**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
                1934****For
                the quarterly period ended December 31, 2006****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
                Applicable**Securities
                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 Filero
            Accelerated
                Filero
            Non-Accelerated
                Filerx





*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
      8,
      2007 was 65,479,756.*








**STRATUS
      SERVICES GROUP, INC.**


Condensed
      Consolidated Balance Sheets


(Unaudited)





**December
                31,**
            
            **September
                30,**Assets
            
            **2006**
            
            **2006**Current
                assetsCash
            
            $
            12,909
            
            $
            84,881Accounts
                receivable-less allowance for doubtful accounts of $75,000and
                $75,000
            
            
            1,404,139
            
            
            815,463Unbilled
                receivables
            
            
            204,939
            
            
            126,191Notes
                receivable
            
            
            80,000
            
            
            80,000Due
                from related party
            
            
            389,264
            
            
            499,264Prepaid
                insurance
            
            
            8,348
            
            
            12,244Prepaid
                expenses and other current assets
            
            
            257,680
            
            
            244,6622,357,279
            
            
            1,862,705Property
                and equipment, net of accumulated depreciation
            
            
            146,415
            
            
            145,727Other
                assets
            
            
            6,350
            
            
            6,350$
            2,510,044
            
            $
            2,014,782Liabilities
                and Stockholders’ Equity (Deficiency)Current
                liabilitiesLoans
                payable
            
            $
            70,446
            
            $
            72,477Loans
                payable - related parties
            
            
            186,721
            
            
            87,721Notes
                payable - acquisitions (current portion)
            
            
            178,945
            
            
            203,663Note
                payable - related party (current portion)
            
            
            381,790
            
            
            265,308Line
                of credit
            
            
            1,090,812
            
            
            596,950Insurance
                obligation payable
            
            
            -
            
            
            7,348Accounts
                payable and accrued expenses
            
            
            3,779,194
            
            
            3,737,712Accrued
                payroll and taxes
            
            
            209,023
            
            
            107,204Payroll
                taxes payable
            
            
            3,548,852
            
            
            3,823,710Series
                A redemption payable
            
            
            300,000
            
            
            300,0009,745,783
            
            
            9,202,093Notes
                payable - acquisitions (net of current portion)
            
            
            511,595
            
            
            476,017Note
                payable - related party (net of current portion)
            
            
            235,060
            
            
            351,542Convertible
                debt
            
            
            40,000
            
            
            40,00010,532,438
            
            
            10,069,652Commitments
                and contingenciesStockholders’
                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 $101,500 and $91,000)
            
            
            701,500
            
            
            691,000Common
                stock, $.04 par value, 100,000,000 shares authorized;
                65,479,756and
                65,479,756 shares issued and outstanding
            
            
            2,619,190
            
            
            2,619,190Additional
                paid-in capital
            
            
            9,396,738
            
            
            9,407,238Accumulated
                deficit
            
            
            (20,739,822
            )
            
            (20,772,298
            )Total
                stockholders’ equity (deficiency)
            
            
            (8,022,394
            )
            
            (8,054,870
            )$
            2,510,044
            
            $
            2,014,782





See
      notes
      to condensed consolidated financial statements


**2**


**STRATUS
      SERVICES GROUP, INC.**


Condensed
      Consolidated Statements of Operations


(Unaudited)








**Three
                Months Ended****December
                31,****2006**
            
            **2005**Revenues
            
            $
            1,862,854
            
            $
            1,233,858Cost
                of revenues ($-0- and $389,735 to related parties)
            
            
            1,273,803
            
            
            822,256Gross
                profit
            
            
            589,051
            
            
            411,602Selling,
                general and administrative expenses
            
            
            648,203
            
            
            1,246,033Operating
                (loss) from continuing operations
            
            
            (59,152
            )
            
            (834,431
            )Interest
                expense
            
            
            (62,423
            )
            
            (299,351
            )Other
                income (expense)
            
            
            (21,808
            )
            
            (57,309
            )Gain
                (loss) on change in fair value of warrants
            
            
            -
            
            
            2,135(Loss)
                from continuing operations
            
            
            (143,383
            )
            
            (1,188,956
            )Discontinued
                operations - (loss) from discontinued operations
            
            
            -
            
            
            (107,044
            )Gain
                on sale of discontinued operations (net)
            
            
            175,859
            
            
            3,156,442Net
                earnings
            
            
            32,476
            
            
            1,860,442Dividends
                on preferred stock
            
            
            (10,500
            )
            
            (10,500
            )Net
                earnings attributable to common stockholders
            
            $
            21,976
            
            $
            1,849,942Net
                earnings (loss) per share attributable to common
                stockholdersBasic:(Loss)
                from continuing operations
            
            $
            -
            
            $
            (.06
            )Earnings
                from discontinued operations
            
            
            -
            
            
            .15Net
                earnings
            
            $
            -
            
            $
            .09Diluted:(Loss)
                from continuing operations
            
            $
            -
            
            $
            (.06
            )Earnings
                from discontinued operations
            
            
            -
            
            
            .14Net
                earnings
            
            $
            -
            
            $
            .08Weighted
                average shares outstanding per common shareBasic
            
            
            65,479,754
            
            
            20,432,727Diluted
            
            
            65,479,754
            
            
            23,115,798

















See
      notes
      to condensed consolidated financial statements


**3**


**STRATUS
      SERVICES GROUP, INC.**


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)







**Three
                Months Ended****December
                31,****2006**
            
            **2005**Cash
                flows from operating activitiesNet
                earnings
            
            $
            32,476
            
            $
            1,860,442Adjustments
                to reconcile net earnings to net cash used by operating
                activitiesDepreciation
            
            
            17,850
            
            
            50,904Amortization
            
            
            -
            
            
            41,902Gain
                on sale of discontinued operations
            
            
            (175,859
            )
            
            (3,156,442
            )Imputed
                interest
            
            
            14,350
            
            
            133Dividends
                on preferred stock
            
            
            -
            
            
            163,625Intrinsic
                value of the beneficial conversion feature of convertible preferred
                stock
            
            
            -
            
            
            1,674(Gain)
                loss on change in fair value of warrants
            
            
            -
            
            
            (2,135
            )Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (667,424
            )
            
            8,224,976Due
                from related party
            
            
            -
            
            
            185,736Prepaid
                insurance
            
            
            3,896
            
            
            111,826Prepaid
                expenses and other current assets
            
            
            (14,835
            )
            
            231,118Other
                assets
            
            
            -
            
            
            (1,000
            )Insurance
                obligation payable
            
            
            (7,348
            )
            
            (83,486
            )Accrued
                payroll and taxes
            
            
            101,819
            
            
            (55,254
            )Payroll
                taxes payable
            
            
            (274,858
            )
            
            (283,413
            )Accounts
                payable and accrued expenses
            
            
            30,311
            
            
            (1,390,135
            )Accrued
                interest
            
            
            11,171
            
            
            3,809Total
                adjustments
            
            
            (960,927
            )
            
            4,043,838(928,451
            )
            
            5,904,280Cash
                flows (used in) investing activitiesPurchase
                of property and equipment
            
            
            (18,538
            )
            
            (13,977
            )Cash
                received in connection with sale of discontinued operations
                (including$110,000
                from a related party in 2006) (net of $10,000 in costs in
                2005)
            
            
            287,676
            
            
            98,861269,138
            
            
            84,884Cash
                flows from financing activitiesNet
                proceeds from (repayments of) line of credit
            
            
            493,862
            
            
            (5,989,075
            )Proceeds
                from loans payable - related parties
            
            
            100,000
            
            
            -Payments
                of loans payable
            
            
            (2,031
            )
            
            -Payments
                of loans payable - related parties
            
            
            (1,000
            )
            
            (4,002
            )Payments
                of notes payable - acquisitions
            
            
            (3,490
            )
            
            (11,269
            )Cash
                overdraft
            
            
            -
            
            
            (14,731
            )587,341
            
            
            (6,019,077
            )Net
                change in cash
            
            
            (71,972
            )
            
            (29,913
            )Cash
                - beginning
            
            
            84,881
            
            
            40,784Cash
                - ending
            
            $
            12,909
            
            $
            10,871Supplemental
                disclosure of cash paidInterest
            
            $
            51,252
            
            $
            305,299





See
      notes
      to condensed consolidated financial statements


**4**





Schedule
                of non-cash investing and financing activitiesSale
                of discontinued operations:Gain
                on sale
            
            $
            175,859
            
            $
            3,156,442Net
                assets sold
            
            
            -
            
            
            1,683,783Due
                from related party
            
            
            110,000
            
            
            -Accrued
                earn-out
            
            
            1,817
            
            
            -Cancellation
                of accounts payable - related parties (net)
            
            
            -
            
            
            (3,541,364
            )Due
                from related party
            
            
            -
            
            
            (1,250,000
            )Accrued
                expenses
            
            
            -
            
            
            50,000Net
                cash received
            
            $
            287,676
            
            $
            98,861Issuance
                of common stock upon conversion of convertible preferred
                stock
            
            $
            -
            
            $
            24,366Cumulative
                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.





Until
      December 2005, Stratus Services Group, Inc. together with its 50%-owned
      consolidated joint venture, (the “Company”) was a national provider of staffing
      and productivity consulting services. Prior to December 2005, the Company
      operated a network of 29 offices in 7 states. In December 2005, the Company
      completed a series of asset sales transactions pursuant to which it sold
      substantially all of the assets that it used to conduct its staffing services
      business (see Note 5). As a result, the Company is no longer conducting active
      staffing services for any clients and is not operating any branch offices.
      The
      Company plans to focus on expanding its information technology staffing
      solutions business, which is conducted through its 50% owned consolidated joint
      venture, Stratus Technology Services, LLC (“STS”) (see Note 10).





**NOTE
                2 -**
            **LIQUIDITY**





At
      December 31, 2006, the Company had limited liquid resources. Current liabilities
      were $9,745,783 and current assets were $2,357,279. The difference of $7,388,504
      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
      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
      5).





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
                3 -**
            **NEW
                ACCOUNTING PRONOUNCEMENTS**





In
      July
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48
      (FIN 48), “Accounting for Uncertainty in Income Taxes - an interpretation of
      FASB Statement No. 109.” FIN 48 provides guidance for the recognition,
      measurement, classification and disclosure of the financial statement effects
      of
      a position taken or expected to be taken in a tax return (“tax position”). The
      financial statement effects of a tax position must be recognized when there
      is a
      likelihood of more than 50 percent that based on the technical merits, the
      position will be sustained upon examination and resolution of the related
      appeals or litigation processes, if any. A tax position that meets the
      recognition threshold must be measured initially and subsequently as the largest
      amount of tax benefit that is greater than 50 percent likely of being realized
      upon ultimate settlement with a taxing authority. The interpretation is
      effective for fiscal years beginning after December 15, 2006. The Company does
      not expect its adoption of FIN 48 to have a material impact on its consolidated
      financial portion, results of operations or cash flows.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157 (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


**6**


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 does not expect the adoption of this new standard to
      have
      a material impact on its consolidated financial position, results of operations
      or cash flow.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans.” This Statement improves
      financial reporting by requiring an employer to recognize the overfunded or
      underfunded status of a defined benefit postretirement plan as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income. This Statement also improves financial reporting by requiring an
      employer to measure the funded status of a plan as of the date of its year-end
      statement of financial position, with limited exceptions. The effective date
      to
      initially recognize the funded status and to provide the required disclosures
      is
      for fiscal years ending after December 15, 2006, or the Company’s fiscal year
      ending September 30, 2007. The requirement to measure plan assets and benefit
      obligations is effective for fiscal years ending after December 15, 2008, or
      the
      Company’s fiscal year ending September 30, 2009. The Company does not expect the
      adoption of this new standard to have a material impact on its consolidated
      financial position, results of operations or cash flows.





**NOTE
                4 -**
            **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 -0- and 2,683,071
      dilutive shares for the three months ended December 31, 2006 and December 31,
      2005, respectively. Outstanding common stock options and warrants not included
      in the computation of earnings per share for the three months ended December
      31,
      2006 and 2005, totaled 18,614,903 and 18,611,403, respectively. These options
      and warrants were excluded because their inclusion would have an anti-dilutive
      effect on earnings per share.





**NOTE
                5 -**
            **DISCONTINUED
                OPERATIONS**





In
      December 2005, the Company completed the following series of transactions
      pursuant to which it sold substantially all of the assets used to conduct its
      staffing services business, other then the IT staffing solutions business that
      is conducted through the Company’s 50% owned joint venture, STS.





(i)
            On
                December 2, 2005, the Company completed the sale, effective as of
                November
                21, 2005, of substantially all of the tangible and intangible assets,
                excluding accounts receivable, of several of its offices located
                in the
                Western half of the United States (the “ALS Purchased Assets”) to ALS, LLC
                (“ALS”), a related party (see Note 10). The offices sold were the
                following: Chino, California; Colton, California; Los Nietos, California;
                Ontario, California; Santa Fe Springs, California and the Phoenix,
                Arizona
                branches and the Dallas Morning News Account (the “Western Offices”).
                Pursuant to the terms of an Asset Purchase Agreement between the
                Company
                and ALS dated December 2, 2005 (the “ALS Asset Purchase Agreement”), the
                purchase price for the ALS Purchased Assets was paid or is payable
                as
                follows:





•
            $250,000
                was paid over the 60 days following December 2, 2005, at a rate no
                faster
                than $125,000 per 30 days;




•
            $1,000,000
                payable by ALS will be paid directly to certain taxing authorities
                to
                reduce the Company’s tax obligations;
                and




•
            $3,537,000
                was paid by means of the cancellation of all net indebtedness owed
                by the
                Company to ALS outstanding as of the close of business on December
                2,
                2005.




In
      addition to the foregoing amounts, ALS also assumed the Company’s obligation to
      pay $798,626 due under a certain promissory note issued by the Company in
      connection with an acquisition to Provisional Employment Solutions, Inc. As
      a
      result of the sale of the ALS Purchased Assets to ALS, all sums due and owing
      to
      ALS by the Company were deemed paid in full and no further obligations
      remain.





(ii) On
      December 5, 2005, the Company completed the sale, effective as of November
      28,
      2005 (the “AI Effective Date”), of substantially all of the tangible and
      intangible assets, excluding accounts receivable and other certain items, as
      described below, of three of its California offices (the “AI Purchased Assets”)
      to Accountabilities, Inc. (AI”). The offices sold were the following: Culver
      City, California; Lawndale, California and Orange, California (the “Other
      California Offices”). Pursuant to the terms of an Asset Purchase Agreement
      between the Company and AI dated December 5, 2005 (the “AI Asset Purchase
      Agreement”), AI has agreed to pay to the Company an earnout amount equal to two
      percent of the sales of the Other California Offices for the first twelve month
      period


**7**




after
      the AI Effective Date;
      one percent of the sales of the Other California Offices for the second twelve
      month period after the AI Effective Date; and one percent of the sales of the
      Other California Offices for the third twelve month period from the AI Effective
      Date. In addition, a Demand Subordinated Promissory Note between the Company
      and
      AI dated September 15, 2005, which had an outstanding principal balance of
      $125,000 at the time of closing was deemed paid and marked
      canceled.





Certain
      assets held by the other California Offices were excluded from the sale,
      including cash and cash equivalents, accounts receivable and the Company’s
      rights to receive payments from any source.




(ii) On
      December 7, 2005, the Company completed the sale, effective as of November
      28,
      2005 (the “SOP Effective Date”), of substantially all of the tangible and
      intangible assets, excluding accounts receivable and other assets as described
      below, of several of its Northeastern offices (the “SOP Purchased Assets”) to
      Source One Personnel, Inc. (“SOP”). The offices sold were the following: Cherry
      Hill, New Jersey; New Brunswick, New Jersey; Mount Royal/Paulsboro, New Jersey
      (soon to be Woodbury Heights, New Jersey); Pennsauken, New Jersey; Norristown,
      Pennsylvania; Fairless Hills, Pennsylvania; New Castle, Delaware and the former
      Freehold, New Jersey profit center (the “NJ/PA/DE Offices”). The assets of Deer
      Park, New York, Leominster, Massachusetts, Lowell, Massachusetts and Athol,
      Massachusetts (the “Earn Out Offices”) were also purchased (collectively the
“NJ/PA/DE Offices” and the “Earn Out Offices” shall be referred to as the
“Purchased Offices”). In addition to the foregoing, the SOP Purchased Assets
      also included substantially all of the tangible and intangible assets, excluding
      accounts receivable and other assets as described below, used by the Company
      in
      the operation of its business at certain facilities of certain customers
      including the following: the Setco facility in Cranbury, New Jersey, the Record
      facility in Hackensack, New Jersey, the UPS-MI (formerly RMX) facility in Long
      Island, New York, the UPS-MI (formerly RMX) facility in the State of
      Connecticut, the UPS-MI (formerly RMX) facility in the State of Ohio, the APX
      facility in Clifton, New Jersey (the “Earn Out On-Site Business”) and the
      Burlington Coat Factory in Burlington, New Jersey, the Burlington Coat Factory
      facility in Edgewater Park, New Jersey and the UPS-MI (formerly RMX) facility
      in
      Paulsboro, New Jersey (the foregoing business and the “Earn Out On-Site
      Businesses” shall be referred to herein collectively as the “On-Site
      Businesses”). Pursuant to the SOP Asset Purchase Agreement between the Company
      and SOP dated December 7, 2005 (the “SOP Asset Purchase Agreement:), the
      purchase price for the SOP Purchased Assets was paid or is payable as follows
      (the “SOP Purchase Price”):





•
            An
                aggregate of $974,031 of indebtedness owed by the Company to SOP
                (i) under
                certain promissory notes previously issued by the Company to SOP
                and (ii)
                in connection with a put right previously exercised by SOP with respect
                to
                400,000 shares of our common stock was
                cancelled.




•
            SOP
                is required to make the following earn out payments to the Company
                during
                the three year period commencing on the SOP Effective Date (the “Earn Out
                Period”):




•
            Two
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the initial twelve months of
                the Earn
                Out Period.




•
            One
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the second twelve months of the
                Earn
                Out Period.




•
            One
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the third twelve months of the
                Earn
                Out Period.




Certain
      assets held by the Purchased Businesses were excluded from the sale, including
      cash and cash equivalents, accounts receivable, and the Company’s rights to
      receive payments from any source.





(iv)
            On
                December 7, 2005 (the “Closing Date”), the Company completed the sale of
                substantially all of the tangible and intangible assets, excluding
                cash
                and cash equivalents, of two of its California branch offices (the
“TES
                Purchased Assets”) to Tri-State Employment Service, Inc. (“TES”). The
                offices sold were the following: Bellflower, California and West
                Covina,
                California (the “California Branch Offices”). Pursuant to the terms of an
                Asset Purchase Agreement between the Company and TES dated December
                7,
                2005 (the “TES Asset Purchase Agreement”), TES has agreed to pay to the
                Company an earnout amount as
                follows:





•
            two
                percent of sales of the California Branch Offices to existing clients
                for
                the first twelve month period after the Closing
                Date;




•
            one
                percent of sales of the California Branch Offices to existing clients
                for
                the second twelve month period after the Closing Date;
                and




•
            one
                percent of sales of the California Branch Offices to existing clients
                for
                the third twelve month period after the Closing
                Date.




**8**


For
      purposes of calculating the amount owed by TES to the Company, in no event
      shall
      the aggregate annual sales to such clients exceed $25,000,000.




On
      the
      Closing Date, TES made a payment of $1,972,521 to the Company’s then lender (see
      Note 6) and acquired the lender’s rights to certain of the Company’s accounts
      receivable that collateralize its obligation to the lender. As a result of
      this
      transaction, the Company’s obligations to the lender were reduced by
      $1,972,521.





The
      operating results of discontinued operations for the three months ended December
      31, 2005, are summarized as follows:





Revenues
            
            $
            18,265,587Cost
                of revenues
            
            
            16,218,630Gross
                profit
            
            
            2,046,957Selling,
                general and administrative expenses
            
            
            1,950,622Operating
                income
            
            
            96,335Interest
                expense
            
            
            (205,056
            )Other
                income
            
            
            1,677Net
                (loss)
            
            $
            (107,044
            )





The
      gain
      (loss) on sale of discontinued operations is summarized as follows:





**Three
                Months Ended****December
                31,****2006**
            
            
            **2005**Sold
                to:ALS
            
            $
            -
            
            $
            4,340,459AI
            
            
            76,573
            
            
            (297,437
            )SOP
            
            
            39,346
            
            
            (331,265
            )TES
            
            
            59,940
            
            
            (495,315
            )175,859
            
            
            3,216,442Other
                costs of sales
            
            
            -
            
            
            (60,000
            )Gain
                on sale of discontinued operations
            
            $
            175,859
            
            $
            3,156,442





The
      above
      gain is comprised of earnout payments in the three months ended December 31,
      2006 and includes earnout payments of $73,861 in the three months ended December
      31, 2005.





**NOTE
                6 -**
            **LINE
                OF CREDIT**





The
      Company had a loan and security agreement (the “Loan Agreement”) with Capital
      Temp Funds, Inc. (the “Lender”) which provided for a line of credit up to 85% of
      eligible accounts receivable, as defined, not to exceed $12,000,000. The Loan
      Agreement restricted the Company’s ability to incur other indebtedness, pay
      dividends and repurchase stock. Borrowings under the Loan Agreement bore
      interest at 3% above the prime rate. Borrowings under the Loan Agreement were
      collateralized by substantially all of the Company’s assets.





On
      January 15, 2005, the Company entered into a Forbearance Agreement (the
“Forbearance Agreement”) pursuant to which Lender agreed to forebear from
      accelerating obligations and/or enforcing existing defaults.




The
      Forbearance Agreement amended the Loan Agreement to reduce the maximum credit
      line to $12,000,000, which, after March 1, 2005 was further reduced by $250,000
      per month.




On
      August
      11, 2005, the Company and the Lender entered into an Amended and Restated
      Forbearance Agreement (the “Amended Forbearance Agreement”) whereby the Lender
      had again agreed to forbear from accelerating obligations and/or enforcing
      existing defaults until the earlier to occur of (a) August 26, 2005 or (b)
      the
      date of any Forbearance Default, as defined (the “Forbearance
      Period”).




The
      Amended Forbearance Agreement provided that during the Forbearance Period,
      the
      maximum credit line would be $10,500,000.




**9**


Between
      August 25, 2005 and December 21, 2005, the Lender granted the Company a series
      of extensions of the Amended Forbearance Agreement. An extension granted in
      November 2005 was conditioned upon, among other things, the Company and ALS
      entering into a binding agreement providing for a sale to ALS of certain assets
      of the Company. The Company and ALS entered into such an agreement on November
      3, 2005. As a condition to obtaining an extension granted in December 2005,
      the
      Company was required to represent that it had closed the sale of assets to
      ALS
      and to acknowledge and agree that any loans and advances made by the Lender
      during the extension period would be the last requested advances under the
      Loan
      Agreement. The final extension of the Amended Forbearance Agreement expired
      on
      December 21, 2005. As of January 31, 2006, the Company repaid all of the
      indebtedness under the Loan Agreement.




The
      Lender charged the Company $350,000 of fees in connection with the Forbearance
      Agreement, the Amended Forbearance Agreement and the various extensions thereof
      during the three months ended December 31, 2005.




In
      connection with the Company and the Lender entering into the Amended Forbearance
      Agreement, the Company, the Lender and ALS also entered into the ALS
      Forbearance, whereby ALS agreed to forbear, through August 25, 2005, from
      enforcing payment defaults under the Company’s Outsourcing Agreement (see Note
      10). All of the Company’s obligations under the Company’s Outsourcing Agreement
      with ALS were satisfied in connection with the sale of assets to ALS which
      occurred in December 2005 (see Note 5).




On
      January 3, 2006, the Company’s consolidated 50% owned joint venture, STS (see
      Notes 1 and 10), 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, 2006 was 8.25%.





**NOTE
                7 -**
            **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, 2006, there was still an aggregate of $3.5
      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. The Company
      is to continue to pay $12,500 per week to be first applied to its unpaid
      employment tax liability of $284,046 (as of December 31, 2006) for periods
      prior
      to the second quarter 2004; then to second quarter 2004 and third quarter 2004
      employment taxes to the extent not already paid, then to interest and then
      to
      penalties. 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.





**NOTE
                8 -**
            **INCOME
                TAXES**





No
      income
      tax expense was recorded in the three months ended December 31, 2006 and 2005,
      because the Company recognized a deferred tax benefit resulting from the
      utilization of the Company’s net operating loss carryforwards.





**NOTE
                9 -**
            **PREFERRED
                STOCK**





**a.**  **Series
      F**





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,


**10**


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.





**b.**  **Series
      I**





The
      Company was required to redeem each share of the Series I Preferred Stock for
      an
      amount equal to the stated value of $100 per share plus all accrued and unpaid
      dividends on August 5, 2005, the one year anniversary date of the issuance
      of
      the Series I Preferred Stock to the extent permitted by applicable law;
      provided, however, that the Company had the right to extend the required
      redemption date for an additional one year, in which case the Company was
      required to pay all dividends accrued through the first year of issuance in
      cash
      and issue to each holder of Series I Preferred Stock a number of shares of
      its
      common stock which then have a value equal to 10% of the stated value of the
      Series I Preferred Stock held. In addition, because the Company extended the
      redemption date, it was required to pay dividends quarterly and pay an advisory
      fee to an advisor designated by the holders of the Series I Preferred Stock
      in
      an amount equal to 10% of the aggregate stated value of the outstanding shares
      of Series I Preferred Stock, 80% of which was payable in cash and 20% of which
      will be paid in shares of the Company’s common stock, valued at the then current
      market value. If the Company did not redeem the Series I Preferred Stock by
      the
      extended redemption date, the dividend rate of the Series I Preferred Stock
      would have increased to 24% per year and the Series I Preferred Stock would
      have
      been convertible, at the option of the holder, into either common stock at
      a
      conversion price equal to 80% of the average closing bid price of the common
      stock during the five trading days preceding the conversion or common stock
      and
      warrants at a rate of 125 shares of common stock and 250 warrants for each
      $100
      of stated value and accrued and unpaid dividends represented by the Series
      I
      Preferred Stock. Holders of Series I Preferred Stock had no voting rights,
      except as provided by law and with respect to certain limited
      matters.





Pinnacle
      Investment Partners, LP (“Pinnacle”), the holder of the shares of the Company’s
      Series I Preferred Stock (see Note 10) notified the Company that the Company
      was
      in default of its obligations to pay $30,000 of the $174,200 cash portion of
      the
      advisory fee which was required to be paid in connection with the Company’s
      election to extend the date by which it was required to redeem the Series I
      Preferred Stock to August 5, 2006. The Company was also in default for
      non-payment of $40,091 of dividends on the Series I Preferred Stock that were
      due on September 30, 2005.





The
      Company permitted Pinnacle to convert 41 shares of Series I Preferred Stock
      into
      840,000 shares of common stock in October 2005 as a result of the payment
      defaults.





In
      December 2005, the Company permitted Pinnacle to convert an aggregate of 203
      shares of Series I Preferred Stock into 3,000,000 shares of Common Stock and
      agreed to pay to Pinnacle a default fee $100,000.





On
      January 13, 2006, the Company entered into an agreement with Pinnacle, 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 21,531 shares of the Company’s Series I
      Preferred Stock held by Pinnacle. As a result of the exchange, there are no
      longer any shares of Series I Preferred Stock outstanding, and the Company
      no
      longer has any obligation to pay to Pinnacle any amounts owed to it under the
      terms of the Series I Preferred Stock, including $103,716 of unpaid dividends
      which had accrued through December 28, 2005. 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. During the year ended
      September 30, 2006, the Company issued 5,000,000 shares of its




**11**


Common
      Stock, valued at the then market value, to Pinnacle as payment of $45,000
      against this portion of the Convertible Note. At December 31, 2006, $210,000
      remains unpaid.




•  $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 commencing June 28,
      2007 and ending on May 28, 2009.




•  $225,000
      and accrued interest thereon at the rate of 6% per annum becomes due and payable
      on December 28, 2007; 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 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
                10 -**
            **RELATED
                PARTY TRANSACTIONS**





***Consulting
      Fees***


An
      entity
      which employs the son of the Chief Executive Officer of the Company (the (“CEO”)
      provided consulting services to the Company. Consulting expense was $-0- and
      $28,000 for the three months ended December 31, 2006 and 2005, respectively.





***Joint
      Venture***


The
      Company provides information technology staffing services through a joint
      venture, STS (see Note 1), in which the Company has a 50% interest. A son of
      the
      CEO of the Company has a majority interest in the other 50%
      venturer.





***Payroll
      Outsourcing***


The
      Company was a party to an Outsourcing Agreement with ALS pursuant to which
      ALS
      and its affiliate, Advantage Services Group, LLC (“Advantage”), were to provide
      payroll outsourcing services for all of the Company’s in-house staff, except for
      its corporate employees, and customer staffing requirements. As a result of
      this
      arrangement, all of the Company’s field personnel were employees of ALS. The
      Company paid agreed upon pay rates, plus burden (payroll taxes and workers’
compensation insurance) plus a fee ranging between 2% and 3% (0% - 1 1⁄2%
      effective June 10, 2005) of pay rates. On June 10, 2005, the Company entered
      into a Second Addendum to Outsourcing Agreement with ALS, which, among other
      things, reduced certain rates charged by ALS to the Company. The total amount
      charged by ALS under this agreement and similar agreements previously in effect
      between the parties was $17,226,000 in the three months ended December 31, 2005.





The
      Company terminated the Outsourcing Agreement effective February 3,
      2006.





***Due
      from Related Party***


The
      amount due from related party in the condensed consolidated balance sheet is
      the
      remaining balance due from ALS in connection with the sale of the ALS Purchased
      Assets (see Note 5).





***Loans
      Payable***


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





***Other***


An
      entity
      through which the son of the CEO is employed is a consultant to AI (see Note
      5).





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 9). The Company believes
      that PIP Management Inc., which was designated as the advisor to the Series
      I
      holders (see Note 9), is also affiliated with Pinnacle Investment Partners,
      LP.





**12**





**NOTE
                11 -**
            **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
                12 -**
            **SUBSEQUENT
                EVENTS**





(a)
            On
                February 13, 2007, the Company acquired from Fusion Business Services,
                LLC
                (“Fusion”) an additional one percent (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 is 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.





(b)
            On
                February 13, 2007, the Company filed a Certificate of Amendment to
                its
                Amended and Restated Certificate of Incorporation which increased
                the
                number of authorized shres of its common stock from 100,000,000 shares
                to
                500,000,000 shares.  The increase in the authorized shares was
                approved by the Company's stockholders at a special meeting of
                stockholders held on November 28,
                2006.




(c)
            Effective
                January 14, 2007, the Company reduced the exercise price of its warrants
                to purchase common stock to $.50 per share and extended the expiration
                date of the warrants to January 14, 2008.  Previously, the exercise
                price of the warrants was $.76 per share and the warrants were to
                expire
                on January 14, 2007.  As of February 13, 2007, warrants to purchase
                an aggregate 14,213,653 shares of common stock were
                outstanding.





**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, 2006.





**Introduction**





Through
      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. Regardless of the
      type
      of temporary service offering we provided, we recognized revenues based on
      hours
      worked by assigned personnel. Generally, we billed our customers a
      pre-negotiated, fixed rate per hour for the hours worked by our temporary
      employees. Therefore, we did not separate our various service offerings into
      separate offering segments. We did not routinely provide discrete financial
      information about any particular service offering. We also did not conduct
      any
      regular reviews of, nor make decisions about, allocating any particular
      resources to a particular service offering to assess its performance. Certain
      of
      our service offerings targeted specific markets, but we did not necessarily
      conduct separate marketing campaigns for such services. Pursuant to the
      Outsourcing Agreement that was in place with ALS, LLC (“ALS”), ALS was
      responsible for paying wages, workers’ compensation, unemployment compensation
      insurance, Medicare and Social Security taxes and other general payroll related
      expenses for all of the temporary employees we placed, and we were billed for
      such expenses plus a fee by ALS. These expenses are included in the cost of
      revenue. Because we paid our temporary employees only for the hours they
      actually worked, wages for our temporary personnel were a variable cost that
      increased or decreased in proportion to revenues. Gross profit margin varied
      depending on the type of services offered. In some instances, temporary
      employees placed by us may have decided to accept an offer of permanent
      employment from the customer and thereby “convert” the temporary position to a
      permanent position. Fees received from such conversions were included in our
      revenues. Selling, general and administrative expenses include payroll for
      management and administrative employees, office occupancy costs, sales and
      marketing expenses and other general and administrative costs.





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 50% owned joint venture,
      STS.


**14**


**Results
      of Operations**


**Discontinued
      Operations/Acquisition on Disposition of Assets**





In
      December 2005, we completed the following series of transactions pursuant to
      which we sold substantially all of our assets used to conduct our staffing
      services business, other than the IT staffing solutions business that is
      conducted through our 50% owned joint venture, Stratus Technology Services,
      LLC:





(a)
            On
                December 2, 2005, we completed the sale, effective as of November
                21,
                2005, of substantially all of the tangible and intangible assets,
                excluding accounts receivable, of several of our offices located
                in the
                Western half of the United States (the “ALS Purchased Assets”) to ALS. The
                offices sold were the following: Chino, California; Colton, California;
                Los Angeles, California; Los Nietos, California; Ontario, California;
                Santa Fe Springs, California and the Phoenix, Arizona branches and
                the
                Dallas Morning News Account (the “Western Offices”). Pursuant to the terms
                of an Asset Purchase Agreement between us and ALS dated December
                2, 2005
                (the “ALS Asset Purchase Agreement”), the purchase price for the ALS
                Purchased Assets was paid or is payable as
                follows:





•
            $250,000
                was paid over the 60 days following December 2, 2005, for our documented
                cash flow requirements, all of which is payable at a rte no faster
                than
                $125,000 per 30 days;





•
            $1,000,000
                payable by ALS will be paid directly to certain taxing authorities
                to
                reduce our tax obligations; and





•
            $3,537,000
                was paid by means of the cancellation of all net indebtedness owed
                by us
                to ALS outstanding as of the close of business on December 2,
                2005.





In
                addition to the foregoing amounts, ALS also assumed our obligation
                to pay
                $798,626 due under a certain promissory note issued by us to Provisional
                Employment Solutions, Inc. As a result of the sale of the ALS Purchased
                Assets to ALS, all sums due and owing to ALS by Stratus were deemed
                paid
                in full and no further obligations
                remain.





In
      connection with the transaction, we entered into Non-Compete and
      Non-Solicitation Agreements with ALS pursuant to which we agreed not to compete
      with ALS with the customers of and in the geographic area of the Western
      Offices, and ALS agreed not to compete with us with respect to certain customers
      and accounts, including, accounts serviced by our remaining offices, for a
      period of two years.




(b)
            On
                December 5, 2005, we completed the sale, effective as of November
                28, 2005
                (the “AI Effective Date”), of substantially all of the tangible and
                intangible assets, excluding accounts receivable and other certain
                items,
                as described below, of three of our California offices (the “AI Purchased
                Assets”) to Accountabilities, Inc. (“AI”) The offices sold were the
                following: Culver City, California; Lawndale, California and Orange,
                California (the “Other California Offices”). Pursuant to the terms of an
                Asset Purchase Agreement between the Company and AI dated December
                5, 2005
                (the “AI Asset Purchase Agreement”), AI has agreed to pay to us an earnout
                amount equal to two percent of the sales of the Other California
                Offices
                for the first twelve month period after the AI Effective Date; one
                percent
                of the sales of the Other California Offices for the second twelve
                month
                period after the AI Effective Date; and one percent of the sales
                of the
                Other California Offices for the third twelve month period from the
                AI
                Effective Date. In addition, a Demand Subordinated Promissory Note
                between
                us and AI dated September 15, 2005 which had an outstanding principal
                balance of $125,000 at the time of closing was deemed paid and marked
                canceled.




Certain
      assets held by the Other California Offices were excluded from the sale,
      including cash and cash equivalents, accounts receivable, and our rights to
      receive payments from any source.




In
      connection with the AI transaction, we entered into Non-Compete and
      Non-Solicitation Agreements with AI pursuant to which we agreed not to compete
      with AI with the customers of and in the geographic area of the Other California
      Offices, and AI agreed not to compete with us with respect to certain customers
      and accounts, including, accounts serviced by our remaining offices, for a
      period of three years.




(c)
            On
                December 7, 2005, we completed the sale, effective as of November
                28, 2005
                (the “SOP Effective Date”), of substantially all of the tangible and
                intangible assets, excluding accounts receivable and other assets
                as
                described below, of several of our Northeastern offices (the “SOP
                Purchased Assets”) to Source One Personnel, Inc. (“SOP”). The offices sold
                were the following: Cherry Hill, New Jersey; New Brunswick, New Jersey;
                Mount Royal/Paulsboro, New Jersey (soon to be Woodbury Heights, New
                Jersey); Pennsauken, New Jersey; Norristown, Pennsylvania; Fairless
                Hills,
                Pennsylvania; New Castle Delaware and the former Freehold, New Jersey
                profit




**15**


center
                (the “NJ/PA/DE Offices”). The assets of Deer Park, New York, Leominster,
                Massachusetts, Lowell, Massachusetts and Athol, Massachusetts (the
“Earn
                Out Offices”) were also purchased (collectively the “NJ/PA/DE Offices” and
                the “Earn Out Offices” shall be referred to as the “Purchased Offices”).
                In addition to the foregoing, the SOP Purchased Assets also included
                substantially all of the tangible and intangible assets, excluding
                accounts receivable and other assets as described below, used by
                us in the
                operation of our business at certain facilities of certain customers
                including the following: the Setco facility in Cranbury New Jersey,
                the
                Record facility in Hackensack, New Jersey, the UPS-MI (formerly RMX)
                facility in Long Island, New York, the UPS-MI (formerly RMX) facility
                in
                the State of Connecticut, the UPS-MI (formerly RMX) facility in the
                State
                of Ohio, the APX facility in Clifton, New Jersey (the “Earn Out On-Site
                Business”) and the Burlington Coat Factory in Burlington, New Jersey, the
                Burlington Coat Factory facility in Edgewater Park, New Jersey and
                the
                UPS-MI (formerly RMX) facility in Paulsboro, New Jersey (the foregoing
                business and the “Earn-Out On-Site Businesses” shall be referred to herein
                collectively as the “On-Site Businesses”). Pursuant to the SOP Asset
                Purchase Agreement between us and SOP dated December 7, 2005 (the
“SOP
                Asset Purchase Agreement”), the purchase price for the SOP Purchased
                Assets was paid or is payable as follows (the “SOP Purchase
                Price”):




•
            An
                aggregate of $974,031 of indebtedness owed by us to SOP (i) under
                certain
                promissory notes previously issued by us to SOP and (ii) in connection
                with a put right previously exercised by SOP with respect to 400,000
                shares of our common stock was
                cancelled.





•
            SOP
                is required to make the following earn out payments to us during
                the three
                year period commencing on the SOP Effective Date (the “Earn Out
                Period”):





•
            Two
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the initial twelve months of
                the Earn
                Out Period.





•
            One
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the second twelve months of the
                Earn
                Out Period.





•
            One
                percent of sales (excluding taxes on sales) from the Earn Out Offices
                and
                the Earn Out On-Site Businesses for the third twelve months of the
                Earn
                Out Period.





Certain
      assets held by the Purchased Offices were excluded from the sale, including
      cash
      and cash equivalents, accounts receivable, our rights to receive payments from
      any source.




In
      connection with the SOP transaction, we entered into Non-Compete and
      Non-Solicitation Agreements with SOP pursuant to which we agreed not to compete
      with SOP with respect to the business acquired from us by SOP for a period
      of
      two years.




(d)
            On
                December 7, 2005 (the “Closing Date”), we completed the sale of
                substantially all of the tangible and intangible assets, excluding
                cash
                and cash equivalents, of two of our California branch offices (the
“TES
                Purchased Assets”) to Tri-State Employment Service, Inc. (“TES”). The
                offices sold were the following: Bellflower, California and West
                Covina,
                California (the “California Branch Offices”). Pursuant to the terms of an
                Asset Purchase Agreement between the Registrant and TES dated December
                7,
                2005 (the “TES Asset Purchase Agreement”), TES has agreed to pay to us as
                follows:




·
            two
                percent of sales of the California Branch Offices to existing clients
                for
                the first twelve month period after the Closing
                Date;




·
            one
                percent of sales of the California Branch Offices to existing clients
                for
                the second twelve month period after the Closing Date; and




·
            one
                percent of sales of the California Branch Offices to existing clients
                for
                the third twelve month period after the Closing Date.




For
      purposes of calculating the amount owed by TES to us, in no event shall the
      aggregate annual sales to such clients exceed $25,000,000.




On
      the
      Closing Date, TES made a payment of $1,972,521 to our lender and acquired the
      lender’s rights to certain of our accounts receivable that collateralize our
      obligation to the lender. As a result of this transaction, our obligations
      to
      the lender were reduced by $1,972,521.




**16**


In
      connection with the TES transaction, we entered into Non-Compete and
      Non-Solicitation Agreements pursuant to which we agreed not to compete with
      TES
      with the customers of and in the geographic area of the California Branch
      Offices, and TES agreed not to compete with Stratus with respect to certain
      customers and accounts, including, accounts serviced by Stratus’ remaining
      offices, for a period of three years.




The
      foregoing transactions resulted in a net gain on sale of discontinued operations
      which is summarized as follows:




**Three
                Months Ended****December
                31,****2006**
            
            **2005**Sold
                to:ALS
            
            $
            -
            
            $
            4,340,459AI
            
            
            76,573
            
            
            (297,437
            )SOP
            
            
            39,346
            
            
            (331,265
            )TES
            
            
            59,940
            
            
            (495,315
            )175,859
            
            
            3,216,442Other
                costs of sales
            
            
            -
            
            
            (60,000
            )Gain
                on sale of discontinued operations
            
            $
            175,859
            
            $
            3,156,442





The
      above
      gain is comprised of earnout payments in the three months ended December 31,
      2006 and includes earnout payments of $73,861 in the three months ended December
      31, 2005.




**Continuing
      Operations**


**Three
      Months Ended December 31, 2006 Compared to Three Months Ended December 31,
      2005**





***Revenues.*** Revenues
      increased 51.0% to $1,862,854 for the three months ended December 31, 2006
      from
      $1,233,858 for the three months ended December 31, 2005. This increase was
      primarily a result of an increase in billable hours and expansion of our
      customer base.





***Gross
      Profit.*** Gross
      profit increased 30.0% to $589,051 for the three months ended December 31,
      2006
      from $412,602 for the three months ended December 31, 2005, primarily as a
      result of increased revenues. Gross profit as a percentage of revenues decreased
      to 31.6% for the three months ended December 31, 2006 from 33.4% for the three
      months ended December 31, 2005. This decrease was a result of decreased
      permanent placements.





***Selling,
      General and Administrative Expenses.*** ** Selling,
      general and administrative expenses (“SG&A”) decreased 48.0% to $648,203 for
      the three months ended December 31, 2006 from $1,246,033 for the three months
      ended December 31, 2005. Selling, general and administrative expenses as a
      percentage of revenues decreased to 34.8% for the three months ended December
      31, 2006 from 101.0% for the three months ended December 31, 2005. SG&A in
      the three months ended December 31, 2005, includes $350,000 of fees charged
      to
      us by our Lender in connection with the Forbearance Agreement, the Amended
      Forbearance Agreement and the various extensions thereof (see Note 6 to the
      Condensed Consolidated Financial Statements).





As
      a
      result of the asset sales transactions completed in December 2005, we began
      reducing our corporate overheard structure to be more in line with the remaining
      revenues. These reductions were completed in February 2006.





***Interest
      Expense.*** Interest
      expense decreased 79.1% to $62,423 for the three months ended December 31,
      2006
      from ** $299,351
      for the three months ended December 31, 2005. Interest expense as a percentage
      of revenues decreased to 3.4% for the three months ended December 31, 2006
      from
      24.3% for the three months ended December 31, 2005. Interest expense in the
      three months ended December 31, 2005, includes $100,000 of the principal amount
      of the Convertible Note issued in exchange for our Series I Preferred Stock
      that
      was attributable to the settlement of our obligation to pay certain advisory
      fees and dividend payments under the terms of the Series I Preferred Stock.
      (see
      Note 9 to the Condensed Consolidated Financial Statements).





***Gain
      on Change in Fair Value of Warrants.*** We
      recognized a non-cash gain as a result of the decrease in the fair value of
      certain warrants accounted for as a derivative liability of $2,135 in the three
      months ended December 31, 2005.





***Net
      Loss Attributable to Common Stockholders.*** ** As
      a
      result of the foregoing, we had a net loss attributable to common stockholders
      of $153,883, for the three months ended December 31, 2006 compared to a net
      loss
      attributable to common stockholders of $1,199,456 for the three months ended
      December 31, 2005.


**17**


**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, 2006
      and
      2005 was comprised of the following:





**Three
                Months Ended****December
                31,****2006**
            
            **2005**Cash
                used in operating activities
            
            $
            (269,601
            )
            $
            (444,426
            )Cash
                provided by investing activities
            
            
            287,676
            
            
            305,412Cash
                used in financing activities
            
            
            -
            
            
            (38,786
            )Net
            
            $
            18,075
            
            $
            (177,800
            )





Although
      there is no assurance we will continue to receive earnout payments in connection
      with discontinued operations, we estimate that we will receive approximately
      $40,000 per month, through November 2008.





At
      December 31, 2006, we had limited liquid resources. Current liabilities were
      $9,745,783 and current assets were $2,357,279. The difference of $7,388,504
      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 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.





Net
      cash
      provided by (used in) operating activities was $(928,451) and $5,904,780 in
      the
      three months ended December 30, 2006 and 2005, respectively.





Net
      cash
      provided by investing activities was $269,138 and $84,884 in the three months
      ended December 31, 2006 and 2005, respectively. Net cash received in connection
      with the sale of discontinued operations was $287,676 (comprised of earnout
      payments) and $98,861 (including earnout payments of $73,861), in the three
      months ended December 31, 2006 and 2005, respectively. Cash used for capital
      expenditures was $18,538 and $13,977 in the three months ended December 31,
      2006
      and 2005, respectively.





Net
      cash
      provided by (used in) financing activities was $587,341 and $(6,019,077) in
      the
      three months ended December 31, 2006 and 2005, respectively. We had net
      borrowings (repayments) of $493,865 and $(5,989,095) under our line of credit
      in
      the three months ended December 31, 2006 and 2005, respectively. Net short-term
      borrowings (repayments) were $96,969 and $(4,002) in the three months ended
      December 31, 2006 and 2005, respectively. Net short-term borrowings in the
      three
      months ended December 31, 2006, includes $100,000 loaned to us by our Chief
      Executive Officer, which was repaid in January 2007. Payments of notes payable
      -
      acquisitions was $3,490 and $11,269 in the three months ended December 31,
      2006
      and 2005, respectively.





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.





Through
      December 2005, we had a loan and security agreement (the “Loan Agreement”) with
      Capital Temp Funds, Inc. (the “Lender”) which provided for a line of credit up
      to 85% of eligible accounts receivable, as defined, not to exceed $12,000,000.
      Until April 10, 2003, advances under the Loan Agreement bore interest at a
      rate
      of prime plus -3/4%. The Loan Agreement restricted our ability to incur other
      indebtedness, pay dividends and repurchase stock. Effective April 10,


**18**


2003,
      we
      entered into a modification of the Loan Agreement which provided that borrowings
      under the Loan Agreement would bear interest at 3% above the prime rate.
      Borrowings under the Loan Agreement are collateralized by substantially all
      of
      our assets. As of September 30, 2005, $8,931,689 was outstanding under the
      credit agreement.





During
      the year ended September 30, 2005, we were in violation of the following
      covenants under the Loan Agreement:





(i)
            Failing
                to meet the tangible net worth requirement;(ii)
            Our
                common stock being delisted from the Nasdaq SmallCap Market;
                and(iii)
            Our
                having delinquent state, local and federal
                taxes





We
      had
      received a waiver from the lender on all of the above violations.





On
      January 15, 2005, we entered into a Forbearance Agreement (the “Forbearance
      Agreement”) pursuant to which the Lender agreed to forebear from accelerating
      obligations and/or enforcing existing defaults. The Forbearance Agreement
      amended the Loan Agreement to reduce the maximum credit line to $12,000,000,
      which, after March 1, 2005 was further reduced by $250,000 per
      month.




On
      August
      11, 2005, we entered into an Amended and Restated Forbearance Agreement (the
      “Amended Forbearance Agreement”) whereby the Lender had again agreed to forbear
      from accelerating obligations and/or enforcing existing defaults until the
      earlier to occur of (a) August 26, 2005 or (b) the date of any Forbearance
      Default, as defined (the “Forbearance Period”).




The
      Amended Forbearance Agreement provided that during the Forbearance Period,
      the
      maximum credit line would be $10,500,000.




Between
      August 25, 2005 and December 21, 2005, the Lender granted us a series of
      extensions of the Amended Forbearance Agreement. An extension granted in
      November 2005 was conditioned upon, among other things, our entry into a binding
      agreement providing for a sale to ALS of the assets of our offices in Southern
      California, the Phoenix region and its Dallas Morning News account. We entered
      into such an agreement with ALS on November 3, 2005. As a condition to obtaining
      an extension granted in December 2005, we were required to represent that we
      had
      closed the sale of assets to ALS and to acknowledge and agree that any loans
      and
      advances made by the Lender during the extension period would be the last
      requested advances under the Loan Agreement. The final extension of the Amended
      Forbearance Agreement expired on December 21, 2005. At such time, $2,431,808
      of
      indebtedness remained outstanding under the Loan Agreement. As of January 31,
      2006, we had repaid all of the indebtedness.




The
      Lender charged us $412,500 of fees in connection with the Forbearance Agreement,
      the Amended Forbearance Agreement and the various extensions thereof during
      the
      fiscal year ended September 30, 2005 and $350,000 during the three months ended
      December 31, 2005.




In
      connection with us and the Lender entering into the Amended Forbearance
      Agreement, we, the Lender and ALS also entered into the ALS Forbearance, whereby
      ALS agreed to forbear, through August 25, 2005, from enforcing payment defaults
      under our Outsourcing Agreement with ALS subject to certain conditions. All
      of
      our obligations under our Outsourcing Agreement with ALS were satisfied in
      connection with the sale of assets to ALS which occurred in December
      2005.




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.




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, 2006, there was still an aggregate of $3.5 million in delinquent
      payroll taxes outstanding, including interest and penalties, which are included
      in “Payroll taxes payable” on the balance sheet as of December 31, 2006.
      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




**19**


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 threatened to institute
      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 9 to the Condensed
      Consolidated Financial Statements.





As
      of
      December 31, 2006, 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
      $8,022,394.





We
      engaged in various transactions with related parties during the three months
      ended December 31, 2006 including the following:





•
            At
                December 31, 2006, 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; $4,123 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 and $100,000 to Joseph J. Raymond which was repaid
                in
                January 2007.•
            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, 2006, $616,850 was outstanding on the Convertible
                Note.





**20**


**Contractual
      Obligations**





Our
      aggregate contractual obligations are as follows:





**Payments
                Due by Fiscal Period (in Thousands)****2008
                -**
            
            **2010
                -****Total**
            
            **2007**
            
            **2009**
            
            **2011**
            
            **Thereafter**Contractual
                Obligations:Long-term
                debt obligations
            
            $
            1,565
            
            $
            818
            
            $
            492
            
            $
            223
            
            $
            32Operating
                lease obligations
            
            
            266
            
            
            62
            
            
            119
            
            
            85
            
            
            -Series
                A redemption payable
            
            
            300
            
            
            300
            
            
            -
            
            
            -
            
            
            -Payroll
                tax liability (a)
            
            
            284
            
            
            284
            
            
            -
            
            
            -
            
            
            -Workers’
                compensation insurance liability (b)
            
            
            295
            
            
            54
            
            
            127
            
            
            114
            
            
            -TOTAL
            
            $
            2,710
            
            $
            1,518
            
            $
            738
            
            $
            422
            
            $
            32





(a)
            Exclusive
                of interest and penalties. Payments may be accelerated based upon
                future
                operating result benchmarks.(b)
            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,
                2006, $2,019,000 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
      July
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48
      (FIN 48), “Accounting for Uncertainty in Income Taxes - an interpretation of
      FASB Statement No. 109.” FIN 48 provides guidance for the recognition,
      measurement, classification and disclosure of the financial statement effects
      of
      a position taken or expected to be taken in a tax return (“tax position”). The
      financial statement effects of a tax position must be recognized when there
      is a
      likelihood of more than 50 percent that based on the technical merits, the
      position will be sustained upon examination and resolution of the related
      appeals or litigation processes, if any. A tax position that meets the
      recognition threshold must be measured initially and subsequently as the largest
      amount of tax benefit that is greater than 50 percent likely of being realized
      upon ultimate settlement with a taxing authority. The interpretation is
      effective for fiscal years beginning after December 15, 2006. We do not expect
      our adoption of FIN 48 to have a material impact on our consolidated financial
      portion, results of operations or cash flows.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157 (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
      our fiscal year ending September 30, 2009. We do not expect the adoption of
      this
      new standard to have a material impact on our consolidated financial position,
      results of operations or cash flow.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans.” This Statement improves
      financial reporting by requiring an employer to recognize the overfunded or
      underfunded status of a defined benefit postretirement plan as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income. This Statement also improves financial reporting by requiring an
      employer to measure the funded status of a plan as of the date of its year-end
      statement of financial position, with limited exceptions. The effective date
      to
      initially recognize the funded status and to provide the required disclosures
      is
      for fiscal years ending after December 15, 2006, or our fiscal year ending
      September 30, 2007. The requirement to measure plan assets and benefit
      obligations is effective for fiscal years ending after December 15, 2008, or
      our
      fiscal year ending September 30, 2009. We do not expect the adoption of this
      new
      standard to have a material impact on our consolidated financial position,
      results of operations or cash flows.





**21**


**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, 2006. As of December 31, 2006, 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 internal control over financial reporting discussed below,
      our disclosure controls and procedures were effective as of the end of the
      period covered by this report.





In
      March
      2006, the Securities and Exchange Commission requested that we amend our Annual
      Report on Form 10-K for the fiscal year ended September 30, 2005 to remove
      the
      audit report issued by Amper Politziner & Mattia, P.C., our predecessor
      auditor, on our financial statements as of and for the years ended September
      30,
      2004 and 2003, inasmuch as we had not obtained permission from the predecessor
      auditor to include such report in the filing as contemplated by Public Company
      Accounting Oversight Board Statements of Auditing Standards Section 508. Our
      Chief Executive Officer and Chief Financial Officer have concluded that the
      inclusion of the predecessor auditor report in our Form 10-K for the fiscal
      year
      ended September 30, 2005, represents a material weakness in our review of
      applicable financial reporting regulatory requirements when preparing our
      financial statements. A “material weakness” is a reportable condition in which
      the design or operation of one or more of the specific control components has
      a
      defect or defects that could have a material adverse effect on our ability
      to
      record, process, summarize and report financial data in the financial statements
      in a timely manner.


We
      addressed the weakness in our review of the application of applicable financial
      reporting regulatory requirements by improving the training of our personnel
      and
      researching, identifying, analyzing, documenting and reviewing applicable
      regulatory requirements.





In
      connection with its audit of, and in the issuance of its report on our financial
      statements for the year ended September 30, 2004, Amper Politziner & Mattia,
      P.C. delivered a letter to the audit Committee of our Board of Directors and
      our
      management that identified three items that it considered to be material
      weaknesses in the effectiveness of our internal controls pursuant to standards
      established by the American Institute of Certified Public Accountants. Those
      material weaknesses arose due to (1) limited resources and manpower in the
      finance department; (2) inadequacy of the financial review process; and (3)
      inadequate documentation of certain financial procedures. While we believe
      that
      we have adequate policies, we agreed with our independent auditors that our
      implementation of those policies could be improved. As a result, although we
      were unable to expand the number of personnel in the accounting function due
      to
      financial constraints, we did provide additional training to existing staff
      which allowed us to increased redundancies in our system and improve our
      segregation of duties.





In
      addition, we identified deficiencies in our internal controls and disclosure
      controls related to the accounting for certain warrants, primarily with respect
      to accounting for derivative liabilities in accordance with EITF 00-19 and
      SFAS
      133. We restated our consolidated financial statements for the years ended
      September 30, 2004 and 2005, in order to correct the accounting in such
      financial statements with respect to derivative liabilities in accordance with
      EITF 00-19 and SFAS 133. Since July 2006, we have undertaken improvements to
      our
      internal controls in an effort to remediate those deficiencies by training
      our
      accounting staff to understand and implement the requirements of EITF 00-19
      and
      SFAS 133.





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.





Other
      than the continued implementation of the improvements in our internal controls
      described above, there were no significant changes in our internal controls
      during the quarter ended December 31, 2006, that have materially affected,
      or
      are reasonably likely to have materially affected, our internal controls
      subsequent to the date we carried out our evaluation.


**22**





**Part
                II**
            **Other
                Information****Item
                1.**
            **Legal
                Proceedings**





We
      are
      involved, from time to time, in routine litigation arising in the ordinary
      course of business. We do not believe that any currently pending litigation
      will
      have a material adverse effect on our financial position or results of
      operations.





**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, 2006.





**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, $104,767 is in arrears
      on
      the Series F Preferred Stock.





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





A
      Special
      Meeting of Stockholders was held in Manalapan, New Jersey on November 28, 2006.
      The four matters considered and acted upon at the Special Meeting were (i)
      a
      proposal to adopt our 2006 Equity Incentive Plan (the “Equity Plan Proposal”);
      (ii) a proposal to amend our Amended and Restated Certificate of Incorporation
      (the “Certificate of Incorporation”) to increase the number of authorized shares
      of our Common Stock from 100,000,000 shares to 500,000,000 shares (the “Share
      Increase Proposal”); (iii) a proposal to amend our Certificate of Incorporation
      to eliminate the provision which prohibits stockholders from acting by written
      consent (the “Prohibition Elimination Proposal”); and (iv) a proposal to amend
      our Certificate of Incorporation to change our corporate name to “UniPath
      Technologies Group, Inc.” (the “Name Change Proposal”).





The
      number of votes cast for and against each proposal, as well as the number of
      abstentions and broker non-votes with respect to each proposal, is set forth
      below. Each of the proposals voted upon at the Special Meeting was approved,
      except the Prohibition Elimination Proposal.





With
      regard to the Equity Plan Proposal, 21,195,119 shares of Common Stock and shares
      of Series F Preferred Stock representing 1,500,000 votes were voted in favor
      of
      the approval of the proposal to adopt the 2006 Equity Incentive Plan, 1,327,141
      shares of Common Stock and shares of Series F Preferred Stock representing
      -0-
      votes were voted against approval of such proposal, 5,337 shares of Common
      Stock
      and shares of Series F Preferred Stock representing -0- votes abstained from
      voting and there were broker non-votes with respect to 24,947,810 shares of
      Common Stock.





With
      regard to the Share Increase Proposal, 46,225,823 shares of Common Stock and
      shares of Series F Preferred Stock representing 1,500,000 votes were voted
      in
      favor of the proposal to amend the Certificate of Incorporation to increase
      the
      number of authorized shares of Common Stock to 500,000,000 shares, 1,228,376
      shares of Common Stock and shares of Series F Preferred Stock representing
      -0-
      votes were voted against such proposal, 21,208 shares of Common Stock and shares
      of Series F Preferred Stock representing -0- votes abstained from voting and
      there were broker non-votes with respect to -0- shares of Common
      Stock.





With
      regard to the Prohibition Elimination Proposal, 22,061,025 shares of Common
      Stock and shares of Series F Preferred Stock representing 1,500,000 votes were
      voted in favor of the proposal to amend the Certificate of Incorporation to
      eliminate the provision which prohibits stockholders from acting by written
      consent, 438,422 shares of Common Stock and shares of Series F Preferred Stock
      representing -0- votes were voted against such proposal, 28,150 shares of Common
      Stock and shares of Series F Preferred Stock representing -0- votes abstained
      from voting and there were broker non-votes with respect to 24,947,810 shares
      of
      Common Stock.





With
      regard to the Name Change Proposal, 47,092,278 shares of Common Stock and shares
      of Series F Preferred Stock representing 1,500,000 votes were voted in favor
      of
      approval of the amendment of the Certificate of Incorporation to change our
      name
      to “UniPath Technologies Group, Inc.,” 366,655 shares of Common Stock and shares
      of Series F Preferred Stock representing -0- votes were voted against such
      proposal, 16,474 shares of Common Stock and shares of Series F Preferred Stock
      representing -0- votes abstained from voting and there were broker non-votes
      with respect to -0- shares of Common Stock. We have not yet implemented the
      change of our corporate name.


**23**





**Item
                5.**
            **Other
                Information**





On
      February 13, 2007, we acquired from Fusion Business Services, LLC (“Fusion”) an
      additional one percent (1%) interest in STS in exchange for the issuance to
      the
      members of Fusion of 70,111 shares of our common stock. As a result of the
      transfer, which is effective January 1, 2007, we own a 51% interest in STS
      and
      Fusion owns a 49% interest. Fusion has a right to re-acquire the 1% interest
      transferred to us upon the occurrence of certain events, including the
      institution of bankruptcy or insolvency proceedings against us, a sale of all
      or
      substantially all of our assets, a merger or consolidation of us with another
      entity, or our liquidation or dissolution. 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.





**Item
                6**
            **Exhibits**





**Number**
            **Description**3.1.11
            Certificate
                of Amendment to Amended and Restated Certificate of
                Incorporation4.2.15
            First
              amendment dated as of January 14, 2007 to warrant agreement between
              the
              Company and American Stock Transfer and Trust Company10.69
            Membership
                Interest Purchase Agreement dated as of February 13, 2007, between
                the
                Company and Fusion Business Services, LLC31.1
            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





**24**


**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, 2007
            By:
            /s/ Joseph
              J.
              RaymondChairman
                of the
                Board of Directors,
              President and Chief Executive
                Officer


Date: February
              14, 2007
            By:
            /s/ Michael
              A. MaltzmanVice
                President and Chief Financial Officer
              Principal Financial and Accounting
                Officer


25