrease
            
            $
            (361
            )





21




***Interest
      Expense***




Interest
      expense was $782,000 in the second quarter of fiscal 2008, as compared to
      $835,000 in the same period of the prior year, a decrease of $53,000, or 6%.
      The
      decrease was primarily due to lower non-cash interest amortization as a result
      of the refinancing of our long-term debt, since the outstanding secured
      promissory notes issued on August 2003, January 2005 and September 2005 were
      refinanced in August 2007 with new senior secured convertible subordinated
      notes.





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


**Three Months Ended****December 31,****2007**
              
              **2006**Stated
                  Rate Interest Expense:Line
                  of credit
              
              $
              318
              
              $
              269Long
                  term debt
              
              
              354
              
              
              319Other
              
              
              14
              
              
              27Total
                  stated rate interest expense
              
              
              686
              
              
              615Non-Cash
                  Interest Amortization:Amortization
                  of deferred debt costs
              
              
              83
              
              
              76Amortization
                  of debt discount
              
              
              13
              
              
              144Total
                  amortization of interest expense
              
              
              96
              
              
              220Total
                  interest expense
              
              $
              782
              
              $
              835





***Income
      Taxes***




No
      income
      tax expense was recorded for the second 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 $2.0 million in the second quarter of fiscal 2008, as compared to $1.9
      million in the same period in the prior year. The
      $91,000 increase in net loss was primarily due to a $535,000 decrease in gross
      profit as a result of the lower customer demand, reduction in business with
      net
      margin contributions below acceptable levels and the decrease in emergency
      response business earned in the second quarter of fiscal 2007, described above
      in our Business Overview. The decrease in gross profit was partially offset
      by a
      decrease of $361,000 in selling, general and administrative costs primarily
      associated with lower costs as a result of the integration of the H&W and
      Shank acquisitions and personnel savings resulting from our new ERP
      system.




22




***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, so EBITDA as presented by us may not be comparable
      to
      EBITDA presented by other companies.





EBITDA
      was a loss of $387,000
      in the second quarter of fiscal 2008, as compared to a loss of $258,000 in
      the
      same period of the prior year, an increase of $129,000. The increase in the
      EBITDA loss was primarily due to the decrease in industry demand stemming from
      the contraction of the national economy, the reduction in business with net
      margin contributions below acceptable levels, and the decrease in the emergency
      response revenue generated in the second quarter of fiscal 2007, described
      above
      in our Business Overview.




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


**Three Months Ended****December 31,****2007**
              
              **2006**Net
                  loss
              
              $
              (1,986
              )
              $
              (1,895
              )Add
                  back:Interest
                  expense
              
              
              782
              
              
              835Stock-based
                  compensation expense
              
              
              133
              
              
              124Depreciation
                  and amortization expense:Cost
                  of sales
              
              
              380
              
              
              449Selling,
                  general and administrative expenses
              
              
              304
              
              
              229EBITDA
                  loss
              
              $
              (387
              )
              $
              (258
              )




23




**Comparison
      of Six Months Ended** **December
      31, 2007 to Six Months Ended December 31, 2006**




**Revenues**





Revenues
      were $114.5 million in the six months ended December 31, 2007, as compared
      to
      $120.4 million in the same period of the prior year, a decrease of $5.9 million,
      or 5%, primarily as a result of a decrease of 18% in gallons sold. The volume
      reduction caused $21.5 million of the decrease in revenue offset by a positive
      $15.6 million price variance largely due to overall higher market prices of
      petroleum products. The volume reduction was primarily the result of reduced
      demand from our existing customers, which we believe stems from the contraction
      of the national economy, especially as it is impacting the industries we serve,
      and our customers’ efforts to reduce fuel consumption in light of substantially
      higher fuel prices. Revenue also decreased due to the reduction in business
      with
      net margin contributions below acceptable levels, including the curtailment
      in
      the early months of fiscal 2007 of a portion of the fuel transport business.
      Additionally, the decrease in revenues was due to higher emergency response
      revenue earned in fiscal 2007.




***Gross
      Profit***





Gross
      profit was $5.7 million in the six months ended December 31, 2007, as compared
      to $7.2 million in the same period of the prior year, a decrease of $1.5
      million, or 20%. The decrease was primarily due to the decrease in industry
      demand stemming from the contraction of the national economy, the reduction
      in
      business with net margin contributions below acceptable levels, and the decrease
      in emergency response business, described above. The net margin per gallon
      for
      the six months ended December 31, 2007 and 2006 was 17.7 cents and 18.0 cents,
      respectively. The decrease in net margin per gallon was due to the high margin
      emergency response revenue generated in the six months ended December 31, 2006.




24




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




Selling,
      general and administrative expenses were $7.6 million in the six months ended
      December 31, 2007, as compared to $7.8 million in the same period of the prior
      year, a decrease of $208,000, or 3%. The decrease is attributable to the
      following (in thousands):


Reduction
                  in acquired SG&A costs associated with H & W and Shank and
                  reduction of personnel costs as system efficiencies are
                  gained
              
              $
              (625
              )Non-legal
                  public company compliance expense
              
              
              (110
              )Reduction
                  in facilities expenses related to the integration of certain Texas
                  locations
              
              
              (84
              )Corporate
                  infrastructure costs such as, personnel resources, development
                  and
                  implementation of a new fully integrated accounting, operations,
                  internal
                  control and management information system, and ongoing integration
                  costs
              
              
              312Increase
                  in SG&A depreciation primarily related to ERP system
                  Implementation
              
              
              134Employee
                  stock compensation attributable to SFAS No. 123R
              
              
              108Other,
                  net
              
              
              57Total
                  decrease
              
              $
              (208
              )




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 infrastructure development program, the
      majority of the costs were primarily incurred 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 $1.6 million in the six months ended December 31, 2007, as
      compared to $1.8 million in the same period of the prior year, a decrease of
      $225,000, or 13%. The decrease was primarily due to a decrease in non-cash
      amortization expense as a result of the refinancing of our long-term debt,
      as
      the outstanding secured promissory notes issued on August 2003, January 2005
      and
      September 2005 were refinanced in August 2007 with new senior secured
      convertible subordinated notes.




25




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


**Six Months Ended****December 31,****2007**
              
              **2006**Stated
                  Rate Interest Expense:Line
                  of credit
              
              $
              677
              
              $
              606Long
                  term debt
              
              
              656
              
              
              674Other
              
              
              34
              
              
              55Total
                  stated rate interest expense
              
              
              1,367
              
              
              1,335Non-Cash
                  Interest Amortization:Amortization
                  of deferred debt costs
              
              
              130
              
              
              156Amortization
                  of debt discount
              
              
              63
              
              
              294Total
                  amortization of interest expense
              
              
              193
              
              
              450Total
                  interest expense
              
              $
              1,560
              
              $
              1,785




***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,
      partially offset by 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 six months of fiscals 2008 and 2007. The net
      operating loss carryforward at June 30, 2007 was $24.7 million , which
      includes a $2.2 million  net
      operating loss carryforward acquired in connection with the H & W
      acquisition.




***Net
      Loss***




Net
      loss
      was $5.0 million in the six months ended December 31, 2007, as compared to $2.4
      million in the same period in the prior year. The
      $2.6
      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 decrease in industry demand
      stemming from the contraction of the national economy, the reduction in business
      with net margin contributions below acceptable levels, and the decrease in
      emergency response business as described above in our Business Overview.




26




***EBITDA***




EBITDA
      showed a loss of $191,000
      in the six months ended December 31, 2007, as compared to $911,000 in the same
      period of the prior year, a decrease of $1.1 million. The decrease in EBITDA
      was
      primarily due to the decrease in industry demand stemming from the contraction
      of the national economy, the reduction in business with net margin contributions
      below acceptable levels, and the decrease in the emergency response revenue
      generated in the six months ended December 31, 2006, as described above in
      our
      Business Overview.




The
      reconciliation of EBITDA (loss) to net loss for the six months ended December
      31, 2007 and 2006 was as follows (in thousands):


**Six Months Ended****December 31,****2007**
              
              **2006**Net
                  loss
              
              $
              (5,005
              )
              $
              (2,357
              )Add
                  back:Interest
                  expense
              
              
              1,560
              
              
              1,785Stock-based
                  compensation expense
              
              
              259
              
              
              151Depreciation
                  and amortization expense:Cost
                  of sales
              
              
              768
              
              
              880Selling,
                  general and administrative expenses
              
              
              586
              
              
              452Loss
                  on extinguishment of debt
              
              
              1,641
              
              
              -EBITDA
                  (loss)
              
              $
              (191
              )
              $
              911




**CAPITAL
      RESOURCES AND LIQUIDITY**





At
      December 31, 2007, we had total cash and cash availability of $1.8 million,
      which consisted of cash and cash equivalents of $63,000 and additional cash
      availability of approximately $1.8 million through our line of credit. As of
      February 12, 2008, our cash and cash availability was approximately $2.0
      million. We are able to draw on our line of credit on a daily basis subject
      to
      availability and debt covenant requirements.





In
      fiscal
      years 2005 and 2006, we made significant investments in acquiring two new
      companies. We have concentrated our efforts on integrating these acquisitions
      into our existing operations, and 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 six months ended December 31,
      2007, we paid-down $4.4 million on our line of credit.





As
      noted
      above, escalating fuel prices have adversely affected our capital resources.
      Historically, higher fuel costs for operating our own delivery fleet and
      decreased demand for the services and goods provided by most of
      our customer base, and in turn, demand for fuel, had an indirect effect on
      our profitability. However, the recent increases in fuel prices have been
      significant such that they have substantially increased the amount of short
      term
      credit that we need to obtain from our suppliers of fuel. Our higher demand
      for
      credit has led to limitations on the supplier credit available to us and has
      increased our costs of obtaining that credit.





As
      discussed in the Business Overview, we initially addressed the limitations
      on
      supplier credit by obtaining short-term notes from a limited number of investors
      in November 2007, including an agreement to repay the notes with the proceeds
      of
      a planned equity offering. See Adequacy of Capital Resources below for further
      discussion.




27




***Sources
      of Cash***





*Debt
      Financing and Equity Offerings*





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





Interest
      is payable monthly at prime plus 0.75% (8.0% at December 31, 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.





In
      November 2007, we issued two letters of credit for an aggregate amount of $1.0
      million to obtain better purchasing terms and pricing than was then available
      in
      certain markets. The letters of credit expire in November 2008 and no amounts
      have been drawn on them.





As
      of
      December 31, 2007 and June 30, 2007, we had outstanding borrowings of $12.9
      million and
      $17.3 million, respectively, under our $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, and letters of credit outstanding at
      December 31, 2007, we had $1.8
      million of cash
      availability under the line of credit compared to $1.8 million availability
      at
      June 30, 2007.





As
      noted
      above, on November 19, 2007, we obtained an aggregate of $2.0 million in
      short-term notes from a small group of individual and institutional investors
      (the “November 2007 Notes”). The proceeds were used for general working capital
      purposes. The Company’s obligations under the November 2007 Notes are unsecured.
      While the November 2007 Notes mature in July 2008, they must be repaid earlier
      if and to the extent that the Company conducts an offering of its equity
      securities and the aggregate net proceeds of the equity offering, together
      with
      the net proceeds of the November 2007 Notes, exceed $3.5 million. We incurred
      $30,000 in issuance costs which are being amortized over the term of the notes.
      Interest on the unpaid principal balance of the November 2007 Notes will be
      paid
      monthly at an interest rate of 1.5% per month.





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. As a result of this transaction, we recognized $1.6 million in loss
      on
      extinguishment of debt. The loss was the result of the write-off of unamortized
      debt discounts of $978,000, **** the
      write-off of debt costs of $443,000, a pre-payment penalty of $270,000, which
      was incurred due to the satisfaction of the notes prior to their maturity dates,
      partially offset by a gain of $50,000 due to the excess of the carrying value
      of
      the notes over the extinguishment price.





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.




28




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




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





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




***Cash
      Flows***





During
      the six months ended December 31, 2007 and 2006, cash and cash equivalents
      decreased $924,000 and $3.6 million, respectively.





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


**Six Months Ended****December 31,****2007**
                
                **2006**Proceeds
                    from issuance of promissory notes
                
                $
                7,690
                
                $
                -Proceeds
                    from issuance of common stock
                
                
                1,170
                
                
                -Proceeds
                    from exercise of common stock options and warrants
                
                
                -
                
                
                31Cash
                    provided by operating activities
                
                
                2,262
                
                
                14Decrease
                    in restricted cash
                
                
                625
                
                
                -Proceeds
                    from sale of equipment
                
                
                18
                
                
                -$
                11,765
                
                $
                45




29




We
      used
      cash primarily for (in thousands):


**Six Months Ended****December 31,****2007**
              
              **2006**Principal
                  payments on promissory notes
              
              $
              6,359
              
              $
              452Net
                  payments on line of credit payable
              
              
              4,350
              
              
              2,743Purchases
                  of property and equipment
              
              
              1,422
              
              
              365Payments
                  of debt and common stock issuance costs
              
              
              536
              
              
              44Capital
                  lease payments
              
              
              22
              
              
              83$
              12,689
              
              $
              3,687Net
                  change in cash and cash equivalents
              
              $
              (924
              )
              $
              (3,642
              )


As
      of
      December 31, 2007, we had $12.9 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 six months ended December 31,
      2007
      include the cumulative activity of the daily borrowings and repayments, $119.4
      million and $123.8 million, respectively, under the line of credit. The
      availability under the line of credit at December 31, 2007 amounted to $1.8
      million. The net cash borrowings from, or repayments of, the line of credit
      during the six months ended December 31, 2007, respectively, have been included
      as sources or uses of cash in the tables above.




*Adequacy
      of Capital Resources*





Our
      liquidity and ability to meet financial obligations is dependent on, among
      other
      things, the generation of cash flow from 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 and our short term unsecured
      promissory notes.




30





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





Although
      various factors could negatively impact our access to supplier credit terms
      and
      our cash available under our line of credit, including but not limited to
      uncollected accounts receivable, operating losses, delays in collections from
      customers, higher operating expenses or other increases in cash expenditures,
      we
      believe that we will be able to maintain or obtain adequate short term credit
      from our suppliers in all of the markets we serve, or make other financing
      arrangements in those markets where supplier credit is limited, and that our
      cash available under our bank line of credit will provide sufficient working
      capital to maintain our business until the maturity of the November 2007 Notes
      which has been extended until July 18, 2008. If we cannot repay those notes
      or
      extend them until we have obtained replacement capital, we may be in default.
      Such a default could result in a default in our line of credit facility because
      of cross-default provisions in that loan agreement. Historically, the Company
      has been able to renew the line of credit and will be addressing its renewal
      prior to its maturity in June 2008, although there can be no assurance that
      the
      renewal will be on acceptable terms.





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




***Off-Balance
      Sheet Arrangements***




At
      December 31, 2007, we do not have any material off-balance sheet
      arrangements.




***Recent
      Accounting Pronouncements***





See
      notes
      4 and 14 to the financial statements included in Part I of this
      Report.




31




***Critical
      Accounting Policies***




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




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





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





Our
      exposure to market risk related to fluctuating interest rates is associated
      with
      variable rate debt outstanding to finance working 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 six months ended December 31,
      2007 was $677,000, an increase of $71,000 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
      November 19, 2007, the Company issued $2.0 million in short-term promissory
      notes from a small group of individual and institutional investors. The
      proceeds were used for general working capital purposes. Interest on the unpaid
      principal balance of these notes will be paid monthly at an interest rate of
      1.5% per month, and the notes have a six-month term, which was extended until
      July 2008.





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
      December 31, 2007, approximated the outstanding principal amount of $12.6
      million.





As
      noted
      above, escalating fuel prices have adversely affected our capital resources.
      Historically, higher fuel costs for operating our own delivery fleet and
      decreased demand for the services and goods provided by most of
      our customer base, and in turn, demand for fuel, had an indirect effect on
      our profitability. However, the recent increases in fuel prices have been
      significant such that they have substantially increased the amount of short
      term
      credit that we need to obtain from our suppliers of fuel. Our higher demand
      for
      credit has led to limitations on the supplier credit available to us and has
      increased our costs of obtaining that credit.




32




We
      initially addressed the limitations on supplier credit by obtaining six-month
      short-term notes from a limited number of investors in November 2007, including
      an agreement to repay the notes with the proceeds of a planned equity offering.
      The recent downturn in the equity markets and the tightening of the credit
      markets from the sub prime debt crisis have significantly delayed our efforts
      to
      obtain new equity financing in order to pay the November 2007 investors and
      provide additional working capital for the Company’s operations. As a result, we
      have extended this debt until July 18, 2008 while we continue to seek
      replacement financing, which may be obtained as part of the financing of one
      or
      more new acquisitions. While the Company believes that it will be able to obtain
      such replacement financing or a further extension of the short-term notes,
      if
      needed, its failure to do so might result in a default which could trigger
      a
      default in our line of credit facility because of cross-default provisions
      in
      that agreement.




**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 December 31, 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.




*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 December
      31, 2007 that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





33




*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.





34


**PART
      II. Other Information**





**ITEM
              1.**
            **LEGAL
                PROCEEDINGS**





Not
      applicable.




**ITEM
              1A.**
            **RISK
                FACTORS**




The
      following risk factors should be considered in addition to those reported in
      our
      Form 10-K for the year ended June 30, 2007:





***Capital
      Resources--Limitations on Supplier Credit and on Ability to Repay Short-Term
      Debt .*** Recently,
      higher fuel prices have substantially increased the amount of short term credit
      that we need to obtain to cover the time between our receipt of fuel from the
      suppliers and our receipt of payment from our customers. Our higher demand
      for
      credit has led to limitations on the availability of supplier credit and has
      increased our borrowing cost. We have addressed the limitations on supplier
      credit by obtaining $2 million in short-term notes from a limited number of
      investors in November 2007, including an agreement to repay the notes with
      the
      proceeds of a planned equity offering. The recent downturn in the equity markets
      and the tightening of the credit markets from the sub prime debt crisis have
      significantly delayed our efforts to obtain new equity financing to pay the
      November 2007 investors and provide additional working capital for the Company’s
      operations. As a result, we have obtained an extension of this debt until July
      18, 2008 maturity while we continue to seek replacement financing, which may
      be
      obtained as part of the financing of one or more new acquisitions. While the
      Company believes that it will be able to obtain new equity capital or other
      funding to repay the short-term notes as extended, it’s a failure to do so or to
      obtain a further extension of the short-term notes could result in a default
      on
      those notes, which could in turn trigger a default on our debt agreements
      because of cross-default provisions in those agreements.





***Potential
      Delisting of Common Stock from Nasdaq.*** On
      December 28, 2007, the Nasdaq Stock Market notified the Company that the minimum
      closing bid price of the Company’s common stock had fallen below $1.00 for 30
      consecutive trading days and the Company was therefore not in compliance with
      Nasdaq Marketplace Rule 4310(c)(4). In accordance with the Nasdaq Marketplace
      Rule 4310(c)(8)(D), the Company has been provided a compliance period of 180
      calendar days, or until June 25, 2008, to regain compliance. While the
      Company cannot control the trading prices of its stock in the market, there
      are
      various steps that can be taken by an issuer to alleviate a low stock price,
      including but not limited to a reverse stock split. In addition, the Company
      may
      not otherwise meet the requirements for continued listing on the Nasdaq Capital
      Market. In particular, Nasdaq Marketplace Rule 4310 provides that, for continued
      listing, the issuer must maintain either
      (A) stockholders' equity of $2.5 million; or
      (B) market
      value of listed securities of $35 million; or (C) net
      income from continuing operations of $500,000 in the most recently completed
      fiscal year or in two of the last three most recently completed fiscal years.
      Because (a) the market value of the Company’s common stock is currently less
      than $10 million, (b) the Company not had net income from operation for two
      of
      its last three fiscal years, and (c) the Company’s stockholders’ equity as of
      December 31, 2007 was $635,000, $1.9 million below the $2.5 million minimum,
      the
      Company does not otherwise qualify for continued listing on Nasdaq. As a result,
      the Company expects to receive an additional notice from Nasdaq concerning
      its
      noncompliance with the stockholders’ equity requirement. While the Company
      presently intends to raise sufficient new equity capital to raise its
      stockholders’ equity above $2.5 million and thereafter to maintain stockholders’
equity at an amount equal to or greater than that amount, there is no assurance
      that it will be successful in doing so. The Company is actively considering
      all
      possible means to retain its Nasdaq listing, which it considers a valuable
      source of liquidity for its shareholders but there is no assurance that it
      will
      be successful in doing so.





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





Not
      Applicable.





35




**ITEM
              3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**





Not
      Applicable .





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





(a)
            Our
                Annual Meeting of Stockholders was held on December 7,
                2007.




(b)
            The
                Annual Meeting involved the re-election of our board of directors:
                Wendell
                R. Beard, Richard E. Gathright, Steven R. Goldberg, Larry S. Mulkey,
                C.
                Rodney O’Connor,
                Robert S. Pico, and Nat Moore.




(c)
            At
                the Annual Meeting, stockholders voted on the following
                matters:




Election
      of Directors




Votes For
            
            Votes WithheldWendell
                R. Beard
            
            
            10,160,039
            
            
            485,312Richard
                E. Gathright
            
            
            10,191,039
            
            
            454,312Steven
                R. Goldberg
            
            
            10,232,939
            
            
            412,412Larry
                S. Mulkey
            
            
            10,228,139
            
            
            417,212C.
                Rodney O’Connor
            
            
            10,168,738
            
            
            476,613Robert
                S. Picow
            
            
            10,218,939
            
            
            426,412Nat
                Moore
            
            
            10,200,638
            
            
            444,713




Ratification
      of Grant Thornton LLP as independent audit firm




Votes
              For
            
            Votes
              Against
            
            Votes
              Abstain10,144,232
            
            346,417
            
            154,702




(d)        
      Not applicable.




36




**ITEM
              5.**
            **OTHER
                INFORMATION**





Not
      Applicable.





**ITEM
              6.**
            **EXHIBITS**




**Exhibits**





Exhibit No.
            
            Description10.1
            
            Form
                of Thirteenth Amendment to Loan and Security Agreement dated February
                8,
                200810.2
            
            Form
                of Allonge –
                Amendment to Promissory Note dated November 19,
                200731.1
            
            Certificate
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certificate
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certificate
                of Chief Executive Officer, Chief Financial Officer pursuant to Section
                906 of the Sarbanes-Oxley Act of
                2002





37


**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 CORPORATIONFebruary
                14, 2008
            By:
            /s/
                Richard E. GathrightRichard
                E. GathrightChief
                Executive Officer and PresidentBy:
            /s/
                Michael S. ShoreMichael
                S. ShoreChief
                Financial Officer and Senior Vice
                President




38