U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)

|X|   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

                  For the quarterly period ended September 30, 2004
                                                 ------------------

|_|   Transition report under Section 13 or 15(d) of the Exchange Act of 1934

             For the transition period from __________ to __________

                          Commission file number 1-9224

                                 CNE GROUP, INC.
                                 ---------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)

                DELAWARE                              56-2346563
                --------                              ----------
   (State or Other Jurisdiction of                (I.R.S. Employer
    Incorporation or Organization)               Identification No.)

              200 West 57th Street, Suite 507, New York, N.Y. 10019
              -----------------------------------------------------
                    (Address of Principal Executive Offices)

                                  212-977-2200
                                  ------------
                (Issuer's Telephone Number, Including Area Code)

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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 |_|

   The number of shares outstanding of each of the issuer's classes of common
                   equity, as of the latest practicable date.

                  Class                    Outstanding at October 31, 2004
                  -----                    -------------------------------

     Common stock - par value $.00001             10,790,915 shares
     --------------------------------             -----------------

<PAGE>

                                     PART I

                              FINANCIAL INFORMATION

Item l.     Financial Statements.

            The following  consolidated  financial statements of CNE Group, Inc.
            and subsidiaries  (collectively referred to as the "Company," unless
            the context requires  otherwise) are prepared in accordance with the
            rules and regulations of the Securities and Exchange  Commission for
            Form  10-QSB  and  reflect  all  adjustments  (consisting  of normal
            recurring  accruals)  and  disclosures  which,  in  the  opinion  of
            management,  are necessary  for a fair  statement of results for the
            interim  periods  presented.  It is suggested  that these  financial
            statements be read in conjunction with the financial  statements and
            notes thereto included in the Company's Annual Report on Form 10-KSB
            for the year  ended  December  31,  2003,  which was filed  with the
            Securities and Exchange Commission.

            The  results  of  operations  for the  three and nine  months  ended
            September 30, 2004 are not necessarily  indicative of the results to
            be expected for the entire fiscal year.


                                        1
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                           September 30,      December 31,
                                                               2004               2003
                                                           -------------      ------------
                                                            (Unaudited)
<S>                                                        <C>                <C>
ASSETS

Current:
   Cash and cash equivalents                               $     51,702       $    460,832
   Accounts receivable, net of allowance for doubtful
      accounts of $64,707 in 2004 and $51,500 in 2003           152,902            208,358
   Inventory                                                    356,158            246,719
   Other                                                         13,806             27,840
                                                           ------------       ------------
      Total current assets                                      574,568            943,749
Fixed assets, net                                               417,497            447,579
Intellectual property rights, net                             1,390,247          1,475,145
Goodwill                                                      7,285,894          7,285,894
Other assets                                                     21,962             18,961
                                                           ------------       ------------
           Total assets                                    $  9,690,168       $ 10,171,328
                                                           ============       ============

LIABILITIES

Current:
   Accounts payable and accrued expenses                   $  1,343,772       $  1,030,203
   Short-term credit arrangements                                86,365            210,093
   Notes payable                                                639,318            146,988
   Subordinated notes payable                                   941,747                 --
   Debenture payable                                            100,000            100,000
                                                           ------------       ------------
      Total current liabilities                               3,111,202          1,487,284
Notes payable, net of current portion                            29,060            326,045
Subordinated notes payable                                           --          1,767,000
Deferred revenue                                                 16,705             23,620
Deferred grant revenue                                          300,000            300,000
                                                           ------------       ------------
        Total liabilities                                     3,456,967          3,903,949
                                                           ------------       ------------

Commitments and contingencies (Note I)

STOCKHOLDERS' EQUITY

Preferred stock (Note D)                                            134                124
Common stock (Note E)                                               121                101
Paid-in surplus                                              29,919,185         28,258,215
Accumulated deficit                                         (20,813,139)       (19,117,961)
                                                           ------------       ------------
                                                              9,106,301          9,140,479
Less treasury stock, at cost - 1,238,656 shares              (2,873,100)        (2,873,100)
                                                           ------------       ------------
        Total stockholders' equity                            6,233,201          6,267,379
                                                           ------------       ------------
           Total liabilities and stockholders' equity      $  9,690,168       $ 10,171,328
                                                           ============       ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                        2
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                       Three Months                        Nine Months
                                                    Ended September 30,                Ended September 30,
                                              -----------------------------       -----------------------------
                                                  2004              2003             2004              2003
                                              -----------       -----------       -----------       -----------
                                              (Unaudited        (Unaudited)       (Unaudited)       (Unaudited)
<S>                                           <C>               <C>               <C>               <C>
Revenues:
   Product sales                              $   385,711       $   268,591       $ 1,279,111       $   624,684
   Service fee income                             215,364           244,413           798,017           412,932
   Internet related income                         41,920            39,592            99,127           119,450
                                              -----------       -----------       -----------       -----------
                                                  642,995           552,596         2,176,255         1,157,066
   Cost of goods sold                             300,574           294,863         1,085,889           573,216
                                              -----------       -----------       -----------       -----------

      Gross profit                                342,421           257,733         1,090,366           583,850
                                              -----------       -----------       -----------       -----------

Other expenses:
   Advertising                                      5,909             6,591            42,837            23,682
   Compensation and related costs                 207,324           387,467         1,028,916           791,402
   General and administrative                     322,507           341,657           985,806           779,678
   Product development                             92,904                --           130,513                --
   Depreciation and amortization                   48,848            70,193           145,204            93,463
                                              -----------       -----------       -----------       -----------
                                                  677,492           805,908         2,333,276         1,688,225
                                              -----------       -----------       -----------       -----------

Loss before other income (expenses)              (335,071)         (548,175)       (1,242,910)       (1,104,375)

Other income (expenses):
   Amortization of debt discount                  (24,963)         (175,750)         (174,747)         (292,250)
   Interest expense                              (110,757)          (82,320)         (278,099)         (319,163)
   Tax settlement adjustment                           --           895,622                --           895,622
   Interest income                                    277                --               576                --
                                              -----------       -----------       -----------       -----------

(Loss) income before provision for
  income taxes                                   (470,514)           89,377        (1,695,180)         (820,166)

   Provision for income taxes                          --                --                --                --
                                              -----------       -----------       -----------       -----------

(Loss) Income from continuing operations         (470,514)           89,377        (1,695,180)         (820,166)

Discontinued operations:
   Income from discontinued
   operations (Note J)                                 --           533,634                --           533,634
                                              -----------       -----------       -----------       -----------

Net (loss) income                             $  (470,514)      $   623,011       $(1,695,180)      $  (286,532)
                                              ===========       ===========       ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                        3
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations, continued

<TABLE>
<CAPTION>
                                                             Three Months                           Nine Months
                                                          Ended September 30,                   Ended September 30,
                                                    -------------------------------      -------------------------------
                                                        2004               2003              2004               2003
                                                    ------------       ------------      ------------       ------------
                                                    (Unaudited)        (Unaudited)       (Unaudited)        (Unaudited)
<S>                                                 <C>                <C>               <C>                <C>
(Loss) income per common share:
   Basic:
      (Loss) income from continuing operations      $       (.04)      $        .01      $       (.16)      $       (.12)
      Income from discontinued operations                     --                .07                --                .08
                                                    ------------       ------------      ------------       ------------
        Net (loss) income                           $       (.04)      $        .08      $       (.16)      $       (.04)
                                                    ============       ============      ============       ============
   Diluted:
      (Loss) income from continuing operations      $       (.04)      $        .01      $       (.16)      $       (.12)
      Income from discontinued operations                     --                .07                --                .08
                                                    ------------       ------------      ------------       ------------
        Net (loss) income                           $       (.04)      $        .08      $       (.16)      $       (.04)
                                                    ============       ============      ============       ============

Weighted average number of common shares outstanding:
   Basic                                              10,690,915          7,674,253        10,463,137          6,585,372
                                                    ============       ============      ============       ============
   Diluted                                            10,690,915          7,970,808        10,463,137          6,741,610
                                                    ============       ============      ============       ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                        4
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                    Nine Months Ended September 30,
                                                                                    -------------------------------
                                                                                        2004               2003
                                                                                     -----------       -----------
                                                                                     (Unaudited)       (Unaudited)
<S>                                                                                  <C>               <C>
Cash flows from operating activities:
   Loss from continuing operations                                                   $(1,695,180)      $  (820,166)
   Adjustments to reconcile loss from continuing operations to net cash used in
      operating activities:
        Depreciation and amortization                                                    145,204            93,463
        Provision for doubtful accounts                                                   13,207                --
        Issuance of common stock for services                                             50,000            96,250
        Amortization of debt discount                                                    174,747           292,250
        Changes in:
           Accounts receivable                                                            42,249          (149,404)
           Inventory                                                                    (109,439)          (37,765)
           Prepaid expenses and other assets                                              11,003           (33,750)
           Accounts payable, accrued expenses and other liabilities                      346,686          (563,945)
           Deferred grant revenue                                                             --             8,173
                                                                                     -----------       -----------

              Net cash used in operating activities                                   (1,021,523)       (1,114,894)
                                                                                     -----------       -----------

Cash flows from investing activities:
   Purchase of furniture and equipment                                                   (30,224)          (35,572)
                                                                                     -----------       -----------

              Net cash used in investing activities                                      (30,224)          (35,572)
                                                                                     -----------       -----------

Cash flows from financing activities:
   Proceeds from issuance of 10% subordinated notes payable                                   --         1,000,000
   Proceeds from short-term credit arrangements                                           20,853                --
   Net proceeds from issuance of 1,750,000 shares of common stock                        571,000                --
   Proceeds from issuance of 10% notes payable                                           150,000                --
   Proceeds from issuance of 18% notes payable                                           300,000                --
   Proceeds from issuance of 24% notes payable                                           150,000                --
   Principal repayments on short-term credit arrangements                               (144,581)               --
   Principal repayments on notes payable                                                (404,655)         (110,000)
   Payment of accounts receivable due Sellers of Econo-Comm, Inc.                             --          (100,000)
                                                                                     -----------       -----------

              Net cash provided by financing activities                                  642,617         1,090,000
                                                                                     -----------       -----------

Decrease in cash and cash equivalents                                                   (409,130)          (60,466)
Cash and cash equivalents at beginning of period                                         460,832           183,200
                                                                                     -----------       -----------

Cash and cash equivalents at end of period                                           $    51,702       $   122,734
                                                                                     ===========       ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                        5
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

<TABLE>
<CAPTION>
                                                                                                 Nine Months Ended September 30,
                                                                                                 -------------------------------
                                                                                                     2004               2003
                                                                                                  -----------       -----------
                                                                                                  (Unaudited)       (Unaudited)
<S>                                                                                               <C>               <C>
Supplemental disclosures of cash flow information related to
   continuing operations:
      Cash paid during the period for:
        Interest                                                                                  $   212,769       $    12,615
        Income taxes                                                                              $        --       $        --

      Non-cash investing and financing activities relating to the acquisition of
      subsidiaries and certain intellectual property rights,  conversion of debt
      to preferred stock, forgiveness of interest indebtedness to an officer and
      an employee of the Company, and issuance of common stock for services:
           Accounts receivable                                                                                      $   102,048
           Inventory                                                                                                    236,959
           Intellectual property rights                                                                               1,550,609
           Intangibles                                                                                                7,285,894
           Other assets                                                                                                 518,586
           Accrued expenses and other liabilities                                                                    (1,622,015)
           Interest payable                                                                       $    40,000
           8% notes payable                                                                         1,000,000        (2,000,000)
           Issuance of preferred stock, at par                                                            (10)             (119)
           Issuance of common stock, at par                                                                (2)               (9)
           Paid in surplus                                                                         (1,089,988)       (6,048,075)
</TABLE>

See Notes to Consolidated Financial Statements.


                                        6
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE A - THE COMPANY

Business
--------

CNE Group,  Inc.  (the  "Company" or "CNE") is a holding  company  whose primary
operating  subsidiaries are SRC  Technologies,  Inc. ("SRC") and U.S.  Commlink,
Ltd. ("USCL"). SRC, also a holding company, is the parent of Connectivity,  Inc.
("Connectivity")  and SRC-ECI,  Inc. ("ECI") (d/b/a Econo-Comm,  Inc. and Mobile
Communications).  Connectivity,  ECI and USCL  market,  manufacture,  repair and
maintain  remote  radio and  cellular-based  emergency  response  products  to a
variety of federal, state and local government institutions,  and other vertical
markets  throughout the United  States.  The Company has  intellectual  property
rights to  certain  key  elements  of these  products  -  specifically,  certain
communication, data entry and telemetry devices.

The Company also  generates  revenue from its  subsidiary,  CareerEngine,  Inc.,
which  is  engaged  in  the  business  of  e-recruiting.  This  segment  is  not
significant to the operations of the Company.

Going Concern
-------------

The Company has incurred  substantial losses,  sustained  substantial  operating
cash outflows and has a working  capital  deficit at both September 30, 2004 and
December 31, 2003. The above factors raise substantial doubt about the Company's
ability to  continue  as a going  concern.  The  Company's  continued  existence
depends on its ability to obtain additional equity and/or debt financing to fund
its operations and ultimately to achieve profitable  operations.  The Company is
continuously in the process of raising additional  financing and has initiated a
cost reduction  strategy.  At September 30, 2004,  management  believes that the
working  capital  deficit,  losses and  negative  cash flow will  ultimately  be
improved by (i) the acquisition and increased operations of SRC and ECI and (ii)
cost  reduction  strategies  initiated  in January  and June  2004.  There is no
assurance that the Company can obtain additional financing or achieve profitable
operations  or  generate  positive  cash  flow.  The  2004  and  2003  financial
statements  do not include any  adjustments  relating to the  recoverability  or
classification  of recorded  asset amounts or the amount and  classification  of
liabilities  that  might  be  necessary  as  a  result  of  this  going  concern
uncertainty.

American Stock Exchange Listing
-------------------------------

On January 2, 2004,  the Company  received a notice dated December 31, 2003 from
the American Stock Exchange Staff  indicating that the Company had  demonstrated
compliance with the requirements necessary for continued listing on the American
Stock Exchange.

As is  the  case  for  all  listed  issuers,  the  Company's  continued  listing
eligibility  will be  assessed  on an ongoing  basis;  however,  during the year
ending December 31, 2004, the Company will be subject to additional scrutiny (as
set forth in Section  1009(h) of the AMEX Company  Guide) as is the case for any
listed company that has regained compliance.

Private Financings
------------------

On April 23, 2003, the Company completed a private  financing  pursuant to which
it issued notes (the "Notes") in the aggregate  principal  amount of $1,000,000,
of which  $650,000 was to the officers of the Company,  and  4,165,800  ten year
cashless Class B Warrants, each to purchase one share of its Common


                                        7
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE A - THE COMPANY (CONTINUED)

Stock at $0.50 per share.  The Notes  bear  interest  at the annual  rate of 10%
payable quarterly and were due on April 30, 2004. The aggregate number of shares
for  which  the  Warrants  may be  exercised  must  equal  15% of the  Company's
outstanding   Common  Stock  on  a  fully-diluted   basis.  These  Warrants  are
anti-dilutive until the Notes have been repaid. The due date of the Notes may be
extended at the Company's option for an additional year in consideration for the
issuance of 10-year  warrants to purchase an additional 4% of the Company's then
outstanding  common  stock at $0.50 per  share.  These  Warrants  would  also be
anti-dilutive until the Notes have been repaid. In addition,  the Company valued
the warrants,  utilizing the Black-Scholes Pricing Model, at $699,000,  which is
being  accounted  for as debt discount and is being  amortized  ratably over the
one-year term of the Notes.

On March 12, 2004,  the Company  notified the Class B Warrant  holders  that, to
satisfy the 15% non-dilutive  provisions of their Warrants,  these Warrants were
now  exercisable  for an aggregate of 5,245,200  shares of the Company's  common
stock at approximately $0.40 per share. On this date, the Company also exercised
its  option  to extend  the  maturity  date of the  notes to April 30,  2005 and
satisfied the  requirement  for the additional 4%  non-dilutive  interest in the
Company by issuing to the noteholders Class B Warrants to purchase an additional
1,708,900  shares  of the  Company's  common  stock  at  $0.50  per  share.  The
non-dilutive  provisions  of the Warrants  terminate  when all of the notes have
been paid in full.

      1.    On September  17, 2003,  the Company  sold  1,250,000  shares of its
            Common  Stock  at $0.40  per  share to an  existing  noteholder  and
            stockholder of the Company.

      2.    On  January  21,  2004,  a  secured  factoring  arrangement  with an
            individual,  which  amounted to $300,000 at December 31,  2003,  was
            restructured into a $300,000 unsecured Note Payable due February 10,
            2005.  The  individual was also issued Class BB Warrants to purchase
            150,000 shares of the Company's common stock at $0.50 per share.

      3.    On February  10,  2004,  the Company  sold  1,750,000  shares of its
            Common Stock at $0.40 per share. The net proceeds of the transaction
            amounted to $571,000.  The Company used the funds obtained from this
            financing primarily for working capital purposes.

      4.    On June 10, 2004, the two holders of the Company's 8% Subordinated
            Promissory Notes, in the aggregate principal amount of $1,000,000,
            converted their notes into 1,000,000 shares of the Company's Series
            AA 8% Cumulative Preferred Stock, par value $0.00001 per share (the
            "Series AA Preferred Stock"). The aggregate liquidating value of the
            Series AA Preferred Stock acquired by the converting noteholders,
            one of whom is an officer and the other an employee of a subsidiary
            of the Company, is $1,000,000.

      5.    On  June  10,  2004,   an  officer  and  employee  of  a  subsidiary
            relinquished  all  their  rights  to  an  aggregate  420,000  vested
            incentive  stock options of the Company for an aggregate  payment of
            $50,000 cash which is included in compensation and related costs.

      6.    In June 2004,  in an effort to conserve the  financial  resources of
            the Company,  the Board of Directors of the Company deferred 100% of
            the salaries of four  officers of the Company until such time as the
            Board   deems   otherwise.   In   September   2004,   three  of  the
            aforementioned   officers  were  terminated  by  the  Company.   The
            accompanying financial statements include (i) the


                                        8
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE A - THE COMPANY (CONTINUED)

            accrued salary owed to the non-terminated officer for the amounts so
            deferred,  and (ii) with  regard  to the  terminated  officers,  the
            accrued  salaries owed to these officers for the amounts so deferred
            until their termination. See Note I.

      7.    On June 28, 2004 the Company repaid, in full, one of its outstanding
            lines of credit  amounting to  approximately  $146,000.  On the same
            date the Company  issued a secured  note payable to an employee of a
            subsidiary  of the  Company in the amount of  $150,000.  The note is
            secured by the  equipment of a subsidiary  of the Company.  The note
            bears  interest at 10% per annum and the  principal and all interest
            thereon  was due  September  28,  2004.  The  Company  is  currently
            negotiating new terms with regard to this note.

      8.    As of  July  1,  2004,  80% of the  holders  of  the  Company's  10%
            subordinated  notes agreed to defer  $20,000 of interest due on such
            date to October 1, 2004 in  consideration  of the Company issuing to
            them  153,846  Class B  Warrants  of the  Company,  each to give the
            holder  thereof  the right to  purchase  a share of common  stock at
            $0.39 per share.  As of October 1, 2004,  75% of the  holders of the
            Company's 10% subordinated  notes agreed to further defer $18,750 of
            interest from October 1, 2004 to January 1, 2005 in consideration of
            the Company  issuing to them an additional  170,455 Class B Warrants
            of the  Company,  each to give  the  holder  thereof  the  right  to
            purchase a share of common stock at $0.33 per share. The noteholders
            include two officers of the Company.

      9.    In July and August  2004,  the  Company  issued  $150,000 of its 24%
            Secured Notes due April 30, 2005 to the wife of the Chief  Executive
            Officer and an existing 10% subordinated  noteholder of the Company.
            Interest on the notes is payable quarterly in arrears. The notes are
            secured by (i) all the stock of SRC and USCL, and (ii) the pledge of
            Patent Nos.  6,060,979,  6,047,173 and  5,701,338  -all owned by the
            Company.  On October 1, 2004,  100% of the holders of the  Company's
            24% Secured  Notes  agreed to defer  $5,786 of interest  due on such
            date to January 1, 2005 in  consideration  of the Company issuing to
            them 76,712 Class B Warrants of the Company, each to give the holder
            thereof the right to  purchase a share of common  stock at $0.33 per
            share.

      10.   As of October  1, 2004,  75% of the  holders  of the  Company's  10%
            subordinated  notes agreed to defer  $18,750 of interest due on such
            date to January 1, 2005 in  consideration  of the Company issuing to
            them  170,455  Class B  Warrants  of the  Company,  each to give the
            holder  thereof  the right to  purchase  a share of common  stock at
            $0.33  per  share.  The  noteholders  include  two  officers  of the
            Company.

      11.   In  October  2004,  the  Company  and USCL  entered  into a two-year
            Project Financing Agreement with an institutional lender relating to
            USCL's  anticipated  participation in the "Cellular Call Box Upgrade
            and Maintenance Service" projects for numerous Service Authority for
            Freeway   Emergencies   ("SAFE")   programs   within  the  state  of
            California. These call box programs operate over 17,000 motorist aid
            analog call boxes that will  require  upgrades  to digital  cellular
            technology  available  through  USCL.  This  agreement  provides the
            Company with finished goods and accounts receivable  financing of up
            to $2,000,000 relating to these potential  aforementioned  projects.
            The  effective  interest rate is  approximately  3% per month on the
            outstanding balance of


                                        9
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE A - THE COMPANY (CONTINUED)

            the amount  receivables  financed.  The finished  goods and accounts
            receivable  to be  financed,  as well as all the other assets of the
            Company not previously  pledged,  will secure the  borrowings  under
            this agreement.

      12.   In October and November 2004, the Company issued (i) $125,000 of its
            10%  Convertible  Subordinated  Notes  due  June  30,  2005 and (ii)
            787,500  Class C Warrants  of the  Company,  each to give the holder
            thereof the right to  purchase a share of common  stock at $0.50 per
            share.  The  notes  were  sold to the  wife of the  Chief  Executive
            Officer  of the  Company  and  other  accredited  investors  and are
            convertible  by the holder,  at any time,  into common  stock of the
            Company at $0.50 per share.  The warrants  expire on April 30, 2013.
            Interest on the notes is payable monthly in arrears.

      The Company is using the funds  obtained from these  financings  primarily
      for working capital purposes. The aforementioned  financings were effected
      pursuant  to  the  exemption  from  the  registration  provisions  of  the
      Securities Act of 1993 provided by Section 4(2) thereof.

NOTE B - SIGNIFICANT ACCOUNTING POLICIES

[1] Inventory:

            Inventory  is stated at the lower of cost  (determined  by first-in,
            first-out method) or market. The Company's inventory consists of the
            following:

                                         September 30,    December 31,
                                             2004             2003
                                         -------------    ------------

                  Raw materials            $298,714         $158,347
                  Work in progress           24,497            3,089
                  Finished goods             32,947           85,283
                                           --------         --------
                           Total           $356,158         $246,719
                                           ========         ========

[2] Income (loss) per share:

            Basic  and  diluted  earnings  (loss)  per  common  share  have been
            computed  in  accordance  with SFAS No. 128,  "Earnings  Per Share."
            Basic earnings per share ("BEPS") is computed by dividing net income
            (loss) by the  weighted-average  number of common shares outstanding
            during the three and nine month period ended September 30, 2004. For
            the three and nine month  period  ended  September  30, 2003 diluted
            earnings per share  (diluted EPS) is computed by dividing net income
            (loss) used in determining  basic EPS by the weighted average number
            of commons hares outstanding during the period, plus the incremental
            shares,  if any, that would have been  outstanding  upon the assumed
            exercise of dilutive  stock  options.  Common stock  equivalents  to
            purchase  common  stock of the  Company  that  were  outstanding  at
            September 30, 2004 were not included in the  computation  of diluted
            net loss per share as their effect would have been anti-dilutive.


                                       10
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[3] Stock-based compensation:

            As  permitted  under  SFAS  No.  123,   Accounting  for  Stock-based
            Compensation  (SFAS No. 123), the Company has elected to continue to
            follow the  guidance  of APB Opinion  No. 25,  Accounting  for Stock
            Issued to Employees (APB No. 25), and Financial Accounting Standards
            Board  Interpretation  No. 44,  Accounting for Certain  Transactions
            Involving Stock  Compensation--an  interpretation of APB Opinion No.
            25  (FIN  No.  44),  in  accounting  for  its  stock-based  employee
            compensation  arrangements.  Accordingly,  no  compensation  cost is
            recognized for any of the Company's  fixed stock options  granted to
            employees  when the exercise  price of each option equals or exceeds
            the fair value of the  underlying  common stock as of the grant date
            for each stock option.  Changes in the terms of stock option grants,
            such as extensions of the vesting  period or changes in the exercise
            price,  result in variable accounting in accordance with APB Opinion
            No. 25. Accordingly,  compensation expense is measured in accordance
            with APB No.  25 and  recognized  over the  vesting  period.  If the
            modified grant is fully vested, any additional compensation costs is
            recognized immediately.  The Company accounts for equity instruments
            issued to  non-employees  in accordance  with the provisions of SFAS
            No. 123.

            At  September  30, 2004 and  December  31,  2003,  the Company had a
            stock-based  employee  compensation  plan - the  2003  Plan.  Two of
            Company's   subsidiaries  each  had  separate  stock-based  employee
            compensation  plans.  These  subsidiaries'  plans were contractually
            terminated  by the Company  upon the  acquisition  of SRC and ECI on
            April 23, 2003.  Furthermore,  on March 14, 2003,  all recipients of
            options  granted  pursuant  to these  plans  rescinded  all of their
            interests.

            As  permitted  under  SFAS  No.  148,   Accounting  for  Stock-Based
            Compensation--Transition and Disclosure, which amended SFAS No. 123,
            the Company has  elected to continue to follow the  intrinsic  value
            method  in  accounting  for its  stock-based  employee  compensation
            arrangements  as defined by APB No. 25 and  related  interpretations
            including FIN No. 44. The following table  illustrates the effect on
            net loss and loss per  share if the  Company  had  applied  the fair
            value recognition provisions of SFAS No. 123 to stock-based employee
            compensation for options granted under its plan.

<TABLE>
<CAPTION>
                                                                              Nine Month Period
                                                                             Ended September 30,
                                                                        -----------------------------
                                                                            2004              2003
                                                                        -----------       -----------
<S>                                                                     <C>               <C>
              Net loss, as reported                                     $(1,695,180)      $  (286,532)

              Less, Total stock-based employee compensation
              expense determined under fair value-based method for
              all awards, net of related tax effects                       (246,430)               --
                                                                        -----------       -----------

              Pro forma net loss                                        $(1,941,610)      $  (286,532)
                                                                        ===========       ===========

              Net loss per share - basic and diluted:
                   As reported                                          $     (0.16)      $     (0.04)
                                                                        ===========       ===========
                   Pro forma                                            $     (0.18)      $     (0.04)
                                                                        ===========       ===========
</TABLE>


                                       11
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            On April 30, 2003,  incentive  stock  options to purchase  1,987,500
            shares of the  Company's  Common Stock were granted by the Incentive
            Compensation Committee to five officers (1,800,000) and one employee
            (187,500)  of the Company at a weighted  average  exercise  price of
            $1.32 per share.  On November 4, 2003,  incentive  stock  options to
            purchase  950,000 shares of the Company's  Common Stock were granted
            by the  Incentive  Compensation  Committee to three  officers of the
            Company at a weighted  average exercise price of $1.09 per share. On
            January 21 2004,  incentive stock options to purchase 601,000 shares
            of  the  Company's  common  stock  were  granted  by  the  Incentive
            Compensation  Committee of the Board of Directors to one officer and
            18 employees of the Company at a weighted  average exercise price of
            $0.50 per share.  On September 12, 2004,  incentive stock options to
            purchase  500,000 shares of the Company's  common stock were granted
            by the Incentive Compensation Committee of the Board of Directors to
            an officer of the Company at an  exercise  price of $0.28 per share.
            On April 30, 2003 (435,000),  November 4, 2003  (220,000),  November
            21, 2003  (100,000),  January 21, 2004  (295,500)  and September 12,
            2004 (900,000), non-qualified stock options to purchase an aggregate
            1,950,500  shares of the Company's  Common Stock were granted by the
            Board  of  Directors  to  certain  independent  contractors  of  the
            Company. On June 10, 2004 an officer and an employee of a subsidiary
            of the Company  relinquished  all their  rights to an  aggregate  of
            420,000 incentive stock options in consideration of $50,000 cash. No
            options granted have been exercised.

[4] Research and development expenditures:

            Research  and  development   expenditures  in  connection  with  the
            development  of new  products  are  expensed as incurred  unless the
            costs are related to a contractual arrangement.

[5] Recent accounting pronouncements:

            In January 2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN
            46"),  "Consolidation of Variable Interest  Entities." In general, a
            variable  interest entity is a corporation,  partnership,  trust, or
            any other legal structure used for business purposes that either (a)
            does not have equity  investors with voting rights or (b) has equity
            investors that do not provide sufficient financial resources for the
            entity to support its activities.  FIN 46 requires  certain variable
            interest  entities to be consolidated by the primary  beneficiary of
            the entity if the  investors  do not have the  characteristics  of a
            controlling  financial  interest or do not have sufficient equity at
            risk for the entity to finance  its  activities  without  additional
            subordinated  financial support from other parties. In December 2003
            the FASB issued FIN46R which revised certain  elements of FIN46. The
            consolidation  requirements of FIN 46R apply immediately to variable
            interest  entities created after January 31, 2003. The consolidation
            requirements  apply to older  entities  in the first  fiscal year or
            interim period  beginning  after  December 15, 2003.  Certain of the
            disclosure  requirements  apply in all financial  statements  issued
            after  January 31, 2003,  regardless  of when the variable  interest
            entity was  established.  The adoption of this  statement has had no
            effect on the Company's financial position or results of operations.

            In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
            133 on Derivative Instruments and Hedging Activities" ("SFAS No.
            149"). SFAS No. 149 amends and clarifies


                                       12
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            financial  accounting  and  reporting  for  derivative  instruments,
            including certain derivative instruments embedded in other contracts
            (collectively referred to as derivatives) and for hedging activities
            under FASB Statement No. 133, "Accounting for Derivative Instruments
            and Hedging Activities". This Statement requires that contracts with
            comparable  characteristics  be accounted for consistently as either
            derivatives or hybrid  instruments.  This Statement is effective for
            contracts  entered  into or modified  after June 30,  2003,  and for
            hedging  relationships  designated after June 30, 2003. The adoption
            of this  statement  has had no  effect  on the  Company's  financial
            statements.

            In May 2003, the FASB issued SFAS No. 150,  "Accounting  for Certain
            Financial  Instruments with  Characteristics of Both Liabilities and
            Equity." SFAS No. 150 changes the accounting  for certain  financial
            instruments  that under previous  guidance issuers could account for
            as equity.  It requires  that those  instruments  be  classified  as
            liabilities  in  balance  sheets.  The  guidance  in SFAS No. 150 is
            generally  effective for all financial  instruments  entered into or
            modified  after May 31, 2003,  and otherwise is effective on July 1,
            2003.  The  adoption  of this  statement  has had no  effect  on the
            Company's financial statements.

NOTE C - CONVERSION OF 8% SUBORDINATED NOTES PAYABLE

On June 10,  2004,  the two  holders  of the  Company's  8%  Subordinated  Notes
Payable, in the aggregate principal amount of $1,000,000,  converted their notes
into 1,000,000 shares of the Company's Series AA 8% Cumulative  Preferred Stock,
par value  $0.00001 per share (the "Series AA Preferred  Stock").  The aggregate
liquidating  value of the Series AA Preferred  Stock  acquired by the converting
noteholders, one of whom is an officer and the other an employee of a subsidiary
of the Company,  is $1,000,000.  Including the  aforementioned  conversion,  the
Company currently has issued and outstanding an aggregate of 2,000,000 shares of
Series AA Preferred Stock, which has a liquidating preference of $2,000,000 over
all other equity of the Company.

NOTE D - PREFERRED STOCK

Preferred Stock consists of the following:

                                                  September 30,   December 31,
                                                      2004            2003
                                                 -------------    ------------
      Par value per share                          $  0.00001      $  0.00001
                                                   ==========      ==========
      Authorized number of shares                  25,000,000      25,000,000
                                                   ==========      ==========
      Issued and outstanding number of shares:
         Series AA                                  2,000,000       1,000,000
         Series A                                   1,697,966       1,697,966
         Series B                                       4,400           4,400
         Series C                                   9,735,875       9,735,875
                                                   ----------      ----------

               Total                               13,438,241      12,438,241
                                                   ==========      ==========

The Series AA Preferred Stock has an 8% cumulative  dividend,  payable in common
stock or cash,  and a  liquidating  preference  over all  other  CNE  equity  of
$2,000,000.  The Series A Preferred Stock has a liquidating  preference over all
other CNE  equity  except the Series AA of  $1,697,961.  The Series B  Preferred
Stock has a liquidating  preference  over all other CNE equity except the Series
AA and A  Preferred  Stock of  $440,000.  The  Series C  Preferred  Stock has no
liquidating preference.


                                       13
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE E - COMMON STOCK

Common Stock consists of the following:

                                                 September 30,      December 31,
                                                     2004               2003
                                                 -------------      ------------

      Par value per share                         $   0.00001       $   0.00001
                                                  ===========       ===========
      Authorized number of shares                  40,000,000        40,000,000
                                                  ===========       ===========
      Issued number of shares                      12,029,571        10,129,571
         Less, Treasury shares                     (1,238,656)       (1,238,656)
                                                  -----------       -----------
      Issued and outstanding number of shares      10,790,915         8,890,915
                                                  ===========       ===========

NOTE F - WARRANTS

Outstanding warrants to acquire common stock of the Company consists of:

<TABLE>
<CAPTION>
                                                                                 September 30,     December 31,
                                                                                     2004              2003
                                                                                 -------------     ------------
     Type of                                                      Exercise
     Warrant         Exercise Date          Expiration Date        Price              Shares of Common Stock
     -------        ----------------        --------------        --------       ------------------------------
<S>                 <C>                     <C>                     <C>            <C>               <C>
     Class A        October 22, 2008        April 22, 2013          $1.00          1,697,966         1,697,966
     Class B        April 23, 2003          April 30, 2013          $0.50                 --         4,904,800
     Class B        April 23, 2003          April 30, 2013          $0.40          5,245,200                --
     Class B        March 12, 2004          April 30, 2013          $0.50          1,708,900                --
     Class B        July 1, 2004            April 30, 2013          $0.39            153,846                --
     Class BB       May 10, 2003            May 10, 2006            $0.50             20,000            20,000
     Class BB       June 10, 2003           June 10, 2006           $0.50             20,000            20,000
     Class BB       July 10, 2003           July 10, 2006           $0.50             20,000            20,000
     Class BB       August 10, 2003         August 10, 2006         $0.50             20,000            20,000
     Class BB       September 10, 2003      September 10, 2006      $0.50             20,000            20,000
     Class BB       October 10, 2003        October 10, 2006        $0.50             20,000            20,000
     Class BB       June 10, 2003           June 10, 2006           $2.50             10,000            10,000
     Class BB       July 10, 2003           July 10, 2006           $3.00             10,000            10,000
     Class BB       August 10, 2003         August 10, 2006         $4.00             10,000            10,000
     Class BB       September 10, 2003      September 10, 2006      $4.50             10,000            10,000
     Class BB       October 10, 2003        October 10, 2006        $5.00             10,000            10,000
     Class BB       January 21, 2004        February 4, 2009        $0.50            150,000                --
     Class BB       February 10, 2004       February 10, 2014       $1.00            350,000                --
     Class BB       August 29, 2004         August 29, 2009         $1.50             25,000                --
     Class BB       August 29, 2004         August 29, 2009         $2.00             25,000                --
     Class BB       August 29, 2004         August 29, 2009         $2.50             25,000                --
     Class BB       August 29, 2004         August 29, 2009         $3.00             25,000                --
     Class BB       August 29, 2004         August 29, 2009         $3.50             25,000                --
     Class BB       August 29, 2004         August 29, 2009         $4.00             25,000                --
     Class C        October 22, 2008        April 22, 2013          $1.00          9,735,875         9,735,875
     Class F        January 1, 2004         December 31, 2009       $3.00          1,150,000         1,150,000
     Class B(1)     Immediate               March 31, 2005          $6.00             25,000            25,000
     Class B(1)     Immediate               June 28, 2005           $6.00             62,500            62,500
                                                                                  ----------        ----------
                                                                                  20,599,287        17,746,141
                                                                                  ==========        ==========
</TABLE>

     (1)   Class B  warrants  and  Units  of a  subsidiary  of the  Company  are
           exercisable for the Company's common shares.


                                       14
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE G - ACQUISITIONS AND RELATED UNAUDITED PRO FORMA FINANCIAL INFORMATION

The purchase price of the acquisition of SRC and ECI was allocated to the assets
and liabilities acquired,  both tangible and intangible based on fair values (as
determined by an independent  appraiser),  with the excess of the purchase price
over the fair value of the net assets  acquired of $7,285,894  being recorded as
Goodwill.  The fair value of the  intellectual  property  rights,  amounting  to
$1,550,609,  acquired  in  the  related  financing  was  also  determined  by an
independent appraiser.  Due to these acquisitions and related financing, SRC has
acquired  intellectual property rights to certain key elements of these products
- specifically, certain communication, data entry and telemetry devices.

The  Company's   consolidated   financial  statements  include  the  results  of
operations of SRC from its respective acquisition dates. The following unaudited
pro  forma  information  presents  a  summary  of our  consolidated  results  of
operations  as if the SRC and ECI  acquisitions  and the related  financing  had
taken  place on  January  1,  2003 for the three and  nine-month  periods  ended
September  30,  2003.  The  SRC and  ECI  acquisitions  have  been  recorded  in
accordance  with  SFAS No.  141;  therefore,  no  amortization  of  goodwill  or
intangible assets without determinable lives related to SRC and ECI is reflected
in the prior  year  amounts.  These pro forma  results  have been  prepared  for
comparative  purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the  acquisitions  occurred on
January 1, 2003.

                                                      Pro forma
                                       -----------------------------------------
                                       Three Months Ended     Nine Months Ended
                                       September 30, 2003     September 30, 2003
                                       ------------------     ------------------
                                           (Unaudited)           (Unaudited)

      Revenues                             $   552,596           $ 1,754,529
      Expenses                               1,358,841             4,053,165
                                           -----------           -----------
        Pro forma net loss                 $  (806,245)          $(2,298,636)
                                           ===========           ===========

      Pro forma net loss per share:
        Basic and diluted                  $     (0.11)          $     (0.35)
                                           ===========           ===========

NOTE H - STOCK OPTION PLANS

At September 30, 2004, the Company had a stock-based employee  compensation plan
- the 2003 Stock Incentive Plan. Two of Company's subsidiaries each had separate
stock-based employee compensation plans prior to the acquisition of SRC and ECI.
These subsidiaries' plans were contractually  terminated by the Company upon the
acquisition  of SRC and ECI on April 23, 2003.  Furthermore,  on March 14, 2003,
all recipients of options granted  pursuant to these  terminated plans rescinded
all of their interests.

2003 Stock Incentive Plan
-------------------------

On April 30, 2003, the Board of Directors of the Company approved the 2003 Stock
Incentive  Plan,  which  provided,   among  other  matters,  for  incentive  and
non-qualified stock options to purchase 3,500,000 shares of the Company's common
stock.  On November 4, 2003,  the 2003 Stock  Incentive  Plan was amended by the
Board of Directors of the Company, ratified by a majority of the stockholders of
the Company on December  18,  2003,  to increase  the number of shares of Common
Stock for which the  incentive  and  non-qualified  stock options may be granted
from 3,500,00 to 5,000,000. On April 16, 2004, the 2003 Stock Incentive Plan was
further amended by the Board of Directors of the Company, ratified by


                                       15
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE H - STOCK OPTION PLANS (CONTINUED)

a majority of the  stockholders of the Company on June 18, 2004, to increase the
number of shares of Common Stock for which the incentive and non-qualified stock
options  may be granted  from  5,000,00 to  10,000,000.  The purpose of the 2003
Stock  Incentive  Plan is to provide  incentives  to  officers,  key  employees,
directors,  independent contractors and agents whose performance will contribute
to the long-term success and growth of the Company, to strengthen the ability of
the  Company  to  attract  and  retain  officers,   key  employees,   directors,
independent contractors and agents of high competence,  to increase the identity
of interests of such people with those of the Company's stockholders and to help
build loyalty to the Company  through  recognition and the opportunity for stock
ownership.  The Plan is administered by the Incentive  Compensation Committee of
the Board.

On April 30, 2003,  incentive stock options to purchase  1,987,500 shares of the
Company's Common Stock were granted by the Incentive  Compensation  Committee to
five  officers  (1,800,000)  and one  employee  (187,500)  of the  Company  at a
weighted  average  exercise  price of $1.32 per  share.  On  November  4,  2003,
incentive stock options to purchase 950,000 shares of the Company's Common Stock
were granted by the Incentive  Compensation  Committee to three  officers of the
Company at a weighted  average exercise price of $1.09 per share. On January 21,
2004, incentive stock options to purchase 601,000 shares of the Company's common
stock  were  granted by the  Incentive  Compensation  Committee  of the Board of
Directors to one officer and 18  employees of the Company at a weighted  average
exercise  price of $0.50 per share.  On  September  12,  2004,  incentive  stock
options to purchase 500,000 shares of the Company's common stock were granted by
the Incentive  Compensation Committee of the Board of Directors to an officer of
the  Company  at an  exercise  price of $0.28  per  share.  On  April  30,  2003
(435,000),  November 4, 2003 (220,000), November 21, 2003 (100,000), January 21,
2004 (295,500),  and September 12, 2004 (900,000) non-qualified stock options to
purchase  an  aggregate  1,950,500  shares of the  Company's  Common  Stock were
granted by the Board of  Directors  to certain  independent  contractors  of the
Company.  On June 28, 2004 an officer and employee of a subsidiary  relinquished
all their rights to an aggregate  420,000 vested  incentive stock options of the
Company for an aggregate  payment of $50,000 cash. No options  granted have been
exercised.

Stock option activity, for the nine-month period ended September 30, 2004, under
the 2003 Stock Incentive Plan is summarized as follows:

                                     Nine-Month Period Ended September 30, 2004
                                    --------------------------------------------
                                    Incentive    Non-Qualified  Weighted Average
                                      Shares         Shares      Exercise Price
                                    ---------    -------------  ----------------

      Options outstanding at
         December 31, 2003           2,937,500        755,000      $1.14
      Options granted                1,101,000      1,195,500      $0.37
      Options cancelled               (420,000)            --      $0.50
                                     ---------      ---------
      Options outstanding
         at September 30, 2004       3,618,500      1,950,500      $0.87
                                     =========      =========
      Options available
         at September 30, 2004       4,431,000                     $0.88
                                     =========


                                       16
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE H - STOCK OPTION PLANS (CONTINUED)

The following table presents  information  relating to stock options outstanding
at September 30, 2004 relating to the 2003 Incentive Stock Plan:

<TABLE>
<CAPTION>
                    Options Outstanding                         Options Available
          ---------------------------------------     -------------------------------------
                                                       Weighted
              Range                      Weighted      Average                     Weighted
               of                         Average     Remaining                     Average
            Exercise                     Exercise      Life in                     Exercise
              Price          Shares        Price        Years        Shares          Price
            --------        ---------    --------     ---------    ---------       --------
<S>                         <C>            <C>           <C>       <C>              <C>
          $0.15 - $3.00     5,569,000      $ .87         7.70      4,431,000        $ 0.88
</TABLE>

NOTE I - LITIGATION

On August 19,  2004,  two of the  Company's  officers,  who are also  directors,
informed the Company that their employment contracts may have been breached.  On
August 27,  2004 these  officers  filed suit  against  the Company in the United
States District  Court,  Southern  District of Florida,  alleging that (i) their
employment  contracts  have been breached and (ii) certain  future  compensation
relating  thereto to be paid to them  amounting up to an aggregate of $1,003,000
has been  accelerated.  The Company does not believe that it has  committed  any
breach of these  agreements and,  accordingly,  has not incurred the claims that
these  officers are  alleging.  In  addition,  the Company  believes  that these
officers have committed violations of their employment agreements and have taken
other actions that have damaged the Company.  The Company has filed a defense to
this action and asserted appropriate  counterclaims.  This litigation is ongoing
and no  amounts  have been  accrued as of  September  30,  2004  related to this
matter.  Since the institution of this  litigation  these two officers have been
terminated as officers,  directors  and employees of the Company's  subsidiaries
and as officers and  employees of the Company,  and have been removed as members
of the Company's Executive Committee.  They currently remain as directors of the
Company.

On October 5, 2004, an officer of one of the Company's subsidiaries, who is also
a former  director of the Company,  instituted a suit against the  subsidiary in
the Circuit Court, 17th Judicial Circuit,  Broward County,  Florida,  charging a
breach of her employment agreement with the subsidiary and claiming that certain
future  compensation  relating  thereto  to be paid to her from  the  subsidiary
amounting  up to an  aggregate  of  $274,000  has been  accelerated.  Since  the
institution of this  litigation  this officer has been  terminated.  The Company
does not believe that its  subsidiary has committed any breach of this agreement
and, accordingly, has not incurred the claims that this officer is alleging. The
Company has named this officer as a  counterclaim  defendant  in the  litigation
pending in federal court referred to in the previous  paragraph and has asserted
certain claims against her in that action. The subsidiary has filed an answer to
this action.  This  litigation is ongoing and no amounts have been accrued as of
September 30, 2004 related to this matter.

NOTE J - DISCONTINUED OPERATIONS

On August 15, 2003 the Company,  for a nominal amount, sold all the stock of one
of the subsidiaries whose remaining assets and liabilities were transferred to a
trust for the  benefit of its  creditors  and  recognized  a gain  amounting  to
approximately $533,634.


                                       17
<PAGE>

CNE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

NOTE K - SUBSEQUENT EVENTS

1.    80% of the holders of the Company's 10% subordinated notes agreed to defer
      $20,000 of interest due July 1, 2004 to October 1, 2004.  As of October 1,
      2004, 75% of the holders of the Company's 10% subordinated notes agreed to
      further  defer $18,750 of interest from October 1, 2004 to January 1, 2005
      in  consideration  of the Company  issuing to them an  additional  170,455
      Class B Warrants of the Company, each to give the holder thereof the right
      to purchase a share of common  stock at $0.33 per share.  The  noteholders
      include two officers of the Company.

2.    As  of  October  1,  2004,  75%  of  the  holders  of  the  Company's  10%
      subordinated notes agreed to defer $18,750 of interest due on such date to
      January 1, 2005 in  consideration  of the Company  issuing to them 170,455
      Class B Warrants of the Company, each to give the holder thereof the right
      to purchase a share of common  stock at $0.33 per share.  The  noteholders
      include two officers of the Company.

3.    In October  2004,  the Company and USCL  entered  into a two-year  Project
      Financing  Agreement  with an  institutional  lender  relating  to  USCL's
      anticipated   participation   in  the  "Cellular   Call  Box  Upgrade  and
      Maintenance  Service"  projects for numerous Service Authority for Freeway
      Emergencies  ("SAFE") programs within the state of California.  These call
      box programs  operate over 17,000 motorist aid analog call boxes that will
      require upgrades to digital cellular  technology  available  through USCL.
      This  agreement  provides  the Company  with  finished  goods and accounts
      receivable  financing  of up to  $2,000,000  relating  to these  potential
      aforementioned  projects.  The effective interest rate is approximately 3%
      per month on the outstanding balance of the amount financed.  The finished
      goods and accounts  receivable  to be  financed,  as well as all the other
      assets of the Company not previously  pledged,  will secure the borrowings
      under this agreement.

4.    On October 1, 2004, 100% of the holders of the Company's 24% Secured Notes
      issued in July 2004 agreed to defer $5,786 of interest due on such date to
      January 1, 2005 in  consideration  of the  Company  issuing to them 76,712
      Class B Warrants of the Company, each to give the holder thereof the right
      to  purchase  a share of common  stock at $0.33 per  share.  The  warrants
      expire on April 30, 2013.

5.    In October and November  2004,  the Company issued (i) $125,000 of its 10%
      Convertible  Subordinated Notes due June 30, 2005 and (ii) 787,500 Class B
      Warrants  of the  Company,  each to give the holder  thereof  the right to
      purchase a share of common  stock at $0.50 per share.  The notes were sold
      to the wife of the  Chief  Executive  Officer  of the  Company  and  other
      accredited  investors and are convertible by the holder, at any time, into
      common  stock of the Company at $0.50 per share.  The  warrants  expire on
      April 30, 2013. Interest on the notes is payable monthly in arrears.


                                       18
<PAGE>

Item 2.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations.

            General
            -------

            CNE Group,  Inc. (the "Company," "CNE" or "we") is a holding company
            whose primary  operating  subsidiaries  are SRC  Technologies,  Inc.
            ("SRC")  and U.S.  Commlink,  Ltd.  ("USCL").  SRC,  also a  holding
            company, is the parent of Connectivity,  Inc.  ("Connectivity")  and
            SRC-ECI, Inc. ("ECI").  These companies,  which we acquired on April
            23, 2003, market, manufacture,  repair and maintain remote radio and
            cellular-based  emergency response products to a variety of federal,
            state  and  local  government  agencies  as well as  other  vertical
            markets located throughout the United States. In addition, we engage
            in  the   business   of   e-recruiting   through   our   subsidiary,
            CareerEngine,  Inc. The  e-recruiting  business  does not generate a
            significant  part  of our  revenue,  and is not  significant  to the
            operations of the Company.

            Acquisition of all of the outstanding stock of SRC and ECI
            ----------------------------------------------------------

            On April 23, 2003, we issued (i) 899,971 shares of our common stock,
            (ii) 1,697,966 shares of our non-voting Series A Preferred Stock and
            an equal number of ten year Class A Warrants,  (iii) 4,400 shares of
            our  Series B  Preferred  Stock,  and (iv)  9,735,875  shares of our
            non-voting  Series C  Preferred  Stock and a like number of ten year
            Class C  Warrants,  for 100%  ownership  of SRC  which at that  time
            included USCL,  and ECI. On August 19, 2004, we transferred  all the
            stock of USCL to CNE and USCL became a  wholly-owned  subsidiary  of
            CNE. In  addition,  ECI's  sellers  retained  certain of ECI's trade
            receivables  aggregating  approximately $100,000. We also acquired a
            patent  related to the  operation of ECI's  business in exchange for
            notes aggregating  $2,000,000 bearing 8% interest.  The consolidated
            financial  statements  include the operating  results of SRC and ECI
            from  the  date  of  acquisition.   The  details  of  the  foregoing
            transactions are set forth below.

                  SRC
                  ---

            On April 23,  2003,  we issued to Michael J. and Carol L.  Gutowski,
            the former principal common stockholders of SRC and former executive
            officers of the Company,  an  aggregate  of 4,867,937  shares of its
            non-voting  Series C  Preferred  Stock and a like number of ten year
            Class C Warrants,  each to purchase one share of its Common Stock at
            $1.00  per  share.  The  Class C  Warrants  are not  exercisable  or
            detachable  from the  Series C  Preferred  Stock  prior to 66 months
            after their issuance. Mr. Gutowski is also a current director of the
            Company.

            We issued to the other former common  stockholders of SRC, including
            Larry M. Reid, currently one of the Company's directors and a former
            executive officer of the Company,  an aggregate of 899,971 shares of
            its  Common  Stock,  1,697,966  shares  of its  non-voting  Series A
            Preferred Stock and a like number of ten year non-detachable Class A
            Warrants, each to purchase one share of its Common


                                       19
<PAGE>

            Stock at $1.00 per share.  The Class A Warrants are not  exercisable
            or detachable  from the Series A Preferred  Stock prior to 66 months
            after their issuance.

            We issued an  aggregate  of 4,400  shares of our Series B  Preferred
            Stock to the former holders of the SRC Series B Preferred Stock.

                  ECI
                  ---

            On April 23, 2003,  the Company  issued to Thomas  Sullivan and Gary
            Eichsteadt,   the  former   stockholders   of  ECI  and   currently,
            respectively,  an executive officer and employee of the Company,  an
            aggregate of 4,867,938  shares of its Series C Preferred Stock and a
            like number of Class C Warrants. In addition, Messrs. Eichsteadt and
            Sullivan  retained  certain of ECI's trade  receivables  aggregating
            approximately  $100,000.  We also  acquired a patent  ("ECI  Patent)
            related to the operation of ECI's  business from Mr.  Eichsteadt for
            notes in the  aggregate  principal  amount  of  $2,000,000,  bearing
            interest at the annual  rate of 8%,  payable  quarterly,  and due on
            October  31,  2008.  The notes  were  secured  by a  certain  Pledge
            Agreement.  Mr. Sullivan  remained an executive officer ECI. On July
            31, 2003, we transferred  all the stock of ECI to SRC and ECI became
            a wholly-owned subsidiary of SRC.

            On  May  19,  2003,  Mr.  Eichsteadt   assigned  $1,500,000  of  the
            aforementioned  8% notes equally to Mr.  Sullivan,  Mr. Gutowski and
            Mrs.  Gutowski.  On August 31, 2003, Mr. and Mrs. Gutowski converted
            their notes  aggregating  $1,000,000  into  1,000,000  shares of the
            Company's  Series AA  Preferred  Stock.  On June 28,  2004,  Messrs.
            Sullivan and Eichsteadt converted their notes aggregating $1,000,000
            into 1,000,000 shares of the Company's Series AA Preferred Stock.

            The Series AA Preferred Stock has an 8% cumulative dividend, payable
            in common stock or cash, and a liquidating preference over all other
            CNE  equity  of  $2,000,000.  The  Series A  Preferred  Stock  has a
            liquidating  preference  over all other CNE equity except the Series
            AA of  $1,697,961.  The Series B Preferred  Stock has a  liquidating
            preference  over all other CNE  equity  except  the  Series AA and A
            Preferred  Stock of  $440,000.  The Series C Preferred  Stock has no
            liquidating preference.

            The total consideration,  including acquisition costs, was allocated
            based on the estimated fair values of the net assets acquired on the
            acquisition date.

                                       ECI              SRC             Total
                                   -----------      -----------     -----------

            Tangible assets        $   588,492      $   292,979     $   881,471
            Patents                  1,379,789          170,820       1,550,609
            Goodwill                 2,766,233        4,519,661       7,285,894
            Liabilities             (2,144,771)        (857,033)     (3,001,804)
                                   -----------      -----------     -----------
              Net asset value      $ 2,589,743      $ 4,126,427     $ 6,716,170
                                   ===========      ===========     ===========

            There were no relationships between us or any of our affiliates and
            any of the


                                       20
<PAGE>

            sellers of the assets we acquired prior to the acquisition
            transactions.

            Catastrophe of September 11, 2001
            ---------------------------------

            Our  headquarters  were  located  at Suite  2112 of Two World  Trade
            Center in New York City.  The  catastrophe  of  September  11,  2001
            involved  no  injury  to any of our  employees.  However,  with  the
            complete   destruction  of  the  building,   all  of  our  leasehold
            improvements,  furniture  and  fixtures,  and  office  and  computer
            equipment located at this site were also destroyed. Since the attack
            through the date of the  acquisitions and financing set forth above,
            our  management  had  been   preoccupied  with  the  relocation  and
            reestablishment  of our  businesses,  assessing  and  processing  of
            insurance  claims with the  assistance  of a risk  manager  with our
            insurers,  and seeking  sources of financing.  The Company  received
            insurance  proceeds in amounts  that have  exceeded the net carrying
            value of the destroyed  assets.  We also had insurance  coverage for
            other than assets  destroyed.  In 2003, we received all  outstanding
            insurance claims relating to the catastrophe.

            In addition,  we applied for governmental  assistance grants related
            to the catastrophe.  In 2002 and 2003 we received grants aggregating
            $300,000.  The grants have a  restriction  that could  require their
            repayment, specifically if we were to relocate a substantial portion
            our  operations  outside of New York City before May 1, 2005.  Until
            such time as this  restriction no longer  applies,  we will classify
            the  grants  as a  liability  of the  Company.  We will  remove  the
            liability and record grant income on our financial  statements  when
            these restrictions lapse or are satisfied or,  alternatively,  repay
            such grants if the above condition is not satisfied.

            Critical Accounting Policies and Estimates
            ------------------------------------------

            The  preparation  of financial  statements in  accordance  with U.S.
            generally  accepted  accounting   principles  requires  us  to  make
            estimates and assumptions that affect the reported amounts of assets
            and  liabilities  at the date of the  financial  statements  and the
            reported  amounts of net revenue and expenses  during the  reporting
            period.  On an ongoing basis,  we evaluate our estimates,  including
            those  related to our  allowance  for doubtful  accounts,  inventory
            reserves,  goodwill and purchased  intangible asset valuations,  and
            asset  impairments.  We base our estimates on historical  experience
            and on various  other  assumptions  that we believe to be reasonable
            under the  circumstances,  the  results  of which form the basis for
            making   judgments   about  the   carrying   values  of  assets  and
            liabilities.  Actual results may differ from these  estimates  under
            different assumptions or conditions.

            We believe the following critical accounting policies, among others,
            affect  the  significant  judgments  and  estimates  we  use  in the
            preparation of our consolidated financial statements:


                                       21
<PAGE>

                  Revenue Recognition
                  -------------------

            We  recognize  product  revenue  when  persuasive   evidence  of  an
            arrangement  exists,  the  sales  price is  fixed,  the  service  is
            performed or products are shipped to customers,  which is when title
            and risk of loss transfers to the customers,  and  collectibility is
            reasonably assured.

                  Allowance for Doubtful Accounts
                  -------------------------------

            We evaluate the collectibility of our accounts receivable based on a
            combination  of factors.  In  circumstances  where we are aware of a
            specific customer's  inability to meet its financial  obligations to
            us, we record a specific  allowance to reduce the net  receivable to
            the amount we reasonably  believe will be  collected.  For all other
            customers,  we record  allowances for doubtful accounts based on the
            length of time the receivables are past due, the prevailing business
            environment  and  our  historical   experience.   If  the  financial
            condition  of our  customers  were  to  deteriorate  or if  economic
            conditions were to worsen,  additional allowances may be required in
            the future.

            At  September  30, 2004 our  allowance  for  doubtful  accounts  was
            $64,707 or 29.7% of gross receivables,  compared to $51,500 or 19.8%
            of gross  receivables  as of December 31, 2003.  The increase in the
            reserve as a percentage of gross receivable from prior period is the
            result of a decrease in accounts receivable.

                  Inventory Valuation
                  -------------------

            At each balance sheet date, we evaluate our ending  inventories  for
            excess  quantities  and  obsolescence.   This  evaluation   includes
            analyses  of sales  levels  by  product  and  projections  of future
            demand.  If inventories on hand are in excess of forecasted  demand,
            we provide  appropriate  reserves for such excess  inventory.  If we
            have previously  recorded the value of such inventory  determined to
            be in excess of projected  demand, or if we determine that inventory
            is  obsolete,  we write  off these  inventories  in the  period  the
            determination is made.  Remaining inventory balances are adjusted to
            approximate  the lower of our cost or market value. If future demand
            or  market   conditions   are  less  favorable  than  our  projects,
            additional  inventory  write-downs  may be  required,  and  would be
            reflected in cost of revenues in the period the revision is made.

                  Valuation of Goodwill, Purchased Intangible Assets and
                  ------------------------------------------------------
                  Long-Lived Assets
                  -----------------

            We perform  goodwill  impairment  tests on an annual basis and on an
            interim basis if an event or circumstance  indicates that it is more
            likely  than  not  that  impairment  has  occurred.  We  assess  the
            impairment of other  amortizable  intangible  assets and  long-lived
            assets whenever events or changes in circumstances indicate that the
            carrying value may not be recoverable. Factors we consider important
            that could trigger an impairment review include significant


                                       22
<PAGE>

            underperformance  to  historical  or  projected  operating  results,
            substantial   changes  in  our  business  strategy  and  significant
            negative  industry  or  economic  trends.  If  such  indicators  are
            present,  we  evaluate  the fair  value of the  goodwill.  For other
            intangible assets and long-lived assets we determine whether the sum
            of the estimated  undiscounted cash flows attributable to the assets
            in question is less than their caring  value.  If less, we recognize
            an impairment loss based on the excess of the carrying amount of the
            assets over their respective fair values.  Fair value of goodwill is
            determined   by   using  a   valuation   model   based   on   market
            capitalization. Fair value of other intangible assets and long-lived
            assets is  determined  by future  cash  flows,  appraisals  or other
            methods.  If the long-lived asset determined to be impaired is to be
            held and used, we recognize an  impairment  charge to the extent the
            anticipated  net cash flows  attributable to the asset are less than
            the asset's  carrying value.  The fair value of the long-lived asset
            then becomes the asset's new  carrying  value,  which we  depreciate
            over the remaining estimated useful life of the asset.

            Recent Accounting Pronouncements
            --------------------------------

            In January 2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN
            46"),  "Consolidation of Variable Interest  Entities." In general, a
            variable  interest entity is a corporation,  partnership,  trust, or
            any other legal structure used for business purposes that either (a)
            does not have equity  investors with voting rights or (b) has equity
            investors that do not provide sufficient financial resources for the
            entity to support its activities.  FIN 46 requires  certain variable
            interest  entities to be consolidated by the primary  beneficiary of
            the entity if the  investors  do not have the  characteristics  of a
            controlling  financial  interest or do not have sufficient equity at
            risk for the entity to finance  its  activities  without  additional
            subordinated financial support from other parties. The consolidation
            requirements  of FIN  46  apply  immediately  to  variable  interest
            entities   created  after  January  31,  2003.   The   consolidation
            requirements  apply to older  entities  in the first  fiscal year or
            interim period  beginning  after  December 15, 2003.  Certain of the
            disclosure  requirements  apply in all financial  statements  issued
            after  January 31, 2003,  regardless  of when the variable  interest
            entity was  established.  The adoption of this  statement has had no
            effect on the Company's financial position or results of operations.

            In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
            133 on Derivative  Instruments  and Hedging  Activities"  ("SFAS No.
            149").  SFAS No. 149 amends and clarifies  financial  accounting and
            reporting for derivative  instruments,  including certain derivative
            instruments embedded in other contracts (collectively referred to as
            derivatives)  and for hedging  activities  under FASB  Statement No.
            133,  Accounting for Derivative  Instruments and Hedging Activities.
            This   Statement    requires   that   contracts   with    comparable
            characteristics  be accounted for consistently as either derivatives
            or hybrid  instruments.  This  Statement is effective  for contracts
            entered  into or  modified  after  June 30,  2003,  and for  hedging
            relationships  designated  after June 30, 2003. The adoption of this
            statement has had no effect on our financial statements.


                                       23
<PAGE>

            In May 2003, the FASB issued SFAS No. 150,  "Accounting  for Certain
            Financial  Instruments with  Characteristics of Both Liabilities and
            Equity." SFAS No. 150 changes the accounting  for certain  financial
            instruments  that under previous  guidance issuers could account for
            as equity.  It requires  that those  instruments  be  classified  as
            liabilities  in  balance  sheets.  The  guidance  in SFAS No. 150 is
            generally  effective for all financial  instruments  entered into or
            modified  after May 31, 2003,  and otherwise is effective on July 1,
            2003.  The  adoption  of this  statement  has had no  effect  on our
            financial statements.

      A.    Results of Operations:
            ----------------------

            Three-Month Period Ended September 30, 2004 Compared to the
            -----------------------------------------------------------
            Three-Month Period Ended September 30, 2003
            -------------------------------------------

            Revenues

            Total  revenues  increased  to $642,995 for the  three-month  period
            ended  September 30, 2004 from $552,596 for the  three-month  period
            ended  September 30, 2003 due to an increase in the dollar amount of
            the awarded contracts to USCL and SRC and its subsidiaries.

            Product  sales  income  increased  to $385,711  for the  three-month
            period ended  September 30, 2004 from  $268,591 for the  three-month
            period  ended  September  30,  2003 due to an increase in the dollar
            amount  of  the   awarded   contracts   to  USCL  and  SRC  and  its
            subsidiaries.

            Service fee income decreased to $215,364 for the three-month  period
            ended  September 30, 2004 from $244,413 for the  three-month  period
            ended  September  30,  2003 due to the loss of  certain  maintenance
            contracts by ECI.

            Internet  related  income  increased to $41,920 for the  three-month
            period ended  September  30, 2004 from  $39,592 for the  three-month
            period ended September 30, 2003 as the operations of our subsidiary,
            CareerEngine,  Inc.  have  appeared to  stabilized  although we have
            relatively small operations within the e-recruiting industry.

            Cost of Goods Sold

            Costs of goods  sold,  which  relates to product  sales and  related
            service  fee  income  increased  for the  three-month  period  ended
            September 30, 2004 ($300,574) as compared to the three-month  period
            ended  September 30, 2003  ($294,863) due to the increase in related
            revenues.


                                       24
<PAGE>

            Other Expenses

            Total  other  expenses  decreased  to $677,492  for the  three-month
            period ended  September 30, 2004 from  $805,908 for the  three-month
            period  ended   September   30,  2003  as  certain  cost   reduction
            initiatives   were  instituted  in  the  three-month   period  ended
            September  31,  2004 that  were not  instituted  in the three  month
            period ended September 30, 2003.

            Advertising   expenses   modestly   decreased   to  $5,909  for  the
            three-month  period  ended  September  30,  2004 from $6,591 for the
            three-month  period ended  September  30, 2003 as we  decreased  our
            attendance at industry trade shows. These expenditures relate to the
            acquired operations of USCL and SRC and its subsidiaries.

            Compensation  and  related  costs  decreased  to  $207,324  for  the
            three-month  period ended  September  30, 2004 from $387,467 for the
            three-month period ended September 30, 2003 as we instituted certain
            payroll  reduction  initiatives in 2004 and certain  payroll related
            accruals  were reversed as they were deemed  unnecessary  due to the
            termination of certain officers in September, 2004.

            General and  administrative  expenses  decreased to $322,507 for the
            three-month  period ended  September  30, 2004 from $341,657 for the
            three-month period ended September 30, 2003 due to the decreased use
            of professional services in the operations of the Company.

            Product   development   expenses   increased   to  $92,904  for  the
            three-month  period  ended  September  30,  2004  from  nil  for the
            three-month   period  ended   September  30,  2003  due  to  certain
            initiatives  commenced  by USCL  and SRC  and  its  subsidiaries  to
            develop products to meet our customers' future requirements.

            Depreciation and amortization  expenses decreased to $48,848 for the
            three-month  period  ended  September  30, 2004 from $70,193 for the
            three-month  period ended  September 30, 2003, due to the net effect
            of  the  depreciation  and  amortization  expense  relating  to  the
            relatively  long-life fixed assets and intellectual  property rights
            associated with the  acquisition of SRC and its  subsidiaries in the
            three-month period ended September 30, 2004, and the depreciation of
            certain  short-life  assets  of the  Company  that  remained  in the
            three-month period ended September 30, 2003.

            Other Items

            Amortization   of  debt  discount   decreased  to  $24,963  for  the
            three-month  period ended  September  30, 2004 from $175,750 for the
            three-month period ended September 30, 2003 due to the change in the
            monthly rate of amortization of the debt discount ($699,000) related
            to the 10% subordinated  notes issued on April 23, 2003 from $58,250
            to $8,321. The change in the amortization rate was caused


                                       25
<PAGE>

            by the  extension of the  maturity  date of the notes from April 30,
            2004 to April 30, 2005.

            Interest  expense  increased to $110,757 for the three-month  period
            ended  September  30, 2004 from $82,320 for the  three-month  period
            ended  September  30, 2003 due  primarily to the use, by SRC and its
            subsidiaries of accounts  receivable  financing commonly referred to
            as factoring.  Factoring when utilized has a annual interest rate in
            excess of 36%.

            Tax Settlement  adjustment of $895,622  relates to the 2003 accepted
            and paid  Offer in  Compromise  with the  Internal  Revenue  Service
            ($50,000)  pertaining to a $945,000 tax liability of a subsidiary of
            the Company.

            Operating Loss

            On a pre-tax  basis,  we had a loss from  continuing  operations  of
            $470,514  for  the  three-month  period  ended  September  30,  2004
            compared with income from  continuing  operations of $89,377 for the
            three-month  period ended  September 30, 2003. This change is due to
            the  effect  of the tax  settlement  adjustment  in 2003  offset  by
            start-up   expenses   associated   with  the   acquisition   of  SRC
            Technologies,  Inc.  and its  subsidiaries  and the related  private
            financings in 2003.

            Our loss from continuing operations for the three-month period ended
            September 30, 2004 was $470,514 compared with income from continuing
            operations of $89,377 for the three-month period ended September 30,
            2003.  This  change  is due  to the  effect  of the  tax  settlement
            adjustment in 2003 offset by start-up  expenses  associated with the
            acquisition of SRC  Technologies,  Inc. and its subsidiaries and the
            related private financings in 2003. For the three-month period ended
            September   30,  2004,   loss  per  common  share  from   continuing
            operations,   basic  and  diluted,  was  $.04  per  share.  For  the
            three-month period ended September 30, 2003, income per common share
            from continuing operations, basic and diluted, was $.01 per share.

            Our income from discontinued  operations for the three-month  period
            ended  September  30, 2004 was nil compared  with income of $533,634
            from  discontinued  operations  for  the  three-month  period  ended
            September  30, 2003 due to a gain on the sale of a subsidiary of the
            Company. For the three-month period ended September 30, 2003, income
            per common share from  discontinued  operations,  basic and diluted,
            was $.07 per share.

            Our net loss for the three-month period ended September 30, 2004 was
            $470,514  compared  with net income of $623,011 for the  three-month
            period ended  September 30, 2003. For the  three-month  period ended
            September 30, 2004,  net loss per common  share,  basic and diluted,
            was $.04 per share.  For the three-month  period ended September 30,
            2003, net income per common share,  basic and diluted,  was $.08 per
            share.


                                       26
<PAGE>

            Nine-Month Period Ended September 30, 2004 Compared to the
            ----------------------------------------------------------
            Nine-Month Period Ended September 30, 2003
            ------------------------------------------

            Revenues

            Total revenues  increased to $2,176,255  for the  nine-month  period
            ended September 30, 2004 from  $1,157,066 for the nine-month  period
            ended  September  30, 2003 as we had nine months of activity  and an
            increase in the dollar  amount of contracts  awarded to USCL and SRC
            and its  subsidiaries  in the nine months ended  September  30, 2004
            compared  to only five  months of  activity  of USCL and SRC and its
            subsidiaries in the nine months ended September 30, 2003.

            Product  sales income  increased to  $1,279,111  for the  nine-month
            period ended  September  30, 2004 from  $624,684 for the  nine-month
            period ended September 30, 2003 as we had nine months of activity of
            USCL and SRC and its subsidiaries in the nine months ended September
            30,  2004  compared  to only five months of activity of USCL and SRC
            and its subsidiaries in the nine months ended September 30, 2003.

            Service fee income  increased to $798,017 for the nine-month  period
            ended  September  30, 2004 from $412,932 for the  nine-month  period
            ended  September  30, 2003 as we had nine months of activity of USCL
            and SRC and its  subsidiaries in the nine months ended September 30,
            2004  compared  to only five  months of activity of USCL and SRC and
            its subsidiaries in the nine months ended September 30, 2003.

            Internet  related  income  decreased  to $99,127 for the  nine-month
            period ended  September  30, 2004 from  $119,450 for the  nine-month
            period ended September 30, 2003 as the operations of our subsidiary,
            CareerEngine,  Inc. have  continued to decline due to our relatively
            small size in the e-recruiting industry.

            Cost of Goods Sold

            Costs of goods  sold,  which  relates to product  sales and  related
            service fee income increased to $1,085,889 for the nine-month period
            ended  September  30, 2004 from $573,216 for the  nine-month  period
            ended  September  30,  2003 as we had nine months of activity of SRC
            and its  subsidiaries  in the nine months ended  September  30, 2004
            compared to only five months of activity of SRC and its subsidiaries
            in the six months ended September 30, 2003.

            Other Expenses

            Total other  expenses  increased to  $2,333,276  for the  nine-month
            period ended  September 30, 2004 from  $1,688,225 for the nine-month
            period ended September 30, 2003 as we had nine months of activity of
            USCL and SRC and its subsidiaries in the nine months ended September
            30,  2004  compared  to only five months of activity of USCL and SRC
            and its subsidiaries in the nine months ended September 30, 2003.


                                       27
<PAGE>

            Advertising  expenses increased to $42,837 for the nine-month period
            ended  September  30, 2004 from  $23,682 for the  nine-month  period
            ended  September  30, 2003 as we had nine months of activity of USCL
            and SRC and its  subsidiaries in the nine months ended September 30,
            2004  compared  to only five  months of activity of USCL and SRC and
            its subsidiaries in the nine months ended June 30, 2003.

            Compensation  and related  costs  increased  to  $1,028,916  for the
            nine-month  period ended  September  30, 2004 from  $791,402 for the
            nine-month  period ended September 30, 2003 as we had nine months of
            activity  of USCL and SRC and its  subsidiaries  in the nine  months
            ended September 30, 2004 compared to only five months of activity of
            USCL and SRC and its subsidiaries in the nine months ended September
            30, 2003.

            General and  administrative  expenses  increased to $985,806 for the
            nine-month  period ended  September  30, 2004 from  $779,678 for the
            nine-month  period  ended  September  30,  2003  due  to  the  costs
            associated with the  acquisition and related  operations of USCL and
            SRC and its  subsidiaries,  and the professional fees associated the
            significantly increased operations of the Company.

            Product   development   expenses   increased  to  $130,513  for  the
            nine-month  period  ended  September  30,  2004  from  nil  for  the
            nine-month   period  ended   September   30,  2003  due  to  certain
            initiatives  commenced  by USCL  and SRC  and  its  subsidiaries  to
            develop products to meet our customers' future requirements.

            Depreciation and amortization expenses increased to $145,204 for the
            nine-month  period  ended  September  30, 2004 from  $93,463 for the
            nine-month period ended September 30, 2003, due to the net effect of
            the depreciation and amortization expense relating to the relatively
            long-life fixed assets and intellectual  property rights  associated
            with the  acquisition  of USCL and SRC and its  subsidiaries  in the
            nine-month  period ended September 30, 2004, and the depreciation of
            certain  short-life  assets  of the  Company  that  remained  in the
            nine-month period ended September 30, 2003.

            Other Items

            Amortization  of  debt  discount   decreased  to  $174,747  for  the
            nine-month  period ended  September  30, 2004 from  $292,250 for the
            nine-month  period ended  September 30, 2003 due the combined effect
            of (i) an increase in the amortization  period to nine months in the
            nine-month  period ended  September 30, 2004 from five months in the
            nine-month  period ended September 30, 2003 as the notes were issued
            in  late  April  2003,   and  (ii)  the  decrease  in  the  rate  of
            amortization  in the nine-month  period ended  September 30, 2004 as
            compared  to the rate of  amortization  utilized  in the  nine-month
            period ended  September 30, 2003 when the notes were extended for an
            additional year in March 2004 .


                                       28
<PAGE>

            Interest  expense  decreased to $278,099 for the  nine-month  period
            ended  September  30, 2004 from $319,163 for the  nine-month  period
            ended September 30, 2003 due primarily to the combined effect of the
            issuance of the  Company's  10% and 8%  subordinated  notes in April
            2003,  the  cessation  of  interest  expense on a  subsidiary's  12%
            Debentures  Payable  and Tax  Assessment  Payable in July and August
            2003,  and the  conversion of  $1,000,000 of 8% Promissory  Notes to
            preferred stock in July, 2003.

            Tax  Settlement  adjustment of $895,622  relates to the accepted and
            paid Offer in Compromise with the Internal Revenue Service ($50,000)
            pertaining  to a  $945,000  tax  liability  of a  subsidiary  of the
            Company.

            Operating Loss

            On a pre-tax  basis,  we had a loss from  continuing  operations  of
            $1,695,180  for the  nine-month  period  ended  September  30,  2004
            compared with a loss from continuing  operations of $820,166 for the
            nine-month  period ended  September 30, 2003.  This change is due to
            the  effect  of the tax  settlement  adjustment  in 2003  offset  by
            start-up   expenses   associated   with  the   acquisition   of  SRC
            Technologies,  Inc.  and its  subsidiaries  and the related  private
            financings in 2003.

            Our loss from continuing  operations for the nine-month period ended
            September  30,  2004 was  $1,695,180  compared  with  our loss  from
            continuing  operations of $820,166 for the  nine-month  period ended
            September  30,  2003.  This  change is due to the  effect of the tax
            settlement adjustment in 2003 offset by start-up expenses associated
            with the acquisition of SRC Technologies,  Inc. and its subsidiaries
            and the  related  private  financings  in 2003.  For the  nine-month
            period  ended  September  30,  2004,  loss  per  common  share  from
            continuing  operations,  basic and diluted,  was $.16 per share. For
            the  nine-month  period ended  September  30, 2003,  loss per common
            share from continuing  operations,  basic and diluted,  was $.12 per
            share.

            Our income from  discontinued  operations for the nine-month  period
            ended  September  30, 2004 was nil compared  with income of $533,634
            from  discontinued   operations  for  the  nine-month  period  ended
            September  30, 2003 due to a gain on the sale of a subsidiary of the
            Company.  For the nine-month period ended September 30, 2003, income
            per common share from  discontinued  operations,  basic and diluted,
            was $.08 per share.

            Our net loss for the nine-month  period ended September 30, 2004 was
            $1,695,180 compared with our net loss of $286,532 for the nine-month
            period ended  September 30, 2003.  For the  nine-month  period ended
            September 30, 2004,  net loss per common  share,  basic and diluted,
            was $.16 per share.  For the nine-month  period ended  September 30,
            2003, our net loss per common share, basic and diluted, was $.04 per
            share.

      B.    Liquidity and Capital Resources
            -------------------------------


                                       29
<PAGE>

            The Company has incurred substantial losses,  sustained  substantial
            cash outflows from operating  activities  and had a working  capital
            deficit at  September  30, 2004 and  December  31,  2003.  The above
            factors  raise  substantial  doubt  about the  Company's  ability to
            continue  as a going  concern.  The  Company's  continued  existence
            depends  on its  ability to obtain  additional  equity  and/or  debt
            financing  to fund its  operations,  financial  obligations  as they
            become due, and  ultimately to achieve  profitable  operations.  The
            Company  is  continuously  in  the  process  of  raising  additional
            financing and has initiated a cost reduction strategy.  At September
            30, 2004 and December 31, 2003, management believed that the working
            capital  deficit,  losses and negative cash flow will  ultimately be
            improved by (i) the acquisition and increased  operations of SRC and
            ECI, (ii) cost  reduction  strategies  initiated in January and June
            2004, and (iii) additional  equity and debt financing  activities in
            addition to those set forth in the financial statements.  On January
            2, 2004, the Company  received a notice dated December 31, 2003 from
            the  American  Stock  Exchange   indicating  that  the  Company  had
            demonstrated  compliance with the requirement for continued  listing
            on  the  Exchange.  As is the  case  for  all  listed  issuers,  the
            Company's  continued  listing  eligibility  will be  assessed  on an
            ongoing basis;  however,  during the year ending  December 31, 2004,
            the Company will be subject to additional  scrutiny (as set forth in
            Section  1009(h) of the AMEX  Company  Guide) as is the case for any
            listed company that has regained  compliance.  There is no assurance
            that  the  Company  can  obtain  additional   financing  or  achieve
            profitable operations or generate positive cash flow.

            Off-Balance Sheet Arrangements
            ------------------------------

            At September  30, 2004 and  December  31,  2003,  the Company had no
            off-balance sheet arrangements.

            Operating Activities
            --------------------

            We utilized  $1,021,523 of cash in operating  activities  during the
            nine-month  period ended  September  30, 2004.  We had a net loss of
            1,695,180  during  this  period,  which  included  an  aggregate  of
            $383,158 of non-cash items, including depreciation and amortization,
            amortization of debt discount, allowance for doubtful accounts and a
            charge for the issuance of common stock of the Company for services.
            In  addition  to  the  impact  of  non-cash  items,   our  operating
            activities for the nine-month  period ended  September 30, 2004 also
            reflected an increase in inventory  and  accounts  payable,  accrued
            expenses  and  other   liabilities,   and  a  decrease  in  accounts
            receivable and other assets.

            We utilized  $1,114,894 of cash in operating  activities  during the
            nine-month  period ended  September  30, 2003.  We had a net loss of
            $286,532  during  this  period  which  included   depreciation   and
            amortization,  non-cash items,  amounting to $93,463. In addition to
            the impact of  non-cash  items,  our  operating  activities  for the
            nine-month  period  ended  September  30,  2003  also  reflected  an
            increase  in  deferred  grant  revenue  and a decrease  in  accounts
            receivable,  inventory,  prepaid  expenses,  and  accounts  payable,
            accrued expenses and other liabilities.


                                       30
<PAGE>

            On January 21,  2004,  we took  several  initiatives  to address our
            operating cash deficiency,  which included, but were not limited to,
            the reduction  and/or  elimination  of certain  executive  salaries,
            waiving of certain interest  payments due officers and/or directors,
            waiving of certain accounts  receivable due an officer and employee,
            and the reduction of certain  administrative  costs. In addition, we
            raised  (a)  gross  proceeds  of  $700,000  (net  cash  proceeds  of
            $571,000)  in February  2004 from the sale of our common  stock (see
            "Financing   Activities"   below),   (b)  restructured  (i)  certain
            short-term  credit  arrangements into a $300,000 Note payable due in
            February 2005 (see Note A to our Consolidated  Financial Statements)
            and (ii) a  certain  line of credit  into a  $150,000  secured  note
            payable, (c) raised $150,000 through the issuance of our 25% Secured
            Notes in July and August 2004, and (d) raised  $150,000  through the
            issuance of our 10% Convertible Subordinated Notes and related Class
            C warrants in October 2004.

            Financing Activities
            --------------------

            On April 23, 2003, we issued  $1,000,000 in principal  amount of our
            10%  Subordinated  Notes due April 30, 2004 to  investors  for a 15%
            non-dilutive  interest  in the  Company  in the  form  of  4,165,800
            cashless  Class B  Warrants,  each to  purchase  one share of Common
            Stock at $0.50 per share.  We had the option to extend the  maturity
            date of the notes to April 30, 2005 in consideration for issuing the
            noteholders an additional 4%  non-dilutive  interest in the Company.
            The notes also require  prepayment in an amount equal to 100% of any
            net  financing  proceeds  obtained  by us after the  issuance of the
            notes.  The  noteholders  waived  this  provision  to the  extent of
            $2,000,000  through April 15, 2004, of which  $1,200,000 was raised.
            The investors included two of our officers.  Interest is payable, in
            arrears,  calendar quarterly. We valued the Warrants,  utilizing the
            Black-Scholes  Pricing Model, at $699,000,  which is being accounted
            for as debt discount and is being amortized ratably over the initial
            one-year term of the Notes.

            On March 12, 2004, we notified the Class B Warrant  holders that, to
            satisfy the 15%  non-dilutive  provisions of their  Warrants,  these
            Warrants were now exercisable  for an aggregate of 5,245,200  shares
            of our common stock at approximately  $0.40 per share. On this date,
            we also  exercised  our  option to extend the  maturity  date of the
            notes to  April  30,  2005 and  satisfied  the  requirement  for the
            additional 4% non-dilutive interest in the Company by issuing to the
            noteholders  Class B Warrants to purchase  an  additional  1,708,900
            shares of our  common  stock at $0.50 per  share.  The  non-dilutive
            provisions of the Warrants terminate when all of the notes have been
            paid in full.

            In addition,  on September 17, 2003, we sold 1,250,000 shares of our
            common  stock  at $0.40  per  share to an  existing  noteholder  and
            stockholder of the Company.


                                       31
<PAGE>

            On February  10,  2004,  the Company  sold  1,750,000  shares of our
            common stock at $0.40 per share in  consideration  of $700,000  cash
            (net cash proceeds of $571,000).

            In June 2004,  in an effort to conserve the  financial  resources of
            the Company,  the Board of Directors of the Company deferred 100% of
            the salaries of four  officers of the Company until such time as the
            Board   deems   otherwise.   In   September   2004,   three  of  the
            aforementioned officers were terminated by the Company.

            On June 28, 2004 the Company repaid, in full, one of its outstanding
            lines of credit  amounting to  approximately  $146,000.  On the same
            date the  Company  issued a secured  note  payable to an officer and
            employee of a  subsidiary  of the Company in the amount of $150,000.
            The note is secured by the equipment of a subsidiary of the Company.
            The note bears  interest at 10% per annum and the  principal and all
            interest thereon is due September 28, 2004. The Company is currently
            negotiating new terms with regard to this note.

            As of  July  1,  2004,  80% of the  holders  of  the  Company's  10%
            subordinated  notes agreed to defer  $20,000 of interest due on such
            date to October 1, 2004 in  consideration  of the Company issuing to
            them  153,846  Class B  Warrants  of the  Company,  each to give the
            holder  thereof  the right to  purchase  a share of common  stock at
            $0.39 per share.  As of October 1, 2004,  75% of the  holders of the
            Company's 10% subordinated notes agreed to defer $18,750 of interest
            deferred to October 1, 2004 to January 1, 2005 in  consideration  of
            the Company  issuing to them an additional  170,455 Class B Warrants
            of the  Company,  each to give  the  holder  thereof  the  right  to
            purchase a share of common stock at $0.33 per share. The noteholders
            include two officers of the Company.

            In July and August  2004,  the  Company  issued  $150,000 of its 24%
            Secured Notes due April 30, 2005 to the wife of the Chief  Executive
            Officer and an existing 10% subordinated  noteholder of the Company.
            Interest on the notes is payable quarterly in arrears. The notes are
            secured by (i) all the stock of SRC and USCL, and (ii) the pledge of
            Patent Nos.  6,060,979,  6,047,173 and  5,701,338  -all owned by the
            Company.  On October 1, 2004,  100% of the holders of the  Company's
            24% Secured  Notes  agreed to defer  $5,786 of interest  due on such
            date to January 1, 2005 in  consideration  of the Company issuing to
            them 76,712 Class B Warrants of the Company, each to give the holder
            thereof the right to  purchase a share of common  stock at $0.33 per
            share.

            As of October  1, 2004,  75% of the  holders  of the  Company's  10%
            subordinated  notes agreed to defer  $18,750 of interest due on such
            date to January 1, 2005 in  consideration  of the Company issuing to
            them  170,455  Class B  Warrants  of the  Company,  each to give the
            holder  thereof  the right to  purchase  a share of common  stock at
            $0.33  per  share.  The  noteholders  include  two  officers  of the
            Company.

            In  October  2004,  the  Company  and USCL  entered  into a two-year
            Project Financing Agreement with an institutional lender relating to
            USCL's  anticipated  participation in the "Cellular Call Box Upgrade
            and Maintenance Service"


                                       32
<PAGE>

            projects  for numerous  Service  Authority  for Freeway  Emergencies
            ("SAFE")  programs  within the state of  California.  These call box
            programs  operate  over 17,000  motorist  aid analog call boxes that
            will  require  upgrades  to digital  cellular  technology  available
            through  USCL.  This  agreement  provides the Company with  finished
            goods and accounts receivable financing of up to $2,000,000 relating
            to these potential  aforementioned  projects. The effective interest
            rate is approximately 3% per month on the outstanding balance of the
            amount  financed.  The finished goods and accounts  receivable to be
            financed,  as  well as all  the  other  assets  of the  Company  not
            previously pledged, will secure the borrowings under this agreement.

            In October and November 2004, the Company issued (i) $125,000 of its
            10%  Convertible  Subordinated  Notes  due  June  30,  2005 and (ii)
            787,500  Class C Warrants  of the  Company,  each to give the holder
            thereof the right to  purchase a share of common  stock at $0.50 per
            share.  The  notes  were  sold to the  wife of the  Chief  Executive
            Officer  of the  Company  and  other  accredited  investors  and are
            convertible  by the holder,  at any time,  into common  stock of the
            Company at $0.50 per share.  The warrants  expire on April 30, 2013.
            Interest on the notes is payable monthly in arrears.

            We are using the funds obtained from these financings to pay certain
            ECI notes  payable  and for working  capital.  The  financings  were
            effected pursuant to the exemption from the registration  provisions
            of the Securities Act of 1993 provided by Section 4(2) thereof.

            We did not have any material commitments for capital expenditures as
            of September 30, 2004.

      C.    Inflation
            ---------

            Due to the nature of our business,  inflation does not significantly
            impact the Company's operations.

Item 3.     Controls and Procedures

            The Chief  Executive  Officer  and Chief  Financial  Officer  of the
            Company  have  conducted  an  evaluation  of  the  effectiveness  of
            disclosure  controls and  procedures  pursuant to Rule 13a-14 of the
            Exchange Act. Based on that evaluation, they have concluded that the
            Company's  disclosure  controls  and  procedures  are  effective  in
            ensuring that all material  information required to be filed in this
            Quarterly  Report on Form  10-QSB  has been made  known to them in a
            timely fashion.  There have been no significant  changes in internal
            controls,  or in  other  factors  that  could  significantly  affect
            internal  controls,  subsequent  to the date  they  completed  their
            evaluation.


                                       33
<PAGE>

                                     PART II

                                OTHER INFORMATION

Item 1.     Legal Proceedings.

            The Company is a party to various vendor related litigations.  Based
            on the  opinion of  management  and legal  counsel,  the Company has
            accrued an estimated liability of approximately $100,000.

            On  August  19,  2004,  Michael  J.  Gutowski,  then  the  Company's
            President and Chief Operating  Officer and a director,  and Larry M.
            Reid,  then the Company's  Executive  Vice President and a director,
            informed the Company that their  employment  contracts may have been
            breached.  On August 27, 2004, Messrs.  Gutowski and Reid filed suit
            against the Company in the United States  District  Court,  Southern
            District of Florida,  alleging that (i) their  employment  contracts
            have been  breached and (ii) certain  future  compensation  relating
            thereto  to  be  paid  to  them  amounting  up to  an  aggregate  of
            $1,003,000 has been accelerated.  The name of the case is Michael J.
            Gutowski and Larry M. Reid v. CNE Group, Inc., Case Number 04-61125.

            The Company  does not believe  that it has  committed  any breach of
            these agreements and, accordingly,  has not incurred the claims that
            these officers are alleging. In addition,  the Company believes that
            Messrs.  Gutowski  and  Reid  have  committed  violations  of  their
            employment agreements and have taken other actions that have damaged
            the  Company.  The  Company  has filed a defense to this  action and
            asserted appropriate  counterclaims.  This litigation is ongoing and
            no amounts  have been  accrued as of  September  30, 2004 related to
            this  matter.  Since  the  institution  of this  litigation  Messrs.
            Gutowski and Reid have been  terminated  as officers,  directors and
            employees  of  the  Company's   subsidiaries  and  as  officers  and
            employees  of the  Company,  and have been removed as members of the
            Company's Executive Committee. They currently remain as directors of
            the Company.

            On October 5, 2004, Carol L. Gutowski, then an officer of one of the
            Company's  subsidiaries  and  a  former  director  of  the  Company,
            instituted a suit against the subsidiary in the Circuit Court,  17th
            Judicial Circuit, Broward County, Florida,  charging a breach of her
            employment  agreement  with the subsidiary and claiming that certain
            future  compensation  relating  thereto  to be paid to her  from the
            subsidiary  amounting  up to  an  aggregate  of  $274,000  has  been
            accelerated.  Since the  institution of this litigation Ms. Gutowski
            has been  terminated  as an officer and director of the  subsidiary.
            The Company does not believe that its  subsidiary  has committed any
            breach of this  agreement  and,  accordingly,  has not  incurred the
            claims  that Ms.  Gutowski  is  alleging.  The Company has named Ms.
            Gutowski as a counterclaim  defendant in the  litigation  pending in
            federal  court  referred to above and has  asserted  certain  claims
            against her in that action.  The  subsidiary  has filed an answer to
            this  action.  This  litigation  is ongoing and no amounts have been
            accrued as of September 30, 2004 related to this matter.


                                       34
<PAGE>

Item 5.     Other Information.

            On April 28, 2004,  the  Company's  Board of Directors  approved the
            Company's  Code of Business  Conduct  and Ethics for the  Directors,
            Officers and Employees of CNE Group, Inc. (the "Code").  The Company
            has posted the Code on its corporate website: www.cnegroupinc.com.
                                                          --------------------

Item 6.     Exhibits and Reports on Form 8-K.

            (a)   Exhibits:

                  31.1  Certification   pursuant   to   Section   302   of   the
                        Sarbanes-Oxley  Act of 2002  from  the  Company's  Chief
                        Executive Officer

                  31.2  Certification   pursuant   to   Section   302   of   the
                        Sarbanes-Oxley  Act of 2002  from  the  Company's  Chief
                        Financial Officer

                  32.1  Certification of the Chief Executive Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002

                  32.2  Certification of the Chief Financial Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002

                        A  statement  regarding  the  computation  of per  share
                        earnings is omitted because the computation is described
                        in  Note  B  of  the  Notes  to  Consolidated  Financial
                        Statements (Unaudited) in this Form 10-QSB.

            (b) Reports on Form 8-K:

                  The Company  filed a report on Form 8-K on  February  10, 2004
                  and two reports on Form 8-K on June 14, 2004, a report on Form
                  8-K on July 9, 2004 and a report on Form 8-K on September  13,
                  2004.


                                       35
<PAGE>

                                   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.

                                     CNE GROUP, INC.


                                     /s/ George W. Benoit
Date: November 22, 2004              -----------------------------------------
                                     George W. Benoit, Chairman of the Board
                                     of Directors, and Chief Executive
                                     Officer


                                     /s/ Anthony S. Conigliaro
                                     -----------------------------------------
Date: November 22, 2004              Anthony S. Conigliaro, Vice President and
                                     Chief Financial Officer


                                       36