Edgar Filing: FUELNATION INC

Fuelnation

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

^{_______________}

FORM 10-Q

______________

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

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

For the transition period from: _____________ to _____________

FUELNATIONä INC.

(Name of small issuer in its Charter)

_____________


Florida	65-0827283
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

999 Stinson Way, Suite 301

West Palm Beach, Florida 33411

(Address of principal executive offices)

561-383-8212

(Issuer's telephone number, including area code)

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

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

Common Stock, $.01 par value

Class A Convertible Preferred Stock, $.01 par value


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.				ý	Yes	¨	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The Registrant’s common stock outstanding as of September 2, 2008, 858,271,380 was shares.

FUELNATION, INC.

[A DEVELOPMENT STAGE COMPANY]

CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our audited Financial Statements and notes thereto included herein. Certain statements in this Registration Statement on Form 10 (“Registration Statement”), other than purely historical information, include estimates, projections, statements relating to the FuelNation’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.

FuelNation, Inc. is referred to herein as “we”, “our” or “us”.

iii

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

FUELNATION INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS


	June 30, 2008			December 31, 2007
	[Unaudited]			[Audited]
ASSETS

Cash	$	951		$	—
Property and equipment, net of accumulated depreciation of $276,844		—			—
Other receivables- current		161,501			166,148
Total Assets	$	162,452		$	166,148

LIABILITIES AND STOCKHOLDERS' [DEFICIT]

CURRENT LIABILITIES:
Cash overdraft	$	—		$	1,162
Accounts payable		1,399,476			1,399,475
Accrued Liabilities		826,194			643,964
Payroll and Taxes Payable		2,312,374			2,297,469
Due to Affiliates		2,873,415			2,732,379
Note payable		790,000			100,000
Other Payables		148,102			150,102

Total Current Liabilities		8,349,561			7,324,551

Commitments and Contingencies		—			—


STOCKHOLDERS' EQUITY [DEFICIT]:

Preferred Stock, $.01 par value, 5,000,000 shares authorized; 7,369 and 29,286 issued and outstanding at June 30, 2008 and December 31, 2007 respectively		74			293
Common Stock, $.01 par value, 1,500,000,000 shares authorized; 681,471,772 and 144,143,148 issued and outstanding at June 30, 2008 and December 31, 2007 respectively		6,814,718			1,441,431
Additional paid-in capital		42,520,290			46,562,823
(Deficit) Accumulated in the Development Stage		(57,522,191	)		(55,162,950	)
Total Stockholders' [Deficit]		(8,187,109	)		(7,158,403	)

Total Liabilities and Stockholders' [Deficit]	$	162,452		$	166,148

The accompanying notes are an integral part of these financial statements.

FUELNATION INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,
	2008			2007

Revenue	$	—		$	—

Operating expenses:
Salaries and wages including related taxes		94,732			83,382
Consulting fees		67,346
Consulting fees - related party
Legal and professional		3,426			75,014
Marketing and promotion
Rent		6,496			5,589
Rent - related party
Depreciation		—			—
Other general and administrative expenses		32,587			23,889
Impairment loss on technology
Write down of inventory
Loss - deposits
Financing costs		50,000
Non - cash consulting fees		494,790
Non - cash consulting fees - related party
Non - cash financing costs		423,800
Non - cash general and administrative costs
Non - cash employee compensation
Stock- based compensation expense		47,646			47,646
Fuel oil transportation costs
Research and development cost		—			—
Total operating expenses		1,220,823			235,520

Operating Loss		(1,220,823	)		(235,520	)

Other Income (Expense):
Other (Expense) Income		—			—
Interest expense - related party		(33,026	)		(30,587	)
Interest expense		(22,025	)		(3,000	)
Total other (expense), net		(55,051	)		(33,587	)

Net Loss	$	(1,275,874	)	$	(269,107	)

Basic and Diluted Net Loss per Common Share	$	(0.00	)	$	(0.00	)

Basic and Diluted Weighted Average Common Shares Outstanding		335,651,149			81,447,187

The accompanying notes are an integral part of these financial statements.

FUELNATION INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


							Accumulative in the Development Stage From September 30, 2000 To June 30, 2008




	Six Months Ended June 30,
	2008			2007


Revenue	$	—		$	—		$	—

Operating expenses:
Salaries and wages including related taxes		180,661			183,590			3,939,470
Consulting fees		340,990			75,015			1,344,441
Consulting fees - related party								221,162
Legal and professional		45,576			156,170			1,407,201
Marketing and promotion								512,293
Rent		16,624			21,363			442,147
Rent - related party								45,387
Depreciation		—						276,847
Other general and administrative expenses		357,776			98,456			2,215,871
Impairment loss on technology								1,581,747
Write down of inventory								499,749
Loss - deposits								1,022,500
Financing costs		295,000						465,042
Non - cash consulting fees		494,790						29,810,386
Non - cash consulting fees - related party								3,644,251
Non - cash financing costs		423,800						536,000
Non - cash general and administrative costs								42,000
Non - cash employee compensation								6,962,527
Stock- based compensation expense		95,292			249,674			791,723
Fuel oil transportation costs					357,881			657,881
Research and development cost		—			—			10,000
Total operating expenses		2,250,509			1,142,149			56,428,625

Operating Loss		(2,250,509	)		(1,142,149	)		(56,428,625	)

Other Income (Expense):
Other (Expense) Income		—			1			(694,954	)
Interest expense - related party		(63,180	)		(58,562	)		(264,066	)
Interest expense		(45,550	)		(6,002	)		(134,546	)
Total other (expense), net		(108,730	)		(64,563	)		(1,093,566	)

Net Loss	$	(2,359,239	)	$	(1,206,712	)	$	(57,522,191	)

Basic and Diluted Net Loss per Common Share	$	(0.01	)	$	(0.02	)

Basic and Diluted Weighted Average Common
Shares Outstanding		247,282,033			77,554,693

The accompanying notes are an integral part of these financial statements.

FUELNATION INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


							Accumulative During Development Stage
	Six Months Ended June 30,
	2008			2007

Operating Activities:
Net loss	$	(2,359,239	)	$	(1,206,712	)	$	(57,522,191	)
Adjustments to reconcile net loss to net cash provided by (used) in operating activities:
Depreciation		—						276,847
Write- down of Technology								1,581,747
Write- down of Inventory								499,749
Non- Cash Employee Compensation								6,962,527
Non- Cash Consulting Fees		494,790						29,810,386
Non- Cash Consulting Fees -Related Party								3,644,251
Non- Cash Financing Costs		423,800						536,000
Non- Cash General and Administrative Costs								42,000
Write- Down of Investments								657,686
Write- Down of Deposits								1,022,500
Other		2,152						60,660
Amortization of Discount on Convertible Debt								30,394
Stock based compensation expense		95,292			249,674			791,723
								—
Changes in Assets and Liabilities:
[Increase] Decrease in:
Inventory								(499,748	)
Due from Escrow Accounts								(45,000	)
Due from Affiliates		299,037			445,361			3,062,035
Other		4,647			59,835			(29,676	)

Increase [Decrease] in :
Accounts Payable		—			504,961			1,432,388
Accrued Liabilites		427,228			64,562			1,162,525
Payroll and Taxes Payable		14,905			9,104			2,312,372

Net cash provided by (used) in operating activities		(597,388	)		126,785			(4,210,825	)

Investing Activities:
Payments for Technology		—			—			(544,903	)
Purchase of Fixed Assets		—						(276,846	)
Bond Issuance Deposit								(380,000	)
Refund of Bond Issuance Deposit								50,000
Advances Toward Pending Acquisition								(402,724	)
Cash Received in Acquisition		—			—			1,109
Net cash used in investing activities		—			—			(1,553,364	)

The accompanying notes are an integral part of these financial statements.

FUELNATION INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


							Accumulative During Development State
	Six Months Ended June 30,
	2008			2007
Financing Activities:
Payment for option		—						—
Cash Overdraft		(1,161	)					—
Net Proceeds from issuance of common stock		154,500						4,212,969
Net Proceeds from issuance of preferred stock								610,200
Proceeds from Issuance of Convertible Debt								35,953
Proceeds from Related Party Debt								832,069
Payment of Related Party Debt								(223,705	)
Payment of Convertible Debt								(11,542	)
Exercise of Stock Options								15,000
Debt Restructuring								(255,804	)
Net Proceeds / (Payments) of Loans Payable		445,000			(132,398	)		550,000
Net cash provided by financing activities		598,339			(132,398	)		5,765,140

Net (Decrease) in Cash		951			(5,613	)		951

Cash, Beginning of Period		—			7,186			—

Cash, End of Period	$	951		$	1,573		$	951

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest:	$	6,500		$	2		$	9,222
Cash paid during the period for Income Taxes:	$	—		$	—			—

Supplemental Schedule of Non Cash Investing and Financing Activities:

During the six months ended June 30, 2008 and 2007

During the first quarter of 2008, 75 shares of preferred stock were converted into 12,429,152 shares of common stock based on a coversion rate formula.

During the second quarter of 2008, 21,011 shares of preferred stock were converted into 347,774,072 shares of common stock based on a coversion rate formula.

During the second quarter of 2008, 3,187 shares of preferred stock owned by the CEO of the Company were converted into 52,751,224 shares of common stock based on a coversion rate formula.

During the second quarter of 2008, a total of 49,479,000 shares of common stock valued at $494,790 were issued to various consultants for services performed and has been shown as non -cash consulting fees in the financial statements

During the second quarter of 2008, a total of 42,380,000 shares of common stock valued at $423,800 were issued to various lenders as incentive to loan the Company money and has been shown as non -cash financing costs in the financial statements

During the second quarter of 2008, 215,176 shares of common stock valued at $2,152 were issued as a gift to a former employee and has been shown as non -cash other in the financial statements

The following transactions occurred in 2007:

During the second quarter of 2007, 2,602 shares of preferred stock were converted into 12,708,168 shares of common stock based on a conversion rate formula.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

[1]

Description of Business

Organization - FuelNation, Inc. was organized under the laws of the State of Florida on July 6, 1993 under the name International Pizza Corporation. On October 30, 1995, the Company changed its name to QPQ Corporation, and on November 4, 1997, changed its name to Regenesis Holdings, Inc. On October 17, 2000, the Company changed its name to FuelNation, Inc. On January 27, 2003, the Company effected a 150:1 reverse split of its common stock. At the same time, the Company amended its certificate of incorporation authorizing it to issue 105,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 100,000,000 shares are classified as common stock, par value $.01. On June 15, 2005, the Company effected a 900 percent stock dividend in the form of a 10-for-1 forward split of FuelNation's common stock to holders of record June 3, 2005 payable June 17, 2005. On August 15, 2007 the Company amended its certificate of incorporation authorizing it to issue 505,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 500,000,000 shares are classified as common stock, par value $.01. On March 20, 2008 the Company’s Articles of Incorporation were amended to increase the Company’s authorized shares of common stock from 500,000,000 to 1,500,000,000.

Description of Development Stage Activities - FuelNation, Inc. [the "Company" or "FuelNation"], a Florida corporation, located in West Palm Beach, Florida has been in the development stage since its reorganization on October 13, 2000. The Company has continuously worked on plans to build travel centers from 2000 to the present, initially in the state of Florida, followed by additional locations in other key states. Getting the approvals and permitting for the first couple of travel centers are very capital intensive and time consuming. In addition, the Company has also been engaged in the development of providing real-time e-commerce communications in the petroleum marketing and energy services industry from 2000 to 2003. Currently, the travel centers and real-time-e-commerce have been re-prioritized with generating income from the resale of petroleum products and crude oil, acquisition of storage facilities and transportation infrastructure in order to fund future development for the company. Extensive reorganizing and restructuring, as well as, seeking business procurement opportunities have taken place to keep the company as a going concern and to execute our plan of operation. Our business operations principally have been the transportation of petroleum products from Iraq to other countries located in the Arabian Gulf and negotiating agreements for purchase, transportation, storage and resale of petroleum products and crude oil.

Since the establishment of our subsidiaries The Company conducts all of its operations through the following operating subsidiaries, which are referred to as the "Operating Subsidiaries":

Leman Energy Trading, Inc. a Panamanian company incorporated on August 31, 2004, owned 100% by FuelNation Inc. Leman has signed several contracts in Iraq for the purchase and transportation of Petroleum Products;

FuelNation Government Services LLC, a Florida limited liability company, incorporated on March, 22, 2006 owned 100% by FuelNation Inc. The government Services division establishes joint ventures with governments for purchase, transportation, storage and resale of petroleum products and crude oil., which allows us to cooperate with the local government and share profits and opportunities in their regions;

FN Capital Services LLC, a Florida limited liability company, Incorporated on March 29, 2006 owned 100% by FuelNation Inc. This company was established to secure financing and support for the subsidiaries of FuelNation Inc;

FuelNation Antigua & Barbuda Ltd., an Antigua & Barbuda company, incorporated on September 4, 2006 owned 50% by FuelNation and 50% by the Antigua & Barbuda Government. This company is established for purchase, transportation, storage and resale of petroleum products and crude oil;

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[1]

Description of Business-Continued

VNT Fuel Energy Cyprus Trading Limited (“VNT”), a Cyprus corporation, incorporated on April 20, 2006 owned 100% by FuelNation Inc. This company was formed primarily to hold the shares of Nika Oil Limited and seek additional acquisition opportunities in Russia and the former CIS and Baltic States;

Nika Oil Limited, a Russian limited Liability Company, incorporated on March 8, 2007 owned 30% VNT Fuel Energy Cyprus Trading Limited and 70% by Russian Nationals. This company was established for resale of petroleum products and crude oil, acquisition of storage facilities and transportation infrastructure principally in Russia and the former CIS and Baltic States.

Reorganization - The financial statements give effect to the acquisition agreement [the "agreement"] of FuelNation, Inc. [formerly Regenesis Holdings, Inc. ["Regenesis"] with Triad Petroleum, LLC ["Triad"]. The closing date of the agreement was October 13, 2000, however, for accounting purposes the transaction is treated as being effective September 30, 2000. In connection with the agreement, Regenesis issued 626,667 shares of common stock and 33,333 shares of newly designated Series D preferred stock, convertible into 333,333 shares of common stock to the members of Triad. As a result of the agreement, the members of Triad will own approximately 96% of the outstanding common stock of Regenesis. For accounting purposes, the agreement is being recorded as a recapitalization with the members of Triad as the acquirers. The 626,667 shares of common stock and 33,333 shares of Series D preferred stock are shown as outstanding for all periods presented in the same manner as for a stock split. In November 2000, the 33,333 shares of Series D preferred stock were converted into 333,333 shares of common stock. The members of Triad relinquished their entire rights and ownership in the technology of the proprietary computer and software system [the "Technology"] in exchange for such shares. The financial statements of the Company reflect the results of operations of the development stage operations of the Technology acquired from Triad and Regenesis from October 13, 2000. The financial statements prior to October 13, 2000 reflect the development stage operations of the Technology acquired from Triad. Pro forma information on this transaction is not presented as, at the date of this transaction, Regenesis is considered a public shell and accordingly, the transaction will not be considered a business combination. Concurrent with the transaction, Regenesis Holdings, Inc. changed its name to FuelNation, Inc. No adjustment of assets to "fair value" has been recorded.

Basis of Presentation

The consolidated financial statements include the financial position of FuelNation Inc, its consolidated wholly-owned subsidiaries, and certain entities requiring consolidation in accordance with FIN No 46, “Consolidation of Variable Interest Entities.”

Significant inter-company transactions have been eliminated.

[2]

Summary of Significant Accounting Policies

The accounting policies followed by the Company are set forth in Note [2] to the Company’s financial statements in the December 31, 2007 Form 10-KSB

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 did not have a material effect on the Company’s financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007. The Company is currently evaluating the effect, if any, of SFAS 157 on the Company’s consolidated financial statements.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[2]

Summary of Significant Accounting Policies-Continued

Recent Accounting Pronouncements-Continued

In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the "fair value option"). A business entity shall report unrealized gains and losses on items by which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, "Fair Value Measurements". The Company does not expect the adoption of SFAS No. 159 to have a material effect on its financial statements

In December 2007, the FASB issued SFAS No. 160, '“Noncontroling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the following changes. The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent's equity. The amount of consolidated net income attributable to the parent and to the noncontroling interest be dearly identified and presented on the face of the consolidated statement of income. When a subsidiary is deconsolidated, any retained noncontroling equity investment in the former subsidiary is initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontroling equity investment rather than the carrying amount of that retained investment and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontroling owners. The changes to current practice resulting from the application of SFAS No. 160 is effective for financial statements issued for fiscal years beginning alter December 15, 2008, and interim periods within those fiscal years. The adoption of SFAS No. 160 before December 15, 2008 is prohibited. The Company has not evaluated the effect, if any, that SFAS No. 160 will have on its financial statements.

In December 2007, the FASB issued SFAS No. 141(R), 'Business Combinations - Revised,' that improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, this statement establishes principles and requirements how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontroling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The changes to current practice resulting from the application of SFAS No. 141(R) are effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 141(R) before December 15, 2008 is prohibited. The Company does not expect the adoption of SFAS No. 141(R) to have a material effect on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 . SFAS No. 161 gives financial statement users better information about the reporting entity's hedges by providing for qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged, but not required. We do not anticipate the adoption of SFAS No. 161 will have a material effect on the Company’s financial statements.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[3]

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the financial statements, the Company is in the development stage, has a working capital deficiency and has suffered significant losses. These factors, among others, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management plans for the Company to raise capital to fund operations through equity and/or debt financing. It is not possible to predict at this time the success of management's efforts to raise capital.

[4]

Related Party Transactions

The Company has borrowed monies from related parties to fund operations. For the six months ended June 30, 2008 and 2007 the Company borrowed approximately a net amount of $163,234 and $474,515 respectively from the Chief Executive Officer [“CEO”]. At June 30, 2008 and 2007, the balance owed to the [“CEO”] was $2,731,489 and $2,567,296 respectively and is included in Due to Affiliates. Currently, there are no repayment terms for the debt and it is treated as if due on demand. Interest at the rate of 5% per annum is being charged on the amount owed. For the six months ended June 30, 2008 and 2007, interest expense on loans from related parties was $63,180 and $58,562 respectively.

In May 2006, to make payment under a secured promissory note and pledge agreement dated April 15, 2004 to the Department of Treasury, Internal Revenue Service, the CEO converted 511 shares of preferred stock to 1,556,506 shares of common stock (stock certificate #1969), which were pledged as collateral to the Internal Revenue Service, to satisfy outstanding payroll tax liabilities. On May 22, 2006 The company received a letter from the Department of Treasury, Internal Revenue Service, requesting that the common stock be sold and the company was instructed to remit a copy of the sales transaction report along with all sales proceeds using certified funds. As of the date of this report, the stock certificate has not been sold and we have been instructed by the Department of Treasury, Internal Revenue Service to forward the original certificate to their office. Management believes the sale of the common shares should be sufficient to cover the majority or all of the payroll tax liability in the year 2008.

In March 2006, the CEO was issued 10,000 shares of preferred stock as consideration under the non-dilution clause in his employment contract as amended. The company intends to extend the employment agreement and add additional incentives for income and shares of equity based on performance.

In November 2007, the CEO was issued 4,900 shares of preferred stock as consideration under the non-dilution clause in his employment contract as amended.

In November 2007, 14,000,000 shares of common stock were issued to the CEO at an exercise price of $0.01 per share as consideration for accrued compensation.

In June 2008, the CEO converted 3,187 shares of preferred stock into 52,751,224 shares of common stock at the calculated conversion rate.

During 2003, the Company issued 8,000 shares of preferred stock to Alkhalifa petroleum Corp. a company controlled by a director of the Company, Shaikh Isa Mohammed Isa Alkhalifa, in exchange for personally guaranteeing an $8,000,000 bank line of credit on behalf of the Company. The line of credit is to be utilized for future purchases and resale of petroleum products.

During 2006, the 8,000 shares were gifted out to various existing shareholders.

An amount of $769,900 was advanced to Nika oil. Nika Oil Ltd. is a Russian limited liability company and FuelNation Inc. owns a 30% interest in this company. These funds were advanced from FuelNation to pay for acquisition costs of the terminal in the Baltic Sea. The repayment of these funds will take place at the closing of the terminal acquisition, which is schedule by September 2008. No interest has been charged on this outstanding amount. The amount owing has been eliminated on Consolidation of the financial statements [See Basis of Presentation – note 1]

An amount of $128,540 was advanced to Leman Energy, from FuelNation to pay for acquisition costs of the terminal in the Baltic Sea. Leman Energy Trading Inc. is a Panamanian corporation FuelNation Inc. owns a 100% interest in this company. The repayment of these funds will take place at the closing of the terminal acquisition, which is schedule by September 2008. No interest has been charged.. The amount owing has been eliminated on Consolidation of the financial statements [See Basis of Presentation – note 1]

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[6]

Other Receivables

Included in other receivables is an amount of $130,000 owing from First Equity. These monies were advanced from FuelNation to pay for Government costs incurred in Venezuela for financing on behalf of Leman Energy Trading, Inc., Collection procedures are commencing and attempts are being made to collect the full amount of funds owed. Management believes this amount will be fully repaid in 2008.Also included in other receivables is deposits and advances made to employees amounting to $31,501.

[7]

Notes Payable

In 2008 the Company borrowed an additional $200,000, increasing the original loan amount from $100,000 to the new loan amount of $300,000. The note is payable on April 12, 2008 and the total amount of the principal and interest may be paid in cash or shares of FuelNation Inc. Interest on the note is being charged at 12% per annum on the loan amount, and the Company has agreed to give the note holder an equity kicker of 1,000 Series A Preferred Shares of FuelNation, Inc. In the event an additional 30 day extension is requested by the Company to repay the loan, an additional equity kicker of 1,000 Series A Preferred Shares of FuelNation Inc and the same 12% interest per annum will apply. As collateral for the loan, the CEO has pledged 10,000 Series A Preferred Shares of FuelNation Inc. As of June 30, 2008 the principal amount owing was $300,000. For the six months ended June 30, 2008 and 2007 interest expense was $17,000 and $0 respectively. As the repayment date is past due, the note is currently in default.

In January 2008, VNT Fuel Energy Cypress Trading Limited (100% wholly owned by FuelNation Inc) executed a Secured Promissory Note in the sum of $490,000 inclusive of fees of $245,000 and interest, to be repaid on or before April 7,2008. As collateral for the loan, the CEO has pledged 4,900 shares of preferred Series A Shares of FuelNation Inc. Interest on the promissory note is being charged at 18% per annum on the amount owing. At June 30, 2008 the amount owing was $490,000 and for the six months ended June 30, 2008 interest expense was $22,050 As the repayment date is past due, the note is currently in default.

In January 2008, the Company executed a Note Payable for $100,000. The terms and conditions of the note call for unpaid principle and all accrued and unpaid interest to be due and payable on April 10, 2008 and an arrangement fee of $50,000 for a total of $154,500. The principal note, including interest and fees was paid in full in the second quarter of 2008. For the six months ended June 30, 2008 interest expense was $6,500.

[8]

Payroll and Taxes Payable

The Company has primarily funded its payroll costs through borrowing from related parties [See Note 4]. Payroll taxes have become delinquent since the second quarter of 2001. These liabilities through June 30, 2008 amount to approximately $696,000 and in addition we have recorded interest and penalties in the amount of $270,000. In addition the company has recorded a payroll liability for wages owed in the amount of $1,300,000. Penalties [to the maximum limits] and interest will accrue on such payroll tax liabilities, as well as additional payroll tax liabilities incurred subsequent to June 30, 2008, until paid. In 2006, the CEO pledged shares of preferred stock owned by him to the Internal Revenue Service as guarantee for the payment of payroll tax liabilities. The company has retained a Tax attorney to assist in these negotiations with the Internal Revenue Service and believes a resolution will be forth coming in 2008.

[9]

Stockholders' Equity

Capital Stock - On August 15, 2007 the Company amended its certificate of incorporation authorizing it to issue 505,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 500,000,000 shares are classified as common stock, par value $.01. On March 20, 2008 the Company’s Articles of Incorporation were amended to increase the Company’s authorized shares of common stock from 500,000,000 to 1,500,000,000.

Preferred Stock

Up to 30,000 shares of Series A Convertible Preferred Stock has been authorized. The price is $1,000 per share. Each Series A convertible Preferred share is equal to .00255% of the total issued and fully diluted common stock of the Company. Each Preferred share will always maintain a conversion ratio to common stock such that the percentage ownership in the Company represented by one share of Series A Convertible Preferred Stock is

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[9]

Stockholders' Equity-Continued

Preferred Stock-Continued

constant. Noncumulative dividend on the Series A preferred will be at the rate of 8% per share per annum. Dividends will be payable only if, and when declared by the Board of Directors. On June 30, 2008 the company had a total 7,369 Series A convertible Preferred shares issued and outstanding.

During 2007, 3,269 shares of preferred stock were converted into 15,965,796 shares of common stock based on a conversion formulae, of 4,884 shares of common stock issued for every one share of preferred stock converted.

During 2007, 1,500 shares of preferred stock were issued to various individuals for consulting and other services, which resulted in a non-cash charge to operations of $200,000.

In November 2007, the CEO was issued 4,900 shares of preferred stock as consideration under the non-dilution clause in his employment contract as amended.

In the first quarter of 2008, 751 shares of preferred stock were converted into 12,429,152 shares of common stock based on a conversion formulae, of 16,552 shares of common stock issued for every one share of preferred stock converted.

In the second quarter of 2008, 21,011 shares of preferred stock were converted into 347,774,072 shares of common stock based on a conversion formulae, of 16,552 shares of common stock issued for every one share of preferred stock converted.

In June 2008, the CEO converted 3,187 shares of preferred stock into 52,751,224 shares of common stock at the calculated conversion rate.

Common Stock

During 2007, 9,500,000 shares of common stock was issued for $100,000.

During 2007, 33,225,000 shares of common stock were issued to various individuals for consulting and other services, which resulted in a non-cash charge to operations of $996,750.

In November 2007, the CEO was issued 14,000,000 shares of common stock as consideration for accrued compensation at a price of $140,000.

In February 2008, 6,780,000 shares of common stock was issued for $30,000.

In February 2008, 16,000,000 shares of common stock was issued to the CEO at par value.

In June 2008, 9,520,000 shares of common stock was issued for $124,5400.

In June 2008, 49,479,000 shares of common stock were issued to various individuals for consulting and other services, which resulted in a non-cash charge to operations of $494,790.

In June 2008, 42,380,000 shares of common stock were issued to various lenders as incentive to loan the Company money, which resulted in a non-cash charge to operations of $423,800.

In June 2008, 215,176 shares of common stock valued at $2,152 was issued as a gift to a former employee.

See Note 9, (Preferred stock) for additional equity transactions.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[10]

Income Taxes

An analysis of the components of income taxes is as follows:


	Six months ended June 30, 2008		Six months ended June 30, 2007
Current
Federal	$	—	$	—
State	$	—	$	—
TOTALS	$	—	$	—

Deferred:	$	—	$	—
Federal	$	—	$	—
State	$	—	$	—
TOTALS	$	—	$	—

TOTALS	$	—	$	—

Income taxes for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows:


	Six months ended June 30, 2008 (Unaudited)	Six months ended June 30, 2007 (Unaudited)
Computed Federal Statutory Tax Benefit	(34%)	(34%)

Valuation of Temporary Differences	34%	34%
Actual	—	—

The components of the net deferred tax asset and liability are as follows:


	Six months ended June 30, 2008 (Unaudited)			Year ended December 31, 2007
Deferred Tax Asset - Long-Term:
Net Operating Loss Carry forward	$	4,085,000		$	3,592,000
Start-up Costs		5,281,000			4,901,000
Stock Based Compensation		11,482,000			11,445,000
Valuation Allowance		(20,848,000	)		(19,938,000	)
Long-Term Deferred Tax Asset				$	—

Total valuation allowance increased by $910,000 for the six months ended June 30, 2008, and $808,000 and $745,000 in 2007 and 2006, respectively.

At December 31, 2007, the Company had approximately $9,200,000 of federal net operating tax loss carry forwards expiring at various dates through 2022. The Tax Reform Act of 1986 enacted a complex set of rules which limit a company's ability to utilize net operating loss carry forwards and tax credit carry forwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result, the Company's utilization of its net operating loss carry forwards could be significantly limited.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[11]

Stock Options and Warrants

Effective April 18, 2002 [amended December 2, 2002], the Company adopted the 2002 stock option plan [the "Plan"] which provides for the issuance of stock options to key employees and consultants of the Company. Initially, 180,000 shares of common stock were reserved under the Plan. In November 2002, an additional 480,000 shares were registered to be reserved under the Plan, however, due to a lack of authorized shares available only 233,332 shares were reserved under the Plan. In 2004 the remaining 246,668 shares were reserved under the plan. The Plan, which provides for the issuance of both incentive stock options [employees] and non-qualified stock options [employees and consultants], will terminate on July 4, 2010, unless terminated earlier by the Board of Directors.

The terms and conditions of each option granted are determined by a committee consisting of two or more directors, or if no such committee is designated by the Board of Directors, then by the Board of Directors as a whole, except for the pricing of incentive stock options, which is determined using guidelines established in the Internal Revenue Code.

As of June 30, 2008 and December 31, 2007, no options were available to grant under the Plan.

A summary of the changes in outstanding common stock options and warrants is as follows:


	Warrants			Warrants Weighted Average Exercise Price		Options		Options Weighted Average Exercise Price		Options Weighted Average Contract Life
Outstanding – 12/31/05		701,152			$4.31		3,126,696		$0.03
Granted		—					150,000		$0.15
Expired /Forfeited		(710,152	)		$4.31

Outstanding – 12/31/06		—					3,276,696		$0.04
Granted		—					4,000,000		$0.15
Expired /Forfeited		—					—

Outstanding – 12/31/07		—					7,276,696		$0.10		1.61
Exercisable – 12/31/07		—					5,489,188		$0.12		1.41

Outstanding – 06/30/08		—					7,150,000		$0.10		1.61
Exercisable – 06/30/08		—					5,787,486		$0.12		1.41

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[11]

Stock Options and Warrants-Continued

The following table summarizes information about stock options at June 30, 2008:


	Outstanding Stock Options			Exercisable Stock Options
Range of Exercise Price	Numbers	Weighted- Average Contractual Life	Weighted- Average Exercise Price	Number	Weighted- Average Contractual Life	Weighted- Average Exercise Price
$0.03 - $0.03	3,000,000	1.67 Years	$0.03	1,687,486	1.67 Years	$0.03
$0.15 - $0.15	4,150,000	0.75 Years	$0.15	4,410,000	.72 Years	$0.15
	—		—
	—		—
	—		—
TOTALS	7,150,000			5,787,486

Total compensation costs recognized for stock based employee compensation awards was $95,292 and $249,674 for the six months ended June 30, 2008 and 2007, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.


	2007	2006
Black-Scholes Assumptions:

Risk-Free Interest Rate	3.25%	3.25%
Expected Volatility	181.73%	107.91%
Expected Life	2	5
Dividend Yield	0.00%	0.00%

Weighted Average Expected Life :	2007	2006
	Expected Life Years	Expected Life Years

Options Number
3,276,696		3.15
7,276,696	1.61
Weighted Average Fair Value of Options Granted During the Year:	$0.86	$0.64

[12]

Litigation

In the normal course of business, the Company is exposed to a number of other asserted and unasserted potential claims. Management, after review and consultation with counsel, believes it has meritorious defenses and considers that any liabilities from these matters would not materially affect the financial position, liquidity or results of operations of the Company.

FUELNATION, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (CONTINUED)

[13]

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. In assessing the fair value of its cash and cash equivalents, and accounts payables, accrued expenses and short-term debt, management concluded that the carrying amount of these financial instruments approximates fair value because of their short maturities.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes appearing elsewhere in this report.

Critical Accounting Policies

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation allowances for inventory and accounts receivable, and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The SEC suggests that all registrants list their most “critical accounting policies” in Management’s Discussion and Analysis. A critical accounting policy is one which is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of its consolidated financial statements.

These policies include, but are not limited to, the carrying value of the inventory and fixed assets, the life of fixed assets, the expensing of the costs relating to FDA and European Union, Russian and Iraq licensing activities, and the valuation of common stock related to compensation and other services. Complex judgments and estimates underlie these critical accounting policies, such as the estimated life of fixed assets for depreciation purposes, the market valuation of inventory in reporting inventory at the lower of cost or market, dividing consultants’ compensation between expense categories of FDA licensing activities and sales activities, dividing compensation and payments to third parties between cost of goods sold category and general and administrative expense, and the determination of the market value of restricted stock when issued as compensation or as repayment for loans.

For the six months and three months ended June 30, 2008 and 2007 Operations.

The following discussion and analysis of our plan of operation should be read in conjunction with the financial statements and the related notes. This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this document.

We have identified certain policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our report and expected financial results. See the section entitled "Critical Accounting Policies" at the end of this discussion.

OVERVIEW

Our future business operations principally will involve the transportation of petroleum products from Iraq to other countries located in the Arabian Gulf and negotiating agreements for purchase, storage and resale of petroleum products and crude oil.

We have assembled a management team to assist in executing the oil trading in Geneva, Switzerland and a memorandum of understanding to buy the Ventspils Nafta Terminal agreement to buy crude oil in Russia and have it refined for export. Our business plan is contingent upon receiving adequate financing. Our primary needs for cash are for the operation, development, production, exploration and acquisition of undervalued energy assets primarily

in the oil sector in Russia and other countries in the Former Soviet Union and in the Middle East, principally Iraq and for working capital obligations.

OPERATIONAL AND FINANCIAL OBJECTIVES

We plan to acquire undervalued energy assets primarily in the oil sector in Russia and other countries in the Former Soviet Union and in the Middle East, primarily Iraq. Additionally, we will continue our efforts to procure crude oil supply contracts and refined petroleum from Western Siberia, Russia; Middle East and Southeast Asia. These contracts will generally range from one to five years in duration and sometimes longer.

Financial Condition and Changes in Financial Condition

Our continued activities are dependent on obtaining adequate financing. Our financial condition for the six months and three months ended at June 30, 2008, compared with six and three months ended at June 30, 2007, is summarized as follows:

Liquidity and Capital Resources

At June 30, 2008, we had negative working capital of $8,187,109 compared to $6,469,815 at June 30, 2007.

Net cash outflows provided (used) from operating activities was ($597,388) for the six months ended June 30, 2008, compared to $126,785 for the six months ended June 30, 2007. This cash outflow for the six months ended June 30, 2008 is primarily due to the net loss from operations of 2,359,239 which was offset by non-cash consulting fees of $494,790, non cash financing cost $423,800, increase in due from affiliates of $299,037 an increase in accrued liabilities of $427,228. The cash provided from operating activities for June 30 2007. The cash provided from operating activities June 30, 2007 are primarily due to the net loss of operations of $1,206,712 offset by increase in accounts payable of $504,961, increase in due from affiliates of $445,361, stock based compensation expense of $249,674.

Our independent registered public accounting firm has issued a going concern opinion on our audited financial statements for the fiscal year ended December 31, 2007 since we have experienced recurring net losses and at June 30, 2008 have a working capital deficiency. Further, as stated in Note 3 to our consolidated financial statements for the six months ended June 30, 2008, we have experienced significant losses from operations totaling $(2,359,239) and $(1,206,712) for the six months ended June 30, 2008 and 2007, respectively and had an accumulated deficit of $(57,522,191) for the period from our inception to June 30, 2008. We had a stockholders’ deficit for the six months ended June 30, 2008 and 2007 of $(8,187,109) and $(6,469,815), respectively. Our operations have been largely reliant upon loans from our affiliates. At June 30, 2008 and June 30, 2007, we were indebted to our affiliates in the amount of $(2,873,415) and $(2,750,865) respectively, the funds of which have enabled us to continue our operations. Our ability to continue as a going concern is contingent upon our ability to secure additional financing, increase ownership equity, and attain profitable operations. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which we operate.

Results of Operations

We incurred net losses of $(1,275,874) during the quarter ended June 30, 2008, representing an increase of $(1,006,767) over the 2007 quarter. This increase is due to the company using outside consulting and incurring a non-cash consulting expense and non-cash financing costs

An analysis of the major components of the results of operations is as follows:

Revenues

To date the company has not had any revenues and there can be no assurances we will have revenues in the future. In Iraq, we have shipped fuel-oil for third parties and have booked this as a net expense for fuel oil transportation costs at six months ended June 30, 2008 and 2007 of $(0) and $(357,881), respectively. The management and board of directors anticipates these operations in Iraq will commence again in third quarter 2008 and the company will be able to have sustained revenues , however, there can be no assurances the operations in Iraq will be able to re-commence.

Total Costs and Expenses

Total costs and expenses increased by $(1,006,767) for the quarters ended June 30, 2008, from $(269,107) for the comparable 2007 period. Total costs and expenses increased as a result of the company using outside consulting and incurring loan financing costs.

Uncertainties and Trends

RESULTS OF OPERATIONS

We generated no revenues during the six months ended June 30, 2008 and 2007. We will attempt to generate revenues through our crude oil supply agreement with Nika Oil Ltd, where we would begin delivering crude oil to end users. Total operating expenses were $1,220,823 for the quarters ended June 30, 2008, compared to $ 235,520 for the quarters ended June 30, 2007. The expenses incurred during the quarters ended June 30, 2008 arose primarily from salaries and wages, including related payroll expenses ($94,732), legal and professional ($3,426),consulting fees($67,346),financing cost fees ($50,000), non-cash consulting fees($494,790), non-cash financing costs($423,800) and other general and administrative expenses ($32,587). The changes in these expenses in 2008 compared to the same period in 2007, were, increase in consulting fees of ($67,346), increase in finance cost fees ($50,000), increase in non-cash consulting fees($494,790), increase in non-cash financing costs($423,800) and a increase in other general and administrative expenses of ($8,698). Additionally, we incurred interest expense of $55,051 in 2008 compared with interest expense of $33,587 in 2007. As a result, we incurred a net loss of $1,275,874 for the quarters ended June 30, 2008, compared to a Net Loss of $269,107 for the quarters ended June 30, 2007.

PLAN OF OPERATION

We have been a development stage company since October 2000 to present. From October 2000 to May 2005, we attempted to build travel centers in the state of Florida by securing, architectural and engineering drawings, zoning approval, permits, and the investors for the real estate purchase. We also engaged in the development of providing real-time e-commerce communications in the petroleum marketing and energy services industry in six different states and three countries; however, in May 2005, we abandoned this segment of our business plan. Our business focus is now the purchase, transportation, storage and resale of petroleum products and crude oil. In this regard, we are using our contacts in the Middle East for transportation of petroleum products from Iraq to other countries located in the Arabian Gulf and negotiating agreements for purchase, transportation, storage and resale of petroleum products and crude oil. Further, we have tapped our core competencies from partners and management and will partner with the construction and management of state of the art “Green Energy Plants” in the waste to energy business with partners that have over 50 years in the business. Additionally, we have plans to have a minority ownership interest in a oil terminal in Latvia, if we are successful in completing an agreement to do so. We seek to generate income from the resale of petroleum products and crude oil, acquire storage facilities and transportation infrastructure.

During this time of development we devoted most of our efforts to financial planning; raising capital; research and development; establishing sources of supply; contracting to acquire property, plant, equipment, or other operating assets, such as mineral rights; recruiting and training personnel; developing markets; and starting up production.

From July 2008 to year end 2008; we are focusing development efforts on two major project purchases;

VNT, holds the shares of Nika Oil Limited and on October 17, 2007, Nika Oil Ltd. entered into a Memorandum of Understanding with Ventspils NAFTA for the purchase of the Ventspils Nafta Terminal in Ventspils, Latvia. Ventspils Nafta Terminal LTD. is the largest Baltic Sea Region oil and petroleum product transshipment terminal operating in Ventspils port liquid cargo area. This Memorandum of Understanding is non-binding and only reflects the intention of the parties and is subject to an executed agreement. Crude oil and petroleum products are received by pipeline and railways. The tank farm of the enterprise exceeds 1 million cubic meters. Nika Oil, plans to attempt to have the Russian government approve the re-opening of the crude oil pipeline that supplies Ventspils Nafta Terminal from Russia to Latvia. This pipeline was shut down in a dispute between Russia and Latvia in January 2003. It is management’s understanding the agreement to re-open the pipeline is obtainable by third quarter 2008.

We are responsible for arranging the financing of the terminal for our Russian partners. In this regard, we have obtained the services of Visor Capital based in Almaty Kazakhstan to assist with the structured

financing on the purchase. We do not have a written indication of purchase price other than verbal indications from all parties to the transaction during the signing of the Memorandum of Understanding. It is in the best interest of all parties to reach an arrangement that is mutually beneficial since the opening the supply of crude oil through this pipeline benefits all parties involved. Nika Oil has agreed to arrange a substantial supply of Crude oil through the pipeline from the Russian government in order to secure conventional financing from European lenders.

Nika Oil is responsible to provide the oil supply from the Russian government to Ventspils Nafta Terminal in Latvia. Nika Oil has assured our board of directors that the negotiations are ongoing and the agreement to re-open the pipeline is obtainable by third quarter 2008.

In addition to financing the purchase of the terminal we are responsible to open a trade line of credit to purchase crude oil from Russia. This trade line of credit is available through numerous money center banks in Europe and provides for substantial leverage with the crude oil as collateral. We have identified the European banks that will provide our financing and in this regard we are discussing the financial structures available for purchase in third quarter 2008. However, there is no assurance we will be able to obtain any such financing.

The financing of the terminal and all costs associated with closing the transaction should require debt/equity financing in the amount of approximately $350 million USD. The trade line of credit from the money center bank will need to be in an amount equal to the monthly volumes of crude oil purchased by Nika Oil, estimated to be in the monthly amount of $400 Million USD for the first year and then increases each additional year. The financing for the trade line of credit and the terminal purchase are being negotiated with the money center banks, and waiting for the final terms in the contracts for purchase of both the terminal and the crude oil.

We will be a minority shareholder in the terminal and will also participate on all crude oil sales. The pipeline was build to have a maximum capacity of 80 million metric tons annually. It is the estimate of management that pipeline will be capable of handling 20 million metric tons of crude oil without any major upgrades. It is estimated an investment to replace outdated pumping stations will require investment from the owners of the pipeline in order to increase pipeline capacity. During initial meetings these improvements can be made in a matter of 6 months and can bring the capacity closer to the 40-60 million metric ton annual levels if the crude oil production is available.

We believe that conventional financing is available for energy related financing. Although management feels confident the financing will be available for this type of purchase; we still seek investors as needed and warranted, and have discussed the investment opportunity, the expected rate of investor return, anticipated uses of funds, and a payback strategy for some very high net worth companies and individuals.

Our business plan reflects all the information, data and knowledge we have collected to date. Management believes it accurately reflects the intent, rationale, conclusions, assumptions and expectations concerning the business venture for the next five years.

Leman Energy Trading Inc. currently has been negotiating with the Iraq government to secure contracts for the construction of refining equipment to produce gasoline and diesel in Iraq. In addition we are negotiating the installation of a waste to energy plant in Iraq. Emilio Zabaleta our manager of FuelNation Government Services has operated his family company Sefico Inc. www.sefico.com since 1961 and has been in the waste to energy business for the past 47 years. Sefico is providing the technical knowhow, management and licensing for the waste to energy installations. Both the refining and the waste to energy contracts have been awarded to local Iraqi companies and we are negotiating to receive assignment of these contracts.

We have proposed the financing of these projects to be completed by the Iraqi government supplying us Fuel-oil and will resell and use the proceeds to acquire the necessary equipment and installation services in Iraq.

Preliminary approvals have been obtained from the Iraqi Ministry of Oil and we are waiting for the modifications to be accepted by the supplier and the Iraqi Ministry.

The time to needed to design, build and install is in excess of two years of fabrication and installation. The site work and equipment purchase can begin upon approval by all parties to the agreement. Once the contract is agreed upon, the fuel-oil shipments can begin immediately and we can start the purchasing of the equipment for installation.

The opportunities in Iraq are long term in nature, and there will be no immediate benefits. The risks associated with development and employment in Iraq are great, although the rewards can be much greater. We have been very successful in procuring the proper appointments in ministry and negotiating with well established companies and individuals that are native to the country through our manager in Iraq, Dr. Waleed Abdul Malik Alrawi. Our Executive Manager in Iraq: Dr. Waleed Abdul Malek Alrawi, holds a Bachelors Degree and a Masters Degree in Military Science and completed his PHD in Islamic History in December 2004. Dr. Waleed Abdul Malek Alrawi, has maintained several positions in the military for the Iraq Government and recently retired from his position in April 2003 as the Secretary of the Minister of Defense. Dr. Waleed Abdul Malek Alrawi, is currently in fulltime employment and represents FuelNation and its wholly owned subsidiary Leman Energy Trading, Inc. to procure contracts and assist with the redevelopment of Iraq. Managements believes we will be able to secure a successful contract by Year end 2008 in Iraq.

OFF-BALANCE SHEET ARRANGEMENTS

The company is not a party to any off balance sheet financing.

CAPITAL COMMITMENTS

We have committed capital to our activities to acquire a minority interest in the Ventspils Nafta Terminal. This additional capital in the amount of $10,000,000 must be borrowed from investors and deposited into our trading account to purchase crude oil. The terms of this deposit are being negotiated with the investor, and management believes a combination of debt and equity participation will be best suited while the deposit is being used for crude oil purchases. These funds are to be secured from the account deposit and the crude oil purchases providing we reach a successful arrangement from the investor. However, we can give no assurance that we will be successful in securing any debt or equity financing.

Additional capital in the amount of $350,000,000 will need to be raised for the acquisition of the terminal. These funds will be secured by the assets of the projects and the income derived from the asset. We currently are in negotiations with private and institutional lenders, and management believes a combination of debt and equity participation will be required for the investment funds. However, we can give no assurance that we will be successful in securing any debt or equity financing.

LONG-TERM OBLIGATIONS TABLE


	Payments Due By Period
Contractual Obligations	Total	Less Than 1 Year	1-3 years	3-5 Years	More Than 5 Years
Long Term Debt Obligations	—	—	—	—	—
Capital Lease Obligations	—	—	—	—	—
Operating Lease Obligations	—	—	—	—	—
Purchase Obligations	—	—	—	—	—
Other Long Term Liabilities reflected on Balance Sheet under GAAP	—	—	—	—	—
TOTAL	—	—	—	—	—

DATA CENTERS AND NETWORK ACCESS

Our data center in the United States is located at leased facilities at Echosat in Lexington, Kentucky. A data center is a facility containing servers, modem banks, network circuits and other physical equipment necessary to connect users to the Internet. The data center has multiple levels of redundant connectivity to the Internet, back-up power, fire suppression, seismic reinforcement and security surveillance 24 hours a day, 7 days a week. The current base monthly rent is $2,000 per month, on a month to month basis.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting company.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management evaluated, with the participation of its Chief Executive Officer (“CEO”) and acting Chief Financial Officer (“CFO”), the effectiveness of the design/operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2008.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our principal executive officer and our principal financial officer. Based on that evaluation, management concluded that our financial disclosure controls and procedures were effective related to the preparation of the 10-q filing as of June 30, 2008.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2008. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.

Changes in Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting during the three months ended June 30, 2008, that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings other than an arbitration for wrongful termination of a ship charter, which is currently in arbitration in London. The arbitration is: W-O Marine Pte. Ltd v. FuelNation Inc. Leman Energy Trading, Inc., chartered a ship the 28th of October 2006, for a period of six months with a six month renewal at our option, to purchase and transport fuel-oil from Iraq to other countries in the Arabian Gulf. Upon arrival of the chartered ship to the southern port of Khor Al-Zubair in Iraq, the pipeline supplying the ships at the southern port of Khor Al-Zubair was disrupted during the cold weather for a period of approximately 30 to 45 days. and the ship’s crew needed to return to Fujairah, UAE, for supplies and refueling. Upon return to Iraq, we had missed a window to pick up fuel-oil and we waited behind other ships for the pipeline to reopen. Time had lapsed and Leman Energy Trading, Inc. was forced to sublet the ships on short term charters to competitors at a substantial loss transporting fuel-oil from Iraq to Fujairah, UAE. In March 2006, the ship owner wrongfully terminated the charter before expiration and we are currently litigating our losses in the London Arbitration courts. The Arbitrator ruled in favor of FuelNation for the wrongful termination. We are currently arbitrating our claims for losses, and Management believes we should be successful in this arbitration. If successful, we will be entitled to receive approximately $500,000 from W-O Marine.

On November 8, 2006, the SEC instituted an administrative proceeding against us alleging that we had a class of equity securities registered with the SEC, but that we were delinquent in our periodic filings since we last filed our quarterly report for the period ended March 31, 2004. On June 5, 2007, the Securities and Exchange Commission issued an “Order Dismissing Proceeding Based on Lack of Registration” regarding us. The SEC Order dismissing the proceeding against us was based on a motion by the SEC’s Division of Enforcement, which stated that we no longer had any class of securities registered in accordance with Securities and Exchange Act Section 12 and that such proceeding was moot and should be dismissed.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Our operations are subject to federal, state and local laws and regulations. Currently, we are not involved, or the subject of, any pending or existing litigation. (See additional information under the heading “Subsequent events”.)

ITEM 1A.

RISK FACTORS

Not required for smaller reporting company.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On February 14,2008 we sold 80,000 shares of our common stock to Joseph Gorfien at $0.01 per share or an aggregate payment to us of $800.

On February 14,2008 we sold 1,000,000 shares of our common stock to Scott Bader at $0.01 per share or an aggregate payment to us of $10,000.

On February 14,2008 we sold 1,000,000 shares of our common stock to Steve Bader at $0.01 per share or an aggregate payment to us of $10,000.

On February 14,2008 we sold 4,700,000 shares of our common stock to Victor Spektor at $0.01 per share or an aggregate payment to us of $4,700.00.

On February 14, 2008 we issued 8,000,000 shares of our common stock to Christa Salmonson, Custodian in exchange for off-setting the loan account obligating us to pay Christa Salmonson’s Dad, Chris Salmonson our Chief Executive Officer. Each shares was valued at $0.01 or an aggregate of $80,000.

On February 14, 2008 we issued 8,000,000 shares of our common stock to Christian Salmonson, Custodian in exchange for off-setting the loan account obligating us to pay Christa Salmonson’s Dad, Chris Salmonson our Chief Executive Officer. Each shares was valued at $0.01 or an aggregate of $80,000.

On February 22, 2008 David popper converted 220 shares of our preferred shares into 1,074,480 shares of our common stock at the calculated conversion rate

On March 17, 2008 Tower Communication converted 686 shares of our preferred shares into 11,354,672 shares of our common stock at the calculated conversion rate

On April 3, 2008 E Stewart ETAL converted 1,722 shares of our preferred shares into 28,502,544 shares of our common stock at the calculated conversion rate

On April 11, 2008 Condon ETAL converted 376 shares of our preferred shares into 6,223,552 shares of our common stock at the calculated conversion rate

On April 24, 2008 T Cole converted 10 shares of our preferred shares into 165,520 shares of our common stock at the calculated conversion rate

On April 24, 2008 Joe Cole converted 120 shares of our preferred shares into 1,986,240 shares of our common stock at the calculated conversion rate

On April 24, 2008 Steve Rissman converted 555 shares of our preferred shares into 9,186,360 shares of our common stock at the calculated conversion rate

On May 20, 2008 Harold Gelb converted 1,472 shares of our preferred shares into 24,364,544 shares of our common stock at the calculated conversion rate

On May 21, 2008 James Koch converted 34 shares of our preferred shares into 562,768 shares of our common stock at the calculated conversion rate

On May 21, 2008 Kent Hagood converted 228 shares of our preferred shares into 3,773,856 shares of our common stock at the calculated conversion rate

On June 2, 2008 David Garms converted 119 shares of our preferred shares into 1,969,688 shares of our common stock at the calculated conversion rate

On June 6, 2008 Terry Garms converted 119 shares of our preferred shares into 5,246,984 shares of our common stock at the calculated conversion rate

On June 6, 2008 David Devalk converted 15,149 shares of our preferred shares into 250,746,248 shares of our common stock at the calculated conversion rate

On June 12, 2008 we sold 2,500,000 shares of our common stock to Victor Spektor at $0.007 per share or an aggregate payment to us of $19,000.

On June 12, 2008 we sold 50,000 shares of our common stock to David Fenster at $0.05 per share or an aggregate payment to us of $2,500.

On June 12, 2008 we sold 120,000 shares of our common stock to Almog Veig at $0.05 per share or an aggregate payment to us of $6,000.

On June 12, 2008 we sold 200,000 shares of our common stock to Herbert Miller at $0.05 per share or an aggregate payment to us of $10,000.

On June 12, 2008 we sold 25,000 shares of our common stock to Jerry Carroll at $0.03 per share or an aggregate payment to us of $750.

On June 12, 2008 we sold 75,000 shares of our common stock to Thomas Nelson at $0.02 per share or an aggregate payment to us of $2,250.

On June 12, 2008 we sold 700,000 shares of our common stock to Richard Ahlborn at $0.03 per share or an aggregate payment to us of $21,000.

On June 12, 2008 we sold 250,000 shares of our common stock to Raymond Plevyak at $0.03 per share or an aggregate payment to us of $7,500.

On June 12, 2008 we sold 100,000 shares of our common stock to Mark Steele at $0.03 per share or an aggregate payment to us of $3,000.

On June 12, 2008 we issued 375,000 shares of our common stock to Isa Hishmeh in exchange for consulting services rendered by Isa Hishmeh. Each share of common stock was valued at $0.01 or an aggregate of $3,750.

On June 12, 2008 we issued 500,000 shares of our common stock to William Carey in exchange for energy related consulting services rendered by William Carey. Each share of common stock was valued at $0.01 or an aggregate of $5,000.

On June 12, 2008 we sold 5,000,000 shares of our common stock to Eric Ttee at $0.01 per share or an aggregate payment to us of $50,000.

On June 12, 2008 we issued 1,000,000 shares of our common stock to Peter Gianoukas in exchange for a lending fee related to a loan made by Peter Gianoukas to the Company. Each share of common stock was valued at $0.01 or an aggregate of $10,000.

On June 12, 2008 we sold 500,000 shares of our common stock to Jay Zelesnick at $0.05 per share or an aggregate payment to us of $2,500.

On June 12, 2008 we issued 33,104,000 shares of our common stock to Graham Tanaka in exchange for a lending fee related to a loan made by Graham Tanaka to the Company. Each share of common stock was valued at $0.01 or an aggregate of $331,040.

On June 12, 2008 we issued 33,104,000 shares of our common stock to Alkhalifa Petroleum in exchange for energy related consulting services rendered by Alkhalifa Petroleum. Each share of common stock was valued at $0.01 or an aggregate of $331,040.

On June 12, 2008 Chris Salmonson converted 3,187 shares of our preferred shares into 52,751,224 shares of our common stock at the calculated conversion rate.

On June 12, 2008 we issued 8,276,000 shares of our common stock to Michael Flax in exchange for a lending fee related to a loan made by Michael Flax to the Company. Each share of common stock was valued at $0.01 or an aggregate of $82,760..

On June 12, 2008 we issued 500,000 shares of our common stock to Moore Stephens P.C. in exchange for audit related consulting services rendered by Moore Stephens P.C. Each share of common stock was valued at $0.01 or an aggregate of $5,000.

On June 12, 2008 we issued 15,000,000 shares of our common stock to David Schneider in exchange for energy related consulting services rendered by David Schneider. Each share of common stock was valued at $0.01 or an aggregate of $150,000.

On June 13, 2008 Michael Flax converted 710 shares of our preferred shares into 11,751,920 shares of our common stock at the calculated conversion rate.

On June 20, 2008 Milton and Patricia Scott converted 46 shares of our preferred shares into 761,392 shares of our common stock at the calculated conversion rate.

On June 25, 2008 Antonio Ultimo converted 153 shares of our preferred shares into 2,532,456 shares of our common stock at the calculated conversion rate.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not Applicable

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the year ended December 31, 2007 the following were approved by a majority of our shareholders by written consent:

On August 15, 2007 the Company amended its certificate of incorporation authorizing it to issue 505,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 500,000,000 shares are classified as common stock, par value $.01. (In addition, On March 20, 2008 the Company’s Articles of Incorporation were amended. See Subsequent events below)

ITEM 5.

OTHER INFORMATION

Not Applicable

ITEM 6.

EXHIBITS


Exhibit Number		Description
31.1		Chief Executive Officer and Acting Chief Financial Officer Certification
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 2, 2008.


	FUELNATION INC.
	(Registrant)


	By:	/s/ CHRIS R. SALMONSON
		Chris R. Salmonson,
		President, Chief Executive Officer