UNITED
        STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C.  20549





FORM
      10-Q





ý
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the quarterly period ended December 31, 2007o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





Commission
      file number 001-15789





STRATUS
      SERVICES GROUP, INC.


(Exact
      name of Registrant as specified in its charter)





Delaware
            
            22-3499261(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)149
                Avenue at the Common, Shrewsbury, New
                Jersey  07702(Address
                of principal executive offices)(732)
                866-0300(Registrant’s
                telephone number, including area code)Securities
                registered under Section 12(b) of the Exchange Act:Not
                ApplicableSecurities
                registered under Section 12(g) of the Exchange Act:Common
                Stock, $.04 par value(Title
                of class)





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





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





Large
                Accelerated Filer  o
            Accelerated
                Filer  o
            Non-Accelerated
                Filer  x





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





The
      number of shares of Common Stock, $.04 par value, outstanding as of February
      12,
      2008 was 71,318,617.








STRATUS
      SERVICES GROUP, INC.


Condensed
      Consolidated Balance Sheets


(Unaudited)





December
                31,
            
            
            September
                30,Assets
            
            2007
            
            
            2007Current
                assetsCash
            
            $
            296,554
            
            
            $
            144,849Accounts
                receivable–less
                allowance for doubtful accounts of  $200,000and
                $75,000
            
            
            1,305,093
            
            
            
            1,104,650Unbilled
                receivables
            
            
            145,674
            
            
            
            176,690Prepaid
                insurance
            
            
            41,200
            
            
            
            53,351Prepaid
                expenses and other
                current assets
            
            
            266,011
            
            
            
            269,9882,054,532
            
            
            
            1,749,528Property
                and equipment, net of accumulated depreciation
            
            
            172,447
            
            
            
            186,279Intangible
                assets, net of accumulated amortization
            
            
            86,111
            
            
            
            94,444Goodwill
            
            
            1,766,336
            
            
            
            1,766,336Other
                assets
            
            
            8,820
            
            
            
            8,820$
            4,088,246
            
            
            $
            3,805,407Liabilities
                and Stockholders’ Equity (Deficiency)Current
                liabilitiesLoans
                payable (current
                portion)
            
            $
            130,142
            
            
            $
            130,983Loans
                payable – related
                parties
            
            
            167,721
            
            
            
            85,721Notes
                payable – acquisitions
                (current portion) (including $53,746 and $52,859 to
                related  party)
            
            
            350,560
            
            
            
            349,673Note
                payable – related party
                (current portion)
            
            
            547,715
            
            
            
            506,233Line
                of credit
            
            
            876,178
            
            
            
            642,570Insurance
                obligation
                payable
            
            
            7,624
            
            
            
            13,154Accounts
                payable and accrued
                expenses
            
            
            4,406,378
            
            
            
            4,349,523Accrued
                payroll and
                taxes
            
            
            315,562
            
            
            
            190,969Payroll
                taxes
                payable
            
            
            3,129,915
            
            
            
            3,218,455Series
                A redemption
                payable
            
            
            300,000
            
            
            
            300,00010,231,795
            
            
            
            9,787,281Loans
                payable (net of current portion)
            
            
            30,054
            
            
            
            35,013Notes
                payable – acquisitions (net of current portion) (including $95,755 and
                $109,664 to related party)
            
            
            422,709
            
            
            
            430,241Note
                payable – related party (net of current portion)
            
            
            69,135
            
            
            
            110,617Notes
                payable – minority interest investors
            
            
            750,000
            
            
            
            675,00011,503,693
            
            
            
            11,038,152Commitments
                and contingenciesMinority
                interest
            
            
            494,429
            
            
            
            547,135Stockholders’
                equity (deficiency)Preferred
                stock, $.01 par value, 5,000,000 shares authorizedSeries
                F voting convertible
                preferred stock, $.01 par value, 6,000shares
                issued and outstanding,
                liquidation preference of $600,000(including
                unpaid dividends of
                $143,500 and $133,000)
            
            
            743,500
            
            
            
            733,000Common
                stock, $.04 par value, 100,000,000 shares authorized;
                71,318,615and
                69,568,615 shares issued
                and outstanding
            
            
            2,852,745
            
            
            
            2,782,745Additional
                paid-in capital
            
            
            9,745,616
            
            
            
            9,760,516Accumulated
                deficit
            
            
            (21,251,737
            )
            
            
            (21,056,141
            )Total
                stockholders’ equity
                (deficiency)
            
            
            (7,909,876
            )
            
            
            (7,779,880
            )$
            4,088,246
            
            
            $
            3,805,407


See
      notes
      to condensed consolidated financial statements


2


STRATUS
      SERVICES GROUP, INC.


Condensed
      Consolidated Statements of Operations


(Unaudited)








Three
                Months EndedDecember
                31,2007
            
            
            2006Revenues
            
            $
            2,659,020
            
            
            $
            1,862,854Cost
                of revenues
            
            
            1,856,119
            
            
            
            1,273,803Gross
                profit
            
            
            802,901
            
            
            
            589,051Selling,
                general and administrative expenses
            
            
            1,077,296
            
            
            
            648,203Operating
                (loss) from continuing operations
            
            
            (274,395
            )
            
            
            (59,152
            )Interest
                expense
            
            
            (64,415
            )
            
            
            (62,423
            )(Loss)
                from continuing operations before minority interest
            
            
            (338,810
            )
            
            
            (121,575
            )Minority
                interest in net (income) loss of consolidated subsidiaries
            
            
            82,105
            
            
            
            (21,808
            )(Loss)
                from continuing operations
            
            
            (256,705
            )
            
            
            (143,383
            )Gain
                on sale of discontinued operations
            
            
            61,108
            
            
            
            175,859Net
                earnings (loss)
            
            
            (195,597
            )
            
            
            32,476Dividends
                on preferred stock
            
            
            (10,500
            )
            
            
            (10,500
            )Net
                earnings (loss) attributable to common stockholders
            
            $
            (206,097
            )
            
            $
            21,976Net
                earnings (loss) per share attributable to common
                stockholdersBasic:(Loss)
                from continuing
                operations
            
            $
            -
            
            
            $
            -Earnings
                from discontinued
                operations
            
            
            -
            
            
            
            -Net
                earnings
                (loss)
            
            $
            -
            
            
            $
            -Diluted:(Loss)
                from continuing
                operations
            
            $
            -
            
            
            $
            -Earnings
                from discontinued
                operations
            
            
            -
            
            
            
            -Net
                earnings
                (loss)
            
            $
            -
            
            
            $
            -Weighted
                average shares outstanding per common shareBasic
            
            
            69,758,832
            
            
            
            65,479,754Diluted
            
            
            69,758,832
            
            
            
            65,479,754

















See
      notes
      to condensed consolidated financial statements


3


STRATUS
      SERVICES GROUP, INC.


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)







Three
                Months EndedDecember
                31,2007
            
            
            2006Cash
                flows from operating activitiesNet
                earnings
                (loss)
            
            $
            (195,597
            )
            
            $
            32,476Adjustments
                to reconcile net
                earnings to net cash used by operating activitiesDepreciation
            
            
            20,307
            
            
            
            17,850Amortization
            
            
            8,333
            
            
            
            -Gain
                on sale of discontinued
                operations
            
            
            (61,108
            )
            
            
            (175,859
            )Stock
                compensation
            
            
            20,000
            
            
            
            -Imputed
                interest
            
            
            6,378
            
            
            
            14,350Changes
                in operating assets and
                liabilitiesAccounts
                receivable
            
            
            (169,427
            )
            
            
            (667,424
            )Prepaid
                insurance
            
            
            12,151
            
            
            
            3,896Prepaid
                expenses and other
                current assets
            
            
            3,977
            
            
            
            (14,835
            )Minority
                interest
            
            
            (82,105
            )
            
            
            21,805Insurance
                obligation
                payable
            
            
            (5,530
            )
            
            
            (7,348
            )Accrued
                payroll and
                taxes
            
            
            124,593
            
            
            
            101,819Payroll
                taxes
                payable
            
            
            (88,540
            )
            
            
            (274,858
            )Accounts
                payable and accrued
                expenses
            
            
            34,527
            
            
            
            8,503Accrued
                interest
            
            
            22,328
            
            
            
            11,171Total
                adjustments
            
            
            (154,116
            )
            
            
            (960,927
            )(349,713
            )
            
            
            (928,451
            )Cash
                flows (used in) investing activitiesPurchase
                of property and
                equipment
            
            
            (6,475
            )
            
            
            (18,538
            )Cash
                received in connection with
                sale of discontinued operations (including$110,000
                from a related party
                in 2006)
            
            
            61,108
            
            
            
            287,67654,633
            
            
            
            269,138Cash
                flows from financing activitiesNet
                proceeds from line of
                credit
            
            
            233,608
            
            
            
            493,862Proceeds
                from loans payable –
                related parties
            
            
            82,000
            
            
            
            100,000Payments
                of loans
                payable
            
            
            (5,800
            )
            
            
            (2,031
            )Payments
                of loans payable –
                related parties
            
            
            -
            
            
            
            (1,000
            )Payments
                of notes payable –
                acquisitions
            
            
            (13,023
            )
            
            
            (3,490
            )Proceeds
                from minority interest
                investors
            
            
            150,000
            
            
            
            -446,785
            
            
            
            587,341Net
                change in cash
            
            
            151,705
            
            
            
            (71,972
            )Cash
                – beginning
            
            
            144,849
            
            
            
            84,881Cash
                – ending
            
            $
            296,554
            
            
            $
            12,909Supplemental
                disclosure of cash paidInterest
            
            $
            73,743
            
            
            $
            51,252





See
      notes
      to condensed consolidated financial statements


4





Schedule
                of non-cash investing and financing activitiesSale
                of discontinued
                operations:Gain
                on sale
            
            $
            61,108
            
            
            $
            175,859Due
                from related
                party
            
            
            -
            
            
            
            110,000Accrued
                earn-out
            
            
            -
            
            
            
            1,817Net
                cash
                received
            
            $
            61,108
            
            
            $
            287,676Cumulative
                dividends on preferred stock
            
            $
            10,500
            
            
            $
            10,500








See
      notes
      to condensed consolidated financial statements


5


STRATUS
      SERVICES GROUP, INC.


Notes
      to
      Condensed Consolidated Financial Statements


(Unaudited)








NOTE
                1 –
            BASIS
                OF PRESENTATION





The
      accompanying condensed consolidated financial statements have been prepared
      by
      the Company, without audit, pursuant to the rules and regulations of the
      Securities and Exchange Commission.  Certain information and
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States have been
      condensed or omitted pursuant to such rules and regulations.  These
      condensed financial statements reflect all adjustments (consisting only of
      normal recurring adjustments) that, in the opinion of management, are necessary
      to present fairly the financial position, the results of operations and cash
      flows of the Company for the periods presented.  It is suggested that
      these condensed financial statements be read in conjunction with the
      consolidated financial statements and the notes thereto included in the
      Company’s Annual Report on Form 10-K.





The
      results of operations for the interim periods presented are not necessarily
      indicative of the results to be expected for the full year.





Certain
      prior period financial statement amounts have been reclassified to be consistent
      with the presentation for the current period.





NOTE
                2 -
            DESCRIPTION
                OF BUSINESS AND SEGMENT INFORMATION





Description
      of Business


Until
      December 2005, Stratus Services Group, Inc. (“Stratus”) , together with its
      51%-owned joint venture, Stratus Technology Services, LLC (“STS”), was a
      national provider of staffing and productivity consulting
      services.  In December 2005, Stratus completed a series of asset sales
      transactions pursuant to which it sold substantially all of the asset it used
      to
      conduct its staffing services (see Note 7).  In August 2007, Stratus’
newly formed subsidiary, Transworld Assets, LLC (“Transworld”) (see Note 4)
      acquired substantially all of the assets used by Green-Tech Assets, Inc. and
      its
      affiliate, CC Laurel, Inc. in their technology asset disposal business (see
      Notes 4 and 8).  Following the transaction, Transworld Assets, LLC
      changed its named to Green-Tech Assets, LLC (“GTA”).  Stratus, STS and
      GTA are herein referred to as the “Company”.





Segment
      Information


The
      operating segments reported below are the segments for which operating results
      are evaluated regularly by management in deciding how to allocate resources
      and
      in assessing performance.  The Company’s reportable segments are
      strategic divisions that offer different services and are managed separately
      as
      each division requires different resources and marketing
      strategies.  Intersegment sales are not significant.





Prior
      to
      the acquisition of the technology asset disposal business in August 2007, the
      Company operated as one business segment.





Net
      revenues and operating income (loss) by segments for the three months ended
      December 31, 2007 were as follows:





Revenues:Information
                technology services
            
            $1,960,882Technology
                asset disposal business
            
            698,138Consolidated
                revenues
            
            $2,659,020Operating
                (loss):Information
                technology services
            
            (61,746)Technology
                asset disposal business
            
            (60,229)Corporate
                expenses
            
            (152,420)Consolidated
                operating (loss)
            
            $
                (274,395)





Management
      reviews the Company’s assets on a consolidated basis because it is not
      meaningful to allocate assets to the various segments.  Management
      evaluates segment performance based on revenues and operating
      income.  The company does not allocate income taxes or charges
      determined to be non-recurring in nature.  Unallocated amounts of
      operating (loss) consist of corporate expenses.


6


The
      Company primarily operates in the United States.





NOTE
                3 –
            LIQUIDITY





At
      December 31, 2007, the Company had limited liquid resources.  Current
      liabilities were $10,231,795 and current assets were $2,054,532.  The
      difference of $8,177,263 is a working capital deficit, which is primarily the
      result of losses incurred during the last several years.  These
      factors, among others, indicate that the Company may be unable to continue
      as a
      going concern.  The financial statements do not include any
      adjustments relating to the recoverability and classification of liabilities
      that might be necessary should the Company be unable to continue as a going
      concern.





Management
      recognizes that the Company’s continuation as a going concern is dependent upon
      the continued cooperation of its creditors, its ability to generate sufficient
      cash flow to allow it to satisfy its obligations on a timely basis, to fund
      the
      operation and capital needs, and to obtain additional financing as may be
      necessary.





Management
      of the Company has taken steps to revise and reduce its operating requirements,
      which it believes will be sufficient to assure continued operations and
      implementation of the Company’s plans.  The steps include closing
      branches that are not profitable, consolidating branches and reductions in
      staffing and other selling, general and administrative expense, and most
      significantly, the asset sales transactions that were completed in December
      2005
      (see Note 7) and the acquisition of the technology asset disposition business
      that took place in August 2007 (See Notes 4 and 8).





The
      Company continues to pursue other sources of equity or long-term debt
      financings.  The Company also continues to negotiate payment plans and
      other accommodations with its creditors.





NOTE
                4 -
            NEWLY-FORMED
                SUBSIDIARY





In
      July
      2007, Stratus, in exchange for 5,000,000 shares of its common stock received
      a
      51% interest in an entity created to acquire substantially all of the assets
      of
      Green-Tech Assets, Inc. and its affiliate, CC Laurel, Inc.  Following
      the acquisition, Transworld changed its name to Green-Tech Assets,
      LLC.  Minority interest investors in GTA, through a private offering,
      purchased units at the price of $100,000 which was comprised of a pro-rata
      share
      of the minority interest and a $50,000 note bearing interest at 6% per year
      and
      due July 31, 2012.  In addition, each unit owner received 50,000
      shares of Stratus’ common stock which was held by GTA.  The private
      offering was closed in October 2007 with 15 units sold, representing $750,000
      in
      contributed capital and $750,000 in notes payable.





NOTE
                5–
            NEW
                ACCOUNTING STANDARDS





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”.  This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements.  The
      Statement applies under other accounting pronouncements that require or permit
      fair value measurements.  SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007, or the Company’s fiscal year ending September
      30, 2009.  The Company is currently assessing the impact the adoption
      of this pronouncement will have on the financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” and is effective for fiscal years
      beginning after November 15, 2007.  This Statement permits entities to
      choose to measure many financial instruments and certain other items at fair
      value.  The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions.  The Company is currently
      assessing the impact the adoption of this pronouncement will have on the
      financial statements.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” and is effective
      for fiscal years beginning after December 5, 2008.  This Statement
      establishes accounting and reporting standards for the noncontrolling interest
      in a subsidiary and for the deconsolidation of a subsidiary.  The
      Company is currently assessing the impact the adoption of this pronouncement
      will have on the Company’s financial statements.





In
      December 2007, the FASB issued SFAS No. 141 (Revised) “Business
      Combinations”.  SFAS 141 (Revised) is effective for fiscal years
      beginning after December 13, 2008.  This Statement establishes
      principles and requirements for how the acquirer of a business recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any noncontrolling interest in the
      acquiree.  The Statement also provides guidance for recognizing and
      measuring the goodwill acquired in the business combination and determines
      what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination.  The
      Company is currently assessing the impact the adoption of this pronouncement
      will have on the Company’s financial statements.


7





NOTE
                6 –
            EARNINGS/LOSS
                PER SHARE





Basic
      “Earnings Per Share” (“EPS”) excludes dilution and is computed by dividing
      earnings available to common stockholders by the weighted-average number of
      common shares outstanding during the period.  Diluted EPS assumes
      conversion of dilutive options and warrants, and the issuance of common stock
      for all other potentially dilutive equivalent shares
      outstanding.  There were no dilutive shares for the three months ended
      December 31, 2007 and December 31, 2006.  Outstanding common stock
      options and warrants not included in the computation of earnings per share
      for
      the three months ended December 31, 2007 and 2006, totaled 17,963,653 and
      18,614,903, respectively.  These options and warrants were excluded
      because their inclusion would have an anti-dilutive effect on earnings per
      share.





NOTE
                7 –
            DISCONTINUED
                OPERATIONS





The
      gain
      on sale of discontinued operations is comprised of earnout payments in
      connection with the sales of substantially all of the Company’s then assets in
      December 2005.  The earnout payments, which are based on sales of
      certain of the sold branches, continue through November 2008.





NOTE
                8 –
            ACQUISITION





Effective
      as of August 2, 2007, the Company’s newly formed subsidiary, Transworld (see
      Note 4), purchased substantially all of the assets used by Green-Tech Assets,
      Inc. and its affiliate, CC Laurel, Inc. (the “Seller”) in their technology asset
      disposal business located in Providence, Rhode Island. The purpose of the
      acquisition was to generate future cash flow for the Company and provide
      cross-selling opportunities between the Company’s subsidiaries.





The
      purchase price was comprised of $600,000 in cash, a promissory note in the
      principal amount of $166,828 bearing interest at 5% per year payable in equal
      installments of $5,000 over 36 months, and 2,000,000 shares of Stratus’ common
      stock held by Transworld.  Transworld guaranteed the Seller that the
      market price of Stratus’ common stock would be $.20 per share on the third
      anniversary date of the transaction.  Additionally, Transworld assumed
      approximately $817,000 of specified liabilities.  The aggregate cost
      of the acquisition, including finders’ fees and other costs aggregated
      $2,163,745, which was allocated as follows:





Accounts
                receivable
            
            $
            245,484Property
                and equipment
            
            
            35,000Other
                assets
            
            
            16,925Intangible
                assets
            
            
            100,000Goodwill
            
            
            1,766,336Total
            
            $
            2,163,745





The
      intangible assets represent a covenant not to compete which is being amortized
      over three years.





The
      unaudited proforma consolidated results of operations presented below assume
      that the acquisition had occurred at the beginning of fiscal
      2007.  This information is presented for informational purposes only
      and includes certain adjustments such as amortization of intangible assets
      resulting from the acquisition and interest expense related to the acquisition
      debt.





Unaudited
              Three
                Months Ended
              December
                31, 2006Revenues
            $2,417,269Net
                (loss) from continuing operations attributable to common
                stockholders
            (162,078)Net
                (loss) per share attributable to common stockholders basic and
                diluted
            $              -








8





NOTE
                9 -
            LINE
                OF CREDIT





On
      January 3, 2006, the Company’s consolidated 51% owned joint venture, STS (see
      Notes 1 and 15), entered into a factoring and security agreement (the “Factoring
      Agreement”) with Action Capital Corporation (“Action”).  The Factoring
      Agreement provides for the sale of up to $1,500,000 of acceptable accounts
      receivable of STS to Action.  Action reserves and withholds an amount
      in a reserve account equal to 10% of the face amount of accounts receivable
      purchased under the Factoring Agreement.  Action has full recourse
      against STS including, without limitation, the right to charge-back or sell
      back
      any accounts receivable, if not paid within 90 days of the date of
      purchase.  The Factoring Agreement provides for STS to pay interest of
      prime plus 1% plus a monthly fee of .6% on the daily average of unpaid
      advances.  The prime rate at December 31, 2007 was 7.25%.








NOTE
                10 -
            GOODWILL
                AND OTHER INTANGIBLE ASSETS





Intangible
      assets with definite lives are amortized over their estimated useful
      lives.





Intangible
      assets consist of the following as of December 31, 2007 and September 30,
      2007:





December
                31, 2007
            
            
            September
                30, 2007Covenant-not-to-compete
            
            $
            100,000
            
            
            $
            100,000Accumulated
                amortization
            
            
            (13,889
            )
            
            
            (5,556
            )$
            86,111
            
            
            $
            94,444





Covenant
      not to compete is being amortized over three years.





Estimated
      amortization expense related to intangible assets with definite lives is as
      follows:





For
                the Twelve Months
                Ending December 31,2008
            
            $
            33,3332009
            
            
            33,3332010
            
            
            19,445





Amortization
      expense of amortizable intangible assets was $8,333 and $-0-, for the three
      months ending December 31, 2007 and 2006, respectively.





The
      net
      carrying amount of goodwill at December 31, 2007 and September 30, 2007 is
      comprised of goodwill recorded during the year ended September 30, 2007 (See
      Note 8).





NOTE
                11 –
            PAYROLL
                TAX LIABILITIES





During
      fiscal 2003, the Company was notified by both the New Jersey Department of
      Labor
      and the California Employment Development Department (the “EDD”) that, if
      certain payroll delinquencies were not cured, judgment would be entered against
      the Company.  As of December 31, 2007, there was still an aggregate of
      $3.1 million in delinquent payroll taxes outstanding which are included in
      “Payroll taxes payable” on the balance sheet.  Judgment has not been
      entered against the Company in California.  While judgment has been
      entered against the Company in New Jersey, no actions have been taken to enforce
      same.





On
      January 7, 2005, the Company entered into a payment plan agreement with the
      EDD
      with regard to the Company’s past due and unpaid unemployment
      taxes.  Under the terms of the agreement, the Company is required to
      pay $12,500 per week to be first applied to its unpaid employment tax liability,
      then to interest and then to penalties until all amounts are fully
      paid.  The weekly payment of $12,500 is to increase for a three month
      period following any quarter in which the Company’s reported income is above
      $200,000 based on a percentage increase tied to the amount in excess of
      $200,000.  The Company believes that consistent with the parties’
intentions when entering into the Plan, the gain on sale of discontinued
      operations, which resulted in no cash to the Company, would be excluded from
      reported income.





The
      Company paid $12,500 per week to the EDD until July 2007 when it satisfied
      the
      outstanding employment tax liability (exclusive of interest and penalties)
      in
      full.  In August 2007, the Company unilaterally reduced its payments
      with respect to accrued interest and penalties to $1,000 per
      week.


9





NOTE
                12 –
            INCOME
                TAXES





No
      income
      tax expense was recorded in the three months ended December 31, 2006 because
      the
      Company recognized a deferred tax benefit resulting from the utilization of
      the
      Company’s net operating loss carryforwards.





NOTE
                13 –
            SERIES
                F PREFERRED STOCK





In
      July
      2002, the Company’s Chief Executive Officer invested $1,000,000 in the Company
      in exchange for 10,000 shares of newly created Series F Convertible Preferred
      Stock (the “Series F Preferred Stock”), which has a stated value of $100 per
      share.





The
      holder of the Series F Preferred Stock is entitled to receive, from assets
      legally available therefore, cumulative dividends at a rate of 7% per year,
      accrued daily, payable monthly, in preference and priority to any payment of
      any
      dividend on the Common Stock and on the Series F Preferred
      Stock.  Dividends may be paid, at the Company’s option, either in cash
      or in shares of Common Stock, valued at the Series F Conversion Price (as
      defined below).  Holders of Series F Preferred Stock are entitled to a
      liquidation preference of $100 per share, plus accrued and unpaid
      dividends.





The
      Series F Preferred Stock is convertible into Common Stock at a conversion price
      equal to $.40 per share.  The number of shares issuable upon
      conversion is determined by multiplying the number of shares of Series F
      Preferred Stock to be converted by $100, and dividing the result by the Series
      F
      Conversion Price.





Except
      as
      otherwise required by law, holders of Series F Preferred Stock and holders
      of
      Common Stock shall vote together as a single class on each matter submitted
      to a
      vote of stockholders.  Each outstanding share of Series F Preferred
      Stock shall be entitled to the number of votes equal to the number of full
      shares of Common Stock into which each such share of Series F Preferred Stock
      is
      then convertible on the date for determination of stockholders entitled to
      vote
      at the meeting.    Holders of the Series F Preferred Stock
      are entitled to vote as a separate class on any proposed amendment to the terms
      of the Series F Preferred Stock which would increase or decrease the number
      of
      authorized shares of Series F Preferred Stock or have an adverse impact on
      the
      Series F Preferred Stock and on any proposal to create a new class of shares
      having rights or preferences equal to or having priority to the Series F
      Preferred Stock.





The
      Company may redeem the shares of the Series F Preferred Stock at any time prior
      to conversion at a redemption price of 115% of the purchase price paid for
      the
      Series F Preferred Shares plus any accrued but unpaid dividends.





NOTE
                14 -
            NOTE
                PAYABLE – RELATED PARTY





On
      January 13, 2006, the Company entered into an agreement with Pinnacle Investment
      Partners, LP (“Pinnacle”) (See Note 17), the holder of all of the outstanding
      shares of the Company’s Series I Preferred Stock, pursuant to which the Company
      issued to Pinnacle, effective December 28, 2005, a secured convertible
      promissory note (the “Convertible Note”) in the aggregate principal amount of
      $2,356,850 in exchange for all of the shares of the Company’s Series I Preferred
      Stock held by Pinnacle  The Convertible Note, which is secured by
      substantially all of the Company’s assets, was or becomes due as
      follows:





•      
      $1,800,000 was due and payable in cash upon the earlier of the Company’s receipt
      of $1,800,000 of accounts receivable or March 15, 2006.  At September
      30, 2006, $210,000 of this has not been paid.





•      
      $331,850 and accrued interest at a rate of 12% per annum is payable in 24 equal
      installments of principal and interest during the period which commenced June
      28, 2007 and ends on May 28, 2009.





•      
      $225,000 and accrued interest thereon at the rate of 6% per annum became due
      and
      payable on December 28, 2007; and remains outstanding; provided, however, that
      the Company has the right to pay such amount in cash or shares of its common
      stock (valued at $0.0072 per share).





Pinnacle
      has the right to convert the principal amount of and interest accrued under
      the
      Convertible Note at any time as follows:





•      
      $331,850 of the principal amount and unpaid interest accrued thereon is
      convertible into the Company’s Common Stock at a conversion price of $.06 per
      share.





•      
      $225,000 of the principal amount and unpaid accrued interest thereon is
      convertible into the Company’s Common Stock at a conversion price of
      $0.0072.  During the year ended September 30, 2006, $150,000 of
      principal was converted into 20,833,331 shares of the Company’s Common
      Stock.


10


Pinnacle
      may not convert the Convertible Note to the extent that the conversion would
      result in Pinnacle owning in excess of 9.999% of the then issued and outstanding
      shares of Common Stock of the Company.  Pinnacle may waive this
      conversion restriction upon not less than 60 days prior notice to the
      Company.





NOTE
                15 -
            DERIVATIVE
                INSTRUMENTS





The
      Company evaluated the application of SFAS No. 133 and EITF 00-19 for its
      financial instruments and determined that certain warrants to purchase the
      Company’s Common Stock are derivatives that are required to be accounted for as
      free-standing liability instruments in the Company’s financial
      statement.  As a result, the Company reports the value of those
      warrants as current liabilities on its balance sheet and reports changes in
      the
      value of these warrants as non-operating gains or losses on its statements
      of
      operations.  The value of the warrants is required to be remeasured on
      a quarterly basis, and is based on the Black Scholes Pricing Model.





Variables
      used in the Black Scholes option pricing model include (1) 4% risk-free interest
      rate, (2) expected warrant life is the actual remaining life of the warrants
      as
      of each period end, (3) expected volatility is 100% and (4) zero expected
      dividends.





Due
      to
      the nature of the required calculations and the large number of shares of the
      Company’s common stock involved in such calculations, changes in the Company’s
      common stock price may result in significant changes in the value of the
      warrants and resulting non-cash gains and losses on the Company’s statement of
      operations.





NOTE
                16 -
            COMMITMENTS
                AND CONTINGENCIES





The
      Company is subject to legal claims and litigation in the ordinary course of
      business, including but not limited to, the matters described
      below.  A negative result in one or more of such matters could have an
      adverse effect on the Company’s financial condition and results of
      operations.  As of December 31, 2007, the Company was a party to the
      following actions:





Tymatt
      Associates, LLC v.
      Stratus Services Group, Inc.  On October 15, 2007, Tymatt
      Associates, LLC (“Tymatt”) filed suit against the Company for breach of contract
      in the Supreme Court of the State of New York, County of New York, seeking
      damages of $300,000 plus accrued interest at a rate of 18% per annum from
      January 31, 2005, as well as costs and expenses, including accountant’s fees and
      attorney’s fees, in connection with our failure to either pay to Tymatt the sum
      of $250,000 or to deliver to Tymatt a number of shares of Stratus common stock
      with a value of $250,000 by January 31, 2005 as required by the terms of a
      redemption agreement pertaining to our Series A Preferred Stock.  The
      Company have been in discussions with Tymatt in an attempt to resolve this
      matter; however, no assurance can be given that it will be able to resolve
      this
      matter on terms that are satisfactory to it.





Teamone
      Personnel Solutions,
      LLC vs. Stratus Services Group, Inc.  On October 19, 2007,
      Teamone Personnel Solutions, LLC (“Teamone”) filed a Request for Entry of
      Default and Court Judgment in the amount of $157,004 in the Superior Court
      of
      California, County of Solano.  Teamone had filed in July 2007 suit
      seeking enforcement of an acceleration provision of a promissory note executed
      by the Company in favor of Teamone on March 2, 2005 in the principal amount
      of
      $160,000.  The Company has been discussions with Teamone to arrange
      for a deferred payment schedule for the amount owed; however, no assurance
      can
      be given that Teamone will agree to deferring payment and will not seek to
      enforce its judgment.





In
      re APX Holdings, LLC, et
      al.  In August 2007, the Trustee in a Chapter 7 bankruptcy
      proceeding in the United States Bankruptcy Court for the Central District of
      California involving APX Holding, LLC, one of the Company’s former customers,
      brought an action against the Company and several other parties, including
      the
      Company’s former lender and ALS, LLC seeking to recover $860,184 of preference
      payments that were allegedly made by APX and its affiliates.  The
      Company believes that the maximum amount of payments received by it which could
      be considered recoverable preference payments is approximately
      $23,000.  As a result, the Company is vigorously defending this
      action.





Temporary
      Services Insurance
      Ltd. V. Stratus Services Group, Inc., ALS, LLC, U.S. Temps, Inc., et
      al.  In September 2007, Temporary Services Insurance Ltd.
      (“TSIL”) instituted an action in the United States District Court, Middle
      District of Florida, Orlando Division, against us, ALS, LLC, certain principals
      and affiliates of ALS, LLC and certain other parties alleging that the Company
      participated in a fraudulent scheme to obtain workers compensation insurance
      through TSIL at a cost substantially lower than the cost of workers compensation
      insurance that it could have otherwise obtained through its own
      carriers.  In its complaint, TSIL, which seeks unspecified damages,
      alleges that ALS, LLC failed to disclose certain outsourcing agreements with
      its
      clients, including the outsourcing agreements between the Company and ALS,
      LLC
      that the employees provided by ALS, LLC  to perform services for the
      Company and its clients were actually the Company’s employees, and that the
      Company was unjustly enriched by ALS LLC’s misrepresentations and failure to
      disclose material facts pertaining to its relationship with us.  The
      Company intends to vigorously defend this matter.


11





NOTE
                17 -
            RELATED
                PARTY TRANSACTIONS





Joint
      Venture


The
      Company provides information technology staffing services through a joint
      venture, STS (see Note 1), in which the Company has a 51%
      interest.  Prior to February 13, 2007, the Company had a 50%
      interest.  On February 13, 2007, the Company acquired from Fusion
      Business Services, LLC (“Fusion”) an additional 1% interest in STS in exchange
      for the issuance to the members of Fusion of 70,111 shares of the Company’s
      common stock.  As a result of the transfer, which was effective as of
      January 1, 2007, the Company owns a 51% interest in STS and Fusion owns a 49%
      interest.  Fusion has a right to re-acquire the 1% interest
      transferred to the Company upon the occurrence of certain events, including
      the
      institution of bankruptcy or insolvency proceedings against the Company, a
      sale
      of all or substantially all of the Company’s assets, a merger or consolidation
      of the Company with another entity, or the liquidation or dissolution of the
      Company.  The purchase price payable by Fusion in connection with any
      such re-acquisition shall be a return of the shares issued to it for the 1%
      interest or a cash payment of $1,262.  A son of the CEO of the Company
      has a majority interest in Fusion.





Loans
      Payable


During
      the three months ended December 31, 2007, the brother of the Company’s CEO
      loaned $25,000 to STS.  In addition, during the three months ended
      December 31, 2007, a significant shareholder of the Company loaned $7,000 to
      STS
      and $50,000 to GTA.





During
      the three months ended December 31, 2006, the Company’s CEO loaned $100,000 to
      the Company which was repaid in January 2007.





Other


The
      nephew of the CEO of the Company is affiliated with Pinnacle Investment
      Partners, LP, the holder of the convertible note issued in exchange for shares
      of the Company’s Series I Preferred Stock (see Note 14).





Item
      2 -MANAGEMENT’S DISCUSSION AND ANALYSIS
      OF FINANCIAL CONDITION


AND
      RESULTS OF OPERATIONS





This
      Form
      10-Q contains “forward-looking statements” within the meaning of Section 27A of
      the Securities Act of 1933, as amended and Section 21E of the Securities
      Exchange Act of 1934, as amended.  These statements relate to future
      economic performance, plans and objectives of management for future operations
      and projections of revenue and other financial items that are based on the
      beliefs of our management, as well as assumptions made by, and information
      currently available to, our management.  The words “expect”,
“estimate”, “anticipate”, “believe”, “intend”, and similar expressions are
      intended to identify forward-looking statements.  Such statements
      involve assumptions, uncertainties and risks.  If one or more of these
      risks or uncertainties materialize or underlying assumptions prove incorrect,
      actual outcomes may vary materially from those anticipated, estimated or
      expected.  Among the key factors that may have a direct bearing on our
      expected operating results, performance or financial condition are economic
      conditions facing the staffing industry generally; uncertainties related to
      the
      job market and our ability to attract qualified candidates; uncertainties
      associated with the brief operating history of our current operations; our
      ability to raise additional capital; our ability to achieve and manage growth;
      our ability to attract and retain qualified personnel; the continued cooperation
      of our creditors; our ability to diversify our client base; our ability to
      develop new services; our ability to enhance and expand existing offices; our
      ability to open new offices; general economic conditions; and other factors
      discussed from time to time in our filings with the Securities and Exchange
      Commission.  These factors are not intended to represent a complete
      list of all risks and uncertainties inherent in our business.  The
      following discussion and analysis should be read in conjunction with the
      Condensed Consolidated Financial Statements and notes appearing elsewhere in
      this report.





Our
      critical accounting policies and estimates are described in our Annual Report
      on
      Form 10-K for the fiscal year ended September 30, 2007.





Introduction


From
      inception until December 2005, we provided a wide range of staffing services
      and
      productivity consulting services associated with such staffing services
      nationally through a network of offices located throughout the United
      States.  In December 2005, we completed a series of asset sale
      transactions pursuant to which we sold our staffing operations.  As a
      result of such sales, we no longer actively conduct any staffing services
      business, other than IT staffing solutions services conducted through our 51%
      owned joint venture, STS.  In August 2007, we entered the technology
      asset disposition business through our acquisition of the operations now
      conducted by our 51% subsidiary, GTA.


12


Continuing
      Operations


Three
      Months Ended December 31, 2007 Compared to Three Months Ended December 31,
      2006





Revenues.  Revenues
      increased 42.7% to $2,659,020 for the three months ended December 31, 2007
      from
      $1,862,854 for the three months ended December 31,
      2006.  Approximately $698,000 of the increase was attributable to the
      acquisition of our technology asset disposition operations in August
      2007.  Excluding the acquisition, revenues increased
      5.3%.  This increase was primarily a result of an increase in billable
      hours and expansion of our customer base.





Gross
      Profit.  Gross profit increased 26.6% to $802,901 for the three
      months ended December 31, 2007 from $589,051 for the three months ended December
      31, 2006.  Approximately $215,000 of the increase was attributable to
      the acquisition in August 2007.  Excluding the acquisition, gross
      profits remained about the same.  Gross profit as a percentage of
      revenues, exclusive of the gross profit attributable to the acquisition,
      decreased to 30.0% for the three months ended December 31, 2007 from 31.6%
      for
      the three months ended September 30, 2006, primarily as a result of a small
      reduction in our markup percentages.





Selling,
      General
      and Administrative Expenses.  Selling, General and
      Administrative expenses (“SGA”) increased 66.2% to $1,077,296 for the three
      months ended December 31, 2007 from $648,203 for the three months ended December
      31, 2006.  Exclusive of approximately $276,000 attributable to the
      acquisition in August 2007, SG&A increased 23.7%.  SG&A as a
      percentage of revenues increased to 40.5% for the three months ended December
      31, 2007 from 34.8% for the three months ended December 31, 2006.  The
      increases in SG&A for the three months ended December 31, 2007, is primarily
      a result of additions to our sales and recruiting staff.





Interest
      Expense.  Interest expense remained basically unchanged in the
      three months ended December 31, 2007 compared to the three months ended December
      3, 2006.  Interest expense as a percentage of revenues decreased to
      2.4% for the three months ended December 31, 2007 from 3.4% for the three months
      ended December 31, 2006.





Minority
      Interest
      in Net (income) Loss of Consolidated Subsidiaries.  The
      minority interest in net (income) loss of consolidated subsidiaries for the
      three months ended December 31, 2007 and 2006 represents the minority venturers’
proportionate share of the net (income) loss of our consolidated
      subsidiaries.





Net
      Loss
      Attributable to Common Stockholders.As a result
      of the
      foregoing, we had a net loss attributable to common stockholders of $267,205,
      for the three months ended December 31, 2007 compared to a net loss attributable
      to common stockholders of $153,883 for the three months ended December 31,
      2006.





Liquidity
      and Capital Resources





Cash
      flows have not been segregated between continuing operations and discontinued
      operations in the accompanying condensed consolidated statements of cash
      flows.  Cash provided to us from discontinued operations (included in
      the consolidated cash flow discussions below) during the three months ended
      December 31, 2007 and 2006 was comprised of the following:





Three
                Months EndedDecember
                31,2007
            
            
            2006Cash
                used in operating activities
            
            $
            (60,000
            )
            
            $
            (269,601
            )Cash
                provided by investing activities
            
            
            61,108
            
            
            
            287,676Cash
                used in financing activities
            
            
            -
            
            
            
            -Net
            
            $
            1,108
            
            
            $
            18,075





Although
      there is no assurance we will continue to receive earnout payments in connection
      with discontinued operations, we estimate that we will receive approximately
      $20,000 per month, through November 2008.





At
      December 31, 2007, we had limited liquid resources.  Current
      liabilities were $10,231,795 and current assets were $2,054,532.  The
      difference of $8,177,263 is a working capital deficit, which is primarily the
      result of losses incurred during the last several years.  This
      condition raises substantial doubts about our ability to continue as a going
      concern.  The financial statements do not include any adjustments to
      reflect the possible future effect on the recoverability and classification
      of
      assets or the amounts and classification of liabilities that may result from
      the
      outcome of this uncertainty.





Our
      continuation of existence is dependent upon the continued cooperation of our
      creditors, our ability to generate sufficient cash flow to meet our continuing
      obligations on a timely basis, to fund the operating and capital needs, and
      to
      obtain additional financing as may be necessary.


13


We
      have
      taken steps to revise and reduce our operating requirements, which we believe
      will be sufficient to assure continued operations and implementation of our
      plans.  The steps include closing branches that are not profitable,
      reductions in staffing, and other selling, general and administrative expenses,
      and most significantly, the asset sales transactions that were completed in
      December 2005.  We continue to pursue other sources of equity or
      long-term debt financings.  We also continue to negotiate payments
      plans and other accommodations with our creditors.  We believe that
      the cash flow from operations and earnout payments to which we are entitled
      in
      connection with the Asset Sales will provide us with sufficient cash flow to
      support our operations in the next twelve months provided that we continue
      to
      receive cooperation and accommodations from our creditors.  No
      assurance can be given that our creditors will not seek to pursue all remedies
      available to them, which could result in a voluntary or involuntary bankruptcy
      proceeding.





Net
      cash
      used in operating activities was $349,713 and $928,541 in the three months
      ended
      December 30, 2007 and 2006, respectively.





Net
      cash
      provided by investing activities was $54,633 and $269,138 in the three months
      ended December 31, 2007 and 2006, respectively.  Net cash received in
      connection with the sale of discontinued operations (comprised of earnout
      payments) was $61,108 and $287,676, in the three months ended December 31,
      2007
      and 2006, respectively.  Cash used for capital expenditures was $6,475
      and $18,538 in the three months ended December 31, 2007 and 2006,
      respectively.





Net
      cash
      provided by financing activities was $446,785 and $587,341 in the three months
      ended December 31, 2007 and 2006, respectively.  We had net borrowings
      of $233,608 and $493,862 under our line of credit in the three months ended
      December 31, 2007 and 2006, respectively.  Net short-term borrowings
      were $76,200 and $96,969 in the three months ended December 31, 2007 and 2006,
      respectively.  Net short-term borrowings in the three months ended
      December 31, 2007 includes $25,000 loaned to us by the brother of our Chief
      Executive Officer (“CEO”) and $57,000 loaned to us by a significant
      shareholder.  Net short-term borrowings in the three months ended
      December 31, 2006 includes $100,000 loaned to us by our CEO, which was repaid
      in
      January 2007.  Payments of notes payable - acquisitions was $13,023
      and $3,490 in the three months ended December 31, 2007 and 2006,
      respectively.  During the three months ended December 31, 2007, we
      received net proceeds of $150,000 from the minority investors in Green-Tech
      Assets, LLC of which $75,000 is represented by notes payable and the balance
      is
      contributed equity.





Our
      principal uses of cash are to fund temporary employee payroll expense and
      employer related payroll taxes, investment in capital equipment, expansion
      of
      services offered, workers’ compensation, general liability and other insurance
      coverages, and debt service.





In
      January 2006, STS entered into a Factoring and Security Agreement (the
“Factoring Agreement”) with Action Capital Corporation (“Action”) which provides
      for the sale of up to $1,500,000 of accounts receivable of STS to
      Action.  Action reserves and withholds in a reserve account, an amount
      equal to 10% of the face amount of accounts receivable purchased under the
      Factoring Agreement.  Action has full recourse against STS, including
      the right to charge-back or sell back any accounts receivable if not paid within
      90 days of the date of purchase.  The Factoring Agreement provides for
      interest at an annual rate of prime plus 1% plus a monthly fee of .6% on the
      daily average of unpaid balances.  The prime rate at December 31, 2007
      was 7.25%.  As of December 31, 2007, $876,178 was outstanding under
      the Factoring Agreement.





During
      fiscal 2003, we were notified by both the New Jersey Department of Labor and
      the
      California Employment Development Department (the “EDD”) that, if certain
      payroll delinquencies were not cured, judgment would be entered against
      us.  As of December 31, 2007, there was still an aggregate of $3.1
      million in delinquent payroll taxes outstanding, including interest and
      penalties, which are included in “Payroll taxes payable” in the December 31,
      2007 balance sheet.  Judgment has not been entered against us in
      California.  While judgment has been entered against us in New Jersey,
      no actions have been taken to enforce same.  On January 7, 2005, we
      entered into a payment plan agreement with the EDD, which requires us to pay
      $12,500 per week to the EDD.  The $12,500 weekly payment is subject to
      increase for a three month period following any quarter in which our reported
      income exceeds $200,000, based upon a percentage related to the amount of
      increase above $200,000.





In
      July
      2003, we entered into an agreement with the holder of our Series A Preferred
      Stock pursuant to which we agreed to redeem the aggregate 1,458,933 shares
      of
      Series A Preferred Stock then outstanding.  The agreement, as amended
      in March 2004, provided that our obligation to redeem the Series A Preferred
      Stock was contingent upon the sale of not less than $1,000,000 units in our
      “best efforts” public offering of units.  This condition was satisfied
      in July 2004.  As a result, we paid $500,000 and issued 1,750,000
      shares of common stock to the Series A holder and redeemed all of the Series
      A
      Preferred Stock following the initial closing of the offering.  We
      were obliged to pay the Series A holder an additional $250,000 by January 31,
      2005, or at our option, issue to the Series A holder shares of common stock
      having an aggregate market value of $250,000, based upon the average closing
      bid
      prices of the common stock for the 30 days preceding January 31,
      2005.  We failed to make the $250,000 payment in cash or
      stock.  Accordingly, we are required to pay $300,000 in cash, plus
      accrued interest at the rate of 18% per year from the date of default until
      the
      date the default is cured, to the former holder of the Series A Preferred
      Stock.  The former holder of the Series A Preferred Stock has
      instituted


14


litigation
      against us related to this matter and the Asset Sales.  We are
      currently in discussions with the former holder of the Series A Preferred Stock
      to try to resolve all issues.





In
      January 2006 we entered into an agreement with the holder of all of the
      outstanding shares of our Series I Preferred Stock pursuant to which we issued
      to the holder, effective as of December 28, 2005, a secured convertible
      promissory note


in
      the
      aggregate principal amount of $2,356,750 (the “Convertible Note”) in exchange
      for all of such shares of Series I Preferred Stock.  See Note 13 to
      the Condensed Consolidated Financial Statements.





As
      of
      December 31, 2007, there were no off-balance sheet arrangements, unconsolidated
      subsidiaries, commitments or guarantees of other parties, except as disclosed
      in
      the notes to financial statements.  Stockholders’ (deficiency) at that
      date was $(7,908,876).





We
      engaged in various transactions with related parties during the three months
      ended December 31, 2007 including the following:





•
            During
                the three months, the brother of our CEO and a significant shareholder
                loaned us $25,000 and $57,000, respectively, all of which remains
                unpaid
                at December 31, 2007.•
            In
                addition, at December 31, 2007, we owed:  $41,000 under a demand
                note bearing interest at 10% per annum to a corporation owned by
                the son
                of Joseph J. Raymond, our Chairman, President and CEO; $3,123 to
                a trust
                formed for the benefit of a family member of a former member of our
                Board
                of Directors under a promissory note bearing interest at 12% per
                annum
                which became due in full in August 2005; $41,598 to a former member
                of our
                Board of Directors under a promissory note bearing interest at 12%
                per
                annum which became due in full in May 2006.•
            The
                nephew of our Chairman, President and CEO is affiliated with Pinnacle
                Investment Partners, LP, (“Pinnacle”), which is the holder of the
                Convertible Note issued in exchange for our Series I Preferred
                Stock.  As of December 31, 2007, $616,850 was outstanding on the
                Convertible Note.





Contractual
      Obligations





Our
      aggregate contractual obligations as of December 31, 2007 are as
      follows:





Payments
                Due by Fiscal Period (in Thousands)2010
              -
            
            
            
            2012
              -Total
            
            
            2009
            
            
            2011
            
            
            2013
            
            
            ThereafterContractual
                Obligations:Long-term
                debt obligations
            
            $
            2,468
            
            
            $
            1,197
            
            
            $
            414
            
            
            $
            857
            
            
            
            -Operating
                lease obligations
            
            
            174
            
            
            
            60
            
            
            
            114
            
            
            
            -
            
            
            
            -Series
                A redemption payable
            
            
            300
            
            
            
            300
            
            
            
            -
            
            
            
            -
            
            
            
            -Workers’
                compensation insurance liability (a)
            
            
            237
            
            
            
            72
            
            
            
            144
            
            
            
            21
            
            
            
            -TOTAL
            
            $
            3,179
            
            
            $
            1,629
            
            
            $
            672
            
            
            $
            878
            
            
            $
            -





(a)
            In
                December 2006, we entered into an agreement with the California
                Compensation Insurance Fund (“the Fund”) whereby the Fund agreed to reduce
                our then liability of $2,023,000 to $300,000 provided that we make
                certain
                monthly payments aggregating $300,000 over 56 months.  At
                December 31, 2007, $1,960,000 is included in accounts payable and
                accrued
                expenses on the attached condensed consolidated balance
                sheet.  The difference of $1,723,000 has not been recognized in
                earnings at this time since it is contingent upon our paying the
                $300,000
                in accordance with the terms of the
                agreement.





Impact
      of Inflation





We
      believe that since our inception, inflation has not had a significant impact
      on
      our results of operations.





Impact
      of Recent Accounting Pronouncements





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”.  This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements.  The
      Statement applies under other accounting pronouncements that require or permit
      fair value measurements.  SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007, or the


15


Company’s
      fiscal year ending September 30, 2009.  We are currently assessing the
      impact the adoption of this pronouncement will have on our financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” and is effective for fiscal years
      beginning after November 15, 2007.  This Statement permits entities to
      choose to measure many financial instruments and certain other items at fair
      value.  The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions.  We are currently assessing the
      impact the adoption of this pronouncement will have on our financial
      statements.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” and is effective
      for fiscal years beginning after December 5, 2008.  This Statement
      establishes accounting and reporting standards for the noncontrolling interest
      in a subsidiary and for the deconsolidation of a subsidiary.  We are
      currently assessing the impact the adoption of this pronouncement will have
      on
      our financial statements.





In
      December 2007, the FASB issued SFAS No. 141 (Revised) “Business
      Combinations”.  SFAS 141 (Revised) is effective for fiscal years
      beginning after December 13, 2008.  This Statement establishes
      principles and requirements for how the acquirer of a business recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any noncontrolling interest in the
      acquiree.  The Statement also provides guidance for recognizing and
      measuring the goodwill acquired in the business combination and determines
      what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination.  We
      currently assessing the impact the adoption of this pronouncement will have
      on
      our financial statements.





Sensitive
      Accounting Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and
      notes.  Significant estimates include management’s estimate of the
      carrying value of accounts receivable, the impairment of goodwill and the
      establishment of valuation reserves offsetting deferred tax
      assets.  Actual results could differ from those
      estimates.  The Company’s critical accounting policies relating to
      these items are described in the Company’s Annual Report on Form 10-K for the
      year ended September 30, 2007.  As of December 31, 2007, there have
      been no material changes to any of the critical accounting policies contained
      therein.





Item
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET
                RISKS





We
      are
      subject to the risk of fluctuating interest rates in the ordinary course of
      business for borrowings under our Factoring Agreement, which provides for the
      sale of up to $1,500,000 of accounts receivable to Action
      Capital.  Advances under this agreement bear interest at an annual
      rate of prime plus 1%, plus a monthly management fee of .6% on the daily average
      of unpaid balances.





We
      believe that our business operations are not exposed to market risk relating
      to
      foreign currency exchange risk or commodity price risk.





Item
                4.
            CONTROLS
                AND PROCEDURES





Under
      the
      supervision and with the participation of management, including our Chief
      Executive Officer and our Chief Financial Officer, we have evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures.  Disclosure controls and procedures are controls and
      procedures that are designed to ensure that information required to be disclosed
      in our reports filed or submitted under the 1934 Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms.  Based on this evaluation, our Chief Executive Officer and
      Chief Financial Officer have concluded that our disclosure controls and
      procedures were effective as of the end of the period covered by this annual
      report.  There were no changes in our internal controls during the
      quarter ended December 31, 2007 that have materially affected, or are reasonably
      likely to have materially affected our internal controls over financial
      reporting.





Our
      management, including the Chief Executive Officer and Chief Financial Officer,
      does not expect that our disclosure controls and procedures or our internal
      control over financial reporting will prevent all error and all
      fraud.  A control system, no matter how well designed and operated,
      can provide only reasonable, not absolute, assurance that the objectives of
      the
      control system are met.  Because of the inherent limitations in all
      control systems, no evaluation of controls can provide absolute assurance that
      all control issues and instances of fraud, if any, within the company have
      been
      detected.


16





Part
                II
            Other
                InformationItem
                1.
            Legal
                Proceedings





We
      are
      involved, from time to time, in routine litigation arising in the ordinary
      course of business, including the matters described in our Report on Form 10-K
      for the fiscal year ended September 30, 2007 (the “2007 10-K”) and Note 16 to
      the financial statements included with this report.  There have been
      no material changes in the status of such matters since the filing of the 2007
      10-K.





Item
                1A.
            Risk
                Factors





There
      have been no material changes with respect to the risk factors disclosed in
      our
      Report on Form 10-K for the fiscal year ended September 30, 2007.





Item
                3.
            Defaults
                Upon Senior Securities





Dividends
      on our Series F Preferred Stock accrue at a rate of 7% per annum, payable
      monthly.  As of the date of the filing of this report, $148,678 is in
      arrears on the Series F Preferred Stock.





Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders





There
      were no matters submitted to a vote of our security holders during the three
      months ended December 31, 2007.





Item
                5.
            Other
                Information





Not
      applicable.





Item
                6.
            Exhibits





Number
            Description4.2.15
            Second
                Amendment dated as of January 17, 2008 to Warrant Agreement between
                the
                Company and American Stock Transfer and Trust Company31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200231.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200232.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley
                Act
                of 200232.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley
                Act
                of 2002





17


SIGNATURES





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.








STRATUS
                SERVICES GROUP, INC.Date:  February 14,
                2008
            By:      /s/
                Joseph J. Raymond---------------------------------------Joseph
                J. RaymondChairman
                of the Board of Directors,President
                and Chief Executive Officer














Date:  February
                14, 2008
            By:     /s/
                Michael A. Maltzman------------------------------------------Michael
                A. MaltzmanVice
                President and Chief Financial OfficerPrincipal
                Financial and Accounting Officer





18