---

UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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





For
      the quarterly period ended June 30,
2008





o
            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 o  No ý





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





Large
      Accelerated Filer  o
            Accelerated
      Filer  o
            Non-Accelerated
      Filer  o
            Smaller
      Reporting Company  T(Do
      not check if a smaller reporting company)





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





The
number of shares of Common Stock, $.04 par value, outstanding as of September
16, 2008 was 71,318,617.























STRATUS
SERVICES GROUP, INC.


Condensed
Consolidated Balance Sheets


(Unaudited)


June
      30,
            
            
            September
      30,Assets
            
            2008
            
            
            2007Current
      assetsCash
            
            $
            12,702
            
            
            $
            144,849Accounts receivable–less
      allowance for doubtful accounts of  $200,000 and
      $75,000
            
            
            1,820,517
            
            
            
            1,104,650Unbilled
    receivables
            
            
            51,353
            
            
            
            176,690Inventory
            
            
            201,407
            
            
            
            -Prepaid insurance
            
            
            36,910
            
            
            
            53,351Prepaid expenses and other
      current assets
            
            
            122,094
            
            
            
            269,9882,444,983
            
            
            
            1,749,528Property
      and equipment, net of accumulated depreciation
            
            
            209,099
            
            
            
            186,279Intangible
      assets, net of accumulated amortization
            
            
            69,444
            
            
            
            94,444Goodwill
            
            
            1,766,336
            
            
            
            1,766,336Other
      assets
            
            
            20,996
            
            
            
            8,820$
            4,310,858
            
            
            $
            3,805,407Liabilities
      and Stockholders’ Equity (Deficiency)Current
      liabilitiesLoans payable (current
      portion)
            
            $
            130,142
            
            
            $
            130,983Loans payable – related
      parties
            
            
            473,736
            
            
            
            85,721Notes payable – acquisitions
      (current portion) (including $55,103 and $52,859 to
      related  party)
            
            
            427,665
            
            
            
            349,673Note payable – related party
      (current portion)
            
            
            616,850
            
            
            
            506,233Line of credit
            
            
            967,680
            
            
            
            642,570Insurance obligation
      payable
            
            
            15,989
            
            
            
            13,154Accounts payable and accrued
      expenses
            
            
            4,754,796
            
            
            
            4,349,523Accrued payroll and
      taxes
            
            
            429,615
            
            
            
            190,969Payroll taxes
    payable
            
            
            3,126,509
            
            
            
            3,218,455Series A redemption
      payable
            
            
            300,000
            
            
            
            300,00011,242,982
            
            
            
            9,787,281Loans
      payable (net of current portion)
            
            
            21,197
            
            
            
            35,013Notes
      payable – acquisitions (net of current portion) (including $67,860 and
      $109,664 to related party)
            
            
            330,869
            
            
            
            430,241Note
      payable – related party (net of current portion)
            
            
            -
            
            
            
            110,617Notes
      payable – minority interest investors
            
            
            750,000
            
            
            
            675,00012,345,048
            
            
            
            11,038,152Commitments
      and contingenciesMinority
      interest
            
            
            332,648
            
            
            
            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
      $164,500 and $133,000)
            
            
            764,500
            
            
            
            733,000Common
      stock, $.04 par value, 500,000,000 shares authorized;
      71,318,615and 69,568,615 shares issued
      and outstanding
            
            
            2,852,745
            
            
            
            2,782,745Additional
      paid-in capital
            
            
            9,724,616
            
            
            
            9,760,516Accumulated
      deficit
            
            
            (21,708,699
            )
            
            
            (21,056,141
            )Total stockholders’ equity
      (deficiency)
            
            
            (8,366,838
            )
            
            
            (7,779,880
            )$
            4,310,858
            
            
            $
            3,805,407


See notes
to condensed consolidated financial statements


2


STRATUS
SERVICES GROUP, INC.


Condensed
Consolidated Statements of Operations


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenues
            
            $
            3,394,571
            
            
            $
            2,079,589
            
            
            $
            9,031,505
            
            
            $
            5,753,148Cost
      of revenues
            
            
            2,240,760
            
            
            
            1,480,205
            
            
            
            6,217,262
            
            
            
            4,005,109Gross
      profit
            
            
            1,153,811
            
            
            
            559,384
            
            
            
            2,814,243
            
            
            
            1,748,039Selling,
      general and administrative expenses
            
            
            1,286,004
            
            
            
            673,542
            
            
            
            3,493,345
            
            
            
            2,048,103Operating
      (loss) from continuing operations
            
            
            (132,193
            )
            
            
            (74,158
            )
            
            
            (679,102
            )
            
            
            (300,064
            )Interest
      expense
            
            
            (71,532
            )
            
            
            (58,555
            )
            
            
            (205,385
            )
            
            
            (177,227
            )Loss
      from continuing operations before minority interests
            
            
            (203,725
            )
            
            
            (137,213
            )
            
            
            (884,487
            )
            
            
            (477,291
            )Minority
      interests in net (income) loss of consolidated
subsidiaries
            
            
            69,604
            
            
            
            (10,925
            )
            
            
            243,887
            
            
            
            3,653Earnings
      (loss) from continuing operations
            
            
            (134,121
            )
            
            
            (143,638
            )
            
            
            (640,600
            )
            
            
            (473,638
            )Discontinued
      operations – income (loss) from discontinued operations
            
            
            (163,108)
            
            
            
            -
            
            
            
            (186,108
            )
            
            
            -Gain
      on sale of discontinued operations (net)
            
            
            53,435
            
            
            
            183,653
            
            
            
            174,150
            
            
            
            460,147Net
      earnings (loss)
            
            
            (243,794
            )
            
            
            40,015
            
            
            
            (652,558
            )
            
            
            (13,491
            )Dividends
      on preferred stock
            
            
            (10,500
            )
            
            
            (10,500
            )
            
            
            (31,500
            )
            
            
            (31,500
            )Net
      earnings (loss) attributable to common stockholders
            
            $
            (254,294
            )
            
            $
            29,515
            
            
            $
            (684,058
            )
            
            $
            (44,991
            )Net
      earnings (loss) per share attributable to common
    stockholdersBasic:(Loss)
      from continuing operations
            
            $
            -
            
            
            $
            -
            
            
            $
            (.01
            )
            
            $
            -Earnings
      (loss) from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      earnings (loss)
            
            $
            -
            
            
            $
            -
            
            
            $
            (.01
            )
            
            $
            -Diluted:(Loss)
      from continuing operations
            
            $
            -
            
            
            $
            -
            
            
            $
            (.01
            )
            
            $
            -Earnings
      (loss) from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      earnings (loss)
            
            $
            -
            
            
            $
            -
            
            
            $
            (.01
            )
            
            $
            -Weighted
      average shares outstanding per common shareBasic
            
            
            71,318,615
            
            
            
            69,568,615
            
            
            
            70,794,892
            
            
            
            66,874,118Diluted
            
            
            71,318,615
            
            
            
            85,516,115
            
            
            
            70,794,892
            
            
            
            66,874,118








See notes
to condensed consolidated financial statements





3


STRATUS
SERVICES GROUP, INC.


Condensed
Consolidated Statements of Cash Flows


(Unaudited)







Nine
      Months EndedJune
      30,2008
            
            
            2007Cash
      flows from (used in) operating activitiesNet
      (loss)
            
            $
            (652,558
            )
            
            $
            (13,491
            )Adjustments
      to reconcile net earnings to net cash used by operating
      activitiesDepreciation
            
            
            64,112
            
            
            
            59,119Amortization
            
            
            25,000
            
            
            
            -Stock
      compensation
            
            
            20,000
            
            
            
            -Gain
      on sale of discontinued operations
            
            
            (174,150
            )
            
            
            (460,147
            )Imputed
      interest
            
            
            18,181
            
            
            
            28,652Accrued
      interest
            
            
            66,767
            
            
            
            33,373Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (590,530
            )
            
            
            (286,712
            )Inventory
            
            
            (201,407
            )
            
            
            -Prepaid
      insurance
            
            
            16,441
            
            
            
            (18,798
            )Prepaid
      expenses and other current assets
            
            
            202,223
            
            
            
            (16,693
            )Other
      assets
            
            
            (12,176
            )
            
            
            -Minority
      interest
            
            
            (243,887
            )
            
            
            (3,653
            )Insurance
      obligation payable
            
            
            2,835
            
            
            
            (5,429
            )Accrued
      payroll and taxes
            
            
            238,646
            
            
            
            195,159Payroll
      taxes payable
            
            
            (91,946
            )
            
            
            (605,292
            )Accounts
      payable and accrued expenses
            
            
            338,506
            
            
            
            20,196Total
      adjustments
            
            
            (321,385
            )
            
            
            (1,060,225
            )(973,943
            )
            
            
            (1,073,716
            )Cash
      flows from investing activitiesPurchase
      of property and equipment
            
            
            (86,932
            )
            
            
            (31,297
            )Cash
      received in connection with sale of discontinued operations (including
      $499,264 from a related party in 2007)
            
            
            119,821
            
            
            
            953,77232,889
            
            
            
            922,475Cash
      flows from (used in) financing activitiesNet
      proceeds from line of credit
            
            
            325,110
            
            
            
            67,541Proceeds
      from loans payable
            
            
            -
            
            
            
            50,000Payments
      of loans payable
            
            
            (14,656
            )
            
            
            (8,371
            )Proceeds
      from loans payable – related parties
            
            
            486,195
            
            
            
            120,000Payments
      of loans payable – related parties
            
            
            (98,181
            )
            
            
            (106,000
            )Payments
      of notes payable – acquisitions
            
            
            (39,561
            )
            
            
            (7,033
            )Proceeds
      from exercise of warrants
            
            
            -
            
            
            
            9,375Proceeds
      from minority interest investors
            
            
            150,000
            
            
            
            -808,907
            
            
            
            125,512Net
      change in cash
            
            
            (132,147
            )
            
            
            (25,729
            )Cash
      – beginning
            
            
            144,849
            
            
            
            84,881Cash
      – ending
            
            $
            12,702
            
            
            $
            59,152











See notes
to condensed consolidated financial statements


4





Supplemental
      disclosure of cash paidInterest
            
            $
            244,152
            
            
            $
            255,354Schedule
      of noncash investing and financing activitiesSale
      of discontinued operations:Gain
      on sale
            
            $
            174,150
            
            
            $
            460,147Net
      assets sold
            
            
            -
            
            
            
            -Due
      from related party
            
            
            -
            
            
            
            499,264Accrued
      earn-out
            
            
            (54,329
            )
            
            
            (5,639
            )Net
      cash received
            
            $
            119,821
            
            
            $
            953,772Cumulative
      dividends on preferred stock
            
            $
            31,500
            
            
            $
            31,500Assignment
      of note receivable in exchange for notes payable -
      acquisitions
            
            $
            -
            
            
            $
            80,000








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 assets 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 and nine months
ended June 30, 2008 were as follows:





Three
      Months Ended June 30, 2008
            
            
            Nine
      Months Ended June 30, 2008Revenues:Information
      technology services
            
            $
            2,302,014
            
            
            $
            6,391,315Technology
      asset disposal business
            
            
            1,092,557
            
            
            
            2,640,190Consolidated
      revenues
            
            $
            3,394,571
            
            
            
            9,031,505Operating
      (loss):Information
      technology services
            
            $
            24,627
            
            
            $
            (65,471
            )Technology
      asset disposal business
            
            
            (112,402
            )
            
            
            (280,769
            )Corporate
      expenses
            
            
            (44,418
            )
            
            
            (332,862
            )Consolidated
      operating (loss)
            
            
            (132,193
            )
            
            $
            (679,102
            )





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


6


does not
allocate income taxes or charges determined to be non-recurring in
nature.  Unallocated amounts of operating (loss) consist of corporate
expenses.





The
Company primarily operates in the United States.





NOTE
      3 –
            LIQUIDITY





At June
30, 2008, the Company had limited liquid resources.  Current
liabilities were $11,242,982 and current assets were $2,244,983.  The
difference of $8,997,999 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.  If the Company is not
successful in raising additional capital or obtaining additional accommodations
from its creditors, no assurances can be given that its creditors will not seek
to pursue all remedies available to them, which could result in a voluntary or
involuntary bankruptcy proceeding.





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.


7


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.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements which are presented in conformity with
generally accepted accounting principles (“GAAP”) in the United
States.  SFAS No. 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.”  The Company does
not expect the adoption of SFAS No. 162 to have a material impact on its
consolidated financial statements.





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 and nine
months ended June 30, 2008 and 2007.  Outstanding common stock options
and warrants not included in the computation of earnings per share for the three
and nine months ended June 30, 2008 and 2007, totaled 17,963,653 and 17,213,653,
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.  The loss
from discontinued operations is comprised primarily of write-offs of certain
assets.





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.


8





Unaudited
              Three
      Months Ended
              June
      30, 2007
            
            
            Unaudited
              Nine
      Months Ended
              June
      30, 2007Revenues
            
            $
            3,352,306
            
            
            $
            8,852,997Net
      (loss) from continuing operations attributable to common
      stockholders
            
            
            (158,021
            )
            
            
            (475,149
            )Net
      (loss) per share attributable to common stockholders basic and
      diluted
            
            
            -
            
            
            
            (.01
            )





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 June 30, 2008 was 5.00%.








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 June 30, 2008 and September 30,
2007:





June
      30, 2008
            
            
            September
      30, 2007Covenant-not-to-compete
            
            $
            100,000
            
            
            $
            100,000Accumulated
      amortization
            
            
            (30,556
            )
            
            
            (5,556
            )$
            69,444
            
            
            $
            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 June 30,2009
            
            $
            33,3332010
            
            
            33,3332011
            
            
            2,778





Amortization
expense of amortizable intangible assets was $8,333 and $-0-, for the three
months ended June 30, 2008 and 2007, respectively, and $25,000 and $-0-, for the
nine months ended June 30, 2008 and 2007, respectively.





The net
carrying amount of goodwill at June 30, 2008 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 June 30, 2008, 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; however, the EDD has issued notices
of levy to two parties that have payment obligations to the Company which, in
one case, directs the party to remit amounts owed to the Company to the EDD,
and, in the other case, directs the party to hold funds owed to the Company and
provide certain information to the EDD pending


9


further
instruction. 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.  The Company discontinued making any payments upon issuance of
the notices of levy in April 2008.





NOTE
      12 –
            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
      13 -
            NOTE
      PAYABLE – RELATED PARTY





On
January 13, 2006, the Company entered into an agreement with Pinnacle Investment
Partners, LP (“Pinnacle”) (See Note 16), 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 June 30,
2008, $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.


10


•      $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.





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
      14 -
            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
      15 -
            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 June 30, 2008, 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 the Company’s 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 the Company’s Series A Preferred
Stock.  The Company has 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.





11


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 settled this matter in April 2008 by agreeing to pay $23,000 to the
Trustee in four equal monthly installments; however, the company failed to make
the payment due in June 2008 and the Trustee has advised the Company that it is
requesting that the Bankruptcy Court enter a judgment in the amount of
approximately $40,000 against the Company.





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 the
Company.  The Company intends to vigorously defend this
matter.





State Compensation Insurance
Fund vs. Stratus Services Group, Inc.  In December 2006, the
Company entered into an agreement with the California State Compensation
Insurance Fund (the “Fund”) whereby the Fund agreed to reduce the Company’s then
liability of $2,023,000 to $300,000 provided that the Company make certain
monthly payments aggregating $300,000 over 56 months.  The Company
failed to make the payments due in July, August and September 2008 and has been
notified that the Fund intends to enter judgment against the Company in the
amount of $2,023,419.





Liberty Mutual Fire
Insurance Company vs. Stratus Services Group, Inc.  In May
2006, Liberty Mutual Fire Insurance Company (“Liberty”) instituted an action in
the Superior Court of New Jersey alleging that the Company owed it approximately
$250,000 of unpaid workers’ compensation insurance premiums.  A
default judgment was subsequently entered against the Company.  The
Company subsequently entered into a series of Tolling Agreements with Liberty
pursuant to which Liberty agreed to dismiss its action against the Company
without prejudice, and the Company agreed to make periodic payments to Liberty
commencing in September 2006.  Liberty agreed that these payments
would be deducted from the Company’s outstanding balance to
Liberty.  Liberty reserved the right to reinstate its lawsuit against
the Company in the event of a default by the Company under the Tolling
Agreements.  The Company failed to make a $5,500 payment due to
Liberty in June 2008 and Liberty has advised the Company that it is reinstating
its lawsuit.





NOTE
      16 -
            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 nine months ended June 30, 2008, the brother of the Company’s CEO loaned
$151,195 to STS of which $13,181 was repaid during the nine months ended June
30, 2008.  In addition, during the nine months ended June 30, 2008, a
significant shareholder of the Company loaned $40,000 to STS and $295,000 to GTA
of which $85,000 was repaid during the nine months ended June 30,
2008.





During
the nine months ended June 30, 2007, the Company’s CEO loaned $100,000 to the
Company which was repaid in January 2007.  In addition, during the
nine months ended June 30, 2007, a significant shareholder loaned $20,000 to the
Company which was repaid subsequently to June 30, 2007.


12


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 13).





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 (the “Asset Sales”) 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.





Continuing
Operations


Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007





Revenues.  Revenues
increased 63.2% to $3,394,571 for the three months ended June 30, 2008 from
$2,079,589 for the three months ended June 30, 2007.  Approximately
$1,093,000 of the increase was attributable to the acquisition of our technology
asset disposition operations in August 2007.  Excluding the
acquisition, revenues increased 10.7%.  This increase was primarily a
result of an increase in billable hours and permanent placements and expansion
of our customer base.





Gross
Profit.  Gross profit increased 106.2% to $1,153,811 for the
three months ended June 30, 2008 from $559,384 for the three months ended June
30, 2007.  Approximately $434,000 of the increase was attributable to
the acquisition in August 2007.  Excluding the acquisition, gross
profits increased 28.6%.  Gross profit as a percentage of revenues,
exclusive of the gross profit attributable to the acquisition, increased to
31.3% for the three months ended June 30, 2008 from 28.8% for the three months
ended June 30, 2007, primarily as a result of an increase in permanent
placements.





Selling, General
and Administrative Expenses.  Selling, General and
Administrative expenses (“SGA”) increased 90.9% to $1,286,004 for the three
months ended June 30, 2008 from $673,542 for the three months ended June 30,
2007.  Exclusive of approximately $418,000 attributable to the
acquisition in August 2007, SG&A increased 28.8%.  SG&A as a
percentage of revenues increased to 37.9% for the three months ended June 30,
2008 from 32.4% for the three months ended June 30, 2007.  The
increase in SG&A for the three months ended June 30, 2008, is primarily a
result of additions to our sales and recruiting staff.





Interest
Expense.  Interest expense increased 22.1% to $71,532 for the
three months ended June 30, 2008 from $58,555 for the three months ended June
30, 2007.  Interest expense as a percentage of revenues decreased to
2.1% for the three months ended June 30, 2008 from 3.1% for the three months
ended June 30, 2007.


13


Minority Interest
in Net (income) Loss of Consolidated Subsidiaries.  The
minority interest in net (income) loss of consolidated subsidiaries for the
three months ended June 30, 2008 and 2007 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 $144,621,
for the three months ended June 30, 2008 compared to a net loss attributable to
common stockholders of $154,138 for the three months ended June 30,
2007.





Nine
Months Ended June 30, 2008 Compared to Nine Months Ended June 30,
2007





Revenues.   Revenues
increased 57.0% to $9,031,505 for the nine months ended June 30, 2008 from
$5,753,148 for the nine months ended June 30, 2007.  Approximately
$2,603,000 of the increase is attributable to the acquisition in August
2007.  Excluding the acquisition, revenues increased
11.7%.  This increase was primarily a result of an increase in
billable hours and expansion of our customer base, net of a decrease in
permanent placements.





Gross
Profit.  Gross profit increased 61.0% to $2,814,243 for the
nine months ended June 30, 2008 from $1,748,039 for the nine months ended June
30, 2007.  Approximately $884,000 of the increase was attributable to
the acquisition in August 2007.  Excluding the acquisition, gross
profits increased 10.4%.  Gross profit as a percentage of revenues,
exclusive of the gross profit attributable to the acquisition, decreased to
30.0% for the nine months ended June 30, 2008 from 30.4% for the nine months
ended June 30, 2007, primarily as a result of a decrease in permanent placements
and a small reduction in our markup percentages.





Selling, General
and Administrative Expenses.  Selling, General and
Administrative expenses (“SGA”) increased 70.6% to $3,493,345 for the nine
months ended June 30, 2008 from $2,048,103 for the nine months ended June 30,
2007.  Exclusive of approximately $985,000 attributable to the
acquisition in August 2007, SG&A increased 22.5%.  SG&A as a
percentage of revenues increased to 38.7% for the nine months ended June 30,
2008 from 35.6% for the nine months ended June 30, 2007.  The increase
in SG&A for the nine months ended June 30, 2008 is primarily a result of
additions to our sales and recruiting staff.





Interest
Expense.  Interest expense increased 15.9% to $205,385 for the
nine months ended June 30, 2008 from $177,227 for the nine months ended June 30,
2007.  Interest expense as a percentage of revenues decreased to 2.3%
for the nine months ended June 30, 2008 from 3.1% for the nine months ended June
30, 2007.





Minority Interest
in Net (income) Loss of Consolidated Subsidiaries.  The
minority interest in net (income) loss of consolidated subsidiaries for the nine
months ended June 30, 2008 and 2007 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 $672,100,
for the nine months ended June 30, 2008 compared to a net loss attributable to
common stockholders of $(505,138) for the nine months ended June 30,
2007.





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 nine months ended June
30, 2008 and 2007 was comprised of the following:





Nine
      Months EndedJune
      30,2008
            
            
            2007Cash
      used in operating activities
            
            $
            (21,500
            )
            
            $
            (700,184
            )Cash
      provided by investing activities
            
            
            119,821
            
            
            
            946,543Cash
      used in financing activities
            
            
            -
            
            
            
            -Net
            
            $
            98,321
            
            
            $
            246,359





14


At June
30, 2008, we had limited liquid resources.  Current liabilities were
$11,242,982 and current assets were $2,244,983.  The difference of
$8,997,999 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.





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 we will be able to raise additional capital or 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 $1,028,272nd $1,073,716 in the nine months
ended June 30, 2008 and 2007, respectively.





Net cash
provided by investing activities was $87,218 and $922,475 in the nine months
ended June 30, 2008 and 2007, respectively.  Net cash received in
connection with the sale of discontinued operations (comprised of earnout
payments) was $119,821 and $953,772, in the nine months ended June 30, 2008 and
2007, respectively.  Cash used for capital expenditures was $86,932
and $31,297 in the nine months ended June 30, 2008 and 2007,
respectively.





Net cash
provided by financing activities was $808,907 and $125,512 in the nine months
ended June 30, 2008 and 2007, respectively.  We had net borrowings of
$325,110 and $67,541 under our line of credit in the nine months ended June 30,
2008 and 2007, respectively.  Net short-term borrowings were $373,358
and $55,629 in the nine months ended June 30, 2008 and 2007,
respectively.  Net short-term borrowings in the nine months ended June
30, 2008 includes $138,014 (net of repayments of $13,181) loaned to us by the
brother of our Chief Executive Officer (“CEO”) and $250,000 (net of repayments
of $85,000) loaned to us by a significant shareholder.  Net short-term
borrowings in the nine months ended June 30, 2007 includes $100,000 loaned to us
by our CEO, which was repaid in January 2007 and $20,000 which was loaned to us
by a significant shareholder of which $4,000 was repaid through June 30,
2007.  Payments of notes payable - acquisitions was $39,561 and $7,033
in the nine months ended June 30, 2008 and 2007, respectively.  During
the nine months ended June 30, 2008, 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 June 30, 2008 was
5.00%.  As of June 30, 2008, $835,005 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 June 30, 2008, 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 June 30, 2008 balance
sheet.  Judgment has not been entered against us in California;
however, the EDD has issued notices of levy to two parties that have payment
obligations to us which, in one case, directs the party to remit amounts owed to
us to the EDD, and, in the other case, directs the party to hold funds owed to
us and provide certain information to the EDD pending further


15


instruction.  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.  We paid $12,500 per week to the EDD until July 2007 when we
satisfied the outstanding employment tax liability (exclusive of interest and
penalties) in full.  In August 2007, we unilaterally reduced our
payments with respect to accrued interest and penalties to $1,000 per week and
discontinued payments in April 2008.





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 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.





In
December 2006, we entered into an agreement with the California State
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.  We failed to make the
payments due in July, August and September 2008 and have been notified that the
Fund intends to enter judgment against us in the amount of
$2,023,419.





In May
2006, Liberty Mutual Fire Insurance Company (“Liberty”) instituted an action in
the Superior Court of New Jersey alleging that we owed it approximately $250,000
of unpaid workers’ compensation insurance premiums.  A default
judgment was subsequently entered against us.  We subsequently entered
into a series of Tolling Agreements with Liberty pursuant to which Liberty
agreed to dismiss its action against us without prejudice, and we agreed to make
periodic payments to Liberty commencing in September 2006.  Liberty
agreed that these payments would be deducted from our outstanding balance to
Liberty.  Liberty reserved the right to reinstate its lawsuit against
us in the event we defaulted under the Tolling Agreement.  We failed
to make a $5,500 payment due to Liberty in June 2008 and Liberty has advised us
that it is reinstating its lawsuit.





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 our former customers, brought an action against us and several other
parties, including our former lender and ALS, seeking to recover $860,184 of
preference payments that were allegedly made by APX and its
affiliates.  We settled this matter in April 2008 by agreeing to
pay$23,000 to the Trustee in four equal monthly payments; however, we failed to
make the payment due in June 2008 and the Trustee has advised us that it is
requesting the Bankruptcy Court to enter judgment against us in the amount of
approximately $40,000.





As of
June 30, 2008, 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 $(8,123,044).





We
engaged in various transactions with related parties during the nine months
ended June 30, 2008 including the following:


16





•
            During
      the nine months, the brother of our CEO and a significant shareholder
      loaned us $151,195and $335,000, respectively.  We repaid $13,181
      and $85,000 to them, respectively, during the nine
  months.•
            In
      addition, at June 30, 2008, 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 June 30, 2008, $616,850 was outstanding on the
      Convertible Note.





Contractual
Obligations





Our
aggregate contractual obligations as of June 30, 2008 are as
follows:





Payments
      Due by Fiscal Period (in Thousands)2010
      -
            
            
            
            2012
      -Total
            
            
            2009
            
            
            2011
            
            
            2013
            
            
            ThereafterContractual
      Obligations:Long-term
      debt obligations
            
            $
            2,750
            
            
            $
            1,648
            
            
            $
            306
            
            
            $
            796
            
            
            $
            -Operating
      lease obligations
            
            
            491
            
            
            
            219
            
            
            
            272
            
            
            
            
            
            
            
            -Series
      A redemption payable
            
            
            300
            
            
            
            300
            
            
            
            
            
            
            
            
            
            
            
            -TOTAL
            
            $
            3,541
            
            
            $
            2,167
            
            
            $
            578
            
            
            $
            796
            
            
            $
            -





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 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.


17


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.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements which are presented in conformity with
generally accepted accounting principles (“GAAP”) in the United
States.  SFAS No. 162 will become effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.”  The Company does
not expect the adoption of SFAS No. 162 to have a material impact on its
consolidated 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 June 30, 2008, 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
report.  There were no changes in our internal controls during the
quarter ended June 30, 2008 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.


18





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, except as described below.





We
settled the matter captioned In re APX Holdings, LLC, et al. in which the
Trustee in a Chapter 7 bankruptcy proceeding alleged that we had received
$860,184 of preference payments by agreeing to pay $23,000 to the Trustee in
four monthly installments; however, we failed to make the payment due in June
2008 and the Trustee has advised us that it is requesting that the Bankruptcy
Court enter a judgment against us in the amount of approximately
$40,000.





In
December 2006, we entered into an agreement with the California State
Compensation Insurance 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.  We failed to make the payments
due in July, August and September 2008 and have been notified that the Fund
intends to enter judgment against us in the amount of $2,023,419.





In May
2006, Liberty Mutual Fire Insurance Company instituted an action in the Superior
Court of New Jersey alleging that we owed it approximately $250,000 of unpaid
workers’ compensation insurance premiums.  A default judgment was
subsequently entered against us.  We subsequently entered into a
series of Tolling Agreements with Liberty pursuant to which Liberty agreed to
dismiss its action against us without prejudice, and we agreed to make periodic
payments to Liberty commencing in September 2006.  Liberty agreed that
these payments would be deducted from our outstanding balance to
Liberty.  Liberty reserved the right to reinstate its lawsuit against
us in the event we defaulted under the Tolling Agreement.  We failed
to make a $5,500 payment due to Liberty in June 2008 and Liberty has advised us
that it is reinstating its lawsuit.





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, $173,821 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 June 30, 2008.





Item
      5.
            Other
      Information





Not
applicable.





Item
      6
            Exhibits





Number
            Description31.1
            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





19


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: 
      September 18, 2008
            By:
            /s/ Joseph
      J. RaymondName:
      Joseph J. RaymondTitle: 
      Chairman of the Board of Directors,President
      and Chief Executive Officer




Company NameDate: 
      September 18, 2008
              By:
              /s/ Michael
      A. MaltzmanName:
      Michael A. MaltzmanTitle: 
      Vice President and Chief Financial OfficerPrincipal
      Financial and Accounting Officer
























20